-AsAs filed with the Securities and Exchange Commission on March 29, 201718, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐FORM20-FREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162019
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)
LATAM Airlines Group S.A. | Republic of Chile | |
(Translation of registrant’s name into English) | (Jurisdiction of incorporation or organization) |
Presidente Riesco 5711, 20th Floor
Las Condes
Santiago, Chile
(Address of principal executive offices)
Gisela Escobar
Andrés del Valle
Tel.:56-2-2565-3944 • 56-2-2565-2525— E-mail: InvestorRelations@latam.com investorrelations@latam.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: | Trading Symbol(s) | Name of each exchange on which registered: | ||
American Depositary Shares (as evidenced by | “LTM” | New York Stock Exchange | ||
*Not for trading, but only in connection with the registration of the American Depository Shares pursuant to the requirements of the New York Stock Exchange. | “LTM” | 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: 606,407,693.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 RegulationS-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 anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ☒ Accelerated filer ☐
Large Accelerated filer ☒ | Accelerated filer ☐ | Non-Accelerated filer ☐ | |
Emerging Growth Company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
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 ☒ | 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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒
i
Throughout this annual report on Form20-F we make numerous references to “LATAM”. Unless the context otherwise requires, references to “LATAM Airlines Group” are to LATAM Airlines Group S.A., the unconsolidated operating entity, and references to “LATAM,” “we,” “us” or the “Company” are to LATAM Airlines Group S.A. and its consolidated affiliates: Transporte Aéreo S.A. (which does business under the name “LATAM(“LATAM Airlines Chile”), LATAM Airlines Peru S.A. (f/k/a LAN Perú S.A. (“LATAMPeru S.A, “LATAM Airlines Peru”), Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. (“LATAM Airlines Ecuador”), LAN Argentina S.A. (“LATAM Airlines Argentina,” previously Aero 2000 S.A.), Aerovías de Integración Regional, Aires S.A. (which does business under the name “LATAM(“LATAM Airlines Colombia”), TAM S.A. (“TAM” or “LATAM Airlines Brazil”), LAN Cargo S.A. (“LATAM Cargo”) and its threetwo 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. (“ABSA”) in Brazil. Other references to “LATAM”, however,as the context requires, are to the LATAM brand which was launched in 2016 and brings together, under one internationally recognized name, all of the affiliate brands such as LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia, LATAM Airlines Ecuador and LATAM Airlines Brazil.
References to “LATAM” and all references to “LAN” are to LAN Airlines S.A., currently known as LATAM Airlines Group S.A., and its consolidated affiliates, in connection with circumstances and facts occurring prior to the completion date of the combination between LAN Airlines S.A. and TAM S.A. See “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.Company.”
In this annual report on Form20-F, unless the context otherwise requires, references to “TAM” are to TAM S.A., and its consolidated affiliates, including TAM Linhas Aereas S.A. (“TLA”), which does business under the name “LATAM Airlines Brazil”, Multiplus S.A. (“Multiplus”), Fidelidade Viagens e Turismo Limited (“TAM Viagens”) and Transportes Aéreos Del Mercosur S.A. (“TAM Mercosur”).
LATAM Airlines Group and the majority of our affiliates maintain their accounting records and prepare their financial statements in U.S. dollars. Some of our other affiliates, however, maintain their accounting records and prepare their financial statements in Chilean pesos, Argentinean pesos, Colombian pesos or Brazilian reais.real. In particular, TAM maintains its accounting records and prepares its financial statements in Brazilian reais.real. Our audited consolidated financial statements include the results of these affiliates 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 atperiod-end exchange rates, while revenue and expense accounts are translated at each transaction date, although a monthly rate may also be used if exchange rates do not vary widely.
In this annual report on Form20-F, all references to “Chile” are references to the Republic of Chile. 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$” are to Chilean pesos. References to “reais,“real,” “Brazilian reais”real” or “R$” are to Brazilian reais,real, 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 used in this annual report and in our audited consolidated financial statements 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, 2016,2019, which was Ch$669.47744.62 = US$1.00. The observed exchange rate on, February 28, 2017,March 18, 2020, was Ch$645.19=855.09 = US$1.00. Unless we indicate otherwise, the U.S. dollar equivalent for information in Brazilian reaisreal used in this annual report and in our audited consolidated financial statements is based on the average “bid and offer rate”published by Banco Central do Brasil (which we refer to as the Central Bank of Brazil) on December 31, 2016,2019, which was R$3.2594.03 = US$1.00. The observed exchange rate on February 28, 2017March 18, 2020, was $R$3.099R$5.11 = US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos or Brazilian reais.real.
LATAM has a single series of shares of Common Stock, without par value, listed on Chilean Stock Exchange and American Depositary Shares (evidenced by American Depositary Receipts), each representing one share of Common Stock, that are listed on the New York Stock Exchange under the Symbol “LTM”
We have rounded percentages and certain U.S. dollar, Chilean peso and Brazilian reaisreal 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.
LATAM’s audited consolidated financial statements for the periods ended December 31, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 20162019 were prepared in accordance with IFRS.
This annual report contains certain terms that may be unfamiliar to some readers. You can find a glossary of these terms on page 42 of this annual report.
1
This annual report contains forward-looking statements. Such statements may include words such as “anticipate,” “could” “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. There is no assurance that the expected events, trends or results will actually occur. 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. Key Information—Risk Factors”; |
● | our ability to service our debt and fund our working capital requirements; |
● | future demand for passenger and cargo air services in Chile, Brazil, other countries in Latin America and the rest of the world; |
● | the determination of relationships with customers; |
● | the state of the Chilean, Brazilian, other Latin American and world economies and their impact on the airline industry; |
● | the effects of competition in the airline industry; |
● | future terrorist incidents, cyberattacks or related activities affecting the airline industry; |
● | future outbreak of diseases, or the spread of already existing diseases, affecting travel behavior and/or exports; |
● | natural disasters affecting travel behavior and/or exports; |
● | the relative value of the Chilean peso and other Latin American currencies compared to other world 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; |
● | our plans relative to acquisitions, joint ventures, strategic alliances or divestitures; |
● | increases in interest rates; and |
● | changes in regulations, including regulations related to access to routes in which we operate and environmental regulations. |
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly 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.
Consolidated Affiliates of LATAM: | ||||
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“ABSA” | Aerolinhas Brasileiras S.A., incorporated in Brazil. | |||
“LANCO” | Línea Aérea Carguera de Colombia S.A., incorporated in Colombia. | |||
“LATAM Airlines Argentina” | LAN Argentina S.A., incorporated in Argentina. | |||
“LATAM Airlines Chile” | Transporte Aéreo S.A., incorporated in Chile. | |||
“LATAM Airlines Colombia” | Aerovías de Integración Regional, Aires S.A., incorporated in Colombia. | |||
“LATAM Airlines Ecuador” | LATAM-Airlines Ecuador S.A., incorporated in Ecuador. | |||
“LATAM Airlines Peru” | LATAM Airlines Peru S.A. (f/ka LAN Peru S.A.), incorporated in Peru. | |||
“LATAM Cargo” | LAN Cargo S.A., incorporated in Chile. | |||
“TAM” | TAM S.A., incorporated in Brazil. |
Capacity Measurements: | ||
“available seat kilometers” or “ASKs” | The sum, across our network, of the number of seats made available for sale on each flight multiplied by the kilometers flown by the respective flight. | |
“available ton kilometers” or “ATKs” | The sum, across our network, of the number of tons available for the transportation of revenue load (cargo) on each flight multiplied by the kilometers flown by the respective flight. | |
Traffic Measurements: | ||
“revenue passenger kilometers” or “RPKs” | The sum, across our network, of the number of revenue passengers on each flight multiplied by the number of kilometers flown by the respective flight. | |
“revenue ton kilometers” or “RTKs” | The sum, across our network, of the load (cargo) in tons on each flight multiplied by the kilometers flown by the respective flight. | |
“traffic revenue” | Revenue from passenger and cargo operations. | |
Yield Measurements: | ||
“cargo yield” | Revenue from cargo operations divided by RTKs. | |
“passenger yield” | Revenue from passenger operations divided by RPKs. | |
Load Factors: | ||
“cargo load factor” | RTKs expressed as a percentage of ATKs. | |
“passenger load factor” | RPKs expressed as a percentage of ASKs. | |
Other: | ||
“Airbus A320-Family Aircraft” | The Airbus | |
“m²” | Square meters. | |
“ton” | A metric ton, equivalent to 2,204.6 pounds. | |
“utilization rates” | The actual number of | |
“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” | Market Intelligence Schedule Dynamic Table. | |
“Diio Mi” | Data In Intelligence Out Market Intelligence. | |
“CO2” | ||
“PIS/COFINS” | “Program of Social Integration” and “Contribution for the Financing of Social Security” federal taxes in Brazil |
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
LATAM’s Historical Financial Information
The summary consolidated annual financial information of LATAM as of December 31, 2019, 2018, 2017, 2016, 2015, 2014, 2013 and 20122015 has been prepared in accordance with IFRS(*)IFRS. In 2019, the Company adopted IFRS 16,Leases, retrospectively; restating the comparative figures as of December 31, 2018 and for the years ended December 31, 2018 and 2017, in accordance with the provisions of IAS 8,Accounting Policies, Changes in Accounting Estimates and Errors. On June 22, 2012, LATAM Airlines Group was formed throughThe selected Statement of Income Data for the business combinationyears ended 2016 and 2015 and the selected Balance Sheet Data as of LANDecember 31, 2017, 2016 and TAM. Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of LATAM Airlines Group. Financial statements for LATAM fully consolidate TAM’s results since June 23, 2012.2015 have not been restated.
LATAM’s Annual Financial Information
Year ended December 31, | ||||||||||||||||||||
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(in US$ millions, except per share and capital stock data) | ||||||||||||||||||||
The Company(1)(2) | ||||||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 7,877.7 | 8,410.6 | 10,380.1 | 11,061.5 | 7,966.8 | |||||||||||||||
Cargo | 1,110.6 | 1,329.4 | 1,713.4 | 1,863.0 | 1,743.6 | |||||||||||||||
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Total operating revenues | 8,988.3 | 9,740.0 | 12,093.5 | 12,924.5 | 9,710.4 | |||||||||||||||
Cost of sales | (6,967.0 | ) | (7,636.7 | ) | (9,624.5 | ) | (10,054.2 | ) | (7,634.5 | ) | ||||||||||
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Gross margin | 2,021.3 | 2,103.3 | 2,469.0 | 2,870.3 | 2,075.9 | |||||||||||||||
Other operating income(3) | 538.7 | 385.8 | 377.6 | 341.6 | 220.2 | |||||||||||||||
Distribution costs | (747.4 | ) | (783.3 | ) | (957.1 | ) | (1,025.9 | ) | (803.6 | ) | ||||||||||
Administrative expenses | (873.0 | ) | (878.0 | ) | (980.7 | ) | (1,136.1 | ) | (888.7 | ) | ||||||||||
Other expenses | (373.7 | ) | (324.0 | ) | (401.0 | ) | (408.7 | ) | (311.8 | ) | ||||||||||
Other gains/(losses) | (72.6 | ) | (55.3 | ) | 33.5 | (55.4 | ) | (45.8 | ) | |||||||||||
Financial income | 74.9 | 75.1 | 90.5 | 72.8 | 77.5 | |||||||||||||||
Financial costs | (416.3 | ) | (413.4 | ) | (430.0 | ) | (462.5 | ) | (294.6 | ) | ||||||||||
Equity accounted earnings | 0.0 | 0.0 | (6.5 | ) | 2.0 | 1.0 | ||||||||||||||
Exchange rate differences | 121.7 | (467.9 | ) | (130.2 | ) | (482.2 | ) | 66.6 | ||||||||||||
Result of indexation units | 0.3 | 0.6 | 0.1 | 0.3 | 0.0 | |||||||||||||||
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Income (loss) before income taxes | 273.9 | (357.1 | ) | 65.2 | (283.8 | ) | 96.7 | |||||||||||||
Income (loss) tax expense/benefit | (163.2 | ) | 178.4 | (292.4 | ) | 20.0 | (102.3 | ) | ||||||||||||
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Net (loss) income for the period | 110.7 | (178.7 | ) | (227.2 | ) | (263.8 | ) | (5.6 | ) | |||||||||||
Income (loss) attributable to the parent company’s equity holders | 69.2 | (219.3 | ) | (260.0 | ) | (281.1 | ) | (19.1 | ) | |||||||||||
Income (loss) attributable tonon-controlling interests | 41.5 | 40.5 | 32.8 | 17.3 | 13.5 | |||||||||||||||
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Net income (loss) for the year | 110.7 | (178.7 | ) | (227.2 | ) | (263.8 | ) | (5.6 | ) | |||||||||||
Earnings per share | ||||||||||||||||||||
Average number of Shares | 549,559,559 | 545,547,819 | 545,547,819 | 487,930,977 | 412,267,624 |
Basic earnings (loss) per share (US$) Diluted earnings (loss) per share (US$) 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 Othernon-current assets Totalnon-current assets Total assets Total current liabilities Totalnon-current liabilities Total liabilities Issued capital Net equity attributable to the parent company’s equity holders Non-controlling interest Total net equity Shares Outstanding Year ended December 31, 2016 2015 2014 2013 2012 (in US$ millions, except per share and capital stock data) 0.12665 (0.40193 ) (0.47656 ) (0.57613 ) (0.0463 ) 0.12665 (0.40193 ) (0.47656 ) (0.57613 ) (0.0463 ) At December 31, 2016 2015 2014 2013 2012 (in US$ millions, except per share and capital stock data) 949.3 753.5 989.4 1,984.9 650.3 2,340.3 2,067.4 2,644.1 2,992.2 2,626.2 337.2 2.0 1.1 2.4 47.7 3,626.8 2,822.9 3,634.6 4,979.5 3,324.2 10,498.1 10,938.7 10,773.1 10,982.8 11,807.1 5,073.3 4,339.8 6,076.7 6,668.8 7,195.0 15,571.4 15,278.5 16,849.8 17,651.6 19,002.1 19,198.2 18,101.4 20,484.4 22,631.1 22,326.3 6,222.2 5,641.0 5,829.7 6,509.1 6,297.5 8,790.7 9,522.9 10,151.0 10,795.6 10,808.1 15,012.9 15,163.9 15,980.7 17,304.7 17,105.6 3,149.6 2,545.7 2,545.7 2,389.4 1,501.0 4,096.7 2,856.5 4,401.9 5,238.8 5,112.1 88.6 81.0 101.8 87.7 108.6 4,185.3 2,937.5 4,503.7 5,326.5 5,220.7 606,407,693 545,547,819 545,547,819 535,243,229 479,107,860 Year ended December 31, 2019 2018
restated 2017
restated 2016 2015 (in US$ millions, except per share and capital stock data) The Company Statement of Income Data(1)(2)(3): Operating revenues Passenger 9,005.6 8,709.0 8,494.5 7,877.7 8,410.6 Cargo 1,064.4 1,186.5 1,119.4 1,110.6 1,329.4 Total operating revenues 10,070.1 9,895.5 9,613.9 8,988.3 9,740.0 Cost of sales (7,951.3 ) (7,773.4 ) (7,279.4 ) (6,967.0 ) (7,636.7 ) Gross margin 2,118.8 2,122.0 2.334,5 2,021.3 2,103.3 Other operating income(4) 360.9 472.8 549.9 538.7 385.8 Distribution costs (580.0 ) (615.2 ) (696.8 ) (747.4 ) (783.3 ) Administrative expenses (735.2 ) (736.3 ) (952.8 ) (873.0 ) (878.0 ) Other expenses (422.8 ) (356.3 ) (365.5 ) (373.7 ) (324.0 ) Other gains/(losses) 11.5 53.5 (7.8 ) (72.6 ) (55.3 ) Financial income 26.3 53.3 78.7 74.9 75.1 Financial costs (589.9 ) (539.1 ) (579.2 ) (416.3 ) (413.4 ) Equity accounted earnings 0.0 0.0 0.0 0.0 0.0 Foreign exchange gains/losses (32.6 ) (38.1 ) (48,5 ) 121.7 (467.9 ) Result of indexation units (15.0 ) (0.9 ) 0.7 0.3 0.6 Income (loss) before income taxes 141.9 415.7 313.4 273.9 (357.1 ) Income (loss) tax expense/benefit 53.7 (73.9 ) (159.0 ) (163.2 ) 178.4 Net (loss) income for the year 195.6 341.8 154.4 110.7 (178.7 ) Income (loss) attributable to owners of the parent 190.4 309.8 108.9 69.2 (219.3 ) Income (loss) attributable to non-controlling interests 5.2 32.0 45.5 41.5 40.5 Net income (loss) for the year 195.6 341.8 154.4 110.7 (178.7 ) Earnings per share Average number of Shares 606,407,693 606,407,693 606,407,693 546,559,599 545,547,819 Basic earnings (loss) per share (US$) 0.31403 0.51090 0.17958 0.12665 (0.40193 ) Diluted earnings (loss) per share (US$) 0.31403 0.51090 0.17958 0.12665 (0.40193 )
As of December 31, | ||||||||||||||||||||
2019 | 2018 restated | 2017 | 2016 | 2015 | ||||||||||||||||
(in US$ millions, except per share and capital stock data) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash, and cash equivalents | 1,072.6 | 1,081.6 | 1,142.0 | 949.3 | 753.5 | |||||||||||||||
Other current assets in operation | 2,460.5 | 2,188.5 | 2,312.4 | 2,340.3 | 2,067.4 | |||||||||||||||
Non-current assets and disposal groups held for sale | 485.2 | 5.8 | 291.1 | 337.2 | 2.0 | |||||||||||||||
Total current assets | 4,018.2 | 3,275.9 | 3,745.5 | 3,626.8 | 2,822.9 | |||||||||||||||
Property and equipment | 12,919.6 | 12,501.8 | 10,065.3 | 10,498.1 | 10,938.7 | |||||||||||||||
Other non-current assets | 4,150.0 | 4,301.1 | 4,987.2 | 5,073.3 | 4,339.8 | |||||||||||||||
Total non-current assets | 17,069.6 | 16,802.9 | 15,052.5 | 15,571.4 | 15,278.5 | |||||||||||||||
Total assets | 21,087.8 | 20,078.7 | 18,798.0 | 19,198.2 | 18,101.4 | |||||||||||||||
Total current liabilities | 6,960.9 | 5,932.2 | 5,842.7 | 6,222.2 | 5,641.0 | |||||||||||||||
Total non-current liabilities | 10,997.7 | 10,705.9 | 8,688.0 | 8,790.7 | 9,522.9 | |||||||||||||||
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Total liabilities | 17,958.6 | 16,638.1 | 14,530.7 | 15,012.9 | 15,163.9 | |||||||||||||||
Share capital | 3,146.3 | 3,146.3 | 3,146.3 | 3,149.6 | 2,545.7 | |||||||||||||||
Net equity attributable to the parent company’s equity holders | 3,130.8 | 3,360.7 | 4,176.1 | 4,096.7 | 2,856.5 | |||||||||||||||
Non-controlling interest | (1.6 | ) | 79.9 | 91.1 | 88.6 | 81.0 | ||||||||||||||
Total equity | 3,129.2 | 3,440.6 | 4,267.2 | 4,185.3 | 2,937.5 | |||||||||||||||
Shares Outstanding | 606,407,693 | 606,407,693 | 606,407,693 | 606,407,693 | 545,547,819 |
(1) | For more information on the |
(2) | The addition of the items may differ from the total amount due to rounding. |
(3) | For the effects of the adoption of IFRS 15 and IFRS 16 see Note 2.1 to the Fnancial Statements” |
(4) | Other operating income included in this Statement of Income Data is equivalent to the sum of income derived from |
(*)Law No. 20,780 issued on September 29, 2014, introduced 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 on the Balance Sheet within “Retained earnings” instead of on the Income Statement as required by IAS 12. In order to comply with IAS 12, the financial statements in this document for the period ended December 31, 2014 are different from those presented to the SVS as the modifications introduced by Law No. 20,780 have been recognized within the income statement. For more information on the reconciliation of such differencessee Note 2.1 and Note 18 to our audited consolidated financial statements.
The table below presents LATAM’s unaudited operating data as of and for the year ended December 31, 2012 (which includes TAM’s data since June 23, 2012), and as of and for the years ended2015, December 31, 2013,2016, December 31, 2014,2017, December 31, 20152018 and December 31, 2016.2019. LATAM believes this operating data is useful in reporting the operating performance of its business and may be used by certain investors in evaluating companies operating in the global 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 performance in accordance with IFRS. This unaudited operating data is not included in or derived from LATAM’s financial statements.
Year ended December 31, | ||||||||||||||||||||
Operating Data: | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
ASKs (million) | 149,111.9 | 143,264.7 | 136,398.4 | 134,967.7 | 134,167.1 | |||||||||||||||
RPKs (million) | 124,521.1 | 119,077.4 | 115,692.7 | 113,626.9 | 111,509.9 | |||||||||||||||
ATKs (million) | 6,356.7 | 6,497.6 | 6,230.3 | 6,704.1 | 7,082.8 | |||||||||||||||
RTKs (million) | 3,526.0 | 3,582.5 | 3,421.3 | 3,465.9 | 3,797.0 |
Operating Data: ASKs (million) RPKs (million) ATKs (million) RTKs (million) ASK Equivalent (million) For the year ended and as of December 31, 2016 2015 2014 2013 2012 134,967.7 134,167.1 130,200.9 131,690.9 132,186.0 113,626.9 111,509.9 108,534.0 106,466.5 103,886.1 6,704.1 7,082.8 7,219.7 7,651.9 7,645.9 3,465.9 3,797.0 4,317.2 4,466.7 4,488.3 205,537.5 208,722.5 206,197.9 212,237.0 212,669.6
Dividend Policy
In accordance with theLey sobre Sociedades Anónimas No. 18,046 (“Chilean Corporation Act”) and theReglamento de Sociedades Anónimas(“Regulation to the Chilean Corporation Act”) (collectively,, and together with the Chilean Corporation Act, the “Chilean Corporation Law”), we must pay annual cash dividends equal to at least 30.0% of our annual consolidated net income for the prior year, subject to limited exceptions. LATAM 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 dividends in 2014, 2015 or 2016. DividendOn May 18, 2017, LATAM paid US$20,766,119 in dividends in respect of the year ended December 31, 2016. On May 17, 2018, LATAM paid US$46,591,193 in dividends in respect of year ended December 31, 2017. On May 17, 2019, LATAM paid US$54,580,443 in dividends in respect of year ended December 31, 2018. In addition, dividend reserves of US$20,766,199 have been57,129,120 were set aside in 2016,for 2019, to be paid in 2017.2020.
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 business days prior to the day we first make payment to shareholders. Payments of cash dividends to holders of ADSs, if any, are made in Chilean pesos to the custodian, whichwho converts those Chilean pesos into U.S. dollars and delivers U.S. dollars to the depositary for distribution to holders.holders of ADS. The amount of U.S. dollars distributed to holders of ADSs may be adversely affected by a devaluation of the Chilean currency that may occur before such dividends are converted and remitted.
Chilean Peso Exchange RatesLATAM’s Dividend Payments
The following 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 periods indicated,years indicated. Dividends per common share amounts reflect common share amounts outstanding immediately prior to the high, low, average andperiod-end observed exchange rate for the purchasedistribution of U.S. dollars, expressed in Chilean pesos per U.S. dollar. The rates have not been restated in constant currency units. On February 28, 2017 the observed exchange rate was Ch$645.19 = US$1.00.such dividend.
Daily Observed Exchange Rate | ||||||||||||||||
Year Ended December 31, | High | Low | Average(1) | Period-End | ||||||||||||
Ch$ per US$ | ||||||||||||||||
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 | ||||||||||||
2015 | 715.66 | 597.10 | 654.25 | 707.34 | ||||||||||||
2016 | 730.31 | 645.22 | 676.83 | 669.47 | ||||||||||||
2016 | ||||||||||||||||
October | 670.88 | 651.65 | 663.92 | 651.65 | ||||||||||||
November | 679.24 | 650.72 | 666.12 | 675.48 | ||||||||||||
December | 677.11 | 649.40 | 667.17 | 669.47 | ||||||||||||
2017 |
Year Ended December 31, January February Daily Observed Exchange Rate High Low Average(1) Period-End Ch$ per US$ 673.36 648.31 661.19 648.87 646.97 638.35 643.21 645.19 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) 2016 May 18, 2017 $ 20,766,119 606.41 $ 0.03424 $ 0.03424 2017 May 17, 2018 $ 46,591,193 606.41 $ 0.07683 $ 0.07683 2018 May 16, 2019 $ 54,580,443 606.41 $ 0.09001 $ 0.09001
Source: Central Bank of Chile
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
The following important factors, and those important factors described in other reports we submit to or file with the Securities and Exchange Commission (“SEC”), 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 anon-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.
Risk Factors Relating to our Company
LATAM does not control the voting shares or board of directors of TAM
Due to Brazilian law restrictions on foreign ownership of Brazilian airlines, LATAM does not control the voting shares or board of directors of TAM. As of February 28, 2017, the ownership structure of TAM is as follows:
As a result of this ownership structure:
LATAM Airlines Group and TEP Chile and other parties have entered into shareholders’ agreements that establish agreements and restrictions relating to corporate governance with respect to TAM. Certain specified actions require supermajority approval, which in turn means they require the prior approval of both LATAM and TEP Chile. 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 affiliates
of TAM. Actions requiring supermajority shareholder approval of Holdco I or TAM include, among others, certain changes to theby-laws of Holdco I, TAM or TAM’s affiliates or any dissolution/liquidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of certain assets, creation of security interests or entering into guarantees and agreements with related parties. For more information on the shareholders’ agreements, see “Item 7. Controlling Shareholders and Related Party Transactions—Shareholders’ Agreements.”
Our assets include a significant amount of goodwill.
Our assets included US$2,710.42,209.6 million of goodwill as of December 31, 2016, US$2,582.5 million of which results from the combination of LAN and TAM.2019. 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. In 2016,2019, mainly as a result of the appreciationdepreciation of the Brazilian real against the U.S. dollar, the value of our goodwill increaseddecreased by 18.8%3.7% as compared with 2015.2018. Any impairment could result in the recognition of a significant charge to earnings in our statement of income, which could materially and adversely impact our consolidated results for the period in which the impairment occurs.
A failure to successfully implement our strategy or a failure adjusting the strategy to the current economic situation would harm our business and the market value of our ADSs and common shares.
We have developed a strategic plan with the goal of becoming one of the bestmost admired airlines in the world and renewing our commitment to sustained profitability and superior returns to shareholders. Our strategy requires us to identify value propositions that are attractive to our clients, to find efficiencies in our daily operations, and to transform ourselves into a stronger and more risk-resilient company. A tenet of our strategic plan is the continuing adoption of a new travel model for domestic and international services in the six countries where we have domestic operations to address the changing dynamics of customers and the industry, and to increase our competitiveness. The new travel model is based on a continued reduction in air fares that makes air travel accessible to a wider audience, and in particular to those wish to fly more frequently. This model requires continued cost reduction efforts and in order to achieve thisincreasing revenues from ancillary activities. In connection with these efforts, the Company is implementingcontinues to implement a series of initiatives to reduce cost per ASK in all its domestic operations.operations as well as developing new ancillary revenue initiatives.
Difficulties in implementing our strategy may adversely affect our business, results of operation and the market value of our ADSs and common shares.
A failure to successfully transfer the value proposition of the LAN and TAM brands to a new single brand, may adversely affect our business and the market value of our ADSs and common shares.
Following the combination in 2012, LAN and TAM continued to operate with their original brands. During 2016, we began the transition of LAN and TAM into a single brand. LAN and TAM had different value propositions, and there can be no assurances that we will be able to fully transfer the value of the original LAN and TAM brands to our new single brand “LATAM”. Difficulties in implementing our single brand may prevent us from consolidating as a customer preferred carrier and may adversely affect our business and results of operations and the market value of our ADSs and common shares.
It may take time to combine the frequent flyer programs of LAN and TAM.
We have integrated the separate frequent flyer programs of LAN and TAM so that passengers can use frequent flyer miles earned with either LAN or TAM interchangeably. During 2016, LAN and TAM announced their revamped frequent flyer programs, which have new names: LATAM Pass and LATAM Fidelidade, respectively. The change is part of the process of consolidating the airline group’s new brand identity (LATAM) and the evolution of the programs, which enhances existing benefits and introduces new benefits for program members. However, there is no guarantee that full integration of the two plans 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. Moreover, during 2016, LATAM Pass and LATAM Fidelidade approved changes in their mileage earning policy which may impact the attractiveness of the programs to passengers. Until we effectively combine these programs, passengers may prefer frequent flyer programs offered by other airlines, which may adversely affect our business.
Our financial results are exposed to foreign currency fluctuations.
We prepare and present our consolidated financial statements in U.S. dollars. LATAM and its affiliates 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..operations. If the value of the Brazilian real, Chilean peso or other currencies in which revenues are denominated declines against the U.S. dollar, our results of operations and financial condition will be affected. 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. For further information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Variation in Foreign Exchange Rates.”
We depend on strategic alliances or commercial relationships in many of the countries in which we operate, and our business may suffer if any of our strategic alliances or commercial relationships terminates.
We maintain a number of alliances and other commercial relationships in many of the jurisdictions in which LATAM and its affiliates operate. 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 deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be adversely affected.
Our business and results of operations may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits. Also, technical and operational problems with the airport infrastructure of cities in which we have a focus may have a material adverse effect on us.
Our business depends upon our access to key routes and airports. Bilateral aviation agreements between countries, open skies laws and local aviation approvals frequently involve political and other considerations outside of our control. 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 operate numerous international routes subject to bilateral agreements, and also internalas well as domestic flights within Chile, Peru, Brazil, Argentina, Ecuador Colombia and other countries,Colombia, subject to local route and airport access approvals. See “Item 4. Information on the Company—B. Business Overview—Regulation.”
There can be no assurance that existing bilateral agreements with 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 slots, or the imposition of other sanctions could also have a material adverse effect. A change in the administration of current laws and regulations or the adoption of new laws and regulations in any of the countries in which we operate that restrict our route, airport or other access may have a material adverse effect on our business, financial condition and results of operations.
Moreover, our operations and growth strategy are dependent on the facilities and infrastructure of key airports, including Santiago’s International Airport, São Paulo’s Guarulhos International and Congonhas Airports, Brasilia’s International Airport and Lima’s Jorge Chavez International Airport.
Santiago’s Comodoro Arturo Merino Benítez International Airport is currently facing an important expansion, which is expected to be completed by 2021. If the expansion continues to be delayed, this will likely impact our operations and may affect our ability to remain competitive.
One of the major operational risks we face on a daily basis at Lima’s Jorge Chavez International Airport is the limited number of parking positions. Additionally, the indoor infrastructure of the airport limits our ability to manage connections and launch new flights due to the lack of gates and increasing security and immigration controls. Lima’s Jorge Chavez International Airport is currently undergoing an expansion, which is expected to be completed by 2024. Any delays could negatively impact our operations limit our ability to grow and affect our competitiveness in the country and in the region.
Brazilian airports, such as the Brasilia, and São Paulo (Guarulhos) International Airports, have limited the number of takeoff and landing slots per day due to infrastructural limitations. Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our inability to maintain our existing slots and obtain additional slots, could materially adversely affect our operations.
7
A significant portion of our cargo revenue comes from relatively few product types and may be impacted by events affecting their production, trade or demand.
Our cargo demand, especially from Latin American exporters, is 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. Events that adversely affect the production, trade or demand for these goods may adversely affect the volume of goods that we transport and may have a significant impact on our results of operations. Future trade protection measures by or against the countries for which we provide cargo services may have an impact in cargo traffic volumes and adversely affect our financial results. 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.
Our operations are subject to fluctuations in the supply and cost of jet fuel, which could adversely impact our business.
Higher jet fuel prices could have a materially adverse 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 23.0%30.2% of our operating expenses in 2016.2019. For additional information, see “Item 4. Information on the Company—B. Business Overview—Fuel Supplies”. Both the cost and availability of fuel are subject to many economic and political factors and events that we can neither control nor predict.predict, including international political and economic circumstances such as the political instability in major oil-exporting countries. Any future fuel supply shortage (for example, as a result of production curtailments by the Organization of the Petroleum Exporting Countries, or “OPEC”), a disruption of oil imports, supply disruptions resulting from severe weather or natural disasters, labor actions such as the 2018 trucking strike in Brazil, the continued unrest in the Middle East or other events could result in higher fuel prices or reductions in scheduled airline services. We cannot ensure that we would be able to offset any increases in the price of fuel by increasing our fares. In addition, lower fuel prices may result in lower fares through the reduction or elimination of fuel surcharges. We have entered into fuel hedging arrangements, but there can be no assurance that such arrangements will be adequate to protect us from an 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, our hedging methods may also limit our ability to take advantage of any decrease in fuel prices, as was the case in 2015 and, to a lesser extent, in 2016. Although we have implemented measures to pass a portionSee “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of incremental fuel costs to our customers, our ability to lessen the impact of any increaseVariation in fuel costs using these types of mechanisms may be limited.Fuel Prices.”
We rely on maintaining a high aircraft utilization rate to increase our revenues and absorb our fixed costs, which makes us especially vulnerable to delays.
A key element of our 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
absorb the fixed costs associated with our fleet 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, unanticipated maintenance and delays by third-party service providers relating to matters such as fueling and ground handling. If an aircraft falls behind schedule, the resulting delays could cause a disruption in our operating performance.performance and have a financial impact on our results.
We fly and depend upon Airbus and Boeing aircraft, and our business could suffer if we do not receive timely deliveries of aircraft, if aircraft from these companies becomesbecome 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, 2016,2019, LATAM Airlines Group has a total fleet of 250263 Airbus and 8279 Boeing aircraft. Risks 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, aircraft delivery backlog or other factors; |
● | the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft; |
● | the issuance by the Chilean or other aviation authorities of directives restricting or prohibiting the use of our Airbus or Boeing aircraft, or requiring time-consuming inspections and maintenance; |
● | adverse public perception of a manufacturer as a result of safety concerns, negative publicity or other problems, whether real or perceived, in the event of an accident; 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 for 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. For further information, related to current contractual obligations, see “Item 5. Operating and Financial Review and Prospects—F. Long term Indebtedness—Tabular Disclosure of Contractual Obligations.”
8
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 fleet is subject to long-term operating leases. Our operating leases typically run from three to 12 years from the date of delivery.execution. 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.
Our business may be adversely affected if we are unable to service our debt or meet our future financing requirements.
We have a high degree of debt and payment obligations under our aircraft operating leases and financial debt arrangements. 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 Airlines Group S.A.’s credit rating to levels that are below investment grade. Any further securities rating agencies downgrades could increase our financing costs. Higher financing costs could affect our ability to expand or renew our fleet, which in turn could adversely affect our business.
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 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. For further information, related to current contractual obligations, see “Item 5. Operating and Financial Review and Prospects—F. Long term Indebtedness—Tabular Disclosure of Contractual Obligations.”
Moreover, external conditions in the financial and credit markets may limit the availability of funding at particular times or increase its costs, which could adversely affect our profitability, our competitive position and result in lower net interest margins, earnings and cash flows, as well as lower returns on shareholders’ equity and invested capital. Factors that may affect the availability of funding or cause an increase in our funding costs include global macro-economic crises, reductionreductions in our credit rating or in that of our credit rating,issuances, and other potential market disruptions.
We have significant exposure to LIBOR and other floating interest rates; increases in interest rates will increase our financing costs and may have adverse effects on our financial condition and results of operations.
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. 36.9%38.4% of our outstanding consolidated debt as of December 31, 20162019 bears interest at a floating rate after(after giving effect to interest rate hedging agreements.agreements). Volatility in LIBOR or other reference rates 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.
On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by treasury securities. The impact of such a transition away from LIBOR could be significant for us because of our substantial indebtedness. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere. See also the discussion of interest rate risk in “Item 11. Quantitative and Qualitative Disclosures About Market Risk—”Risk of Fluctuations in Interest Rates.”
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 airlines’ insurance premiums or in significant decreases of insurance coverage, as occurred after the September 11, 2001 terrorist attacks. IncreasesFurther increases in insurance costs and/or significant reductions in available insurance coverage could harmhave an adverse impact on our financial conditionresults and results of operations and increasesincrease 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.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 by the corresponding authorities 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.
9
We depend on a limited number of suppliers for certain aircraft and engine parts.
We depend on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers, or adverse perception by the public that would result in unscheduled maintenance requirements, in customer avoidance or in actions by the aviation authorities resulting in an inability to operate our aircraft. During the year 2019, LATAM Airline’s main suppliers were aircraft manufacturers Airbus and Boeing.
In addition to Airbus and Boeing, LATAM Airlines has a number of other suppliers, primarily related to aircraft accessories, spare parts, and components, including Pratt & Whitney, MTU Maintenance, Rolls-Royce, and Pratt and Whitney Canada.
During 2019, Airbus experienced delays in the delivery of A320neo aircraft worldwide. LATAM is currently expecting delivery of three A320neo family aircraft during 2020, but any delivery delays could adversely affect operations.
Rolls-Royce continues to face delays with its Trent 1000 engine program, used to power LATAM’s Boeing 787 fleet, with increased demand for inspections and maintenance. This has affected the availability and the operational flexibility of this aircraft for operators worldwide, with the impact for LATAM reaching its peak in July 2018. LATAM currently has three aircraft on ground awaiting for engines. While the situation has improved considerably, there is no guarantee that this will not continue and therefore reduce the availability of Boeing 787 aircraft, thus negatively affecting operations and financial results.
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 in their provision of services to us, could have an adverse effect on our financial position and results of operations.
We have engaged a significant 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, performance of business processes, including purchasing and cash management, provision of aircraft maintenance and repairs, catering, ground services, and 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 (Global Distribution Systems) may be adversely affected by disruptions in our business relationships with GDS operators.operators or by issues in the GDS’s operations. 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 or systems 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, failure, or failurecybersecurity incident impacting systems hosted internally at our data centers, or externally at third-party locations or cloud providers, or large-scale interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network with potential impactonimpact on our operations. 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, hackerscyber attacks and other security issues. While we have in place,These systems include our computerized airline reservation system, flight operations system, telecommunications systems, website, customer, self-service applications (“apps”), maintenance systems, check-in kiosks, in-flight entertainment systems and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly so as to prevent a business disruption and its adverse financial and reputational consequences to our business.data centers.
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, deception, or deception.cybersecurity incident. 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.
10
Increases in our labor costs, which constitute a substantial portion of our total operating expenses, could directly impact our earnings.
Labor costs constitute a significant percentage of our total operating expenses (21.8%(18.5% in 2016)2019) 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 could result in a material reduction in our earnings.
Collective action by employees could cause operating disruptions and adversely 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 adversely impact our operating and financial performance, as well as our image.
A strike, work interruption or stoppage or any prolonged dispute with our employees who are represented by any of these unions could have an adverse impact on our operations. These risks are typically exacerbated during periods of renegotiation with the unions, which typically occurs every two to four years depending on the jurisdiction and the union. Any renegotiated collective bargaining agreement could feature significant wage increases and a consequent increase in our operating expenses. Any failure to reach an agreement during negotiations with unions may require us to enter into arbitration proceedings, use financial and management resources, and potentially agree to terms that are less favorable to us than our existing agreements. Employees who are not currently members of unions may also form new unions that may seek further wage increases or benefits.
Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees.
As of December 31, 2016,2019, approximately 72.9%46% of our employees, including administrative personnel, cabin crew, 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. For further information regarding the unions representing our employees in each country in which we operate and with which we have established collective bargaining agreements, see “Item 6. Directors, Senior Management and Employees—D. Employees—Labor Relations.”
Collective action by employees could cause operating disruptions and adversely 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 adversely impact our operating and financial performance, as well as our image.
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, especially 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. AWe cannot assure you that we will be able to recruit, train and retain the managers, pilots, technicians and other qualified employees that we need to continue our current operations or replace departing employees. An increase in turnover or failure to recruit, train and retain qualified employees at a reasonable cost could materially adversely affect our business, financial condition, and results of operations.
Risks Related to the Airline Industry and the Countries in Which We Operate
Our performance is heavily dependent on economic conditions in the countries in which we do business. Negative economic conditions in those countries could adversely impact our business and results of operations and cause the market price of our common shares and ADSs to decrease.
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 adversely affected by global economic recessionary conditions, weak economic growth in Chile, recession in Brazil and 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 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:
● | changes in economic or other governmental policies; |
● | changes in regulatory, legal or administrative practices; |
● | weak economic performance, including, but not limited to, a slowdown in the Brazilian economy, political instability 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. |
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 in Brazil or in other markets in which we operate. Sustained weakenedweak demand may adversely impact our revenues, results of operations or financial condition.
An adverse economic environment, whether global, regional or in a particular country, could result in a reduction in passenger traffic, as well as a reduction in our cargo business, and could also impact our ability to raise fares, which in turn would materially and negatively affect our financial condition and results of operations.
We are exposed to increases in landing fees and other airport service charges that could adversely affect our margin and competitive position. Also, it cannot be assured that in the future we will have access to adequate facilities and landing rights necessary to achieve our expansion plans.
Airlines
We must pay fees to airport operators for the use of their facilities. Any substantial increase in airport facilities.charges, including at Guarulhos International Airport in São Paulo, Jorge Chavez International Airport in Lima or Comodoro Arturo Merino Benitez International Airport in Santiago, could have a material adverse impact on our results of operations. Passenger taxes and airport charges have increased substantially in recent years. We cannot assure you that the airports in which we operate will not increase or maintain high passenger taxes and service charges in the future. Any substantial increase in airport chargessuch increases could have an adverse effect on our financial condition and results of operations.
Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose various restrictions, including takeoff and landing slot restrictions during certain periods of the day and limits on aircraft noise levels. We cannot be certain that we will be able to obtain a materialsufficient number of slots, gates and other facilities at airports to expand our services in line with our growth strategy. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots re-allocated to others. Where slots or other airport resources are not available or their availability is restricted in some way, we may have to amend our schedules, change routes or reduce aircraft utilization. It is also possible that aviation authorities in the countries in which we operate, change the rules for the assignment of takeoff and landing slots, as it was the case with the São Paulo airport (Congonhas) in 2019 where the slots previously operated by Avianca Brazil were reassigned. Any of these alternatives could have an adverse financial impact on our results of operations. In addition, anyWe cannot ensure that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase in passenger taxes could negatively impact demand for air travel and affect our results.services at such airports.
Our business is highly regulated and changes in the regulatory environment in the countries 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. 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.
Our business, financial condition, results of operations and the price of preferred shares and ADSs may be adversely affected by changes in policy or regulations at the federal, state or municipal level in the countries in which we operate, involving or affecting factors such as:
● | interest rates; |
● | currency fluctuations; |
● | monetary policies; |
● | inflation; |
● | liquidity of capital and lending markets; |
● | tax and social security policies; |
● | labor regulations; |
● | energy and water shortages and rationing; and |
● | other political, social and economic developments in or affecting Brazil, Chile, Peru, and the United States, among others. |
For example, the Brazilian federal government has frequently intervened in the domestic economy and made drastic changes in policy and regulations to control inflation and affect other policies and regulations. This required the federal government to increase interest rates, change taxes and social security policies, implement price controls, currency exchange and remittance controls, devaluations, capital controls and limits on imports.
Uncertainty over whether the Brazilian federal government will implement changes in policy or regulation affecting these or other factors may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. These and other developments in the Brazilian economy and governmental policies may adversely affect us and our business and results of operations and may adversely affect the trading price of our preferred shares and ADSs.
We are also subject to international bilateral air transport agreements that provide for the exchange of air traffic rights between the countries where we operate, and we must obtain permission from the applicable foreign governments to provide service to foreign destinations. There can be no assurance that such existing bilateral agreements will continue, or that we will be able to obtain more route rights under those agreements to accommodate our future expansion plans. Certain bilateral agreements also include provisions that require substantial ownership or effective control. Any 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 permits to operate to certain airports or destinations, the inability for us to obtain favorable take-off and landing authorizations at certain high-density airports or the imposition of other sanctions could also have a negative impact on our business. We cannot be certain that a change in ownership or effective control or in a foreign government’s administration of current laws and regulations or the adoption of new laws and regulations will not have a material adverse effect on our business, financial condition 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:
● | 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, or by other flight operators, 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.airlines, or due to a perception of increased risk in the industry related to concerns about war or terrorist attacks, the general industry, or general industry safety.
High levels of competition in the airline industry, such as the presence of low-cost carriers in the markets in which we operate, 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 or passenger 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 offerings in an effort to gain greater market share. For more information regarding our main competitors, see “Item 4. Information of the Company—B. Business Overview—Passenger Operations—International Passenger Operations” and “Item 4. Information of the Company—B. Business Overview—Passenger Operations—Business Model for Domestic Operations.”
Low-cost carriers have an important impact in the industry’s revenues given their low unit costs. Lower costs allow low-cost carriers to offer inexpensive fares which, in turn, allow price sensitive customers to fly or to shift from large to low cost carriers. In past years we have seen more interest in the development of the low-cost model throughout Latin America. For example, in the Chilean market, Sky Airline, our main competitor, has been migrating to a low-cost model since 2015, while in July 2017, JetSmart, a new low-cost airline, started operations. In the Peruvian domestic market, VivaAir Peru, a new low-cost airline, started operations in May 2017, and in April 2019, another low-cost airline, Sky Airline Peru, started operations. In Colombia, low-cost competitor VivaColombia has been operating in the domestic market since May 2012. Low-cost competitors Flybondi and Norwegian began operations in the Argentinian domestic market during 2018, and in April 2019, JetSmart, another low-cost airline, started operations and announced the acquisition of Norwegian´s Argetinian subsidiary operations in December 2019. A number of low-cost carriers have announced growth strategies including commitments to acquire significant numbers of aircraft for delivery in the next few years. The entry of the low-cost carriers local into markets in which we compete, including those described above, could have a material adverse effect on our operations and financial performance.
Our international strategic growth plans rely, in part, upon receipt of regulatory approvals of the countries in which we plan to expand our operations with a Joint Business Agreement (JBA). We may not be able to obtain those approvals, while other competitors might be approved. Accordingly, we might not be able to compete for the same routes as our competitors, which could diminish our market share and adversely impact our financial results. No assurances can be given as to any benefits, if any, that we may derive from such agreements.
Some of our competitors may receive external support, which could adversely 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. For example, Aerolineas Argentinas has historically been government subsidized.
Moreover, as a result of the competitive environment, there may be further consolidation in the Latin American and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry. Furthermore, consolidation in the airline industry and changes in international alliances will continue to affect the competitive landscape in the industry and may result in the development of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures.
Some of the countries where we operate may not comply with international agreements previously established, which could increase the risk perception of doing business in that specific market and as a consequence impact our business and financial results.
Rulings by a bankruptcy court in Brazil and by higher judicial authorities related to the bankruptcy proceedings of Avianca Brazil may appear to be inconsistent with the Cape Town Convention (CTC) treaty that Brazil has signed, thus raising concerns about the rights of creditors in respect of financings secured by aircraft. Accordingly, if creditors perceive that an increase business risk is created by these rulings for leasing or other financing transactions involving aircraft in Brazil, there is a possibility that rating agencies may issue lower credit ratings in respect of financings that are secured by aircraft in Brazil. As a result, our business and financial results may be adversely affected if our financing activities in Brazil are impacted by such events.
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 coveredaffected 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.
In 2016, the ICAOInternational Civil Aviation Organization (“ICAO”) adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize carbon dioxide (“CO2”) emissions in international civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). The CORSIA will be implemented in phases, starting with the participation of ICAO member states on a voluntary basis during a pilot phase (from 2021 through 2023), followed by a first phase (from 2024 through 2026) and a second phase (from 2027). Currently, CORSIA focuses on defining standards for monitoring, reporting and verification of emissions from air operators, as well as on defining steps to offset CO2 emissions after 2020. To the extent most of the countries in which we operate continue to be ICAO member states, in the future we may be affected by regulations adopted pursuant to the CORSIA framework.
The proliferation of national regulations and taxes on CO2 emissions in the countries that we have domestic operations, including recent enviromentalenvironmental regulations that the airline industry is facing in Colombia, may also affect our costs of operations and our margins.
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 and Zika), and outbreaks such as the recent coronavirus, 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 typesthe current spread of situationsthe coronavirus and other adverse public health developments could have a prolonged effect on air transportation demand and any prolonged or widespread effects could significantly impact our operations.
After the terrorist attacks in the United States on September 11, 2001, the Company made the decision to reduce its flights to the United States. In connection with the reduction in service, the Company reduced its workforce resulting in additional expenses due to severance payments to terminated employees during 2001. Any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations or otherwise and any related economic impact could result in decreased passenger traffic and materially and negatively affect our business, financial condition and results of operations.
After the 2001 terrorist attacks, airlines have experienced increased costs resulting from additional security measures that may be made even more rigorous in the future. In addition to measures imposed by the U.S. Department of Homeland Security and the TSA, IATA and certain cost items.foreign governments have also begun to institute additional security measures at foreign airports we serve.
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.profitability. 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, byoil-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.
A pandemic or the widespread outbreak of contagious illnesses can have a material adverse effect on our business and results of operations.
The widespread outbreak of a contagious illness such as the novel COVID-19 (Coronavirus), first identified in Wuhan, Hubei Province, China and which has been declared a pandemic by the World Health Organization (WHO), or fear of such an event, is materially reducing demand for, and availability of, worldwide air travel and therefore is having a material adverse effect on our business and results of operations.
In 2003, an outbreak of a coronavirus known as severe acute respiratory syndrome (SARS) originating in China became an epidemic and resulted in a slowdown of passenger air traffic due contagion fears. At the time, RPK growth was reduced due to oversupply in the market as airlines tried to cut capacity.
The recent outbreak of Coronavirus has negatively affected global economic conditions, disrupted supply chains and otherwise negatively impacted aircraft manufacturing operations and may reduce the availability of aircraft and aircraft spare parts. The ultimate severity of the Coronavirus outbreak is uncertain at this time and therefore we cannot predict the impact it may have on the availability of aircraft or aircraft spare parts. However, the effect on our results may be material and adverse if supply chain disruptions persist and preclude our ability to adequately maintain our fleet.
The recent outbreak of Coronavirus has also led to government-imposed travel restrictions, flight cancellations, and a marked decline in passenger demand for air travel. Accordingly, LATAM Airlines Group and its affiliates implemented a reduction in international flights of approximately 30% and recently updatedthe decrease in capacity to approximately 70% of the total operations, corresponding 90% to international operations and 40% to domestic operations. These measures will apply principally to flights from South America to Europe and the US between April 1 and May 30, 2020. The potential for a period of significantly reduced demand for travel has and will likely continue to result in significant lost revenue. As a result of these or other conditions beyond our control, our results of operations could be volatile and subject to rapid and unexpected change. In addition, if the spread of the Coronavirus were to continue unabated, our operations could also be negatively affected if employees are quarantined as the result of exposure to the contagious illness.We cannot currently fully predict the impact that the Coronavirus outbreak will have on global air travel and the extent to which it may impact the demand for air travel in the regions we operate. Continued travel restrictions or operational issues resulting from the rapid spread of the Coronavirus or other contagious illnesses that adversely reduce demand for air travel in a part of the world in which we have significant operations could a material adverse effect on our business and results of operations.
We are subject to risks related to litigation and administrative proceedings that could adversely affect our business and financial performance in the event of an unfavorable ruling.
The nature of our business exposes us to litigation relating to labor, insurance and safety matters, regulatory, tax and administrative proceedings, governmental investigations, tort claims and contract disputes. Litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome among other matters. Currently, as in the past, we are subject to proceedings or investigations of actual or potential litigation. Although we establish accounting provisions as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. We cannot assure you that these or other legal proceedings will not materially affect our business. For further information, see “Item 8. Financial Information—Legal and Arbitration Proceedings.” and Note 31 to our audited consolidated financial statements included in this report.
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We are subject to anti-corruption, anti-bribery, anti-money laundering and antitrust laws and regulations in Chile, the United States and in the various countries we operate. Violations of any such laws or regulations could have a material adverse impact on our reputation and results of operations and financial condition.
We are subject to anti-corruption, anti-bribery, anti-money laundering, antitrust and other international laws and regulations and are required to comply with the applicable laws and regulations of Chile, Brazil, the United States and certain otherall jurisdictions where we operate. In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our affiliates, employees, directors, officers, partners, agents and service providers or that any such persons will not take actions in violation of our policies and procedures. Any violations by us of anti-bribery and anti-corruption laws or sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition.
The Brazilian government hasLatin American governments have exercised and may continue to exercise significant influence over their economies.
Governments in Latin America frequently intervene in the Brazilian economy, which mayeconomies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions have an adverse impactoften involved, among other measures, nationalizations and expropriations, price controls, currency devaluations, mandatory increases on ourwages and employee benefits, capital controls and limits on imports. Our business, financial condition and results of operations.
The Brazilian economy has been characterizedoperations may be adversely affected by the significant involvementchanges in government policies or regulations, including such factors as exchange rates and exchange control policies; inflation control policies; price control policies; consumer protection policies; import duties and restrictions; liquidity of the Brazilian government, which often changes monetary, credit, fiscaldomestic capital and lending markets; electricity rationing; tax policies, including tax increases and retroactive tax claims; and other policies to influence Brazil’s economy. Thepolitical, diplomatic, social and economic developments in or affecting the countries where we operate.
For example, the Brazilian government’s actions to control inflation and implement other policies have involved wage and price controls, depreciation of the real, controls over remittance of funds abroad, intervention by the Central Bank to affect base interest rates and other measures. In the future, the level of intervention by Latin American governments may continue or increase. We cannot assure you that these or other measures will not have no controla material adverse effect on the economy of each respective country and, consequently, will not adversely affect our business, financial condition and results of operations.
Political instability and social unrest in Latin America may adversely affect our business.
We operate primarily within Latin America and are thus subject to a full range of risks associated with our operations in this region. These risks may include unstable political or social conditions, lack of well-established or reliable legal systems, exchange controls and other limits on our ability to repatriate earnings and changeable legal and regulatory requirements.
Although political and social conditions in one country may differ significantly from another country, events in any of our key markets could adversely affect our business, financial conditions or results of operations.
For example, in Brazil, in the last couple of years, as a result of the ongoing Operation Car Wash (Lava Jato investigation), a number of senior politicians have resigned or been arrested and other senior elected officials and public officials are being investigated for allegations of corruption. One of the most significant events that elapsed from this operation was the impeachment of the former President Rousseff by the Brazilian Senate on August, 2016, for violations of fiscal responsibility laws and the governing of its Vice-President, Michel Temer, during the last two years of the presidential mandate, which due to the development of the investigations conducted by the Federal Police Department and the General Federal Prosecutor’s Office indicted President Temer on corruption charges. Along with the political and economic uncertainty period the country was facing, in July 2017, former President Luiz Inácio Lula da Silva was convicted of corruption and money laundering by a lower federal court in the State of Paraná in connection with the Operation Car Wash (Lava Jato). In addition, Argentine presidential elections held in October 2019, saw the return of the former president of Argentina, Cristina Fernandez de Kirchner who was elected Vice-President and who was previously prosecuted for alleged corruption. In 2019, Peru experienced a constitutional crisis began when President Martín Vizcarra dissolved the Congress of Peru on September 30, 2019. The Peruvian Congress responded by declaring Vizcarra's presidency suspended and appointed Vice President Mercedes Aráoz as interim president, moves that were largely seen as null and void. The Peruvian Constitutional Court ruled that President Martín Vizcarra had not exceeded his powers when he took the step amid a stand-off between the government and opposition-controlled Congress. Opposition lawmakers had denounced it as a coup but the heads of armed forces and the police backed the president. In October 2019. Chile saw significant protests associated with economic conditions resulting in the declaration of a state of emergency in several major cities. The protests in Chile began over criticisms about a lack of quality education, weak pensions, increasing prices and low minimum wage. Current initiatives to address the concerns of the protesters are under discussion in the Chilean Congress. These initiatives include labor reforms, tax reforms and pension reforms, among others. It is not possible to predict the effect of these changes as they are still under discussion, but could potentially result in higher payments of wages and salaries and an increase in taxes. On April 26, 2020, Chile will hold a referendum on whether and how to change the current constitution, which could lead to additional protests. If social unrest in Chile were to continue or intensify, it could lead to operational delays or adversely impact our ability to operate in Chile. LATAM took a series of measures to alleviate the impact for its passengers, including refunds and changes of tickets. The Company estimated a total impact of approximately US$40 million for 2019.
Although conditions throughout Latin America vary from country to country, our customers’ reactions to developments in Latin America generally may result in a reduction in passenger traffic, which could materially and negatively affect our financial condition and results of operations.
Latin American countries have experienced periods of adverse macroeconomic conditions.
Our business is dependent upon economic conditions prevalent in Latin America. Latin American countries have historically experienced economic instability, including uneven periods of economic growth as well as significant downturns. High interest, inflation (in some cases substantial and prolonged), and unemployment rates generally characterize each economy. Because commodities such as agricultural products, minerals, and metals represent a significant percentage of exports of many Latin American countries, the economies of those countries are particularly sensitive to fluctuations in commodity prices. Investments in the region may also be subject to currency risks, such as restrictions on the flow of money in and out of the country, extreme volatility relative to the U.S. dollar, and devaluation.
For example, in the past, Peru has experienced periods of severe economic recession, currency devaluation, high inflation, and political instability, which have led to adverse economic consequences. We cannot predict what measuresassure you that Peru will not experience similar adverse developments in the future even though for some years now, several democratic procedures have been completed without any violence. We cannot assure you that the current or any future administration will maintain business-friendly and open-market economic policies or policies that stimulate economic growth and social stability. In Brazil, the Brazil Real GDP decreased 3.5% in 2015, decreased 3.3% in 2016, increased 1.1% in 2017 and increased 1.1% in 2018, according to the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estadística, or “IGBE”). In addition, the credit rating of the Brazilian federal government was downgraded in 2015 and 2016 by all major credit rating agencies and is no longer investment grade. We can offer no assurances as to the policies that may takebe implemented by the recently elected Argentine administration, or that political developments in Argentina will not adversely affect the Argentine economy.
Accordingly, any changes in the future.
Risks Related to our Common Shares and ADSs
Our major shareholders may have interests that differ from those of our other shareholders.
One of our
The major shareholder groups,group, the Cueto Group (the “LATAM Controlling Shareholders”“Cueto Group”),which as of February 28, 2017, beneficially owned 28.27%21.46% of our common shares is entitled to elect threeas of the nine members of our board of directors and is in a position to direct our management.February 29, 2020. In addition, the LATAM Controlling Shareholders haveCueto Group entered into a shareholdersshareholders’ agreement with the Amaro Group (the “Amaro Group”), which as of January 31, 2017,February 29, 2020, held a 3.02%1.98% of LATAM shares through TEP Chile, in addition to the indirect stake they haveit has through the 21.88% interest they holdit holds in Costa Verde Aeronáutica S.A., the main legal vehicle through which the Cueto Group holds LATAM shares),shares, pursuant to which these two major shareholder groups have agreed to vote together to elect individuals to our board of directors in accordance with their direct and indirect shareholder interest in LATAM. Pursuant to athe shareholders’ agreement, the LATAM Controlling ShareholdersCueto Group and the Amaro Group have also agreed to use their good faith efforts to reach an agreement and act jointly on all actions to be taken by our board of directors or shareholdersshareholders’ meeting, and if unable to reach to such agreement, to follow the proposalproposals made by our board of directors. Decisions by the Company that require supermajority votes under Chilean law are also subject to voting arrangements by the LATAM Controlling ShareholdersCueto Group and the Amaro Group. In addition, another major shareholder,other shareholders including, Delta Air Lines, Inc, which, as of February 29, 2020, held 20.00% of our common shares, and Qatar Airways Investments (UK) Ltd., which as of January 31, 2017,February 29, 2020, held 10.03%110.00% of our outstanding common shares, is entitled to appoint one individual to our board of directors. Thecould have interests of our major shareholdersthat may differ from those of our other shareholders. See “Item 7. ControllingMajor Shareholders and Related Party Transactions—A. 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 currently Mauricio Amaro,to exercise this right; for example, the members of the board of directors elected by the shareholders in 2019 designated Ignacio Cueto, to serve in this role.
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Trading of our ADSs and common shares in the securities markets is limited and could experience further illiquidity and price volatility.
Our common shares are listed on the various Chilean stock exchanges. 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 of 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 ADRs 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 affectnon-Chilean residents that invest in our shares.
Equity investments in Chile bynon-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. Furthermore, futureany changes in withholding taxes could negatively affectnon-Chilean residents that invest in our shares.
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—D. Exchange Controls—Foreign Investment and Exchange Controls in 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.
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 stock exchanges also provides less detail in certain respects than the information regularly published by listed companies in the United States or in certain other countries. Furthermore, there is a lower level of regulation of the Chilean securities market 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. For further information, see “Item 16. Reserved—G. Corporate Governance.”
ITEM 4. | INFORMATION ON THE COMPANY |
A. HISTORY AND DEVELOPMENT OF THE COMPANY
General
LATAM Airlines Group is a Chilean-based airline holding company formed bythrough the business combination of LAN Airlines S.A. of Chile and TAM of Brazil in 2012. Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM S.A. continues to exist as a subsidiary of LATAM. The Company is primarily involved in the transportation of passengers and cargo and operates as one unified business enterprise. During 2016, we began the transition of unifying LAN and TAM into a single brand: LATAM.
LATAM’s airline holdings include LATAM and its affiliates in Chile, Peru, Argentina, Colombia and Ecuador, and LATAM Cargo and its affiliates MasAir (in Mexico) andaffiliate LANCO (in Colombia), as well as TAM S.A. and its affiliates TAM Linhas Aereas S.A (LATAM Airlines Brazil), TAM Transportes Aereos del Mercosur S.A., (LATAM Airlines Paraguay), and LATAM Cargo and Multiplus.Cargo. LATAM is a publicly traded corporation listed inon the Santiago Stock Exchange (“SSE”), the Valparaiso Stock Exchange, the Chilean Electronic Exchange and the New York Stock Exchange (“NYSE”). with a market capitalization of US$4.12 billion as of February 29, 2020.
LAN was founded in
LATAM’s history goes back to 1929, bywhen the Chilean government.government founded LAN. In 1989, the Chilean government sold 51.0% of LAN’s capital stock to Chilean investors and to theSAS, Scandinavian Airlines System. In 1994, LATAM’s current controlling shareholders, together with other major shareholders, acquired 98.7% of LAN’s stock, including the remaining shares then held by the Chilean government. In 1997, LAN became the first Latin American airline to list its shares (which trade in the form of ADRs)ADSs) on the New York Stock Exchange.
Over the past decade, LATAM 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 acquisition2010. The business combination of Aerovias de Integracion Regional, Aires S.A. (dba “LAN Colombia”),LAN and the combination with TAM in 2012.
LATAMJune 2012 further expanded the Company’s operations in Brazil, where TAM Linhas Aéreas S.A. (“TLA” or “LATAM Airlines BrazilBrazil”), the TAM operating entity, is one of thea leading domestic and international airlines in the Brazilian market,airline offering flights throughout Brazil with a strong domestic market share, international passenger services and significant cargo operations. The companyTAM was founded in May 1997 (under the name CIT—Companhia de Investimentos em Transportes)Transportes), for the purpose of participating in, managing and consolidating shareholdings in airlines. In September 2002, itsTAM’s name was changed to TAM S.A. and its shares were listed on Bovespathe Brazilian Stock Exchange (“Bovespa”) in June 2005. From 2006 until the combination with LAN in 2012, TAM American Depositary SharesADSs were also listed on the New York Stock Exchange.
Our principal executive offices are located at Presidente Riesco 5711, 20th floor, Las Condes, Santiago, Chile and our general telephone number at this location is(56-2) 2565-2525. We have designated LATAM Airlines Group as our agent in the United States, located at 970 South Dixie Highway, Miami, Florida 33156. Our website address is 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,Andrés del Valle, Senior Vice President of Corporate ControllerFinance and Investor Relations, at InvestorRelations@latam.com.
Combination of LAN
The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and TAM
On June 22, 2012, LAN and TAM successfully completed an exchange offer resulting inother information regarding issuers that file electronically with 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 Amaro Group 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. The beneficial ownership and organizational structure of LATAM Airlines Group as of January 31, 2017 was as follows:SEC.
Capital Expenditures
For a description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”
B. BUSINESS OVERVIEW
General
LATAM Airlines Group is the largest passenger and cargo airline group 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 135145 destinations in 2426 countries and cargo services to approximately 139151 destinations in 29 countries, with aan operating fleet of 332331 aircraft and a set of bilateral
alliances. In total, LATAM Airlines Group has near to 46,000approximately 42,000 employees. For the year 2019, LATAM transported approximately 74 million passengers. LATAM Airlines Group and its affiliates currently provide domestic services in Brazil, Chile, Perú,Peru, Argentina, Colombia and Ecuador; weand also provide intra-regional and long-haul operations. The cargo affiliate carriers of LATAM in Chile, Brazil, Colombia and MexicoColombia carry out cargo operations through the use of belly spacesspace on the passenger flights and dedicated cargo operations using freight aircraft. We also offer other services, such as ground handling, courier, logistics and maintenance.
As of December 31, 2016,2019, we provided scheduled passenger service to 1617 destinations in Chile, 1720 destinations in Peru, fivesix destinations in Ecuador, 1513 destinations in Argentina, 14 destinations in Colombia, 4145 destinations in Brazil, 1210 destinations in other Latin American countries and the Caribbean, fiveseven destinations in North America, sixseven destinations in Europe, threefour destinations in the South PacificAustralasia, one destination in Asia and one destination in Africa.
In addition, as of December 31, 2016,2019, through our various code-sharing and interline agreements, we offer service to 8466 destinations in North America, 4667 destinations in Europe, 2215 destinations in Australasia, 922 destinations in Asia and 47 destinations in Africa.
Competitive Strengths
Our strategy is to maintain LATAM Airlines Group’s position as the leading airline in South America by leveraging our unique position in the airline industry. LATAM Airlines Group is the only airline group in the region with a localdomestic presence in six markets, as well as intra-regional and long-haul operations.operations to five continents. As a result, the Company has moregeographical diversity and operational flexibility, as well as a proven track record of acting quickly to adapt ourits business to economic challenges. Moreover, LATAM’s unique leadership position in a region with growth potential and the focus inon our existing competitive strengths, will allow us to continue building our business model and to fuel our future growth.growth, ensuring LATAM’s long term sustainability. We believe our most important competitive strengths are:
Leader in the South America Airlines space,Space, with a Unique Leadership Position among Global Airlines
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 and its affiliates have domestic passenger operations in Chile, Brazil, Peru, Argentina, Colombia and Ecuador. These six countries are among the most significant passenger markets in South America and represent approximately 96% of the domestic ASKs in the region. We are also the largest operator of intra-regional routes, connecting the main cities and also some secondary cities in South America. Furthermore, through our significant presence in the largest hubs in South America—Lima and São Paulo—we are able to offer the best connectivity options between South America and the rest of the world. In addition, our cargo companies are the largest air cargo operators within, to and from Latin America, and particularly in Brazil.
Geographically Diversified Revenue Base, including both Passenger and Cargo Operations
The
Our operations of 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. We believe 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, contributing toreducing our fixed operating expenses per flight, lowering break-even load factors and enhancing our 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, 2016,2019, passenger, cargo and other revenues accounted for 82.7%86.3%, 11.7%10.2% and 5.7%3.5% of total revenues respectively.
Modern Fleet and Optimized Fleet Strategy
The average age of our fleet is approximately sevennine years, making it 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, and also decreasingin noise levels.
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 plans envisageplan includes a short-haul fleet formed exclusively by aircraft from the A320 family, with a focus on the A321 and A320neo. In 2016, LATAM incorporated two A320neo, are-engined A320 that the Company received for the first time in 2016, becoming the first airline in Latin America to fly this model.
For long-haul passenger flights, we operate the Boeing767-300ER, the Boeing787-8, and Boeing787-9 aircraft, the Boeing 787-9, the Boeing 777-300ER aircraft and the AirbusA350-900 that which started operationoperations in 2016. The Boeing 787 and Airbus A350 models allow us to achieve important savings in fuel consumption, while incorporating modern technology to deliver the best travel experience for our passengers. In 2016,2019, we incorporated fivefour Airbus 350-900 and two Boeing787-9 and six Airbus350-900 into our fleet.
LATAM continues to take a flexible approach to its fleet plan in order to better align it to market conditions. During 2016, we achieved2019, LATAM further restructured its fleet delivery schedule, achieving a significant reduction of US$1.1 billion in our fleet commitments for the coming years, allowing usperiod 2020-2022, equivalent to defer capital expenditures and continue to strenghten our Balance Sheet.a reduction of approximately 38% of total fleet commitments for this period.
20
Strong Brand Teamed with Key Global Strategic Alliances
In May 2016 our new brand, LATAM, was officially launched. We believe that our new brand is associated with superior service aircraft and technologically advanced operations, and is well recognized and respected in the markets in which we operate. In 2016, our operations in Chile, Argentina, Ecuador, Peru and Colombia were awarded2019, LATAM Airlines Group was named for the top prizesecond year running as the “Best Airlines‘Best Global Airline in South America”America’ in the Passenger Experience Association of Airlines (APEX) Passenger Choice Awards. In addition, for the second year in a row, LATAM Airlines Group led the rankings of the “Punctuality List 2020,” compiled by the SkyTrax WorldOfficial Airline Awards. These awards are considered a global barometer for customer satisfaction within the industry, thanks to their exclusive reliance on the opinion of passengers.
LAN joined theoneworld®alliance, one of the world’s leading airline alliances, in 2000. TAM (nowGuide (OAG), which highlights LATAM Airlines Brazil) joinedoneworld®Group as the global leader in 2014, marking a significant milestone and completing the entry“Mega Airlines” category. In addition, LATAM also received the first place in punctuality in the global category, according to the annual On-Time Performance (OTP) report compiled for the year 2019 by Cirium, expert consultants in analysis of all LATAM Airlines into oneworld®. To our passengers, this means greater convenience when traveling, since they will have the same standard of high-quality customer service, regardless of their international destination. travel data.
Our strategic global alliances and existing commercial agreements provide our customers with access to more than 1,000 destinations worldwide, a combined reservations system, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market.
In 20162019, LATAM entered into two new joint business agreements: ana framework agreement with American AirlinesDelta Air Lines, Inc. that will we expect to unlock new growth opportunities, building upon Delta’s and anLATAM’s global footprint. For more information on the framework agreement with British Airwayssee “Item 4. Information on the Company—B. Business Overview—Passenger Alliances and Iberia. These agreements further strengthen our relationship with otheroneworld® partners. Both agreements will allow LATAM to expand its network to more than 420 destinations worldwide, operating routes from South America to the United States and Canada with American Airlines and routes from South America to Europe with British Airways and Iberia. The agreements remain subject to regulatory approval in different countries. Some approvals have already been granted: in March, 2017, the administrative court of economic defense of the CADE (Administrative Council for Economic Defense) in Brazil, approved the agreement with British Airways and Iberia, representing the final stage of an evaluation process that began in June 2016. During the review, the CADE evaluated the scope of the agreement in terms of free competition and the benefits that it will bring to passengers, including improved connectivity, an expansion of the destination network and reduced prices. Both agreements have been approved in Uruguay.Commercial Agreements.”
Financial Flexibility
We have historically managed our business to maintain financial flexibility and a strong balance sheet, seeking 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 deliveries, including an important part of our currentre-fleeting program, at attractive financing rates. Our wide array of funding sources includes bilateral loans, syndicated loans, aircraft rentals and a variety of capital markets structures, among others.
Recognized Loyalty ProgramsProgram
On March 1, 2016, we announced our rebranded and improved
Our frequent flyer programs namedprogram, LATAM Pass, (corresponding to the previous LAN Pass) and LATAM Fidelidade (corresponding to the former TAM Fidelidade). The change is part of the process of consolidating our new brand identity (LATAM) and the evolution of our loyalty programs.
LATAM Fidelidade and LATAM Pass together represent the leading frequent flyer programsprogram in South America, with strong participation rates and brand recognition by our customers. Customers in eachthe program earn points or kilometersmiles based on distance flown,the price paid for the ticket, class of ticket purchased, and elite level, as well as by using the services of outside partners in the program. In addition, in 2009 TAM launched its affiliate Multiplus, a coalition of loyalty programs, which allows members to accumulate points not just by flying with LATAM, but also by making purchases through credit cards or using services and products at partner establishments, and allows members to redeem points for LATAM Airlines Brazil flights and other products at partner establishments.
We believe these flexible programs arethat our program is attractive to customers because they doit does not impose restrictions on those flights for which points can be redeemed, or limit the number of seats available on any particular flight to members using the loyalty program. LATAM Pass and LATAM Fidelidade members can also accrue and redeem points for flights on otheroneworld® member airlines.
Business Strategy
Our mission is to connect people safely, with operational excellence and a personal touch, seeking to become one of the bestmost admired airline groups in the world. In order to achieve our mission, the principal areas on which we plan to focus our efforts going forward are as follows:
Continually Strengthen Our Network
We intend to continue to strengthen our route network in South America, offering the best connectivity within the region at competitive prices and ensuring that we are the most convenient option for our passengers. We believe that we are the only airline group in the world with a local presence in six home markets and an international and intra-regional operation. This position is bolstered by our enhanced infrastructure in several of our key hubs, allowing us to further strengthen our network and connection.network. We intend to leverage our position to create a leading portfolio of services and destinations, providing more options to our passengers and building a platform to support continued growth.
Enhance Brand Leadership and Customer Experience
We will always seek to be the preferred choice of passengers in South America. Our efforts are supported by a differentiated passenger experience and our leveraging of mobile digital technologies. We continue working on the implementation of our single, unified brand, culture, product and value proposition for our passengers. Additionally, we are focused 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.
Improving Efficiency and Cost Competitiveness
We are continually working to maintain a competitive cost structure and further improve our effectiveness,efficiency, simplify our organization and increase flexibility and speed in decision-making. As previously announced, LATAM is embarked on an important project to introduce a new travel model for its domestic passenger servicesCost savings include reductions in South America, in order to increase competitivenessfuel and ensure the sustainability of the domestic business model in the long term. This model requires continued cost efforts to reduce sellingfees, procurement, operations, overhead and distribution expenses, increase fleet utilizationcosts, among others, as well as the implementation of a customized service offering in domestic and operational productivity and simplify back-office and support functions, while controlling fixed costs.international markets.
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 proposition to our customers surpass our competitors consistently and operate sustainably forover the long term.
Proactive Risk Management
We strive to have a holistic and responsible view of risk in decision-making. We put special focus on 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 setsset forth our operating revenues by activity and point of sale for the periods indicated:
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in US$ millions) | ||||||||||||
Total passenger revenues | 7,877.7 | 8,410.6 | 10,380.1 | |||||||||
Total cargo revenues | 1,110.6 | 1,329.4 | 1,713.4 | |||||||||
Total traffic revenues | 8,988.3 | 9,740.0 | 12,093.5 | |||||||||
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(in US$ millions) | ||||||||||||
Peru | 627.2 | 681.3 | 660.1 | |||||||||
Argentina | 1,031.0 | 979.3 | 813.5 | |||||||||
United States | 933.1 | 1,025.5 | 1,224.3 | |||||||||
Europe | 714.4 | 723.1 | 935.9 | |||||||||
Colombia | 343.0 | 353.0 | 391.7 | |||||||||
Brazil | 2,974.2 | 3,464.3 | 5,361.6 | |||||||||
Ecuador | 198.2 | 238.5 | 248.6 | |||||||||
Chile | 1,512.6 | 1,575.5 | 1,589.2 | |||||||||
Asia Pacific and rest of Latin America | 654.6 | 699.5 | 868.6 | |||||||||
Total Operating Revenues | 8,988.3 | 9,740.0 | 12,093.7 |
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in US$ millions) | ||||||||||||
Total passenger revenues | 9,005.6 | 8,709.0 | 8,494.5 | |||||||||
Total cargo revenues | 1,064.4 | 1,186.5 | 1,119.4 | |||||||||
Total traffic revenues | 10,070.1 | 9,895.5 | 9,613.9 |
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in US$ millions) | ||||||||||||
Peru | 802.0 | 705.1 | 626.3 | |||||||||
Argentina | 585.0 | 989.9 | 1,113.5 | |||||||||
United States | 1,004.2 | 985.9 | 900.4 | |||||||||
Europe | 726.2 | 782.2 | 676.3 | |||||||||
Colombia | 380.4 | 372.8 | 359.3 | |||||||||
Brazil | 3,949.8 | 3,433.9 | 3,436.4 | |||||||||
Ecuador | 203.3 | 203.8 | 190.3 | |||||||||
Chile | 1,547.0 | 1,591.3 | 1,527.2 | |||||||||
Asia Pacific and rest of Latin America | 872.2 | 830.5 | 784.2 | |||||||||
Total Operating Revenues | 10,070.1 | 9,895.5 | 9,613.9 |
Passenger Operations
General
As of December 31, 2016,2019, our passenger operations were performed through airlines in Chile, Brazil, Peru, Argentina, Colombia and Ecuador, where we operate both domestic and international services. We collect and report operating data for our passenger operations in three categories: international (connecting more than one country), Domestic operations in Spanish speaking countries or “SSC” (including Chile, Peru, Argentina, Colombia, and Ecuador), and Domestic Brazil (wholly within Brazil).
The following table sets forth certain of our passenger operating data for international and domestic routes for the periods indicated:
Year ended and as at December 31 | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
ASKs (million) (at period end) | ||||||||||||
International | 73,541.9 | 69,615.9 | 65,574.6 | |||||||||
SSC | 23,847.1 | 22,072.8 | 21,065.8 | |||||||||
Domestic Brazil | 37,578.7 | 42,478.5 | 43,560.5 | |||||||||
Total | 134,967.7 | 134,167.1 | 130,200.9 | |||||||||
RPKs (million) | ||||||||||||
International | 63,392.6 | 59,003.4 | 55,980.1 | |||||||||
SSC | 19,293.7 | 17,858.4 | 16,964.3 | |||||||||
Domestic Brazil | 30,940.5 | 34,648.1 | 35,589.7 | |||||||||
Total | 113,626.9 | 111,509.9 | 108,534.0 | |||||||||
Passengers (thousands) |
Year ended December 31, | ||||||||||||||||||||||||
Year ended and as at December 31 | 2019 | 2018 | 2017 | |||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
ASKs (million) (at period end) | ||||||||||||||||||||||||
International | 15,107 | 14,156 | 13,630 | 81,332.3 | 81,059.5 | 76,366.1 | ||||||||||||||||||
SSC | 22,829 | 21,540 | 20,735 | 27,337.2 | 24,664.0 | 23,821.0 | ||||||||||||||||||
Domestic Brazil | 29,024 | 32,139 | 33,468 | 40,442.3 | 37,541.2 | 36,211.3 | ||||||||||||||||||
Total | 66,960 | 67,835 | 67,833 | 149,111.9 | 143,264.7 | 136,398.4 | ||||||||||||||||||
RPKs (million) | ||||||||||||||||||||||||
International | 69,065.4 | 68,365.3 | 66,344.2 | |||||||||||||||||||||
SSC | 22,092.7 | 20,220.6 | 19,407.9 | |||||||||||||||||||||
Domestic Brazil | 33,363.0 | 30,491.5 | 29,940.6 | |||||||||||||||||||||
Total | 124,521.1 | 119,077.4 | 115,692.7 | |||||||||||||||||||||
Passengers (thousands) | ||||||||||||||||||||||||
International | 16,186 | 16,456 | 16,057 | |||||||||||||||||||||
SSC | 26,619 | 23,928 | 22,775 | |||||||||||||||||||||
Domestic Brazil | 31,384 | 28,422 | 28,314 | |||||||||||||||||||||
Total | 74,189 | 68,806 | 67,146 | |||||||||||||||||||||
Passenger RASK (passenger revenues/ASK, in US cents) | ||||||||||||||||||||||||
International(1) | US¢5.8 | US¢6.5 | US¢7.6 | US¢ | 5.8 | US¢ | 6.1 | US¢ | 6.2 | |||||||||||||||
SSC(1) | US¢6.9 | US¢8.3 | US¢9.1 | US¢ | 6.5 | US¢ | 7.1 | US¢ | 7.3 | |||||||||||||||
Domestic Brazil(1) | US¢5.8 | US¢5.9 | US¢8.6 | US¢ | 6.9 | US¢ | 6.3 | US¢ | 6.6 | |||||||||||||||
Combined Passenger RASK(2) | US¢5.8 | US¢6.3 | US¢8.0 | US¢ | 6.0 | US¢ | 6.1 | US¢ | 6.2 | |||||||||||||||
Passenger load factor (%) | ||||||||||||||||||||||||
International | 86.2 | % | 84.8 | % | 85.4 | % | 84.9 | % | 84.3 | % | 86.9 | % | ||||||||||||
SSC | 80.9 | % | 80.9 | % | 80.5 | % | 80.8 | % | 82.0 | % | 81.5 | % | ||||||||||||
Domestic Brazil | 82.3 | % | 81.6 | % | 81.7 | % | 82.5 | % | 81.2 | % | 82.7 | % | ||||||||||||
Combined load factor | 84.2 | % | 83.1 | % | 83.4 | % | 83.5 | % | 83.1 | % | 84.8 | % |
(1) | 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. We use our revenues as defined under IFRS to calculate this metric. The revenues per business unit include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues. These operating 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. |
(2) | The combined Passenger RASK for LATAM is calculated by dividing passenger revenues by total passenger ASKs. |
International Passenger Operations
Our international network combinesincludes the international operations of our Chilean, Peruvian, and Ecuadorian, Argentinean, Colombian and Brazilian affiliates. WeLATAM Airlines Group and its affiliates have operated international services out of Chile since 1946 and have since greatly expanded our international services, offering flights out of Peru, Ecuador, Argentina, Colombia and Brazil. As of December 31, 2016, we offer 272019, LATAM offers 30 international destinations in 1820 countries, in addition to our domestic destinations and international flights and connections between our domestic destinations. As of 2016, we combined all of our operations under the LATAM brand.
Our
The general strategy to expand our international network is aimed at enhancing our value proposition by offering customers more destinations and routing alternatives, and promoting tourism to and within South America.alternatives. Sustained development of ourLATAM’s international network has beenis a crucial factor in ourthe long-term strategy. The group provides long-haul services out of Santiago, Lima, Guayaquil, Buenos Aires, Bogota, Sao Paulo and Rio de Janeiro. The group also provides regional services from Chile, Peru, Ecuador, Argentina, Colombia and Brazil.
During 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 slots for takeoff and landing, which has allowed us to significantly decrease our connection times. This is a key milestone in the development of our most important hub at Guarulhos airport. In addition,2019, the group has continued to consolidate our secondary hubsgrow at Guarulhos Airport in São Paulo, Jorge Chavez Airport in Lima and Santiago.
During 2016, we received five Boeing787-9 Dreamliners (we have orders for nine more), which will allow us to achieve important savings on fuel consumption, while incorporating modern technology to deliver the best travel experience forComodoro Arturo Merino Benítez Airport in Santiago, launching 26 new routes, especially from our passengers and reduce our carbon footprint, as the Dreamliner produces up to 20% less CO2 than similar aircraft. We also took delivery of six Airbus A350 aircraft (we have orders for 20 more). In addition, we received the first two Airbus A320neo, out of an order of 34 aircraft of this model, becoming the first airline in Latin America to fly this model.main hubs.
As part of our mission, LATAM seeks to promote tourism to South America. Due to our 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, and Patagonia in Chile and Argentina, including the cities of Punta Arenas, Puerto Natales, Ushuaia, El Calafate and Bariloche.
Market Share Information
The following table presents air passenger traffic information for international flights (including intra-regional flights) and LATAM’s market share in each geographic market in which we operate:
LATAM passenger figures | LATAM’s Market Share | |||||||||||||||||||||||||||||
Country | Industry passenger figures | LATAM’s Market Share | ||||||||||||||||||||||||||||
% variation 2016-2015 | 2016 | 2015 | % variation | % variation 2019-2018 | 2019 | 2018 | % variation | |||||||||||||||||||||||
Brazil(1) | -0.3 | % | 78.9 | % | 78.5 | % | +0.4 p.p. | +0.2 | % | 26.6 | % | 29.2 | % | -2.6 p.p. | ||||||||||||||||
Chile(2) | +11.5 | % | 61.7 | % | 62.5 | % | -0.8 p.p. | -2.1 | % | 52.6 | % | 55.6 | % | -3.0 p.p. | ||||||||||||||||
Argentina(3) | +9.9 | % | 11.9 | % | 11.8 | % | +0.1 p.p. | -16.9 | % | 21.0 | % | 25.6 | % | -4.6 p.p. | ||||||||||||||||
Peru(4) | +9.8 | % | 44.0 | % | 43.9 | % | +0.1 p.p | +4.3 | % | 42.9 | % | 41.6 | % | +1.3 p.p. | ||||||||||||||||
Colombia(5) | +12.0 | % | 8.0 | % | 8.0 | % | 0.0 p.p | +0.5 | % | 5.4 | % | 6.2 | % | -0.9 p.p. | ||||||||||||||||
Ecuador(3) | +11.5 | % | 17.2 | % | 18.9 | % | -1.7 p.p. | |||||||||||||||||||||||
Ecuador(6) | +2.5 | % | 11.4 | % | 14.9 | % | -3.5 p.p. |
(1) | Source: ANAC Brazil’s website. |
(2) | Source: JAC Chile’s website. |
(3) | Source: |
(4) | Source: Ministry of Transportation Peru’s website. |
(5) | Source: |
(6) | Source: Diio.net. Passenger figures considers ASK changes in 2019 vs 2018. Market share considers ASKs as of December. |
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Competitors in international routes
The following table shows LATAM’s main competitors in each geographic market in which we operate:
Country | Route | Competitors | ||
Brazil | North America | American Airlines, United Airlines, Azul Linhas Aereas, Delta Air Lines, | ||
Latin America | Copa, | |||
Europe | TAP Portugal, AirFrance-KLM, | |||
Africa | Ethiopian Airlines, South African Airways, Royal Air Maroc, TAAG Angola Airlines, and Cabo Verde Airlines. | |||
Chile | North America | American Airlines, Air Canada, | ||
Latin America | Copa, Sky Airline, Avianca, JetSmart Aeromexico, Gol, and | |||
Europe | IAG, AirFrance-KLM, | |||
Pacific | Qantas | |||
Airways. | ||||
Argentina | North America | American Airlines, Aerolíneas Argentinas, | ||
Latin America | Aerolineas Argentinas, | |||
Azul Linhas Aereas. | ||||
Peru | North America | American Airlines, Avianca, Aeromexico, InterJet, United Airlines, | ||
Latin America | Avianca, Copa, Aeromexico, InterJet, JetSMART, and Sky | |||
Europe | AirFrance-KLM, | |||
Plus Ultra. | ||||
Colombia | North America | Avianca, InterJet, American Airlines, Spirit Airlines, Aeromexico, JetBlue Airways, United Airlines, | ||
Latin America | Avianca, | |||
Copa. | ||||
Ecuador | North America | American Airlines, | ||
Latin America | Avianca, Copa, | |||
Europe | AirFrance-KLM, Iberia and |
Source: Diio.net considering ASKs.
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Domestic Passenger Operations
As of December 31, 2016,2019, domestic passenger services within Chile, Brazil, Peru, Ecuador, Argentina and Colombia were operated by LATAM Airlines Chile, LATAM Airlines Brazil, LATAM Airlines Peru, LATAM Airlines Ecuador, LATAM Airlines Argentina and LATAM Airlines Colombia, respectively.
Business Model for Domestic Operations
In November 2016, the group announced an important project to revamp the business model of our domestic services offeringofferings in the six domestic markets where the group operateswe operate in South America. The purpose of this change iswas to increase our competitiveness
and ensure the long-term sustainability of our domestic business model. This project seeks to increaseWe implemented this new business model in all of our operational efficiency,domestic operations, allowing us to provide more competitive fares and contributing to the development of tourism and the growth of air travel per capita in the region. Our newThe domestic service model requires continuous cost reduction efforts, and we are implementingcontinue to implement a series of initiatives to reduce cost per ASK in all domestic operations. These efforts are aimed at significantly reducing selling and distribution expenses, increasing fleet utilization and operational productivity and simplifying back-office and support functions, thereby allowing us to expand our operations while controlling fixed costs.
Another key element of this business model areis initiatives to increase our ancillary revenues, while allowing passengers to customize their journey. Customers will beon domestic flights are now able to access a simpler sales platform, which will allowallows them to choose their fare depending on the type of journey they want, and to purchase additional services such as extra luggage, a variety of food and beverage options on board, preferred seating options and the flexibility to change tickets.
In January 2020, LATAM Airlines Group announced that it will introduce its superior cabin class, Premium Economy, in all domestic and international flights within Latin America operated by the Airbus A320 family (A319, A320, A320neo and A321; “short-/medium-haul”) aircraft, starting March 16, 2020. This cabin class offers premium services both at the airport and in-flight, including priority check-in and boarding, VIP lounge access in airports where available, a differentiated onboard service (including complimentary snacks and drinks), an exclusive overhead bin for hand luggage and a blocked-middle seat, providing greater space and privacy.
We continue to develop digital initiatives to empower passengers providing them an enhanced digital experience withend-to-end control of their reservation. LATAM customers will increasingly be able to buy,check-in and manage the after sale service in a simpler and faster manner through their smartphones.
We will implement our new
The following table shows LATAM’s number of destinations, passengers transported, market share and main competitors in each domestic strategy by country,market in stages starting in the first half of 2017.which we operate:
Brazil | Chile | Argentina | Peru | Colombia | Ecuador | Brazil | Chile | Argentina | Peru | Colombia | Ecuador | |||||||||||||||||||||||||||||||||||||
Destinations | 41 | 16 | 15 | 17 | 14 | 5 | 45 | 17 | 13 | 20 | 14 | 6 | ||||||||||||||||||||||||||||||||||||
Fleet | 100 | 27 | 15 | 18 | 17 | 6 | ||||||||||||||||||||||||||||||||||||||||||
Passengers Transported (million) | 29.0 | 7.9 | 2.6 | 6.6 | 4.8 | 1.0 | 31.4 | 8.5 | 2.5 | 8.6 | 5.9 | 1.2 | ||||||||||||||||||||||||||||||||||||
Change (YoY) | (9.7 | %) | 8.1 | % | 7.0 | % | 6.7 | % | 4.4 | % | (8.3 | %) | 10.4 | % | 6.6 | % | 5.2 | % | 16.6 | % | 16.8 | % | (2.2 | %) | ||||||||||||||||||||||||
Market share | 35 | %(1) | 76 | %(2) | 25 | %(3) | 62 | %(4) | 21 | %(5) | 31 | %(6) | 38 | %(1) | 57 | %(2) | 16 | %(3) | 63 | %(4) | 25 | %(5) | 32 | %(5) | ||||||||||||||||||||||||
Main competitors | | Gol, Azul, Avianca Brazil | | Sky Airlines | | Aerolíneas Argentinas | | | Avianca, Peruvian Airlines, Star Perú | | | Avianca, Viva Colombia, Santena | | Tame, Avianca | Gol, Azul | Sky Airlines, JetSmart | Aerolíneas Argentinas, Flybondi, JetSmart, Norwegian, Andes | Sky Airlines Peru, Viva Airlines Peru, Star Peru, Avianca | Avianca, Viva Colombia, EasyFly, Satena, Copa Airlines Colombia (“Wingo”) | Tame, Avianca |
(1) | Source: ANAC Brazil’s website. Market share considers |
(2) | Source: JAC Chile’s website. Market share considers |
(3) | Source: |
(4) | Source: Ministry of Transportation Peru’s website. Market share considers number of passengers carried as of |
(5) | Source: |
On April 3, 2019, LATAM Airlines Brazil, announced that it had been approached by Elliott Associates L.P., Elliott International L.P., and Manchester Securities Corporation (jointly “Elliott”), the largest debt holders of Oceanair Linhas Aéreas S.A. and AVB Holding S.A. (jointly “Avianca Brasil”), in connection with the auction of one independent productive unit (“IPU”) of Avianca Brazil (including but not limited to certain contracts, operating certificates, permits, and slots). The auction was part of Elliot’s restructuring proposal and included bidsinthe minimum amount of US$70 million. In addition, as part of the proposed restructuring, LATAM Airlines Brazil extended to Avianca Brasil US$13 million of debtor–in–possession loans to finance, in part, working capital in support of their operations, amount that will be reimbursed to LATAM Airlines Brazil if the restructuring proposal is successful.
On July 10, 2019, LATAM Airlines Brazil presented winning bids for the IPUs ‘B’ and ‘C’, valued at US$70 million and US$10,000, respectively. The adjudication, and the payment, of the aforementioned productive units is subject to any and all required governmental and antitrust approvals. However, the ANAC in Brazil distributed slots according to its regular procedures, with the exception of Congonhas’ airport in São Paulo, for which ANAC defined a new distribution rule that resulted in LATAM Airlines Brazil not receiving slots at that airport.
Passenger Alliances and Commercial Agreements
Strategic Alliance with Delta
On September 26, 2019, LATAM entered into a framework agreement (the “Framework Agreement”) with Delta Air Lines, Inc. (“Delta”) relating to(i) the creation of a strategic alliance between the two airlines,(ii) the purchase by Delta of a number of common shares representing up to 20% of LATAM share capital through a tender offer process, (iii) payment by Delta of certain transition costs and provision of certain support services, and(iv) the purchase by Delta of certain aircraft currently owned by LATAM and the assignment to and assumption by Delta of certain aircraft ordered by LATAM. Below is a brief summary of main details of the partnership.
StrategicAlliance.Under the Framework Agreement, LATAM and Delta agreed to enter into a strategic alliance with respect to passenger and cargo networks, on routes between the United Stated and Canada and certain countries in Latin America, allowing LATAM and Delta to offer their customers access to a greatly expanded array of destinations. The implementation of the strategic alliance is subject to governmental and regulatory approvals, including antitrust requirements.
Tender offer and investment.Under the Framework Agreement, Delta commenced a public tender offer for the acquisition of up to 20% of LATAM common shares at a price per share of U.S. $16. On December 29, 2019, the public tender offer was finalized, resulting in Delta acquiring a total amount of 121,281,538 shares, representing 20% of the total common shares issued, subscribed and paid of LATAM Airlines for an overall investment of approximately U.S. $ 1.9 billion. The settlement of the tender offer occurred on January 3, 2020. In connection with consummation of the tender offer, Delta is now entitled to representation on the LATAM board of directors.
Transition costs and support services. Under the Framework Agreement, Delta agreed to(i)pay LATAM certain transition costs that LATAM is currentlyexpected to incur in connection with the framework agreement, for an overall amount of U.S. $ 350 million, and(ii)providing certain transition support services to LATAM.
Aircraft purchase and assumptions.Under the Framework Agreement, Delta, in support of its ongoing fleet transformation, agreed to(i)purchase from LATAM four Airbus A350 aircraft, and(ii) assume LATAM’s commitment to purchase 10 additional Airbus A350 aircrafts that are to be delivered beginning in 2021 through 2025.
Termination of previous arrangements and alliances and subscription of new codeshare agreements
On September 26, 2019, and after being a member for around 20 years, LATAM communicated its decision to exit the oneworld global alliance, and indicated that it would not be entering in any other global alliance at this time. In line with this decision, LATAM also announced the termination of the global marketing allianceoneworld, which includes Airberlin,codeshare agreements with American Airlines effective January 31, 2020, and that it will not participate in the previously announced JBA.
In addition, on December 2, 2019, the group’s affiliates in Colombia, Peru and Ecuador signed codeshare agreements with Delta to provide greater connectivity with the United States starting the first quarter of 2020, also subject to applicable regulatory approval.
On December 6, 2019, LATAM Airlines Group announced that it will not participate in the proposed joint business agreement (JBA) with International Airlines Group (IAG; the parent company of British Airways Cathay Pacific, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. Iberia). The decision was made for commercial reasons and in the context of changes in the aviation market since the JBA was first announced in January 2016.
Other alliances and material commercial agreements
In the aggregate,oneworld® members serve more than 1,000 destinations in 157 countries, operating over 13,000 daily departures.
addition, LATAM and its affiliates have ongoing passenger commercial agreements with several airlines, including American Airlines, Iberia, Quantas,Qantas, British Airways, Lufthansa, Swiss, Interjet, All NipponQatar Airways, Korean Air, China Eastern, Cathay Pacific, Japan Airlines and Jetstar Airways, among others. These commercial agreements allow us to provide additional benefits to our passengers, including access to a wider network, more flight options with better connectionconnections times, more competitive fares to destinations not served by LATAM, and increased potential for developing new routes and adding direct flights to new destinations and to destinations already served by LATAM.
Moreover, on January 14, 2016, we entered into two new joint business agreements: an agreement with American Airlines and an agreement with British Airways and Iberia. These agreements further strengthen our relationship with theseoneworld® partners.
The agreements remain subject to regulatory approval in different countries. Some approvals have already been granted: on March, 2017, the administrative court of economic defense of the CADE (Administrative Council for Economic Defense) in Brazil, approved the agreement with British Airways and Iberia, representing the final stage of an evaluation process that began in June 2016. During the review, the CADE evaluated the scope of the agreement in terms of free competition and the benefits that it will bring to passengers, including improved connectivity, an expansion of the destination network and reduced prices. Both agreements have been approved in Uruguay.
Passenger Marketing and Sales
Our long-haul marketing strategy emphasizes attributes valued by our international customers: reliable, high-quality
During 2019, the LATAM Group continued to strengthen its network, especially from its main hubs in São Paulo (Guarulhos), Lima and Santiago. In connection with these efforts, LATAM’s affiliates launched new non-stop routes connecting Guarulhos with Santa Cruz, Navegantes, Ilheus and Ribeirao Preto, Lima with Cali, Ilo, Calama, Brasilia, Porto Alegre and Montego Bay, and Santiago with Sydney, Quito, Porto Alegre and Brasilia, among others.
In 2019 the LATAM Group introduced the new Premium Business experience that incorporates the enhanced new cabins; aimed at transforming the travel experience. The investment in this program exceeded US$500 million, including, US$400 million in cabin renovation. In 2019 the cabin transformation was implemented in five Boeing 777 aircraft, five 767 aircraft and 32 A320 aircraft. The new service centered onand gastronomic concept of the Premium Business class, provides greater rest, comfort and entertainmentprivacy so that passengers can arrive fresh at their destination.
As part of our commitment to offer more options, customization and flexibility to serve all types of passengers, the new ‘Basic’ fare was introduced, thus replacing the previous ‘Promo’ option for long-haul travel. We also highlight our extensive network, which coversdomestic flights, becoming the company’s most economical option for passengers.
In addition, LATAM received several awards and recognitions; LATAM was elected as the most important destinationspunctual airline group in the world by the Official Airline Guide (OAG) and Cirium. For the second year in a row, LATAM Airlines Group led the rankings of the “Punctuality List 2020,” compiled by OAG, which highlights LATAM Group as the global leader in the “Mega Airlines” category. In addition, LATAM also received first place in punctuality in the global category, according to the annual On-Time Performance (OTP) report compiled by Cirium. LATAM Airlines Group was recognized as the ‘Best Airline in South America’ in Skytrax World Airline Awards, LATAM also was awarded by passengers as the “Best global Airline of South America” according to the awards APEX Passenger Choice.
LATAM Airlines Group was listed in the ‘World’ category of the Dow Jones Sustainability Index (DJSI) for the sixth consecutive year; recognition of the company’s ongoing commitment to incorporating sustainable practices into every aspect of its operations. Today, LATAM Airlines Group is the only airline group in the Americas with a presence in this category and one of the only three airline groups in the world in the category.
LATAM was also named as the “Official Airline” of the Lima 2019 Panamerican and Parapanamerican Games, which were held for the first time in Peru.
Branding
During 2019 the loyalty programs of LATAM Pass and LATAM Fidelidade were combined under the single brand, LATAM Pass, to deliver to our customers a unified and integrated experience with the benefits of LATAM Airlines. Since October 1, 2019, LATAM Pass is LATAM’s single loyalty program, becoming the fourth largest program in the world and the largest in South America, andwith more than 33 million members worldwide. See “Item 4. Information on the Caribbean and provides frequent service to major overseas gateways such as New York, Los Angeles, Miami, Orlando, Washington, DC, London, Madrid, Paris, Frankfurt, Milan, Barcelona and Sydney. Company—B. Business Overview—Frequent Flyer Program.”
In aOctober 2019, continuing effort to strengthen our network, during 2016 we launched three new direct routes: Sao Paulo—Johannesburg, Lima—Barcelona and Santiago—Melbourne (the last being our longest flight).
Our short-haul operations are designed to fit our customers’ needs: punctuality, reliability, frequency, modern aircraft and efficient operations. To deliver this value proposition, we have been increasing our fleet and frequencies with morepoint-to-point flights, improved punctuality, and streamlined processes including Internet sales, web and mobilecheck-in and airportself-check-in.
We strivecommitment to deliver our promisea world-class experience to our customers. Therefore,customers, we constantly monitor customer satisfactionunveiled our Star Wars-inspired Boeing 777 “Stormtrooper Plane” under a partnership within-flight surveys and research, and measure our performance against Disney, just days after the highest standards. This commitment to excellence is reflected in the numerous prizes and recognitions earned by the Company, including Skytrax’s “2016, Best Airline in South America” and “2016, Best Airline to South America” by Global Travelers.
Branding
Our new brand, “LATAM”, was officially launched in May 2016. The new brand brings together all the passenger and cargo airline operationsofficial premiere launch of the LATAM Airlines Group carriers: with the new brand, we will continue the legacy of leadership started decades ago by LAN, TAM and their respective affiliate carriers.movie, Star Wars: Gallaxy’s Edge zone Disney Hollywood Studios park in Orlando, Florida.
We are committed to the future of South America and to connecting it to the world. The new brand allows us to offer a better, consistent service throughout our network, which in turn strengthens our position in the region.
Using a single brand enables LATAM’s customers to better understand the common service and operating standards among its airlines. LATAM’s unified image has improved its visibility, thereby increasing the efficiency of its marketing efforts.
Since the launch of our new brand, we have made significant progress on its implementation, making our brand visible to our passengers. The new brand has been adopted at 15 airports, and we now offer a new single website for all of our different points of sale. The LATAM brand has also been applied to 43 aircraft, representing approximately 13% of our fleet. We also launched new uniforms for our crew, adopting the Company’s colors of indigo and coral while providing elegance and comfort for our crew.
During 2016, LATAM Airlines Brazil was the official airline sponsor of the Rio 2016 Olympic Games, reinforcing our brand positioning as a leader in the region through our presence in one of the most important sport events worldwide.
Distribution Channels
We are committed to being the preferred choice of our customers, placing the passenger at the center of our decision making. Our distribution structure is divided into direct and indirect distribution channels, both focused on improving their respective platforms to allow for easy interaction for our client in sales and services alike. Direct channels owned by LATAM are comprised of city ticket offices, contact-centers ande-Business (including website, mobile and smart business), and accounted for approximately 52%53% of total passengerssales in 2016.2019 (including award passengers). These direct channels support sales and service, both before and after the flight.
Thee-Business channel is an integral partOur city ticket offices include additional services in order to complement the experience of our commercial, marketingcustomers. Our contact centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and service efforts, and during 2016Italian).
We are committed to constantly improving the way we offer our Internet-related sales achieved a better channel mix with an increaseproducts via our distribution channels, including the adoption of 0.5 percentage points out of our total sales.new technology. The Company will continue to improve ourits e-Business platforms to support expected future growth.growth and simplify our customers’ online experience.
Our digital strategy includes mobile applications that provide trip information to our passengers regarding their trip.passengers. These applications improve our management of contingencies, enable us to provide information and solutions to our customers in a timely and transparent manner and will serve as a new direct sales channel.
Our city ticket offices support the growth of our operations, providing a sales channel. Our contact centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian).
Indirect channels currently include travel agencies, general sales agencies, direct channels from other airlines and online agencies, and accounted for a 48%47% of total passengerssales in 2016.2019. LATAM offers travel agencies different options to connect to our systems and provide their customers our best product offering. These options include Global Distribution Systems as well as our direct connection eLATAM, which we are continuously expanding and improving.
Frequent Flyer ProgramsProgram
Our frequent flyer programs areprogram is a key element of our marketing and loyalty strategy. These programs rewardstrategy. The program rewards customer loyalty, and, as a result, generategenerates incremental revenue and promotes customer retention.
During 2016,
In 2019 we announcedestablished a new way to qualify for “Elite” status in our revamped frequent flyer programs named LATAM Pass and LATAM Fidelidade. This change is part of the process of consolidating the airline group’s new brand identity (LATAM) and the evolution of the programs, which enhances existing benefits and introduces new benefits for program members.
We continued working on the homologation of our programs’ features and benefits. Among other improvements, our initiatives include cross-level recognition of all members, for example, by allowing LATAM Pass members to upgrade on TAM flights and and LATAM Fidelidade members to upgrade on LAN flights, in addition to having the same services at the airport.
During 2017 LATAM Pass and LATAM Fidelidade will continue their harmonization efforts and will offer new cross benefits for their members, with the goal of remaining or becoming the leading loyalty program in all of LATAM’s home markets. Moreover, beginning on April 22, 2017, LATAM’s frequent flyer program will change the way our members earn kilometers from the current system (based on the distance flown) to a new method based on the price paid for the ticket.
ticket, and is aligned with a simpler methodology for mileage accrual, generating simplicity and efficiency to our frequent flyer program. As a LATAM Pass member, you can access superior categories and enjoy better benefits by earning Qualifying Points on all your flights. Qualifying Points are different from LATAM Pass Points, which you can use to redeem for tickets and on-board benefits. The amount of Qualifying Points you earn depends on the dollars spent on purchasing the ticket (discounting charges, taxes and additional services) and the multiplier of the destination (domestic or international).
Also, a new alliance with Amazon was implemented, strengthening the value of miles available for redemption.
During 2019, LATAM Airlines Brazil acquired the 27.3% minority stake of Multiplus S.A. (“Multiplus”), a former subsidiary of TAM. Multiplus was launched by TAM in 2009 and in February 2010 it became a publicly traded company in Brazil following its initial public offering, and TAM S.A continued to own 72.74% of the ordinary shares of Multiplus. On September 5, 2018, it was announced that (i) LATAM Airlines Brazil did not intend to extend or renew the operational agreement entered into with Multiplus after December 31, 2024, and (ii) LATAM Airlines Brazil intended to launch a tender offer to acquire all of the outstanding shares of Multiplus that LATAM’s affiliates do not currently own, and to subsequently delist Multiplus from the B3 Novo Mercado and cancel its registration. After acquiring 100% of Multiplus, in May 31, 2020, LATAM Airlines Brazil merged with Multiplus, bringing more flexibility to offer program members a better value proposition for redeeming points and increase the preference for our services.
The frequent flyer program is a strategic asset for the airline group, and a core source of value that differentiates LATAM from other carriers. The acquisition of Multiplus and its full integration into LATAM’s network will, together with LATAM Pass, create what LATAM estimates to be the fourth largest frequent flyer and loyalty program in the world (measured by member base). LATAM Airline Brazil’s decision is consistent with recent transactions in the industry, and with the strategy of in-house frequent flyer business models of the largest global airlines.
In addition, a new tier category, Gold Plus, was launched in its market with focus on recovering Brazilian’s domestic corporate market share delivering to a specific type of customer a better experience at the airport, and also a better mileage accrual. Improvements for the Gold category include priority check-in in all flights (for Gold category only in international flights) and free same day changes for Brazilian domestic flights.
As of December 31, 2016,2019, LATAM Pass had 13approximately 33 million members, representing an increase of 17%8.5% compared to 2015.
2018. Members of the LATAM Pass members earn LATAM Pass kilometersprogram receive benefits and increase miles for ticket purchases in accordance with their accounts based on distance flown, class of ticket purchased and theirelite level status, level, as well as by purchasing the services of other partners in the the LATAM Pass program. Customers of the program can redeem kilometersmiles or points for free tickets as well as for other productsproducts. LATAM Pass members are classified in an online catalogue. Under our current frequent flyer program, our passengers are grouped into four differentfive elite levels based on their flying behavior:levels: Gold, Gold Plus, Platinum, Black and Black Signature. These different groups determine which benefits customers are eligible to receive, including kilometers earningsmile earning bonuses, free upgrades, on a space-available basis, VIP lounge access and preferred boarding andcheck-in. These categories have their equivalent in theoneworld® alliance: Ruby for Gold, Sapphire for Platinum, and Emerald for both Black and Black Signature. check-in privileges.
In 2016 LATAM Pass had increases of 32 % in award tickets redeemed, and 9% innon-flight products redeemed. LATAM Pass 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, the United States and Colombia, including Banco Santander in Chile and Banco de Bogotá and Occidente (both members of Grupo Aval) in Colombia. These commercial agreements give our customers the opportunity to earn additional kilometers for using their services.
In thenon-banking segment, LATAM Pass continues to leverage its members’ purchase behavior to partner with leading players in its markets and become the most attractive loyalty program. In recent years, LATAM Pass has expanded into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers.29
In the past few years, we have implemented a number of marketing initiatives to increase customer engagement and activity with the program in all of its markets. In 2016, membership in LATAM Pass continued growing, expanding by 10% in Chile, 14% in Perú, 38% in Argentina, 6% in Ecuador, 14% in Colombia and 6% in the United States.
LATAM Fidelidade
LATAM Fidelidade was the first loyalty program launched by a Brazilian airline and represents a key element of LATAM’s marketing strategy. LATAM believes LATAM Fidelidade, like LATAM Pass, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flight availability or on the number of seats available when members redeem accumulated points. LATAM Fidelidade currently has more than 13.2 million members, which represents an increase of 14% compared to 2015. Members of LATAM Fidelidade, like those of LATAM Pass, receive benefits and increased points for kilometers flown depending on their elite level, allowing them to accrue redeemable points for free travel more quickly. LATAM Fidelidade customers are classified in the same four elite levels as LATAM Pass: Gold, Platinum, Black and Black Signature.
Multiplus
In 2009, TAM launched Multiplus, a company designed to create a broader network in which LATAM Airlines Brazil’s customers can earn points through the LATAM Fidelidade program. Multiplus is a coalition of loyalty programs that permits the accrual of points that can be redeemed for products and services offered by many different partner companies, in addition to LATAM Airlines Brazil. We believe this expanded network acts as a sales channel for LATAM Airlines Brazil, helping to capture and retain customers and increase sales. Multiplus is attractive to our less-frequent flyers because it allows them to accrue loyalty points in many ways besides flying. In 2016,non-air accrual reached 15% of the total points. At the end of 2016, Multiplus had more than 400 partners and approximately 16.5 million participants that can accrue Multiplus points directly (through LATAM Fidelidade,co-branded cards, apps, retail partners, etc.) and indirectly (by transferring points from a partner program).
Multiplus became a publicly traded company in Brazil following its initial public offering in February 2010. TAM S.A continues to own 72.74% of the ordinary shares of Multiplus.
On December 10, 2009, Multiplus entered into an Operating Agreement with LATAM Airlines Brazil, effective as of January 1, 2010, which established the terms and conditions governing the relationship with TLA (the “Operating Agreement”). Under the Operating Agreement, Multiplus became responsible for, among other tasks, processing information on accumulating and redeeming points under the LATAM Airlines Brazil 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 and is automatically renewed every five years thereafter.
Aiming to increase the value created to Multiplus and LATAM shareholders, and to improve the alignment of interests between Multiplus and TLA, on May 4, 2015, the companies approved a new amendment to the Operating Agreement, effective on that date. This amendment provides that the cost for each 10,000 points redeemed on TLA air tickets shall be approximately 3% less than Multiplus’s current prices paid for those 10,000 points. Furthermore, the amendment establishes that from December 1, 2015, fixed prices for air tickets will come into force with objective rules for annual price adjustments for the purchase of air tickets, paid by Multiplus to TLA. The fixed prices of each are determined by both companies as a function of the market (domestic and international), fare class, demand, season, distance and flight origin/destination.
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, remain, in their essence, unchanged.
On December 14, 2015, Multiplus’ Board of Directors approved a management proposal for the establishment of a limited liability company, with the name of “Multiplus Corretora de Seguros Ltda.”, for the purpose of developing an insurance brokerage business. This project is in line with Multiplus’ main objectives of providing a differentiated experience for its participants, offering a new source for accrual of points and generating value to its shareholders.
On July 5, 2016, Multiplus S.A. and Banco Itaucard S/A (“Itaucard”) signed a Commercial Partnership Contract for the offering, promotion, distribution and sale ofco-branded credit cards (“Multiplus cards”), throughout Brazil’s national territory. The partnership’s key objective is to offer its network members a product which permits the direct accumulation of Multiplus Points by means of conversion and differentiated bonuses.
On July 12, 2016, Multiplus S.A. signed a partnership with the Expedia Affiliate Network, making 270,000 hotel options available to members, allowing them to accumulate Multiplus points when making their reservations.
On August 25, 2016, “Multiplus Corretora de Seguros Ltda.” started operations as “Pontus Corretora”. Pontus Corretora debuted with two types of insurance policies offered with different partners: residential insurance, in partnership with Seguradora Porto Seguro, and travel insurance through Assist Card. Pontus Corretora offers a totally original digital experience, with flexibility, innovation and excellent products from the main insurance companies in the market.
On December 27, 2016, Multiplus announced that it is expanding its “Points + Cash” offering to allow the redemption of points fornon-air products and services. This allows members who do not have sufficient accumulated points to redeem with network partners totop-up their points with a cash payment. The objective is to ensure the availability of attractive offers for all ’Multiplus members, with constant incentives for them to increasingly use and experience the loyalty network.
Cargo Operations
Our
The Cargo division operatesbusiness is operated internationally and domestically through our affiliatesby affiliate airlines under the unified LATAM Cargo brand, which has acquired significant market recognition. OurThe cargo business generally operates on the same route network used by ourthe passenger airline business. It includes approximately 138 destinations,151 destinations; of which around 127approximately 145 are served by passenger and/or freighter aircraft and approximately 11six 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 and as at December 31, | ||||||||||||||||||||||||
Year ended and as at December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
ATKs (millions) | 6,704.1 | 7,082.8 | 7,219.7 | 6,356.7 | 6,497.6 | 6,230.3 | ||||||||||||||||||
RTKs (millions) | 3,465.9 | 3,797.0 | 4,317.2 | 3,526.0 | 3,582.5 | 3,421.3 | ||||||||||||||||||
Weight of cargo carried (thousands of tons) | 944.3 | 1,008.7 | 1,102.2 | 903.8 | 920.6 | 895.9 | ||||||||||||||||||
Total cargo yield (cargo revenues/RTKs, in U.S. cents) | 32.0 | 35.0 | 39.7 | 30.2 | 33.1 | 32.7 | ||||||||||||||||||
Total cargo load factor (%) | 51.7 | % | 53.6 | % | 59.8 | % | 55.5 | % | 55.1 | % | 54.9 | % |
We derive our revenues roughly equally betweenfrom the transport of cargo as follows:through our dedicated freighter fleet and in the bellies of our passenger aircraft.
1)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.
2)Dedicated freighterFreighter fleet. As of December 31, 2016,2019, our dedicated freighter fleet under operation consisted of eighttwelve Boeing767-300 freighters, each with a capacity for 58 structural tons of freight each, and two Boeing777-200 freighters, each with a capacity of 102 structural tons of freight. In 2016 we continued ourOur freighter fleet optimization efforts, subleasing three B767-300F aircraft andunder operation consisted of eleven Boeing 767-300F since one B777-200Fof our Boeing 767-300F was subleased to a third party (reclassified from property, plant and equipment to held for sale as of December 31, 2016). OurMasAir S.A. The freighter fleet program has two main focus areas: first, to support the group’s belly business, improving its load factor by feeding cargo into our passenger routes, and second, to provideenhance our product offering by providing our customers flexibility in scheduling, origins, destinations and destinations. With these two objectivestypes of cargo.
The United States is the main market for cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, cargo consolidated in mind,the United States accounts for the majority of goods transported by air to Latin American countries. Accodingly, we are complementing and enhancinghave headquartered our network. Ininternational cargo operations in Miami. This geographical location is a natural gateway between Latin America and the principalUnited States. We also utilize of passenger flights to and from New York, Los Angeles, Orlando and Boston and our dedicated freighter service to Chicago. Additionally, we operated road-feeder network to feed traffic from other origins ofin the United States,
The LATAM Group also transports cargo to and from nine destinations in Europe: London, Barcelona, Milan, Paris, Lisbon, Frankfurt, Madrid, Amsterdam and Brussels. The first five points are served only via passenger aircraft. Frankfurt and Madrid are served by both passenger and freighter aircraft, while Amsterdam and Brussels are only served through freighter operations. We operate a road-feeder service within Europe to expand our cargo are footprint and balance traffic between our different origins.
Chile, Colombia, Perú,Peru, Ecuador, Brazil and Argentina, whichBrazil represent a large part of ourthe northbound traffic. This demand is mainly concentrated on a small number of product categories, such as exports of fish, sea products and fruits from Chile, asparagus and fruits from Peru, and exports of fresh flowers from Ecuador and Colombia.
For our
The main destinations for southbound flights,traffic are Brazil, is the main import market.Chile, Colombia and Peru. Southbound demand is mainly concentrated on a small number of product categories including high-tech equipment, mining equipment, electronics, auto parts and pharmaceuticals.
Our
The largest domestic cargo operations are in Brazil, where LATAM Cargo Brasil remains the market leader, there, carrying cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export-orientedlogistics operators, e-commerce companies and individual consumers. In order to maintain its leadership, LATAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.
The United States accounts for the majority of 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. We have thus headquartered our international cargo operations in Miami. This geographical location is a natural gateway between Latin America and the United States. We also transport cargo to and from eight destinations in Europe: London, Madrid, Milan, Paris, Barcelona, Frankfurt, Amsterdam and Basel. The first six are served via passenger aircraft, and we also serve Amsterdam, Frankfurt and Basel through freighter operations. In October 2016 LATAM Cargo added a new operation to its belly network: Sao Paulo, Brazil – Johannesburg, South Africa, opening a gateway between Latin American markets and the African continent.
During 2016,2019, cargo traffic decreased 8.7%,1.6% mainly due to weaker imports to Latin America. Cargo capacity decreased 2.2% and as a result cargo load factors improved 0.4 points to 55.5%. Cargo yields decreased 8.8% during 2019, mainly due to a strong declinelower air cargo demand into Latin America and an increase in Brazilian imports resulting from economic weakness and currency depreciationindustrial capacity in Brazil. However, Latin American exports remain at healthy levels, despite a contraction in production of fresh salmon in Chile.certain Trans-Atlantic markets.
The cargo business in the region is highly competitive, as international and regional carriers often have spare capacity in their cargo operations. Despite this, we have been able to maintain solid market shares through an efficient utilization of ourthe fleet and network. Today, on Latin America-United States routes, ourthe main competitors are Centurion,Atlas Air, Avianca Cargo Atlas Air and American Airlines. On the Latin America-Europe routes, ourthe main competitors are Cargolux, Lufthansa Cargo, MartinairAir France/KLM, IAG Cargo and Emirates Airlines.
30
Marketing and Sales
OurDivestiture of Aerotransportes Mas de Carga, S.A. de C.V. (November 30th 2018)
On November 30, 2018, LATAM Airlines Group sold its direct and indirect stakes in Mexican cargo sales and marketing efforts are carried out directly in cities where we have a local office, or through general sales agents. In total, we have over 30 international offices. In Latin America, we have our own offices in all key markets. Inairline MasAir S.A. At 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 our sales efforts are conducted through general sales agents. In total, we maintain a network of more than 30 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; strong connectivity to, from and within Latin America; and a clear focus on providing 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 2016 we focused on various aspects of our value chain to improve our customer experience. We developed a new portfolio of LATAM Cargo products with an innovative proposition aligned to the needs of customers, allowing us to deliver greater consistency and a clear service offering to the market. In line with this, we made progress in transforming the Company’s internal processes to ensure they are aligned with our commitments to clients.
Cargo Agreements
During 2016 we maintained our Enhanced Cargo Transfer Interline and other commercial agreements with Asian carriers such as Air China, Korean Air and Cathay Pacific, among others. Under these agreements, we receive space allocations to move our cargotime, MasAir operated one Boeing 767-300F subleased from the main gateways in Asia to hubs in the United States—Los Angeles, New York and Miami—and in Europe, where we can connectCompany. As of December 31, 2019, MasAir continued operating this aircraft under a sublease. As a result of this sale MasAir no longer consolidates with our cargo network. In exchange, we provide these airlines with space from these same hubs in the United States and Europe to all of our Latin American destinations and also provide them with westbound cargo. These agreements have allowed us to achieve greater visibility, improved support and allowed us to provide better service recovery, further expanding our network between Latin America and Asia.LATAM.
Cargo-Related Investigations
See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”
Fleet
General
As of December 31, 2016,2019, we operated a fleet of 329331 aircraft, comprised of 319320 passenger aircraft and 1011 cargo aircraft. Additionally,In addition, we subleased four11 aircraft, comprised of 10 passenger aircraft and 1 cargo aircraft to third parties (one of them not included in the table below as it was reclassified from property plant and equipment held for sale).parties.
Number of aircraft in operation | ||||||||||||||||||||
Total | Owned(1) | Operating Lease | Average term of lease remaining (years) | Average age (years) | ||||||||||||||||
Passenger aircraft(2) | ||||||||||||||||||||
Airbus A320-Family Aircraft | ||||||||||||||||||||
AirbusA319-100 | 48 | 36 | 12 | 3.4 | 9.2 | |||||||||||||||
AirbusA320-200 | 146 | 93 | 53 | 2.6 | 8.6 | |||||||||||||||
AirbusA321-200 | 47 | 30 | 17 | 9.3 | 2.7 | |||||||||||||||
Airbus A320-200neo | 2 | 1 | 1 | 9.7 | 0.2 | |||||||||||||||
Airbus A350-Family Aircraft | ||||||||||||||||||||
AirbusA350-900 | 7 | 5 | 2 | 11.8 | 0.5 |
Number of aircraft in operation | ||||||||||||||||||||||||||||||||||||||||
Total | Aircraft included in Property, plant and equipment | Aircraft included as Rights of use assets | Average term of lease remaining (years) | Average age (years) | ||||||||||||||||||||||||||||||||||||
Passenger aircraft(1) | ||||||||||||||||||||||||||||||||||||||||
Airbus A320-Family Aircraft | ||||||||||||||||||||||||||||||||||||||||
Airbus A319-100 | 46 | 37 | 9 | 2.6 | 12.1 | |||||||||||||||||||||||||||||||||||
Airbus A320-200(2) | 142 | 96 | 46 | 4.4 | 10.6 | |||||||||||||||||||||||||||||||||||
Airbus A321-200 | 49 | 30 | 19 | 6.5 | 5.6 | |||||||||||||||||||||||||||||||||||
Airbus A320-neo | 13 | 7 | 6 | 10.1 | 1.3 | |||||||||||||||||||||||||||||||||||
Airbus A350-Family Aircraft | ||||||||||||||||||||||||||||||||||||||||
Airbus A350-900(3) | 13 | 6 | 7 | 10.6 | 2.3 | |||||||||||||||||||||||||||||||||||
Boeing Aircraft | ||||||||||||||||||||||||||||||||||||||||
Boeing767-300ER | 37 | 34 | 3 | 2.6 | 8.5 | |||||||||||||||||||||||||||||||||||
Boeing 767-300ER(4) | 31 | 29 | 2 | 0.8 | 10.4 | |||||||||||||||||||||||||||||||||||
Boeing787-8 | 10 | 6 | 4 | 9.2 | 3.1 | 10 | 6 | 4 | 6.2 | 6.1 | ||||||||||||||||||||||||||||||
Boeing787-9 | 12 | 4 | 8 | 10.8 | 1.2 | 16 | 6 | 10 | 8.1 | 3.5 | ||||||||||||||||||||||||||||||
Boeing 777-300ER | 10 | 4 | 6 | 2.1 | 5.7 | 10 | 4 | 6 | 6.1 | 8.7 | ||||||||||||||||||||||||||||||
Total passenger aircraft | 319 | 213 | 106 | 4.8 | 7.0 | 330 | 221 | 109 | 5.8 | 8.8 | ||||||||||||||||||||||||||||||
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Cargo aircraft | ||||||||||||||||||||||||||||||||||||||||
Boeing767-300 Freighter(3) | 11 | 8 | 3 | 2.0 | 13.1 | |||||||||||||||||||||||||||||||||||
Boeing777-200 Freighter(4) | 2 | 2 | 0.4 | 7.6 | ||||||||||||||||||||||||||||||||||||
Boeing 767-300 Freighter(5) | 12 | 11 | 1 | 2.0 | 16.0 | |||||||||||||||||||||||||||||||||||
Total cargo aircraft | 13 | 8 | 5 | 1.4 | 12.2 | 12 | 11 | 1 | 2.0 | 16.0 | ||||||||||||||||||||||||||||||
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Total fleet | 332 | 221 | 111 | 4.7 | 7.2 | 342 | 232 | 110 | 5.7 | 9.1 | ||||||||||||||||||||||||||||||
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All passenger aircraft bellies are available for cargo. |
Five A320-200 aircraft |
(3) | Five A350-900 aircraft leased to a third party, four of which are classified as held for sale. |
(4) | Includes one Boeing 767-300ER classified as held for sale. |
(5) | One Boeing 767-300F aircraft leased to a third party. |
LATAM Airlines Group and its affiliantes operate various different aircraft types that are best suited for our different services, which include short-haul domestic and intracontinental trips as well as long-haul intercontinental flights. The aircraft have been selected based on their ability to effectively and efficiently serve all of these routes while trying to minimize the number of aircraft families we operate.
For short-haul domestic and continental flights, LATAM Airlines Group and its affiliantes operate Airbus A320-Family aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to leases and has been acquired directly from Airbus pursuant to various purchase agreements since 1999. In 2019, we redelivered two A320 aircraft under a lease, disassembled one A320 aircraft, received fourteen A320 aircraft under leases and received nine A320neo in accordance with our purchases agreement with Airbus. For long-haul passengers LATAM Airlines Group and its affiliates operate Boeing 767-300ER, Boeing 787-8 and 787-9, Boeing 777-200ER and 777-300ER, and the Airbus A350-900 aircraft. In 2019, we sold two Boeing 767 and received four Airbus A350-900 and two Boeing 787-9 in accordance with various purchases agreement.
For cargo flights, we operate Boeing 767-300F aircraft. In 2019, two Boeing 767 passenger aircraft were converted into two Boeing 767-300F aircraft.
The average utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below, in hours per day.
2016 | 2015 | 2014 | ||||||||||
Passenger aircraft | ||||||||||||
Boeing767-300ER | 10.0 | 11.3 | 10.5 | |||||||||
Boeing787-8/9 | 11.0 | 11.7 | 10.5 | |||||||||
Airbus A320-Family | 8.9 | 9.5 | 9.8 | |||||||||
Boeing777-300ER | 11.7 | 12.2 | 12.9 | |||||||||
AirbusA330-200 | 4.4 | 6.2 | 7.0 | |||||||||
AirbusA350-900 | 8.5 | 0.8 | — | |||||||||
Cargo aircraft | ||||||||||||
Boeing767-300 Freighter | 12.1 | 10.9 | 9.5 | |||||||||
Boeing777-200 Freighter | 13.7 | 13.0 | 13.2 |
2019 | 2018 | 2017 | ||||||||||
Passenger aircraft | ||||||||||||
Boeing 767-300ER | 10.1 | 10.2 | 9.4 | |||||||||
Boeing 787-8/9 | 11.0 | 9.3 | 11.2 | |||||||||
Airbus A320-Family | 10.0 | 9.7 | 9.2 | |||||||||
Boeing 777-300ER | 10.1 | 11.0 | 11.6 | |||||||||
Airbus A350-900 | 7.6 | 8.2 | 9.1 | |||||||||
Total passenger aircraft | 10.0 | 9.7 | 9.5 | |||||||||
Cargo aircraft | ||||||||||||
Boeing 767-300 Freighter | 12.3 | 11.9 | 11.5 | |||||||||
Boeing 777-200 Freighter(1) | - | 7.7 | 12.6 | |||||||||
Total cargo aircraft | 12.3 | 11.8 | 11.7 | |||||||||
Total passenger and cargo | 10.1 | 9.8 | 9.6 |
We operate various different aircraft types that are best suited for our different services, which include short-haul domestic and regional trips as well as long-haul transcontinental flights. We have selected our aircraft based on their ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.
(1) | Aircraft sold in April 2018. |
For short-haul domestic and regional flights, we principally operate Airbus A320-Family Aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to operating leases or has been acquired directly from Airbus pursuant to various purchase agreements since 1999. In 2016, we received our first two A320neo,re-engined A320s, which incorporate the latest technologies including new generation engines and Sharklet wing tip devices, resulting in approximately 15% in fuel savings compared with the original A320. LATAM was the first airline in the Americas, and the fifth on the world, to operate the A320neo.
For long-haul passenger and cargo flights, we operate Boeing767-300 passenger and cargo aircraft, Boeing787-800 and787-900 aircraft, Boeing 777 passenger and cargo aircraft and the AirbusA350-900 passenger aircraft that started operations in 2015. LATAM is the firstA350-900 operator in the Americas.
Fleet Leasing and Financing Arrangements
LATAM’s fleet financing and leasing structures include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases. As of December 31, 2016,2019, LATAM had 332a total fleet of 342 aircraft, of which threeeleven were subleased to third parties resulting in 329331 aircraft in operation. Of the aircraft in operation, 156 are operated by LAN and 163 aircraft are operated by TAM and 10 are operated by LATAM Airlines Cargo.
As of December 31, 2016,2019, LATAM’s operating fleet was comprised of 192142 financial leases, 1225 tax leases, 102 operating97 leases, and 1039 aircraft as loan guarantees and 1328 unencumbered aircraft. Most of LATAM’s financial and tax leases are structured with a 12- year12-year initial term. LATAM has 4232 financial aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 8568 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities initially range from three to 12twelve 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 a group of banks) as counterparty; however, the tax leases also include third parties. 63.1%49.59% of our aircraft debt has a fixed interest rate and the balance has a floating rate based on USD LIBOR.
In order to reduce TAM’sLATAM Airlines Brazil’s balance sheet FX exposure to the Brazilian real, as part of the integration plan following the combination with TAM, we have sought to transfer the majority of the TAMLATAM Airlines Brazil aircraft under financial leases to the LATAM level. As of December 31, 2016, we have transferred 512019, only eight aircraft are subject to financial leases by LATAM including 13 transferred during 2016. This program has helped reduce the exposure to approximately US$1.2 billion equivalent.Airlines Brazil. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of financing” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a description of expected sources of financing and expected expenditures on aircraft.
The leases provide us with flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value to our strategy and financial performance. The aircraft lease obligation as of December 31, 2019 was US$ 3,801.8 million, for all remaining periods through maturity (the latest of which expires in 2032). See “—F. Long Term Indebtedness—Tabular Disclosure of Contractual Obligations.”
Under the aforementioned 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.
See Note 32 to our audited consolidated financial statements for a more detailed discussion of these commitments.
Maintenance
LATAM Maintenance
Our heavy maintenance, line maintenance and component shops are equipped and certified to service our entire fleet of Airbus and Boeing aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.
More than 4,000 LATAM Line Maintenance
Our Line Maintenance Network (the “Network”) provides a full range of aircraft maintenance services toprofessionals ensure our fleet operates safely and in compliance with all local and international regulations. We strive to provide the best experience to our passengers through the highest standards of on timesafety, on-time performance and cabin condition.image and functionality.
The heavy maintenance and component repair shop facilities are located in São Carlos (Brazil) and Santiago (Chile), adding up to a total of thirteen heavy maintenance production lines, including painting capabilities, and component repair shops, including landing gear, hydraulics, pneumatics, avionics, electroplating, composites, wheels and brakes, emergency equipment, galleys and structures.
LATAM Line Maintenance
The Line Maintenance Network serves over 190160 locations which are staffed by over 4,000 LATAM maintenance professionals. In 2016, the Network effectivelyand carried out over 2.12.3 million man hours of preventive and corrective maintenance tasks on the LATAM fleet.fleet during 2019. We also rely on certified third party services in a fewmany of our international destinations where it is economically convenient, such as in Frankfurt, (where we are served by Lufthansa Technik), Milan (served by AirFrance-KLM), and Johannesburg (served by South African Airways)., among others.
LATAM Maintenance has usedcontinues to innovate through LEAN methodology, and developed computerized systems to achieve improved automationincreased productivity and integration processes, offering sustainablehigher levels of reliability. In 2019 we created a new Digital team to work on projects and scalable planning, productive and operational processes.We have deployed more than 600 tablets in order to:initiatives grouped under 3 pillars:
1) |
2) |
3) |
LATAM Line Maintenance Network has hangar facilities in Santiago, São Carlos, São Paulo (CGH)(CGH and GRU), Lima, Miami, Buenos Aires (AEP) and Brasilia,Bogota, among others. These multiple locations improve the flexibility of the Line Maintenance Network by allowing the execution of tasks that previously might be restricted because of adverse weather conditions and environmental authority restrictions.
In order to strictly comply with applicable regulations, all of our maintenance operations are supervised and audited by the local authorities and international entities around the Network, such as DGAC Chile,Dirección Nacional de Aeronáutica Civil (“DGAC”), ANAC Brazil, the Federal Aviation Administration in the United States (“FAA”), the International Air Transport Association Operational Safety Audit (“IOSA”) (from(by the International Air Transport Association or “IATA”) and the International Civil Aviation Organization (“ICAO”), among others. The audits are conducted in connection with each country’s certification procedures and enable us to perform maintenance for the aircraft types registered in the certificating jurisdictions. Our repair stations hold FAAPart-145 certifications under these approvals.
In addition, to ensure the most qualified personnel as needed for safe, accurate andon-time Line Maintenance, we seekLATAM Airlines Group seeks to improve our technicians’ skills through extensive training programs at our LATAM Technical Training CenterCenters in Chile and Brasil, and through specific training programs designed and conducted by our partnerships. Our Fleet and Engineering teams participate actively in periodic airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.
LATAM MRO
Our
The two MROmain Maintenance, Repair and Overhaul (“Maintenance, repair and Operations”MRO”) facilities, one in São Carlos (Brazil) and one in Santiago (Chile), are equipped and certified to service our fleet of Airbus and Boeing aircraft and provide 76%71% of all heavy maintenance services that LATAM demands.demands as well as, effectively executed 1.35 million man-hours. The services not executed internally are contracted to our extensive network of MRO partners around the globe. Both of our MRO facilities are FAAPart-145 certified repair stations. We occasionally performOccasionally certain heavy maintenance and component services for other airlines or OEMs.OEMs are performed. LATAM MRO is also responsible for the planning and execution of aircraft redeliveries.
In MRO São Carlos (LATAM Airlines Brazil MRO), we areLATAM is prepared to service up to eight aircraft (narrow and wide body) simultaneously with a dedicated hangar for stripping and painting. In this facility we also have 22 technical component shops, including a full landing gear repair & overhaul shop, hydraulics, pneumatics, electronics, (ATEC), electrical components, electroplating, composites, wheels & brakes, interiors and emergency equipment shops. This facility has a total area of 400 hectares and a 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 the FAA, the European Aviation Safety Agency (“EASA”), ANAC Brazil, the Chilean DGAC, the ArgentineanAdministración Nacional de Aviación Civil (“ANAC Argentina”), the EcuadorianDirección General de Aviación Civil(“DGCA”), the ParaguayanDirección Nacional de Aeronautica Civil (“DINAC”), and Transport Canada (“TC”) , among others, for Heavy Maintenance and Components Repair and Overhaul for the AirbusA-320 family (A318, A319, A320 and A321) and Airbus A330, Boeing 767,ATR-42/72 and the EmbraerE-Jet 170/190 families.767. The MRO also has some minor capabilities for the repair and overhaul of Boeing 777 components. MRO São Carlos includes its own support engineering capabilities and a full technical training center.
In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have two hangars capable of servicing one wide body aircraft and two narrow body aircraft simultaneously. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC, ANAC Argentina and DGCA, among others, for Heavy Maintenanceheavy maintenance services for the Airbus A320-Family (A318, A319, A320 and A321) and Boeing 767. MRO Santiago has eight10 shops prepared to support hangar activities such as cabin shops, galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including the installation of IFE(in-flight (in-flight entertainment) equipment and blended winglets in the Boeing 767 fleet.equipment.
During 2016,2019, LATAM MRO effectively executed 1.2 millionman-hours in more than 300425 services, including C checks (114)(150) and Special Checks (209)(275) for the LATAM fleet, maintaining our 2015 labor production. Our shops delivered more than 50,000 components and performed 17 landing gear overhauls.fleet.
LATAM Safety and Security
Our most important priority is the
The safety of our passengers and employees. LATAM has been working to standardizeemployees is LATAM’s highest priority. It is for this reason that we have put significant efforts in standardizing our operational indicators regarding safety, audits and emergency response throughoutresponse.
This standardization is achieved through our operations.
The divisions that currently support theseSafety, Security and Emergency Management Departments, which functions are Safety Management, Emergency Response Management, and Security Management. These divisions function on the basis of uniform policies and procedures issuedthroughout the whole company, ranging from the Corporate Safety and Security Vicepresidency locatedour corporate headquarters in Santiago, Chile to every affiliated location within LATAM Airlines Group. As a result of this unification, we can ensure the highest levels of safety and that are represented in each affiliated company.security throughout our entire network.
Organization
Organizational Structure of the LATAM Safety and Security VicepresidencyVice-presidency
Safety Management Corporate
We give the highest priority to
This Department ensures that providing safe and reliable air service. We have unified our Safety Managementservice remains LATAM’s highest priority. Given the operational complexity, as well as the multicultural challenges that we face, LATAM has decided to concentrate its safety management activities under the umbrella of a single organization (Corporate) thatcoordinated structure, which is responsible for the definitionimplementation and oversight of processesunified policies and procedures for LATAMthroughout the group.
The core foundation of this department lies within its robust Safety Management System (SMS), which is built upon four main components (Policies and forObjectives, Risk Management, Safety Assurance, and Safety Promotion). These components give the oversightSMS a proper structure and provide management with the necessary tools to oversee the safety of our operations. For example, through Flight Data Monitoring (FDM), also known as Flight Operations Quality Assurance (FOQA), we are able to capture, analyze and even visualize the affiliates that applydata recorded during revenue flights and implement those processescompare it with the company’s Standard Operating Procedures (SOPS). In parallel, the Line Operations Monitoring Program (LOMP) permits us to monitor Flight Crew performance and procedures.
All LATAM affiliates havedetect errors ahead of time. As a result of these proactive activities, we are able to improve overall safety, management system (“SMS”) documentation thatincrease maintenance effectiveness, and reduce operational costs. The company’s SMS is publicly documented and it provides clear definitions of the functionsguidelines and responsibilities regarding operational safety for all persons involved, fromthat each employee must meet, regardless of function or hierarchy, which in turn assures our commitment towards safety. Furthermore, IOSA certification ensures the top toproper qualification of our employees, including the bottomprovision of the operational structure in the airline.
All systems are IOSA certified and have a Senior Safety Manager who is responsible for each system implementation and for settingwithin the Safety Department, as well as defining standardized procedures for measuring the quality and safety of services provided by third party companies or professional contractors that affect the operational safety of LATAM.and contractors.
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Emergency Response Management Corporate
The emergency response management team
This Department is responsible for managing the administration of thecompany’s Emergency Response Plan (“ERP”)(ERP). It has been developed for thedesigned to provide an effective management of different kinds of emergencies (aircraftresponse to various emergency scenarios, such as aircraft accidents, natural disasters, union strikes and pandemics) withpandemics. We are therefore able to mitigate the purpose of mitigating the impacts of emergenciesimpact that these contingencies have on our passengers and their relatives, as well as onin addition to ensuring the continuation of our operations. The structure of the ERP includes among others,(but is not limited to) Emergency Process and Procedures, Emergency Control Centers, a Relatives & Passengers Assistance Team, a Notification Team, Aircraft Recovery, and a dedicated “Go Team” which is a special team that can be dispatched in the case of anactivated and address any given emergency and assume responsibility for emergency management.situation.
Security Management Corporate
The Company ensuresSecurity Management Department is responsible to coordinate the highest levelssecurity of security for all of itsLATAM’s passengers, employees, aircraft, equipment and facilitiesfacilities. This department secures LATAM’s infrastructure while protecting people against any threatsthreat or unlawful action.
Corporate Security policiesPolicies and a Security Management System (“SeMS”) have been implemented to detect any vulnerabilities in our security operations and to prevent acts of unlawful interference. Through the use of audits, inspections and risk analysis, we are able to establish the different security protocols required in our international and domestic operations. The results ofacts. These policies, as well as the SeMS itself, are constantly evaluated, analyzed and assigned a risk level (high, medium or low) by LATAMqualified Corporate Security Managers, who are in turn responsible for determiningestablishing new security protocols. In addition,protocols or modifying current ones Corporate Security Management then oversees all of thethese security processes and procedures through the execution of annual audits.
Furthermore,
In addition to protecting the organization against any threat or unlawful action, LATAM is committed to the general health and safety of all of its employees. Therefore, through Security Management, LATAM has created a dedicated Health, Safety and Environment (HSE) Team that, in addition to safeguarding the general wellbeing of its employees, is responsible for ensuring a safe work environment and educate against common dangers/risks associated with everyday activities.
Lastly, every LATAM affiliate has to abide by ais responsible for complying with the Security Program approved by the relevantappropriate local authority. These Security Programs provide clear definitions of the security functions required for every operation.
Fuel Supplies
Fuel costs comprise one of the single largest categories of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations. However, inIn 2016, mainly due to the significant drop in the international price of crude oil, LATAM saw a drop in its jet fuel costs. In 2016,2017 and 2018, crude oil prices increased resulting in higher fuel costs for LATAM, while in 2019, average market price for JetFuel declined by 7.3% year-over-year, and thus, reducing costs per gallon. In 2019, total fuel costs represented 23.0%30.2% of our total operating expenses. Our average into-wing price for 20162019 (fuel price plus taxes and transportation costs, including hedge)hedging and gains/losses) was US$1.702.30 per gallon, representing a decrease of 22.2%7.5% from the 20152018 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, we believe it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs, which is in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices.”
The following table details our consolidated fuel consumption and operating expenses, after related hedging gains and losses (which exclude fuel costs related to charter operations because fuel expenses are covered by the entity that charters the flight) duringfor the last three years.
Year ended December 31,(1) | Year ended December 31,(1) | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
Fuel consumption (thousands of gallons) | 1,185,508.8 | 1,221,096.9 | 1,219,882.7 | 1,272,676.8 | 1,205,188.8 | 1,156,062.3 | ||||||||||||||||||
ASK equivalents (millions) | 205,537.5 | 208,722.5 | 206,197.9 | |||||||||||||||||||||
Fuel gallons consumed per 1,000 ASK equivalents | 5.77 | 5.85 | 5.92 | |||||||||||||||||||||
ASK (millions) | 149,116.6 | 143,264.7 | 136,398.4 | |||||||||||||||||||||
Fuel gallons consumed per 1,000 ASK | 8.53 | 8.41 | 8.48 | |||||||||||||||||||||
Total fuel costs (US$ thousands) | 2,056,643 | 2,651,067 | 4,167,030 | 2,929,008 | 2,983,028 | 2,318,816 | ||||||||||||||||||
Cost per gallon (US$) | 1.70 | 2.19 | 3.42 | 2.30 | 2.49 | 2.00 | ||||||||||||||||||
Total fuel costs as a percentage of total operating expenses | 23.0 | % | 27.6 | % | 34.8 | % | 30.2 | % | 31.5 | % | 25 | % |
(1) | See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—LATAM Airlines Group Financial Results Discussion: Year ended December 31, |
In our fuel supply agreements, we manage different price structures and price update calculations. The main price structure is Jet Fuel plus fixed fees and taxes, and the main fuel price updates are in a weekly, bi-weekly and monthly basis. Brazil, our largest market, bases its price on a refinery posting updated every month, which is set in Brazilian real per liter, plus fees and taxes. Refinery prices in Brazil have stabilized recently creating a more competitive market for the region.
Our fuel supply arrangementsagreements vary by airport and are distributed among 34 providers, but are30 suppliers. Our fuel consumption volume is mainly concentrated in Brazil (42%(40%), Chile (15%(16%), the United States (11%(9%) and Peru (11%(12%). During 2016,2019, were-negotiated our fuel supply contracts in all North American,Brazil, Argentina, major European, and certain South American airports.
Regarding our operations in theAustralian and United States airports. In 2019 we changedcontinued to strengthen our strategy relatedrelationship with global fuel suppliers, extended our credit terms and achieved conditions that improved LATAM´s cash flow.
In Chile and Peru, a fuel import model is used in addition to the term of our agreements. While previously we relied only on short term agreements, in 2016 we established medium term agreements, securingtraditional local refinery supply, creating a more competitive market and ensuring our supply with different sources. During 2018 we implemented the fuel import model in Brazil, by creating a complex market.
As part of a comprehensive energy efficiency initiative, LATAM Airlines Group worked with a team of stakeholders to generate a streamlined fuel efficiency program (the “LATAM Fuel Efficiency Program”), which encompassessencompasses a wide range of different innovations and technologies for fuel efficiency:
● | Investments in more modern and efficient aircraft, such as the Boeing 787, the Airbus A350 and the Airbus A320neo. Investment has been carried out to perform retrofits to a portion of our Airbus A320 fleet, allowing more efficient standard operational procedures. |
● | Weight reduction measures, such as minimizing unnecessary onboard water, using ultra-light service carts, optimizing fuel according to destination, improving the distribution of weight to have an optimal center of gravity and the improvement of freight factor (the combination of passenger and cargo services). |
● | As of 2019, LATAM Pilot Tools, an in-house developed mobile app was deployed. This app allows personalized feedback to flight crews, focusing on captain fuel requests and usage, and ground fuel consumption, among other efficiency and safety indicators. This app is groundbreaking as it is the first time a direct communication channel has been created between the flight crews and the Company’s Safety Efficiency operations. As of December 2019, fuel efficiency initiatives were added to the pilot app, giving more visibility to their KPIs and adding significant savings. |
● | Standardized operational procedures on every stage of the flight (taxiing, climb, cruise, approach and landing); for example, changes in climb profiles that generate savings with minimum changes in the workload of the flight crew, or minimizing the use of the auxiliary power unit when aircraft is on the ground. |
● | Monitoring maintenance and performance of the fleet, including frequent engine washes, which allow more efficient combustion of fuel and reduce emissions in airport areas. |
● | Improvements of the flight plan, management, including continuous feedback using a post flight analysis tool called Full Tracks developed by the Fuel Team with the support and collaboration of Operations and Safety. This tool allows us to better program and optimize our flight plans. During 2019, policy changes were implemented, optimizing fuel planning according to destination, standardizing policies for all dispatch centers, allowing for centralized performance tracking and unified criteria. |
As a direct result of this program, LATAM Airlines Group has been recognized since 2014 by the Dow Jones Sustainability Index as one of the world’s leading companies ineco-efficiency. The magnitude of this program has allowed the Company to improve itsreduce their operational costs along with the improvement of environmental performance, and to enhance environmental awareness both within the Company and externally.
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Ground Facilities and Services
Our
LATAM’s main operations are based at the Guarulhos Airport in São Paulo, Brazil. LATAM also operates significant ground facilities and services at LATAM Airlines Brazil’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2018, LATAM Airlines Brazil inaugurated a Maintenance Hangar in Guarulhos with an approximate area of 65,080m².
We also have significant operations at the Comodoro Arturo Merino Benítez International Airport in Santiago, Chile, where we operate hangars, aircraft parking and other airport service facilities pursuant to concessions granted by the DGAC.DGAC and other outsourced concessions. 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 at LATAM Airlines Brazil’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2013, LATAM Airlines Brazil 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).
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 andcheck-in counter space.
Ancillary Airline Activities
In recent years, LATAM has been developing different initiatives to increase its ancillary revenues generated by its airline operations. The implementation of these initiatives aims to offer a better on-board experience, while allowing passengers to customize their journey. LATAM’s customers are able to purchase for additional services such as extra luggage, preferred seating options and the flexibility to change tickets on the same day of their flight, among others.
In addition to our airline operations, we generateLATAM generates 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-freein-flight sales, maintenance services for third parties, handling, storage and customs services, handling and activities and revenues of Multiplus and the sale of certain LATAM Pass kilometers to third parties.services. In 2016,2019, LATAM generated other revenues of US$538.7361.1 million from ancillarythese activities.
Insurance
We maintain
LATAM maintains aviation insurance policies as required by law, and in accordance with the terms of all aircraft financing and leasing agreements, for its whole fleet, aircraft that LATAM and its affiliates own, operate and are responsible for or operate. The scope of thesefor. These policies includesprovide all risk coverage for aircraft hulls including(including war risks and spares), third-party legal liability for passengers, cargo, baggage, injuries, property damage and injuriesloss of cargo. LATAM´s policies are in full force and are renewed annually along with IAG Group (British Airways, Iberia and their affiliates), which allows LATAM to third parties onobtain better premiums and improved coverage at the ground. We also maintain insurance in respectbest level of the assets against the risk ofaviation industry.
LATAM also insures its physical properties and equipment from theft, fire, flood, electrical damageearthquake, hurricane, and similar events for equipment and buildings we own or for which weother damages. All of LATAM´s vehicles are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insuranceinsured against the risk of robbery, theft,damages, fire and civil liability against third parties for all vehicles we own or for which we are responsible. Our current policies, which are in force through April 1, 2017 and are renewed annually, follow the best practices adopted by the international civil aviation industry.liability.
We have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with IAG Group (the parent of British Airways, Iberia and their affiliates and franchises), which allows us to obtain premium reductions and coverage improvements.
Information Technology
Passenger Service Systems
As part of our agenda of transformation of the customer experience atInformation and Digital Technologies
During 2019 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 2012 combination of LAN and TAM,capitalized on a series of transformational initiatives aimed at increasing the value delivered in projects, have been implementedmove to communicatea more data driven culture and increase the unificationreliability of our technological platforms.
In the area of projects, our new practices allowed us to improve our on-time delivery, expand our product offering and support and grow our digital channels. Likewise, we also started a strong focus towards innovation. Examples of such initiatives include pilot programs for biometric boarding or the use of automatized drones to improve the efficiency and reliability of aircraft visual inspections. LATAM was recognized by the national civil agency in Brazil (ANAC) for its contribution to innovation by the development of the companiesapp called Pilot LATAM. This application allows our pilots to have improved visibility of their security indicators and compare them to their peers identifying improvement opportunities in a timely and confidential fashion.
To strengthen our customers. Intense efforts have been madedata culture, in 2019 we started the construction of our Data Lake. The objective of this initiative is to standardize processes such as passenger recognition, attention at contact centers, sales officesconsolidate all LATAM data and airports,in-flight services,e-commercegenerate the conditions to ensure this data is both integrated and loyalty programs. However, many of these efforts are partial pending full unification ofconsistent. We also believe the two companies’ processesData Lake will enable more profound analysis by accessing historical data. In 2019 we also grew our machine learning capabilities by creating predictive models to anticipate events, behaviors and systems, which is still ongoing.purchase preferences, among others.
In 2014,technology platforms we redefinedkeep taking strides towards simplification and reliability. We continue to simplify our footprint and move towards modern cloud based technologies. Besides, the optimization of our technological landscape, cybersecurity remains high in our priorities with an Information Security Office with dedicated staff and strategic partners specialized in all areas of CyberSecurity, which includes organized units focused on potential cyber attacks.
We continue our engagement to make information and technology a competitive advantage for LATAM. Our improvements aim to continually transform and upgrade the travel experience model based on the needs of our target customer, reinforcing six key elements: transparency of information, early solutions, passenger choice, digital simplicity,end-to-end rapidity,customers and care for our customer. In order to implement this model, during 2016 we continuedfacilitate the work of previous years, adopting several measures for the unification of our processes and systems:employees.
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Regulation
From the integration perspective, we continue working to reach a simplified and consistent technological platform. For example, we implemented a unified Revenue Accounting System for the passenger business, and we have improved our airport management, loyalty program, contact center, customer database, and marketing tools applications. We continue to work with SABRE to unify the Passenger Service Platform in an effort to obtain operational and financial synergies, as set forth below.
During 2017, we expect to continue developing solutions aimed at improving our customers’ experience.
LATAM PSS Migration and Digital Platform
Prior to the 2012 combination, LAN and TAM used different passenger service platform (“PSP”) solutions, TAM used Amadeus and LAN used SABRE. LATAM has since decided to unify the Passenger Service Platform in an effort to obtain operational and financial synergies. As a result, the PSS Migration Program began in 2014.
After running a Request for Proposal (“RFP”) process with both providers (SABRE and Amadeus) in May 2015, LATAM signed a10-year contract with SABRE. Since June 2015, LATAM and SABRE have jointly started the execution of PSS Migration, which should be fully implemented by 2018.
Maintenance
In 2013, LATAM Airlines Brazil began a Maintenix implementation project which was completed in the first quarter of 2016. This project included standardization of all of our network’s maintenance processes, permitting optimization of stocks of components and seeking to take advantage of synergies in the maintenance process, while maintaining operational safety as the key pillar.
Disaster Recovery Plan
As of December 2016, LATAM has two data centers in Chile and one in Brazil. Design and configuration of two data centers and a Disaster Recovery Plan for LATAM was completed in 2015 and implementation and testing was done during 2016.
Regulation
Below is a brief reference to the material effects of aeronautical and other regulations in force in the relevant jurisdictions in which we operate.
We are subject to the jurisdiction of various regulatory and enforcement agencies in each of the countries where we operate. We believe we have obtained and maintain the necessary authority, including authorizations and operative certificates where required, which are subject to ongoing compliance with statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
The countries where we carry out most of our operations are contracting states and permanent members of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transportation. The ICAO establishes technical standards for the international aviation industry. In the absence of an applicable local regulation concerning safety or maintenance, the countries where we operate have incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all such relevant technical standards.
Environmental and Noise Regulation.ThereT
here are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us, except for environmental laws and regulations of general applicability.
In Argentina, Brazil, Colombia, Ecuador, Peru and the United States, aircraft shouldmust comply with certain noise restrictions. We believe ourLATAMs aircraft substantially compliescomply with all such restrictions. Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile, observing a standard known as “Stage 3 requirements”. Our fleet already complies with such standards, so we do not believe that enactment of the proposed standards would impose a material burden on us.
In 2016, the ICAO adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize CO2 emissions in international civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). With the adoption of this framework, the aviation industry became the first industry to achieve an agreement with respect to its CO2 emissions. The scheme, which defines a unified standard to regulate CO2 emissions in international flights, will be implemented in various phases by ICAO member states starting in 2020.
Safety and Security.
Our operations are subject to the jurisdiction of various agencies in each of the countries where we operate, which set standards and requirements for the operation of aircraft and its maintenance.
In the United States, the Aviation and TransporationTransportation 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$5.60 per segment passenger security fee, subject to a US$11.20 per roundtrip 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.
Below are some specific aeronautical regulations related to route rights and pricing policy in the countries where we operate.
Chile
Aeronautical Regulation
Both the Dirección Nacional de Aeronáutica Civil (“DGAC”)DGAC and the Junta de Aeronáutica Civil (“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 and regulates the assignment of international routes and the compliance with certain insurance requirements, while 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. Chilean authorities have incorporated ICAO’s technical standards for the international aviation industry 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 such relevant technical standards.
Route Rights
Domestic Routes.Chilean airlines are not required to obtain permits in order to carry 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 of the Chilean domestic skies. This was confirmed on November 2013, and has been in force since that date.
International Routes.As an airline providing services on international routes, LATAM is also subject to a variety of bilateral civil air transportation 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 transportation 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.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” “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least 20 days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least 10 days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares onnon-competitive routes. We must also ensure that our average yields on anon-competitive route are not higher than those on competitive routes of similar distance.
Argentina
Aeronautical Regulation
Both the Administración Nacional de Aviación Civil (“ANAC”) and the Ministry 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 directly to the Ministry of Transport. ANAC also is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Ministry of Transport 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 such relevant technical standards.
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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, LATAM 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. 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. However, there areIn the case of domestic flights, government-fixed minimum prices for domestic flights. Government-fixed maximum prices were in place until February 3, 2016, when the government eliminated the controls that limited maximum prices. However, there remain government-fixed minimum prices while retainingfor one-way tickets, and also for tickets sold within 30 days before the minimum prices.flight. Prices for roundtrip tickets sold 30 days or more before the flight were de-regulated on July 31, 2018.
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, LATAM 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. Last year the PDGAC revoked the unused route although that has never happened in practice.frequencies of a couple Peruvian operators.
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; |
● | controlling air traffic control inside domestic air space; |
● | approving shared codes; and |
● | modifying operations permits. |
The EDGAC also must comply with the standards and recommended methods of 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.
Airfare Pricing Policy.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.
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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 its 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 were 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 operate under a public services concession, and for that reason Brazilian airlines are not required to obtain permits in connection witha concession to provide passenger and cargo air transportation services from the Brazilian authorities. In addition, an Air Operator Certificate (AOC) is also required for Brazilian Airlines to provide regular domestic passenger or cargo transportation but onlyservices. Brazilian Airlines also need to comply with theall technical requirements established by ANAC.the Brazilian Aviation Authority (ANAC). Based on the Brazilian Aeronautical Code (“CBA”) established by Brazilian Federal Law No. 7.565/7,565/86, there are no limitations to ownership of Brazilian airlines by foreign investors. The CBA also states that non-Brazilian airlines are not permittedauthorized to provide domestic air service between destinationstransportation services in Brazil. The same law prevents a foreign airline from creating a Brazilian subsidiary and entering the Brazilian domestic market using that subsidiary.Brazil
International Routes. Brazilian andnon-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 failsANAC’s resolution 491/18 indicates the requirements to operateestablish the underuse of 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%frequency, and how it could be revoked and reassigned. This provision of the frequency given for that specific route.
Airfare Pricing Policy.
Brazilian andnon-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.
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,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.
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Airfare Pricing Policy.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 authority ceased to impose 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 a fuel surcharge is charged, it must be part of the fare, but shall 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 any restriction on maximum fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil authority the fares and conditions the day after being published.
Administrative fares are not subject to any changes, and its charge is mandatory for the transport of passengers under Aeronautical Civil Regulations. Differential administrative fares apply to ticket sales made through internetInternet channels.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission)National Economic Prosecutor Office (“FNE” by its Spanish name), oversees and investigates antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law.“Antitrust Law”. The Antitrust Law prohibitsstates as anticompetitive, any entity from preventing, restrictingconduct that prevents, restricts or distortinghinders competition, in any market or any part of any market. sets out to produce said effects.
The Antitrust Law also prohibits any businesscontinues by giving examples of the following anticompetitive conducts: (i) cartels; (ii) abuse of dominance; and (iii) interlocking. The Antitrust Law defines abusive practices as “The abusive exploitation on the part of an economic agent, or businesses that havea group thereof, of a dominant position in anythe market, fixing sale or purchase prices, imposing on a substantial partsale the acquisition of anyanother product, allocating territories or market from abusing thatquotas or imposing similar abuses on others; as well as predatory practices, or unfair competition, carried out with the purpose of reaching, maintaining or increasing a dominant position. position.”
An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint withby suing in the AntitrustChilean Competition Court requesting an order to enjoin the violation of the Antitrust Law.(“TDLC” by its Spanish name). The Antitrust CourtTDLC has the authority to impose a variety of sanctions for violations of the Antitrust Law, includingincluding: (i) amendment or termination of contracts contraryacts and contracts; (ii) amendment or dissolution of legal entities involved in the punished conducts; and/or (iii) imposition a fine up to 30% of the sales of the infringing entity corresponding to the Antitrust Law, dissolutionline of products and/or services associated to the infraction, during the entire term for which the infringement lasted; alternatively, a company and impositionfine equal to the double of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. the economic benefit obtained by the infringing company. When none of these alternatives can be applied, a fine up to USD 50,000,000 approximately (60,000 UTA).
As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust CourtResolution N°445 of August 1995, the TDLC approved in with a merger control transaction, imposed the merged airline to a specific self-regulatory fare plan for usdomestic air passenger market consistent with the Antitrust Court’sTDLC’s directive to maintain a competitive environment within the domestic market. This Airfare Pricing Policy Plan was updated by the TDLC particularly to maintain it objective which consists of a tariff regulation, through which maximum rates are established on non-competitive routes under a monthly compliance scheme.
Since October 1997, LATAM and LATAM Chile follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court)TDLC in July 2005, and further in September 2011. In February 2010, the Fiscalía Nacional Economica (the National Economic Prosecutor’s Office) finalizedFNE closed the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made.
As a condition to the 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 .merger transaction. Furthermore, the association was also submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The associationmerger was filed with the Argentinean antitrust authorities,authorities; which approval is still pending. For more information regarding these mitigation measures please see below:
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Chile
On September 21, 2011, the TDLC issued a decision (the “Decision”) with respect to the consultation procedure initiated on January 28, 2011 in connection with the proposed combination between LAN and TAM. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:
1. | exchange of certain slots in the Guarulhos Airport at |
2. | extension of the frequent flyer program to airlines operating or willing to operate the |
3. | execution of interline agreements with airlines operating the |
4. | certain capacity and other transitory restrictions applicable to theSantiago-São Paulo route; |
5. | certain amendments to LAN’s self-regulatory fare plan approved by the TDLC with respect to LAN’s domestic passenger business; |
6. | the obligation of LATAM to renounce to one global airline alliance within 24 months from the date in which the combination becomes effective, except in the case that the TDLC approves otherwise, or to elect not to participate in any global airline alliance; |
7. | certain restrictions on code-sharing agreements outside the global airline alliance to which LATAM belongs for routes with origin or destination in Chile or that connect to North America and Europe, or with Avianca/TACA or Gol for international routes in South America, including the obligation to consult with, and obtain approval from, the TDLC prior to its execution of certain of those codeshare agreements; |
8. | the abandonment of four air traffic frequencies with fifth freedom rights between Chile and |
9. | issuance of a statement by LATAM supporting the unilateral opening of the Chilean domestic skies (cabotage) and abstention from any actions that would prevent such opening; |
10. | promotion by LATAM of the growth and normal operation of the Guarulhos (Brazil) and Arturo Merino Benítez (Chile) airports, to facilitate access thereto to other airlines; |
11. | certain restrictions regarding incentives to travel agencies; |
12. | to maintain temporarily 12 round trip flights per week between Chile and the United States and at least seven round tripnon-stop flights per week between Chile and Europe; |
13. | certain transitory restrictions on increasing fares in the |
14. | engaging an independent consultant, expert in airline operations, which for 36 months, and in coordination with the FNE, will monitor and audit compliance with the conditions imposed by the Decision. |
On or about June 2015, the FNE initiated a legal claim against LATAM before the TDLC alleging that LATAM was not complying with certain mitigation conditions related to the code share agreements with airlines outside LATAM’s global alliance as referenced above. Although LATAM opposed this allegation and responded the claim accordingly, a settlement agreement was reached between the FNE and LATAM. The Settlement Agreement approved by the TDLC on December 22, 2015 terminated the legal proceeding initiated by the FNE and did not establish any violation of the TDLC resolutions or any applicable antitrust regulations by LATAM. The Agreement did establish the obligation of LATAM to amend/terminate certain code share agreements and contract an independent third party consultant, which would act as an advisor to the FNE to monitor the compliance by LATAM of the Seventh Condition and the Agreement.
On October 31, 2018, the TDLC approved the joint business agreements between LATAM and American Airlines, and between LATAM and IAG, subject to nine mitigation measures. On May 23, 2019 the Supreme Court of Chile revoked the TDLC decision, and both agreements were rejected. On September 26, 2019, LATAM announced that the JBA with American Airlines would be terminated and, on December 6, 2019, LATAM announced that the JBA with IAG would not be implemented.
Brazil
The Brazilian Council for Economic Defense – CADE approved the LAN/TAM merger 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 directnon-stop flights between São Paulo and Santiago, Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
C. ORGANIZATIONAL STRUCTURE
LATAM operates through sevenAirlines Group and LATAM Airlines Brazil ownership structure as of February 29, 2020 is as follows:
The LATAM Group is composed of eight main airlines: LATAM Airlines Group S.A., incorporated in Chile; Transporte Aéreo S.A. (“LATAM Airlines Chile”), a Chilean subsidiary; LANLATAM Airlines Peru S.A. (“LATAM( “LATAM Airlines Peru”), a Peruvian subsidiary, LATAM-Airlines Ecuador S.A. (“LATAM Airlines Ecuador”, previously Aerolane Líneas Aéreas Nacionales del Ecuador S.A. (“LATAM Airlines Ecuador”), andan Ecuadorian subsidiary, LAN Argentina S.A. (“LATAM Airlines Argentina,” previously Aero 2000 S.A.), an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (“LATAM Airlines Colombia”), a Colombian subsidiary; TAM Linhas Aereas S.A. (“LATAM Airlines Brazil”) incorporated in Brazil; and Transportes Aéreos del MercosurLAN Cargo S.A. (“LATAM Airlines Paraguay”Cargo”), a Paraguayan subsidiary..
As of JanuaryDecember 31, 20172019 we held a 100% stake in Transporte Aéreo S.A. through direct and indirect interests, a 70% stake in LANLATAM Airlines Peru through direct and indirect interests, a 55.00% stake of the voting shares of LANLATAM-Airlines Ecuador and a 100% of thenon-voting shares of Holdco Ecuador S.A., who has 45.00% of the voting shares of LANLATAM-Airlines Ecuador, a 95%99.87% indirect stake in LANLATAM Airlines Argentina, a 99.19%99.20% indirect stake in LANLATAM Airlines Colombia and a 100.00% stake of thenon-voting shares of TAM, and 48.99%51.04% of the voting shares and 100% oftheof the non-voting shares of Holdco I S.A., whowhich has 100.00% of the voting shares of TAM. Following changes in Brazilian law, which now permitpermits foreign persons to own up to 49%100% of the voting capital of Brazilian airlines, on April 20, 2016,February, 2019, we increased our ownership of the voting shares of Holdco I S.A. to 48.99%51.04%. For a description of the 2012 combination with TAM, including TAM’s operating structure, see “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.”
Our cargo
Cargo operations are carried out by ourthe affiliates under the new brand LATAM Cargo. Our 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”) inLATAM Cargo Brazil and Linea Aérea Carguera de Colombia S.A. (“LANCO”) inLATAM Cargo Colombia. As of JanuaryDecember 31, 2016,2019, we indirectly held 100% of thenon-voting shares and 24.99% of the voting shares of MasAir, 100% of thenon-voting shares and 20% (preferred) of TAM S.A. (a total of 63,09% of TAM S.A.) which is the voting sharessole shareholder of ABSA,LATAM Cargo Brazil and a 90% stake in LANCOLATAM Cargo Colombia through direct and indirect participations. TAM S.A. has 100% of thenon-voting shares and 100% of the voting shares of ABSA. Following the combination between LAN and TAM, we have coordinated the operations of ABSA and TAMLATAM Cargo in Brazil. In the cargo business, we market ourselves internationally primarily under the LATAM Cargo brand internationally.brand. Cargo Operation, in Perú, are carried out by LATAM Airlines Peru.
D. PROPERTY, PLANT AND EQUIPMENT
Chile
Headquarters
Our main facilities are located on approximately five acres of land that we ownrent near the Comodoro Arturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet14,000 m2 of office space, 32,292 square feet3,000 m2 of conference space and training facilities, 9,688 square feet1,000 m2 of dining facilities andmock-up cabins used for crew instruction.
In addition, we occupy 17,715 square feetrent 10,000 m2 for our executive offices in a more central location of Santiago, Chile. This space includes five floors owned by LATAMis distributed in one building and 16 leasedeleven floors in an adjacent building.four buildings. We also own one additional floor of 11,840 square feet at the Arrau Buildinglease 5,000 m2, in twelve floors in downtown in Santiago, Chile.
Finally, last year we acquired a 17,000 m2 land, on which we plan to build our new main headquarters during 2020.
Maintenance Base
Our 877,258 square foot 82,000 m2maintenance 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 feet52,000 m2 aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a 53,820 square foot5,000 m2 office building plus a 10,000 square foot 1,000 m2office and workshop space. We also lease from the DGAC 193,750 square feet Sociedad Concesionaria Nuevo Pudahuel S.A. approximately 5,000 m2of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. OurThe lease has a duration of 14 years.30 days and is renewed monthly.
Other Facilities
We own sixteen acres of land and a building on the west side of the Comodoro Arturo Merino Benítez International Airport that houses a flight-training center. This facility features three full-flight simulators for(which are not property of LATAM), one Boeing 767,787 and two Airbus A320 and Boeing 737 aircraft.
Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our affiliates that operates import customs warehouses, utilizes an import warehouse and office building at the Comodoro Arturo Merino Benítez International Airport. This 172,000 square foot building was developed in conjunction with two other operators. We have leased these facilities since 2004 and we will continue to operate there until March 2017. During April 2017, we will transfer our operations to a 5,600 m² warehouseswarehouse located at Comodoro Arturo Merino Benítez International Airport.
Brazil
Headquarters
LATAM Airlines Brazil’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, LATAM Airlines Brazil leases office facilities in converted hangars belonging to INFRAERO (the Local Airport Administrator). These facilities comprise 60,380an area of approximately 38,807 m².
The LATAM Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport. This property, which LATAM Airlines Brazil owns, is used for human resources selection, medical services, training,mock-ups and offices- The Service Academy comprises 15,342 m² of land area and 9,032 m² of building area.
We also lease office space for corporate purposesoffices in the city of São Paulo, where we operate 1,5001,225 workstations distributed in 11spread over 9 floors.
Maintenance Base Maintenance
At Hangars II and V in Congonhas Airport, which TAMLATAM Airlines Brazil leases from INFRAERO, LATAM Airlines Brazil has 21,72723,886 m² of offices and hangars with about 1,300 workstations. This site also houses the aircraft maintenance, procurement, aeronautical materials logistics and retrofitting departments.
Headquarters of the Presidency
Completed in 2013, the
The Headquarters of the Presidency has an area of 5,066 m², space for 641 workstations. The headquarters isare located at the Tower Bridge Building in the Brooklin region ofRua Verbo Divino 2001 Floor 17th, Chácara Santo Antonio, São Paulo.
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Other Facilities
In São Paulo, LATAM Airlines Brazil has other facilities, including: Uniform Building, used for storage and delivery of uniforms; a Call Center Building with 3,199 m2, distributed over 5five floors (plus a ground floor and a basement) that currently holds about 400272 workstations and support rooms (meetings / training / dining room / coordination) of the operations of Call Center Reservations, Talk to People and LATAM Cargo BrazilABSA back office.
In Guarulhos, LATAM has a total area of approximately 12,89412,649 m2 distributed within the Passenger Terminal, including areas such asCheck-in, Ticket Sales, Check Out, Operations Areas, a VIP Lounges,Lounge and Aircraft Maintenance GSE, Cargo Terminal, Distribution Centers, etc.spaces. The Cargo TerminalHangar Complex adds an area of 65.080 m². The cargo terminal has 164252 m2²of office and 8,534 m217,215 m2 of open area. Our Distribution Centre Supplies area occupies 3,030 m2².
New Facilities
TAM
LATAM Airlines Brazil completed several infrastructure projects in Brazil during 2016. The main highlights are:2019, including:
1. New Cargo Warehouses in Fortaleza and Rio de Janeiro: total of 3,500 m².
1. | Opening of Maringá Station: 238m² |
2. | Ground Handling area reduction of 12,150m² due to third party outsourcing in Guarulhos including a space reduction of 12.150m² |
3. | Maintenance and Supply areas’ relocation to the Hangar Complex in GRU: including a space reduction of 1,306m² |
4. | Cargo Terminal optimization in Viracopos: including a space reduction of 864m² |
5. | New area for Recovery Kit storage in GRU: including an expansion of 1.000m² |
6. | Perishables Hub - Cold Storage Unit for Transfer Cargo |
7. | Transfer of Multiplus S/A Fidelidade company (currently LATAM Pass) with the relocation of rented property (2,400 m2) to the EENU Verbo Divino building. |
2. Terminal transfers in São Paulo- Viracopos and Goiânia: total of 250 m².
3. Relocation of office areas in Rio de Janeiro and São José do Rio Preto: total of 650 m².
4. Improvement of Hangar 3 at Congonhas: 4,060 m2.
Other locations
We occupy a 36.3 acre36.3-acre site at the Miami International Airport that has been leased to us under a concession agreement by the Miami Dade Aviation Department. Our facilities include a 44,650 square feet13,609 m² corporate building, a 380,000 square feet115,824 m² cargo warehouse (including an 116,670 square meter cooling35,561 m² refrigerated area) and a 783,000 square feet238,658 m² aircraft-parking platform. These facilities were constructed and are now leased to us under a long-term contract by Aero Term, a division of Real Term Global. TheFor the year ended 2019, we paid US$ 9.8 million in rent we pay annually for all facilities totals US$9.6 million.under the foregoing leases.
In June 2016 we receivedFebruary 2014, the final occupancy permit forCompany entered into a new hangar atlease agreement with Miami- Dade County covering approximately 1.81 acres of land located on the grounds of the Miami International Airport. The lease has a term of 30 years with a total annual land cost of US$172,080.
Under the lease, we retained the right to construct a hangar facility on the leased premises. The Company completed construction in November 2015 and the hangar has been operational since June 2016. The property has a 50,785 square feet15,479 m² aircraft maintenance space, sufficient to house a Boeing B777 aircraft, in addition to a 32,440 square feet9,888 m² area designated for office space.
In addition, Total investment in this hangar in construction and related expenditures by LATAM holds leases to airport concessions, administrative and sale offices, hangars and maintenance areas in Argentina, Colombia, Ecuador, and Peru.was US$16.5 million.
ITEM 4A | UNRESOLVED STAFF COMMENTS |
None.
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A.
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 pageF-1 of this annual report.
The summary consolidated annual financial information as of December 31, 20162019, 2018 and 20152017 and for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report.
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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 2016, 82.7%2019, 86.3% of our total revenues (including in the total for this purpose other income from operating activities) came from passenger revenues and 11.7%10.2% came from our cargo business. The remaining 5.7%3.5% was classified as other operating income, which consists primarily of revenues generated from our coalition and loyalty program Multiplus before its acquisition and merger with LATAM Airlines Brazil, tour operator services, aircraft leasing, customs and warehouseingwarehousing services, third-party maintenance duty free sales and other miscellaneous income.
Our operating environment in 20162019 was marked by a generally weak macroeconomic environment in Latin America, including slower GDP growth or GDP contraction. In Brazil specifically, where GDP declined by 3.5% in 2016, the macroeconomic environment was marked by political corruption issues leading to a marked decrease in business and consumer confidence levels. LATAM Airlines Group successfully managed capacity throughout its markets in order to address this challenging environment, and continued to rationalize capacity in line with demand conditions on both domestic and international operationsvolatility in the Brazilian market.region mainly resulting from the trade war between the United States and China–which generated volatility and devaluation of the currencies in the region–and economic decline in Argentina and protests at the end of the year in Ecuador, Chile and Colombia.
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 sum, across our network, of the number of seats we make available for sale on each flight, multiplied by the kilometers flown by the respective flight. We measure traffic in RPKs, as the sum, across our network, of the number of revenue passengers on each flight multiplied by the number of kilometers flown by the respective flight. Load factors represent RPKs (traffic) as a percentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Last, weWe 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—A. Selected Financial Data.”
Passenger demand overduring 2019 showed a recovery as compared to the past years has been affected as a result of weaker economic environmentsprevious year, mainly in some Latin American countries, reflectedour domestic operations, in slower GDP growth trends and depreciated currencies, and increaseswhich we carried 5.7 million more passengers compared to the domestic passengers carried in 2018, despite the increase in competition from operators to South America and within the region.in our domestic markets.
During 2016,2019, domestic operations of our affiliate carriers based in the Spanish speaking countries (“SSC”,SSC, which includes Chile, Peru, Argentina, Colombia and Ecuador) continued to show growthaccount for 18.3% of total passenger capacity, showed an increase of 9.3% in terms ofpassenger traffic and remained profitable, in spite of the economic slowdown in some countries. Our SSC business in 2016 grew at a higher pace than in 2015; wewhile capacity increased capacity (as measured in ASKs) by 8.0%10.8% as compared to 2015,2018. As a result, the passenger load factor declined by 1.2 percentage points to 80.8%. Despite intensifying competition in line with our 8.0% growththese markets, especially in passenger traffic (as measured in RPKs), maintaining our load factors at 80.9%. However, yieldsChile, Peru and Argentina, LATAM Airlines affiliates in the SSC domestic markets continue to be under pressure, due largely to the decline of fuel prices, the depreciation of local currencies, (mainly the Argentinian Peso and the Colombian Peso, which depreciated by 59.2% and 11.0% respectively, during 2016), and increased competitioncarried 2.7 million more passengers than in certain markets. The combination of these factors resulted in a 16.5% decline in revenue2018. Revenue per ASK in US dollars asdeclined by 7.4% compared to 2015.2018 mainly due to the devaluation of the Argentinian Peso, Colombian Peso and Chilean Peso.
In ourthe domestic operations in Brazil, we continued to adjust capacity in response to a weak demand environment. LATAM Airlines Brazil reducedincreased capacity (as measured by ASKs)7.7% in 2019, higher than anticipated at the beginning of the year due to changes in the competitive landscape resulting from the end of operations by 11.5%Avianca Brazil. Passenger traffic increased by 9.4%, while passenger traffic (as measuredresulting in RPKs) decreased by 10.7%, allowing for an improvementincrease of 0.81.3 percentage points in passenger load factors, which reached a healthy 82.3%82.5%. LATAM Airlines Brazil ended the year with an increase of 6.3%9.7% in our revenues per ASK in US dollars, despite the the devaluation of the Brazilian ReaisReal during 2019, as revenue per ASK in Brazilian Reals increased by 19.2% as compared to 2015. Moreover, during2018.
In international operations, LATAM maintained relatively flat its passenger capacity due to challenging market conditions for international passengers generated by the fourth quarterdevaluation and volatility of 2016, revenues per ASK (RASK)currencies in the region. Capacity in international operations increased by 34.8% as compared to the same quarter of 2015, driven by a 14.8% increase in RASK in BRL as well as by the 14.3% average appreciation of the Brazilian Real.
In our international operations, we0.3% and traffic increased our passenger capacity by adding new destinations and strengthening the use of our regional hubs, consistent with the Company’s focus on network improvements. Brazilian international demand was also adversely affected by the weak macroeconomic conditions in the country. For this reason, LATAM Airlines Brazil reduced its capacity on routes with weaker demand, specifically between Brazil and the US, with a significant recovery in unit revenues as compared to 2015, especially in the second half of the year. On the other hand, the other affiliates added capacity on healthy routes, primarily from the Spanish Speaking Countries to destinations in the US and Europe. As a result, capacity in those markets (as measured by ASKs) increased by 5.6%, while traffic (as measured in RPKs) increased 7.4%1.0%, resulting in an improvementincrease of 1.40.6 percentage points in passenger load factors, which reached 86.2%, while the revenue84.9%. Revenue per ASK (RASK) declined 9.9%decreased 5.4% in US dollars. A portiondollars, especially in the first half of the RASK decline is relatedyear, prior to lower fuel prices and devaluation of local currencies during 2016 as compared to 2015.
Although 2016 was a challenging year, with weakening regional economies and recession in Brazil, devalued local currencies and high inflation rates in certain countries, LATAM continues to be the best positioned airline group in Latin America to respond to these challenging conditions, as we continue to improve our margins, generate cash flow and deleverage our balance sheet, showing the resiliencecapacity adjustments across most of our business model. Our management has been proactive in addressing these economic challenges. We continue to pursue initiatives to further reduce costs, and we also successfully restructured our fleet commitments to adapt fleet deliveries to the current demand environment in the region, reaching historically low levels of fleet commitments for 2017.international network.
Cargo Operations
Our cargo
Cargo operations depend on exports from South America to North America and Europe, and imports from North America and Europe to South America, where Brazil is the main import market. Cargo markets are affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries and competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are affected by our capacity, traffic, cargo load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available across our network for the transportation of cargo on each flight, multiplied by the kilometers flown by the respective flights. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) on each flight multiplied by the number of kilometers flown by the respective flights. 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 cargo 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.
During 2016,2019, cargo traffic declined by 1.6% while cargo capacity declined by 2.2%, which led to an improvement of 0.4 percentage points in cargo load factors to 55.5%. Cargo yields decreased 8.7%by 8.8%, reflectingand as a challenging scenarioresult, revenues per ATK decreased by 8.3% as compared to the previous year. Decline in Latin American cargoyields was driven by weak import markets, mainly due to a strong decline in Brazilian imports affected by recessionary conditions and currency devaluation. However, Latin American exports remain at healthy levels, notwithstanding lower productionthe devaluation of the currencies in the salmon industry in Chile. Revenues per ATK declined by 8.5% as fares continued to be pressured by the competitive landscape and low fuel prices.region. The Companygroup continued its rational and disciplined approach toward freighter capacity utilization,deployment, while focused on maximizing the belly utilization of ourthe passenger fleet. Consistent with this approach, we are currentlysub-leasing three of our767-300Fs and one of our777-200Fs to a third party operating in a different market.Our cargo capacity decreased by 5.3% in 2016, resulting in a load factor of 51.7%.
Cost Structure
LATAM Airlines Group’s costs are largely 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 of our control, particularly fuel prices. At the end of 2015,During 2019, average Jet fuel prices were relatively low, principally due to an aggregate excess supply from exporter countries (mainly OPEC members and Russia), which offset the lower production by shale oil companies in the U.S. In 2016, fuel prices followed the same trend largely due to the agreement reached by Iran and the largest economies regarding Iran’s nuclear program, ending the penalties imposed on that country’s oil exports. However, the concerns and speculations regarding the actual implementation of this agreement put pressure on fuel prices toward the end of 2016.decreased 7.3%. LATAM Airlines Group has a hedging policy to protect medium term liquidity risk from fuel price increases, while participating ofin the benefits fromof fuel price reduction.reductions. Cost of fuel is also affected by the amount of gallons we consume, which depends on the size of our operation, the efficiency of our fleet and the impact of our efficiency programs.
Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs isare denominated in Chilean pesos and in Brazilian reais,Reals, appreciation of these currencies against the U.S. dollar as well as increases in local inflation rates can result in increased costs in U.S. dollar terms and can negatively affect our results. Depreciation of local currencies results in decreases in costs in dollars. Other important drivers of personnel expenses 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 largely fixed and can be reduced on a per unit basis by achieving higher aircraft utilization rates.
Results of Operations
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 20162019 compared to year ended December 31, 2015.2018.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2016,2019, and December 31, 2015.2018. Financial information for 2018 was restated to give effect to the application of IFRS16. For certain operating data for these periods, see “Item 3. Key Information—A. Selected Financial Data.”
Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016/2015 % 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 | 7,877.7 | 8,410.6 | 87.6 | % | 86.4 | % | (6.3 | %) | ||||||||||||
Cargo | 1,110.6 | 1,329.4 | 12.4 | % | 13.6 | % | (16.5 | %) | ||||||||||||
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Total operating revenues | 8,988.3 | 9,740.0 | 100.0 | % | 100.0 | % | (7.7 | %) | ||||||||||||
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Cost of sales | (6,967.0 | ) | (7,636.7 | ) | (77.5 | %) | (78.4 | %) | (8.8 | %) | ||||||||||
Gross margin | 2,021.3 | 2,103.3 | 22.5 | % | 21.6 | % | (3.9 | %) | ||||||||||||
Other operating income | 538.7 | 385.8 | 6.0 | % | 4.0 | % | 39.6 | % | ||||||||||||
Distribution costs | (747.4 | ) | (783.3 | ) | (8.3 | %) | (8.0 | %) | (4.6 | %) | ||||||||||
Administrative expenses | (873.0 | ) | (878.0 | ) | (9.7 | %) | (9.0 | %) | (0.6 | %) | ||||||||||
Other operating expenses | (373.7 | ) | (324.0 | ) | (4.2 | %) | (3.3 | %) | 15.4 | % | ||||||||||
Financial income | 74.9 | 75.1 | 0.8 | % | 0.8 | % | (0.3 | %) | ||||||||||||
Financial costs | (416.3 | ) | (413.4 | ) | (4.6 | %) | (4.2 | %) | 0.7 | % | ||||||||||
Share of profit of investments accounted for using the equity method | 0.0 | 0.0 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
Foreign exchange gains/(losses) | 121.7 | (467.9 | ) | 1.4 | % | (4.8 | %) | (126.0 | %) |
Result of indexation units Other gains/(losses) Income (loss) before income taxes Income (loss) tax expense Net income (loss) for the period Income (loss) for the period attributable to the parent company’s equity holders Income (loss) for the period attributable tonon-controlling interests Net income (loss) for the period Earnings per share Basic earnings per share (US$) Diluted earnings per share (US$) Year Ended December 31, 2016 2015 2016 2015 2016/2015
% change (in US$ millions, except per
share and capital stock data) As a percentage of total
operating revenues 0.3 0.6 0.0 % 0.0 % (50.0 %) (72.6 ) (55.3 ) (0.8 %) (0.6 %) 31.3 % 273.9 (357.1 ) 3.1 % (3.5 %) (17.7 %) (163.2 ) 178.4 (1.8 %) 1.8 % (16.2 %) 110.7 (178.7 ) 1.3 % (1.7 %) (38.1 %) 69.2 (219.3 ) 0.8 % (2.3 %) (131.6 %) 41.5 40.5 0.5 % 0.4 % 2.2 % 110.7 (178.7 ) 1.3 % (1.7 %) (38.1 %) 0.12665 (0.40193 ) n.a. n.a. (131.5 %) 0.12665 (0.40193 ) n.a. n.a. (131.5 %)
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||
(in US$ millions, except per share data) | As a percentage of total operating revenues | 2019/2018 % change | ||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||
Operating revenues | ||||||||||||||||||||
Passenger | 9,005.6 | 8,709.0 | 89.4 | % | 88.0 | % | 3.4 | % | ||||||||||||
Cargo | 1,064.4 | 1,186.5 | 10.6 | % | 12.0 | % | (10.3 | )% | ||||||||||||
Total operating revenues | 10,070.1 | 9,895.5 | 100.0 | % | 100.0 | % | 1.8 | % | ||||||||||||
Cost of sales | (7,951.3 | ) | (7,773.4 | ) | (79.0 | )% | (78.6 | )% | 2.3 | % | ||||||||||
Gross margin | 2,118.8 | 2,122.0 | 21.1 | % | 21.4 | % | (0.2 | )% | ||||||||||||
Other operating income | 360.9 | 472.8 | 3.6 | % | 4.8 | % | (23.7 | )% | ||||||||||||
Distribution costs | (580.0 | ) | (615.2 | ) | (5.8 | )% | (6.2 | )% | (5.7 | )% | ||||||||||
Administrative expenses | (735.2 | ) | (736.3 | ) | (7.3 | )% | (7.4 | )% | (0.1 | )% | ||||||||||
Other operating expenses | (422.8 | ) | (356.3 | ) | (4.2 | )% | (3.6 | )% | 18.7 | % |
Net Income
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||
(in US$ millions, except per share data) | As a percentage of total operating revenues | 2019/2018 % change | ||||||||||||||||||
Financial income | 26.3 | 53.3 | 0.3 | % | 0.5 | % | (50.7 | )% | ||||||||||||
Financial costs | (589.9 | ) | (539.1 | ) | (5.9 | )% | (5.4 | )% | 9.4 | % | ||||||||||
Foreign exchange gains/(losses) | (32.6 | ) | (38.1 | ) | (0.3 | )% | (0.4 | )% | (14.4 | )% | ||||||||||
Result of indexation units | (15.0 | ) | (0.9 | ) | (0.1 | )% | 0.0 | % | n.a. | |||||||||||
Other gains/(losses) | 11.5 | 53.5 | 0.1 | % | 0.5 | % | (78.5 | )% | ||||||||||||
Income (loss) before income taxes | 141.9 | 415.7 | 1.4 | % | 4.2 | % | (65.9 | )% | ||||||||||||
Income (loss) tax expense | 53.7 | (73.9 | ) | 0.5 | % | (0.7 | )% | (172.7 | )% | |||||||||||
Net income (loss) for the period | 195.6 | 341.8 | 1.9 | % | 3.5 | % | (42.8 | )% | ||||||||||||
Income (loss) for the period attributable to the parent company’s equity holders | 190.4 | 309.8 | 1.9 | % | 3.1 | % | (38.5 | )% | ||||||||||||
Income (loss) for the period attributable to non-controlling interests | 5.2 | 32.0 | 0.1 | % | 0.3 | % | (83.8 | )% | ||||||||||||
Net income (loss) for the period | 195.6 | 341.8 | 1.9 | % | 3.5 | % | (42.8 | )% | ||||||||||||
Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | 0.31403 | 0.51090 | n.a | n.a. | (38.5 | )% | ||||||||||||||
Diluted earnings per share (US$) | 0.31403 | 0.51090 | n.a | n.a. | (38.5 | )% |
Net income for the year ended December 31, 2016 equaled US$110.7 million, representing an improvement of US$289.4 million from a net loss of US$178.7 million in 2015. Net income attributable to the parent company’s shareholders was US$69.2 million in 2016, compared with a net loss of US$219.3 million in 2015. Results were positively impacted by a foreign exchange gain of US$ 121.7 million, compared to a net foreign exchange loss of US$467.9 million in 2015.* The abbreviation “n.a.” means not available.
Operating Revenues
Our total operating revenues decreasedincreased by 7.7%1.8% to US$8,988.310,070.1 million in the year ended December 31, 20162019 compared to revenues of US$9,740.09,895.5 million in 2015.2018. The 2016 decrease2019 increase in operating revenues was attributable to a 6.3% decrease3.4% increase in passenger revenues, andpartially offset by a 16.5%10.3% decrease in cargo revenues. Passenger and cargo revenues accounted for 87.6%89.4% and 12.4%10.6% of total operating revenues in 2016,2019, respectively.
Our consolidated passenger revenues decreasedincreased by 6.3%3.4% to US$7,877.79,005.6 million in 20162019 from US$8,410.68,709.0 million in 2015,2018, as a result of a decrease of 6.9% in our unit revenues (“RASK”). Our capacity increased by 0.6%. The4.1% increase in capacity was a resultand the recognition of an 8.0% increaseMultiplus revenues under passenger revenues after the integration of Multiplus into LATAM Airlines Brasil in our domestic Spanish-speaking countries operations and a 5.6% increase in our international operations, partiallyMay 2019. This was offset by a 0.6% decrease of 11.5% in capacity in our domestic Brazil operations. Decreases in RASK reflectdue to a 1.1% decrease of 8.1% in consolidated yields, resulting from the slowdown in economic activitywhich were impacted by softer international demand in the region the depreciationdue to currency devaluations in South America. In addition, load factor reached 83.5% in 2019, which represents an increase of local currencies, a more competitive environment, and the pass-through of the savings in fuel costs0.4 percentage points with respect to customers.2018.
Cargo revenues decreased by 16.5%10.3%, to US$1,110.61,064.4 million in 20162019 from US$1,329.41,186.5 million in 2015, as a result of a decrease of 5.3%2018. Decrease in capacity (ATK)cargo revenues is explained by an 8.8% decline in cargo yields and a decrease of 11.7%1.6% decline in unit revenues (“RATK”). Capacity decreasedtraffic measured in our cargo operationsRTK. Decline in yields was explained by weaker import markets, especially in Brazil and Argentina, mainly as a result of a reduced freighter operation. Decreasesdue to currency devaluation. In addition, exports in RATK reflectChile were affected by the still challenging cargo scenariosocial unrest in South America and in particularfourth quarter 2019. Finally, the weaknesssale of the imports intoMexican subsidiary MasAir during the region, mainly to Brazil from North America and Europe, which has affected ourlast quarter of 2018, explained the decline of approximately US$37 million in cargo yields, which decreased by 8.5% in 2016 asrevenues during 2019 compared to 2015.2018.
Cost of Sales
Cost of sales decreasedincreased by 8.8%2.3% to US$6,967.07,951.3 million for the year ended December 31, 20162019 (from US$7,636.77,773.4 million in 2015)2018), mainly due to lower fuel expenses during the yearmore operations and the positive impactan increase on 7.8% in passengers carried in 2019 compared to 2018. Cost of the depreciation of local currenciessales as well as our ongoing cost reduction program. As a percentage of total operating revenues, cost of sales decreasedincreased to 79.0% in 2019 from 78.4%78.6% in 2015 to 77.5% in 2016.
The table below presents cost of sales information for the fiscal year ended December 31, 20162019 and 2015.2018.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016/2015 % change | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | (in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | 2019/2018 % change | ||||||||||||||||||||||||||||||||||||
Revenues | 8,988.3 | 9,740.0 | 100.0 | % | 100.0 | % | (7.8 | %) | 10,070.1 | 9,895.5 | 100.0 | % | 100.0 | % | 1.8 | % | ||||||||||||||||||||||||
Cost of sales | (6,967.0 | ) | (7,636.7 | ) | (77.5 | %) | (78.4 | %) | (8.8 | %) | (7,951.3 | ) | (7,773.4 | ) | (79.0 | )% | (78.6 | )% | 2.3 | % | ||||||||||||||||||||
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Aircraft Fuel | (2,056.6 | ) | (2,651.1 | ) | (22.9 | %) | (27.2 | %) | (22.4 | %) | (2,929.0 | ) | (2,983.0 | ) | (29.1 | )% | (30.1 | )% | (1.8 | )% | ||||||||||||||||||||
Wages and Benefits | (1,479.5 | ) | (1,553.8 | ) | (16.5 | %) | (16.0 | %) | (4.8 | %) | (1,452.9 | ) | (1,442.2 | ) | (14.4 | )% | (14.6 | )% | 0.7 | % | ||||||||||||||||||||
Other Rental and Landing Fees | (1,077.4 | ) | (1,109.8 | ) | (12.0 | %) | (11.4 | %) | (2.9 | %) | (1,275.9 | ) | (1,206.9 | ) | (12.7 | )% | (12.2 | )% | 5.7 | % | ||||||||||||||||||||
Depreciation and Amortization | (960.3 | ) | (934.4 | ) | (10.7 | %) | (9.6 | %) | 2.8 | % | (1,470.0 | ) | (1,372.6 | ) | (14.6 | )% | (13.9 | )% | 7.1 | % | ||||||||||||||||||||
Aircraft Rentals | (569.0 | ) | (525.1 | ) | (6.3 | %) | (5.4 | %) | 8.3 | % | ||||||||||||||||||||||||||||||
Aircraft Maintenance | (366.2 | ) | (437.2 | ) | (4.1 | %) | (4.5 | %) | (16.3 | %) | (444.6 | ) | (366.6 | ) | (4.4 | )% | (3.7 | )% | 21.3 | % | ||||||||||||||||||||
Passenger Services | (286.6 | ) | (295.4 | ) | (3.2 | %) | (3.0 | %) | (3.0 | %) | (261.3 | ) | (280.3 | ) | (2.6 | )% | (2.8 | )% | (6.8 | )% | ||||||||||||||||||||
Other Costs of Sales | (171.4 | ) | (129.9 | ) | (2.8 | %) | (1.3 | %) | 49.8 | % | (117.6 | ) | (121.8 | ) | (1.2 | )% | (1.2 | )% | (3.4 | )% |
The decrease in our cost of sales was driven
Fuel costs declined by lower aircraft fuel expenses, which decreased by 22.4% to US$2,056.6 million in 20161.8%, as a result of a 16.6%9.1% decrease in the full year average fuel price per gallon (excluding hedge). LATAM as compared to 2018. The latter was partially offset by a 5.6% increase in fuel consumption, associated to an increase in capacity. In addition, in 2019, the Company recognized a net loss of US$48.021.2 million in fuel hedging in 2016, compared to a fuel hedge loss of US$239.4 million in 2015. In 2016, the Company also recognized a US$40.3 million hedge loss related to foreign currencyhedging contracts, which were recognized in the fuel cost line comparedcompares to a US$19.247.3 million gain million in 2015.2018.
Depreciation
Wages and amortizationbenefits increased 0.7%, mainly explained by US$25.9 million, amounting to US$960.3 million, which represents an increase of 2.8% due to the increase1.4% in the number of owned aircraft,employees, partially offset by the positive impact of the 4.5% depreciation of the Brazilian real.local currencies.
Other rental and landing fees decreased by 2.9% to US$1,077.4 million in 2016 from U$1,109.8 million in 2015,increased 5.7%, mainly due to a decline7.8% increase in passengers carried and higher handling costs associated to an increase in the rentaloperations.
Depreciation and amortization grew by 7.1%, mainly explained by 29 additional planes we received during 2019, the retrofit of passengerthe cabins and cargo capacity from third parties as well as lower handling costs.digital and IT projects during 2019.
Aircraft maintenance expenses decreasedmaitenance increased by 16.3%, from US$437.278.0 million in 2015 to US$366.2 million in 2016, mainly due to cost efficiencies related with the renewalan increase in line maintenance associated to improve reliability of our fleetoperations and lower maintenance expenses related to the redeliveryreception and operation of aircraft.29 aircraft in the year.
Aircraft rentals increased by 8.3% to US$569.0 million in 2016 from US$525.1 million in 2015 as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s and Airbus A350s), whereas returned aircraft have mainly been older models (i.e. Airbus A319s and A330s).
Passenger service expenses decreaseddeclined by 3.0%, to US$286.6 million in 20166.8% mainly explained by a lower rate of passenger contingencies during the quarter compared to US$295.4 million in 2015, due mainly to a decreasethe same period of 1.3% in the number of passengers transported, as well as the decrease in on board services expenses, offset in part by an increase in passenger compensation.2018.
As a result of the above, gross margin(definedmargin (defined as operating revenue minus cost of sales)decreasedby 3.9% from equaled US$2,103.32,118.8, compared to US$2,122.0 million in 2015 to US$2,021.3 million in 2016.2018.
Other Consolidated Results
Other operating income increaseddecreased in 20162019 by 39.6%23.7%, from US$385.8360.9 million in 20152019 to US$538.7472.8 million in 2016,2019, mainly due to a US$80.1 million gains derivedthe acquisition and subsequent merger of Multiplus with LATAM Airlines Brazil. Revenues from aircraft sales and leaseback transaction (resulting in an operating lease) as well as a US$41.8 million increase inMultiplus are now registered under Passenger revenues, while previous to the merger with LATAM Brazil, revenues from freighter aircraft leases and sales of fixed assets.Multiplus were registered under Other operating income.
Distribution costs decreased by 4.6%5.7% from US$783.3615.2 million in 20152018 to US$747.4580.0 million in 2016,2019, mainly as a result of lower commissions to agents (which decreased by 11.1%, from US$302.8 million to US$269.3 million), in both the passengerreserve systems and cargo businesses, representing a greater percentage decline than the 7.7% decline in passengerdata processing costs and cargo revenues.
Administrative expenses decreased by 0.6% from US$878.0 million in 2015 to US$873.0 million in 2016, mainlywages and benefits costs, due to a decrease of 4.8% in wages and benefits (as a result of a 6.2% decline in average headcount), as well asheadcount and the positive impactdevalution of local currencies.
Administrative expenses remained relatively flat year-over-year, decreasing by 0.1% from US$736.3 million in 2018 to US$735.2 million in 2019, due to the depreciationdevaluation of certain local currencies, on wages denominatedoffset by an increase of 1.4% in those currencies.
Other operating expenses increased by 15.4%18.7% from US$324.0356.3 million in 20152018 to US$373.7422.8 million in 2016, driven by higher costs associated with fleet sales and redeliveries, and due to lower cost in 20152019 as a result of negotiationsan increase of 7.8% of passenger carried and a non-recurring adjustment in the fourth quarter of 2018 associated with third parties relating to our passenger service system.a reversal of a provision of PIS/COFINS.
Financial income was essentially unchangeddecreased by 50.7% to US$74.926.3 million in the year ended December 31, 20162019 compared with US$75.153.3 million in 2015)2018, mainly due to the merger of Multiplus with LATAM Airlines Brazil. Investments made by Multiplus in 2018 were recorded under interest income, while investments made by LATAM with the cash that belonged to Multiplus are now recorded under Other gains (losses).
Financial costs increased by 0.7%9.4% to US$416.3589.9 million in 20162019 from US$413.4539.1 million in 2015,2018, mainly due to base interest rate increases on floating rate debt.the early redemption of LATAM’s 2020 unsecured bond and the issuance of US$800 million unsecured notes due 2026.
Exchange rate differences increased
Foreign exchange result decreased by 14.4% to a gain of US$121.7 million in 2016 from anet loss of US$467.932.6 million in 2015,2019, mainly resulting fromas a result of the 16.5% appreciationdevaluation of 3.7% and 58.9% of the Brazilian real between December 31, 2015Real and December 31, 2016.the Argentinean Peso, respectively.
Income tax expensebenefit for 20162019 amounted to US$163.253.7 million as compared to an income tax benefitexpense of US$178.473.9 million in 2015.2018. This variation is explained mainly by improvedpre-tax resultsa decline in 2016pre-tax income in 2019 (US$273.9141.9 million gain)pre-tax income) compared with 20152018 (US$357.1415.7 million loss)pre-tax income), resulting in an increased income tax charges, of US$196 million;and thenon-recognition none recognition of deferred taxes related to tax losses by TAM S.A. and LATAM Argentina in Brazil from the fourth quarter of 2015(non-recognition of US$90.4 million in 2016 vs US$16.9 million in 2015); the reversal in 2016 of tax provisions in Brazil in the amount of US$61.2 million in 2015; and other items of US$10 million.2018. For more information, see Note 18 to our audited consolidated financial statements.
Out of Period AdjustmentsNet Income
The Company recorded out of period adjustments resulting in an aggregate net decrease of US$18.2 million to “Net
Net income (loss) for the period” for the year ended December 31, 2016. These adjustments include2019 equaled US$195.6 million, representing a lossdecrease of US$39.5 million resulting from an account reconciliation process initiated after TAM S.A. and its subsidiaries completed the implementation of the SAP system. A further US$11.0 million decrease reflects adjustments related to foreign exchange differences, also relating146.2 million. Net income attributable to the Company’s subsidiariesparent company’s shareholders was US$190.4 million in Brazil. The balance2019, representing a decrease of US$32.3 million includes mainly the adjustment of unclaimed fees for expired tickets for the Company and its affiliates outside Brazil. Management of TAM S.A. has concluded that the out of period adjustments that have been identified are material to the 2015 financial statements of TAM S.A., which should therefore require a restatement of TAM’s financial statements. However, LATAM has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that due to their relative size and to qualitative factors they are not material to the annual consolidated financial statements of LATAM for the year ended December 31, 2016, or to any previously reported consolidated financial statements, therefore no restatement or revision is necessary.119.4 million.
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 20152018 compared to year ended December 31, 2014.2017.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2015,2018, and December 31, 2014.2017. Financial information for 2018 and 2017 was restated to give effect to the application of IFRS16. For certain operating data for these periods, see “Item 3. Key Information—A. Selected Financial Data.”
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015/2014 % change | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | (in US$ millions, except per share data) | As a percentage of total operating revenues | 2018/2017 % change | ||||||||||||||||||||||||||||||||||||
Consolidated Results of Income by Function | ||||||||||||||||||||||||||||||||||||||||
Operating revenues | ||||||||||||||||||||||||||||||||||||||||
Passenger | 8,410.6 | 10,380.1 | 86.4 | % | 85.8 | % | (19.0 | %) | 8,709.0 | 8,494.5 | 88.0 | % | 88.4 | % | 2.5 | % | ||||||||||||||||||||||||
Cargo | 1,329.4 | 1,713.4 | 13.6 | % | 14.2 | % | (22.4 | %) | 1,186.5 | 1,119.4 | 12.0 | % | 11.6 | % | 6.0 | % | ||||||||||||||||||||||||
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Total operating revenues | 9,740.0 | 12,093.5 | 100.0 | % | 100.0 | % | (19.5 | %) | 9,895.5 | 9,613.9 | 100.0 | % | 100.0 | % | 2.9 | % | ||||||||||||||||||||||||
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Cost of sales | (7,636.7 | ) | (9,624.5 | ) | (78.4 | %) | (79.6 | %) | (20.7 | %) | (7,773.4 | ) | (7,279.3 | ) | (78.6 | )% | (75.7 | )% | 6.8 | % | ||||||||||||||||||||
Gross margin | 2,103.3 | 2,469.0 | 21.6 | % | 20.4 | % | (14.8 | %) | 2,122.0 | 2,334.6 | 21.4 | % | 24.3 | % | (9.1 | )% | ||||||||||||||||||||||||
Other operating income | 385.8 | 377.6 | 4.0 | % | 3.1 | % | 2.2 | % | 472.8 | 549.8 | 4.8 | % | 5.7 | % | (14.0 | )% | ||||||||||||||||||||||||
Distribution costs | (783.3 | ) | (957.1 | ) | (8.0 | %) | (7.9 | %) | (18.2 | %) | (615.2 | ) | (696.7 | ) | (6.2 | )% | (7.2 | )% | (11.7 | )% | ||||||||||||||||||||
Administrative expenses | (878.0 | ) | (980.7 | ) | (9.0 | %) | (8.1 | %) | (10.5 | %) | (736.3 | ) | (952.8 | ) | (7.4 | )% | (9.9 | )% | (22.7 | )% | ||||||||||||||||||||
Other operating expenses | (324.0 | ) | (401.0 | ) | (3.3 | %) | (3.3 | %) | (19.2 | %) | (356.3 | ) | (365.5 | ) | (3.6 | )% | (3.8 | )% | (2.5 | )% | ||||||||||||||||||||
Financial income | 75.1 | 90.5 | 0.8 | % | 0.7 | % | (17.0 | %) | 53.3 | 78.6 | 0.5 | % | 0.8 | % | (32.2 | )% | ||||||||||||||||||||||||
Financial costs | (413.4 | ) | (430.0 | ) | (4.2 | %) | (3.6 | %) | (3.9 | %) | (539.1 | ) | (579.2 | ) | (5.4 | )% | (6.0 | )% | (6.9 | )% | ||||||||||||||||||||
Foreign exchange gains/(losses) | (38.1 | ) | (48.4 | ) | (0.4 | )% | (0.5 | )% | (21.3 | )% | ||||||||||||||||||||||||||||||
Result of indexation units | (0.9 | ) | (0.7 | ) | 0.0 | % | 0.0 | % | 28.6 | % | ||||||||||||||||||||||||||||||
Other gains/(losses) | 53.5 | (7.8 | ) | 0.5 | % | (0.1 | )% | n.a. | ||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 415.7 | 313.3 | 4.2 | % | 3.3 | % | 32.7 | % | ||||||||||||||||||||||||||||||||
Income (loss) tax expense | (73.9 | ) | (158.9 | ) | (0.7 | )% | (1.7 | )% | (53.5 | )% | ||||||||||||||||||||||||||||||
Net income (loss) for the period | 341.8 | 154.4 | 3.5 | % | 1.6 | % | 121.4 | % | ||||||||||||||||||||||||||||||||
Income (loss) for the period attributable to the parent company’s equity holders | 309.8 | 108.9 | 3.1 | % | 1.1 | % | 184.5 | % |
Share of profit of investments accounted for using the equity method Foreign exchange gains/(losses) Result of indexation units Other gains/(losses) Income (loss) before income taxes Income (loss) tax expense Net income (loss) for the period Income (loss) for the period attributable to the parent company’s equity holders Income (loss) for the period attributable tonon-controlling interests Net income (loss) for the period Earnings per share Basic earnings per share (US$) Diluted earnings per share (US$) Year Ended December 31, 2015 2014 2015 2014 2015/2014
% change (in US$ millions, except per
share and capital stock data) As a percentage of total
operating revenues 0.0 (6.5 ) 0.0 % (0.1 %) 100.0 % (467.9 ) (130.2 ) (4.8 %) (1.1 %) 259.4 % 0.6 0.1 0.0 % 0.0 % 500.0 % (55.3 ) 33.5 (0.5 %) 0.3 % (265.0 %) (357.1 ) 65.2 (3.4 %) 0.4 % (647.6 %) 178.4 (292.4 ) 1.8 % (2.4 %) 39.0 % (178.7 ) (227.2 ) (1.6 %) (2.0 %) (21.3 %) (219.3 ) (260.0 ) (2.2 %) (2.2 %) (15.7 %) 40.5 32.8 0.4 % 0.3 % 23.5 % (178.7 ) (227.2 ) (1.8 %) (1.9 %) (161.0 %) (0.40193 ) (0.47656 ) n.a. n.a. (15.7 %) (0.40193 ) (0.47656 ) n.a. n.a. (15.7 %)
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
(in US$ millions, except per share and capital stock data) | As a percentage of total operating revenues | 2018/2017 % change | ||||||||||||||||||
Income (loss) for the period attributable to non-controlling interests | 32.0 | 45.4 | 0.3 | % | 0.5 | % | (29.5 | )% | ||||||||||||
Net income (loss) for the period | 341.8 | 154.4 | 3.5 | % | 1.6 | % | 121.4 | % | ||||||||||||
Earnings per share | ||||||||||||||||||||
Basic earnings per share (US$) | 0.51090 | 0.17958 | n.a | n.a. | 184.5 | % | ||||||||||||||
Diluted earnings per share (US$) | 0.51090 | 0.17958 | n.a | n.a. | 184.5 | % |
* | The abbreviation “n.a.” means not available. |
Net Income / LossOperating Revenues
Net loss for
Our total operating revenues increased by 2.9% to US$9,895.5 million in the year ended December 31, 2015 equaled US$ 178.7 million, representing an improvement of US$ 48.5 million from a net loss of US$227.2 million in 2014. Net loss attributable to the parent company’s shareholders improved to US$ 219.3 million in 2015 from US$260.0 million in 2014. Results for 2015 include an US$ 80 million provision recognized during the fourth quarter of the year for aircraft redelivery costs associated with the 2016phase-out of the Airbus A330 (for more information, see Financial Statements Note 27 (e) – Restructuring Costs). Results were also impacted by a foreign exchange loss of US$ 467.9 million, (mainly resulting from the 49.0% depreciation of the Brazilian real between December 31, 2014 and December 31, 2015, and a US$41.0 million charge related to the adjustment in the exchange rate of cash held in Venezuela), as compared to a foreign exchange loss of US$130.2 million in 2014.
Operating Revenues
Our total operating revenues decreased by 19.5% to US$ 9,740.0 million for the year ended December 31, 2015,2018 compared to revenues of US$ 12,093.59,613.9 million in 2014.2017. The 2015 decrease2018 increase in operating revenues was attributable to a 19.0% decrease2.5% increase in passenger revenues, and a 22.4% decrease6.0% increase in cargo revenues. Passenger and cargo revenues accounted for 86.4%88.0% and 13.6%12.0% of total operating revenues (defined as revenues from passenger and cargo operations, plus other operating income) in 2015,2018, respectively.
Our consolidated passenger revenues decreasedincreased by 19.0%2.5% to US$8,410.68,709.0 million in 20152018 from US$10,380.18,494.5 million in 2014, largely2017, as a result of a decrease of 21.4% in our unit revenues (RASK). Our capacity increased by 3.1%. The5.0% increase in capacity, was a result of a 6.4% increase in our international operations and a 4.8% increase in our domestic Spanish-Speaking Countries operations, and was partially offset by a decrease of 2.5% in capacity2.4% in our domestic Brazilunit revenues (“RASK”). The passenger RASK decline resulted from a 0.4% yield reduction, together with a load factor decline of 1.7 percentage points, which reached 83.1%. The devaluation of the Argentinean Peso and the Brazilian Real during 2018 negatively affected demand, especially in our international operations. Decreases in RASK reflect a decrease of 21.1% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, mainly in Brazil.
Cargo revenues decreasedincreased by 22.4%6.0%, to US$1,329.41,186.5 million in 20152018 from US$1,713.41,119.4 million in 2014, as2017, driven by a result4.3% increase in cargo capacity and an increase of a decrease of 1.9% in capacity (ATK) and a decrease of 20.9%1.6% in unit revenues (RATK)(“RATK”). Capacity decreased in our cargo operations mainly as a resultCargo yields increased 1.2%, while load factor reached 55.1%, an improvement of a reduced freighter operation and thesub-lease of two additional aircraft0.2 points compared to another company. Decreases2017. Increases in RATK reflectreflected an improvement in market conditions in Brazil, especially during the still challenging cargo scenario in Southfirst half of the year, while import markets from North America and in particular the weakness of the imports into the region, mainlyEurope to Brazil which have affected our cargo yields. During 2015, cargoweakened in the second half of 2018, pressuring yields decreased by 11.8% as comparedand traffic to 2014.
Cost of Sales
Cost of sales decreasedincreased by 20.7%6.8% to US$7,636.77,883.4 million infor the year ended December 31, 2015 from2018 (from US$9,624.57,279.3 million in 2014,2017), mainly due to lowerhigher aircraft fuel expenses in the year.expenses. As a percentage of total operating revenues, cost of sales decreasedincreased from 79.6%75.7% in 20142017 to 78.4%78.6% in 2015.2018.
The table below presents cost of sales information for the fiscal year ended December 31, 20152018 and 2014.2017.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015/2014 % change | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||||||
(in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | (in US$ millions, except as otherwise stated) | As a percentage of total operating revenues | 2018/2017 % change | ||||||||||||||||||||||||||||||||||||
Revenues | 9,740.0 | 12,093.5 | 100.0 | % | 100.0 | % | (19.5 | %) | 9,895.5 | 9,613.9 | 100.0 | % | 100.0 | % | 2.9 | % | ||||||||||||||||||||||||
Cost of sales | (7,636.7 | ) | (9,624.5 | ) | (78.4 | %) | (79.6 | %) | (20.7 | %) | (7,773.4 | ) | (7,279.3 | ) | (78.6 | )% | (75.7 | )% | 6.8 | % | ||||||||||||||||||||
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Aircraft Fuel | (2,651.1 | ) | (4,167.0 | ) | (27.2 | %) | (34.5 | %) | (36.4 | %) | (2,983.0 | ) | (2,318.8 | ) | (30.1 | )% | (24.1 | )% | 28.6 | % | ||||||||||||||||||||
Wages and Benefits | (1,553.8 | ) | (1,751.3 | ) | (16.0 | %) | (14.5 | %) | (11.3 | %) | (1,442.2 | ) | (1,545.6 | ) | (14.6 | )% | (16.1 | )% | (6.7 | )% | ||||||||||||||||||||
Other Rental and Landing Fees | (1,109.8 | ) | (1,327.2 | ) | (11.4 | %) | (11.0 | %) | (16.4 | %) | (1,206.9 | ) | (1,233.6 | ) | (12.2 | )% | (12.8 | )% | (2.2 | )% | ||||||||||||||||||||
Depreciation and Amortization | (934.4 | ) | (991.3 | ) | (9.6 | %) | (8.2 | %) | (5.7 | %) | (1,372.6 | ) | (1,377.1 | ) | (13.9 | )% | (14.3 | )% | (0.3 | )% | ||||||||||||||||||||
Aircraft Rentals | (525.1 | ) | (521.4 | ) | (5.4 | %) | (4.3 | %) | 0.7 | % | ||||||||||||||||||||||||||||||
Aircraft Maintenance | (437.2 | ) | (452.7 | ) | (4.5 | %) | (3.7 | %) | (3.4 | %) | (366.6 | ) | (422.9 | ) | (3.7 | )% | (4.4 | )% | (13.3 | )% | ||||||||||||||||||||
Passenger Services | (295.4 | ) | (300.3 | ) | (3.0 | %) | (2.5 | %) | (1.6 | %) | (280.3 | ) | (288.7 | ) | (2.8 | )% | (3.0 | )% | (2.9 | )% | ||||||||||||||||||||
Other Costs of Sales | (129.9 | ) | (113.3 | ) | (1.3 | %) | (0.9 | %) | 14.6 | % | (121.8 | ) | (92.5 | ) | (1.2 | )% | (1.0 | )% | 31.6 | % |
The decreaseincrease in our cost of sales was driven by largely lowerhigher aircraft fuel expenses, which decreasedincreased by 36.4%28.6% to US$2,651.12,983.0 million in 20152018 as a result of a 40.2% decrease25.1% increase in the full year average fuel price (excluding hedge hedging expenses and gains/losses). and a 4.2% increase in the gallons of fuel consumed. LATAM recognized a net lossgain of US$239.429.7 million in fuel hedging in 2015,2018, compared to a fuel hedge lossgain of US$108.815.1 million in 2014.2017. In 20152018, the Company also recognized a US$19.218.3 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.line, compared to a US$9.7 million loss in 2017.
Depreciation
Wages and amortizationbenefits decreased by 6.7% to US$56.91,442.5 million amounting toin 2018 from US$934.41,545.6 million which represents a decrease of 5.7% (despitein 2017, explained by the increase3.9% decline in modern owned aircraft in our fleet), mainlythe average headcount as a result of thephase-out of leased aircraft with the consequent decrease in maintenance depreciation and the positive impact ofwell as the depreciation of local currencies during the Brazilian real in the year as compared to 2014.year.
Other rental and landing fees decreased by 16.4%2.2% to US$1,109.81,206.9 million in 20152018 from U$1,327.21,233.6 million in 2014,2017, due to a reduction of freighter operations and the lower availability of the fleet Boeing 787 due to engine maintenance delays.
Depreciation and amortization decreased by 0.3%, amounting to US$1,372.6 million in 2018, mainly resulting from lower aeronautical rates (in dollars) as a result ofdue to the depreciation of local currencies.the Brazilian real.
Aircraft maintenance expenses decreased by 3.4%13.3%, from US$452.7422.9 million in 20142017 to US$437.2366.6 million in 2015,2018, mainly due to fewer redelivery costs, as a result of fleet renewal initiatives and reduced operations.the Company returned less aircraft during 2018.
Aircraft rentals increased by 0.7% to US$525.1 million in 2015 from US$521.4 million in 2014 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 were mainly been older and smaller models (i.e. Airbus A319, Dash8 Q400 aircraft).
Passenger service expenses decreased by 1.6%2.9%, to US$295.4280.3 million in 20152018 compared to US$300.3288.7 million in 2014, despite a flat2017, due to lower catering costs related to the numberimplementation of passengers transported, mainly due a decreaseour buy-on-board system in passenger compensations and the positive effectdomestic flights, generating savings of the depreciation of the Brazilian real on supplier costs.US$14.2 million.
As a result of the above, gross margin(definedmargin (defined as operating revenue minus cost of sales)decreasedby 14.8% decreased by 9.1% from US$2,469.02,334.6 million in 20142017 to US$2,103.32,122.0 million in 2015.2018.
Other Consolidated Results
Other operating income increaseddecreased in 20152018 by 2.2%14.0%, from US$377.6549.8 million in 20142017 to US$385.8472.8 million in 2015,2018, mainly due to an increasethe adoption of US$15.4 million in revenueIFRS15, lower revenues from Multiplus driven by the devaluation of the Brazilean real, and lower revenues from aircraft leasedsubleases to third parties.
Distribution costs decreased by 18.2%11.7% from US$957.1696.7 million in 20142017 to US$783.3615.2 million in 2015,2018, mainly as a result of lower commissions to agents (which decreased by 17.2% from US$365.5 million to US$302.8 million),related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies.the passenger businesses.
Administrative expenses decreased by 10.5%22.7% from US$980.7952.8 million in 20142017 to US$878.0736.3 million in 2015,2018, mainly due to a decrease of 11.3% in wages3.9% headcount reduction and benefits resulting from a 5.0% decline in average headcount and the positive impact of the depreciation of local currencies during the year, especially the 14.5% of the Brazilian realReal and Chilean pesothe 69.6% of the Argentinean Peso, on wages denominated in those currencies.currencies, partially offset by the annual increase in unit salaries due to inflation adjustments.
Other operating expenses decreased by 19.2%2.5% from US$401.0365.5 million in 20142017 to US$324.0356.3 million in 2015, mainly due to lower tax contingencies in 20152018 as well asa result of the reversal of certain tax contingencies established during 2014.Company’s ongoing efficiency initiatives.
Financial income decreased by 32.3% to US$75.153.3 million in the year ended December 31, 2015 from2018 compared with US$90.578.6 million in 2014, mainly due to an increase in2017, as a result of lower interest rates in Brazil and due to the depreciation of the local currency affecting the investments the Company held in Brazil and Argentina.Brazilian Real.
Financial costs (fromnon-financial activities) decreased by 3.9%6.9% to US$413.4539.1 million in 20152018 from US$430.0579.2 million in 2014,2017, mainly due to the recognition ofa reduction in our gross debt.
Foreign exchange result decreased US$2310.3 million in breakage costs related to the sale and leaseback of four of our Boeing 777 aircraft during the first quarter of 2014.
Exchange rate differences worsened, from a net loss of US$130.238.1 million in 2014 to2018, mainly as a lossresult of US$467.9 million in 2015, mainly resulting from the 49.0% depreciationdevaluation of 17.2% of the Brazilian real betweenReal and 102.3% of the Argentinean Peso.
Income tax expense decreased by 53.5% to US$73.9 million for 2018, as compared to US$158.9 million in 2017. This decrease is explained mainly by different income distribution by subsidiary and by accumulated deferred tax liabilities due to the dissolution of some subsidiaries originally used for the acquisition of aircraft that were sold during the year.
Net Income
Net income for the year ended December 31, 2014 and December 31, 2015.
We obtained2018 equaled US$341.8 million, representing an income tax benefit for 2015increase of US$178.4187.4 million from a net income of US$154.4 million in 2017. Net income attributable to the parent company’s shareholders was US$309.8 million in 2018, representing an increase of US$154.5 million compared to anwith a net income tax expense of US$292.4155.3 million in 2014. This variation is partially explained by 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 corporate income tax from 20% in 2014 to 27% by 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.2017.
U.S. Dollar Presentation and Price-Level Adjustments
General
Foreign currency transactions
(a)
(a) | Presentation and functional currencies |
The items included in the financial statements of each of the entities of LATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which eachthe entity operates (the “functional currency”)functional currency). The functional currency of LATAM Airlines Group S.A. is the U.S.United States dollar which is also the presentation currency of presentation of the audited consolidated financial statements of LATAM Airlines Group S.A. and its affiliates.Subsidiaries.
(b)
(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)
(c) | Adjustment due to hyperinflation |
After July 1, 2018, the Argentine economy was considered, for purposes of IFRS, hyperinflationary. The financial statements of the subsidiaries whose functional currency is the Argentine Peso have been restated.
The non-monetary items of the statement of financial position as well as the income statement, comprehensive incomes and cash flows of the Argentine's entities, whose functional currency corresponds to a hyperinflationary economy, are adjusted for inflation and re-expressed in accordance with the variation of the consumer price index ("CPI"), at each presentation date of its financial statements. The re-expression of non-monetary items is made from the date of initial recognition in the statements of financial position and considering that the financial statements are prepared under the historical cost criterion.
Net losses or gains arising from the re-expression of non-monetary items and income and costs are recognized in the consolidated income statement under "Result of indexation units".
Net gains and losses on the re-expression of opening balances due to the initial application of IAS 29 are recognized in the consolidated retained earnings.
Re-expression due to hyperinflation will be recorded until the period in which the economy of the entity ceases to be considered as a hyperinflationary economy, at that time, the adjustments made by hyperinflation will be part of the cost of non-monetary assets and liabilities.
The comparative amounts in the Consolidated financial statements of the Company are presented in a stable currency and are not adjusted for subsequent changes in the price level or exchange rates.
(d) | Group entities |
The results and the financial positionsituation of all the LATAMGroup's entities, (none of which operated in a hyper-inflationary economy) that have awhose functional currency other thanis different from the presentation currency of the consolidated financial statements, of LATAM Airlines Group S.A., which does not correspond to the currency of presentationa hyperinflationary economy, are translated toconverted into the currency of presentation as follows:
(i) |
(ii) | The revenues and expenses of each |
(iii) | All the |
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 theperiod-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% in 2016)57% are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (56% in 2016)63% 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 (70.6%(74.6% as of December 31, 2016)2019), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2016, 61.8%2019, 66.0% 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.
Balance sheet imbalance denominated in currencies other than the functional currency of each specific entity creates a foreign exchange rate exposure that impacts our foreign exchange losses and gains due to exchange rate fluctuations. We recorded net foreign exchange losses of US$467.938.1 million in 20152018 and net foreign exchange gainslosses of US$121.732.6 million gain in 2016,2019, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses).” For more information, see Notes 2.3 and 29 to our audited consolidated financial statements.
Critical Accounting Policies
The Company has used estimates to value and record certain assets, liabilities, revenue, expenditure, and commitments. These estimates principally relate to:
(a) Evaluation of possible losses through impairment of goodwill and intangible assets with an indefinite useful life.
As of December 31, 2016 goodwill amounted to US$2,710.4 million (US$2,280.6 million as of December 31, 2015), while intangible assets with an indefinite useful life comprised airport slots of US$978.8 million (US$817.0 million as of December 31, 2015), loyalty program assets of US$326.3 million (US$272.3 million as of December 31, 2015) and trade marksof US$53.0 million at December 31, 2015.
At least once per year the Company verifies whether goodwill and intangible assets with an indefinite useful life have suffered any losses through impairment. For the purposes of this evaluation, the Company has identified two cash-generating units (CGUs): “Air transport” and “Multiplus loyalty and coalition program.” The book value of goodwill assigned to each CGU as of December 31, 2016, amounted to US$2,176.7 million and US$533.7 million (US$1,835.1 million and US$445.5 million as of December 31, 2015), which included intangible assets with undefined useful life.
Air Transport CGU | Coalition and loyalty Program Multiplus CGU | |||||||||||||||
As of | As of | As of | As of | |||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(in US$ million) | ||||||||||||||||
Airport Slots | 978.8 | 817.0 | — | — | ||||||||||||
Trade marks(1) | 53.0 | — | — | |||||||||||||
Loyalty program | — | — | 326.3 | 272.3 |
(a) | Evaluation of possible losses due to impairment of goodwill and intangible assets with an indefinite useful life. |
Useful life, residual value, and impairment of |
The recoverable value of these cash-generating units (CGUs) has been determined based on calculations of their value in use. The principal assumptions used by the management include: growth rate, exchange rate, discount rate, fuel prices,
(c) | Recoverability of deferred tax assets |
(d) | Air tickets sold that will not be used. |
(e) | Valuation of miles and points awarded to holders of loyalty programs, pending use. |
(f) | Required provisions and their valuation when required |
(g) | Leases |
(h) | Investment in subsidiary (TAM) |
Please see Note 4 – Accounting estimates and other economic assumptions. The estimation of these assumptions requires significant judgment by management, as these variables feature inherent uncertainty; however, the assumptions used are consistent with Company’s internal planning. Therefore, management evaluates and updates these estimates on an annual basis, in light of conditions that affect these variables. The principal assumptions used, as well as the corresponding sensitivity analyses, are shown in Note 16judgments – to our audited consolidated financial statements.
(b) Useful life, residual value, and impairment of property, plant, and equipment
The depreciation of assets is calculated based onstatements for a straight-line model, except for certain technical components depreciated on cycles and hours flown. Useful lives are reviewed on an annual basis according with the Company’s future economic benefits associated with them.
Changes in circumstances such as: technological advances, business model, planned use of assets or capital strategy may render the useful life different to the lifespan estimated. When it is determined that the useful life of property, plant, and equipment must be reduced, as may occur in line with changes in planned usage of assets, the difference between the net book value and estimated recoverable value is depreciated, in accordance with the revised remaining useful life.
Residual values are estimated in accordance with the market value that these assets will have at the end of their useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once a year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.8 to our audited consolidated financial statements).
(c) Recoverability of deferred tax assets
Deferred taxes are calculated in accordance with the liability method, applied over temporary differences that arise between the fiscal base of assets and liabilities, and their book value. Deferred tax assets for tax losses are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company makes tax and financial projections to evaluate the realizationfull description of our deferred tax asset over the course of time. Additionally, these projections are tested to be consistent with those used to measure other long term assets. As of December 31, 2016 the company recognized deferred tax assets amounting to US$384.6 million (US$376.6 million at December 31, 2015), and had ceased to recognize deferred tax assets for tax losses amounting to US$115.8 million (US$15.5 million at December 31, 2015) (see Note 18 to our audited consolidated financial statements).critical accounting policies.
(d) Air tickets sold that are not actually used.
The Company treats advance sales of tickets as deferred revenue. Revenue from ticket sales is recognized in the income statement when the service is provided or when tickets expires unused, reducing corresponding deferred revenue. The Company evaluates on a monthly basis the probability that tickets will expire unused, based on the history of ticket utilization. Changes in this probability would have an impact on our revenue in the year in which the change occurs and in future years. As of December 31, 2016, deferred revenue associated with air tickets sold amounted to US$1,535.2 million (US$1,223.9 million as of December 31, 2015). As of December 31, 2016, we estimate that a hypothetical change of one percentage point in passenger behavior regarding to ticket usage, (that is, if during the 6 months after a sale the probability of utilization were 89% rather than 90%), would have a revenue impact of up to US$20.0 million.
(e) Valuation of loyalty points and kilometers issued to loyalty program members, pending usage.
As of December 31, 2016 and 2015, the Company operated the following loyalty programs: LATAM Pass, LATAM Fidelidade, and Multiplus, with the objective of enhancing customer loyalty by offering points or kilometers (see Note 22 to our audited consolidated financial statements).
When kilometers and points are redeemed for products and services other than the services provided by the Company, revenue is recognized immediately; when they are redeemed for air tickets issued by LATAM Airlines Group S.A. and affiliates, revenue is deferred until the transport service is provided or the corresponding tickets expire.
Deferred revenue from loyalty programs at the closing date corresponds to the valuation of unutilized points and kilometers issued to loyalty program members, adjusted for redemption probability.
According toIFRIC-13, the value of kilometers and points that the Company estimates are not likely to be redeemed (“breakage”), is recognized proportionally during the period in which the remaining kilometers or points are expected to be redeemed. The Company uses statistical models to estimate the breakage, based on historical redemption patterns. Changes in breakage would have a significant impact on our revenue in the year in which the change occurs and in future years.
As of December 31, 2016, deferred revenue associated with the LATAM Pass loyalty program amounted to US$896.2 million (US$973.3 million at December 31, 2015). As of December 31, 2016 a hypothetical change of 1% in the probability of usage would result in an impact of approximately US$30.6 million (US$30.0 million as of December 31, 2015). Deferred revenue associated with the LATAM Fidelidade and Multiplus loyalty programs amounted to US$392.1 million (US$452.3 million as of December 31, 2015). As of December 31, 2016 a hypothetical change of 2% in the probability of usage in these programs would result in an impact of approximately US$14.6 million (US$11.7 million as of December 31, 2015).
The fair value of kilometers is determined by the Company based on its best estimate of the price at which they have been sold in the past. As of December 31, 2016 a hypothetical change of 1% in the fair value of unused kilometers would result in an impact of approximately US$8.4 million (US$8.8 million as of December 31, 2015).
(f) Required provisions and their valuation as necessary
Known contingencies are recognized when the Company has an effective legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. The Company applies professional judgment, experience, and knowledge to use available information to determine these values, in light of the specific characteristics of known risks. This process facilitates the early assessment and valuation of potential risks in individual cases or in the development of contingencies.
(g) Investment in subsidiary (TAM)
Management has applied its judgment in determining that LATAM Airlines Group S.A. controls TAM S.A. and its affiliates, for accounting purposes, and has therefore consolidated the financial statements of TAM S.A. and its affiliates.
The grounds for this decision are that LATAM issued ordinary shares in exchange for the majority of circulating ordinary and preferential shares in TAM, entitling LATAM to substantially all economic benefits generated by TAM, and thus exposing it to substantially all risks relating to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the controlling shareholders of TAM, thus insuring that the shareholders and directors of TAM shall have no incentive to exercise their rights in a manner that would be beneficial to TAM but detrimental to LATAM. Furthermore, all significant actions necessary for the operation of the airlines require affirmative votes by the controlling shareholders of both LATAM and TAM.
Since the integration of LAN and TAM, the most critical airline operations in Brazil have been managed by the CEO of TAM while global activities have been managed by the CEO of LATAM, who is in charge of the operation of the LATAM Group as a whole and reports to the LATAM Board. The CEO of TAM functionally reports to the CEO of LATAM.
The CEO of LATAM also evaluates the performance of LATAM Group executives including the CEO of TAM and, together with the LATAM Board, determines compensation. Although Brazilian law currently imposes restrictions on the percentages of voting rights that may be held by foreign investors, LATAM believes that the economic basis of these agreements meets the requirements of accounting standards in force, and that the consolidation of the operations of LAN and LATAM is appropriate.
These estimates were made based on the best information available relating to the matters analyzed. In any case, it is possible that events that may take place in the future could lead to their modification in future reporting periods, which would be made in a prospective manner.
Recently Issued Accounting Pronouncements
a) Accounting pronouncements with implementation effective from January 1, 2019
| Date of issue |
| ||||
(i) Standards and amendments | ||||||
IFRS 16: Leases. | January 2016 | 01/01/2019 | ||||
Amendment to IFRS | ||||||
| ||||||
Amendment to |
|
| ||||||
| ||||||
| ||||||
Amendment to IAS 19: Benefits to employees | February 2018 | 01/01/2019 | ||||
(ii) Improvements | ||||||
Improvements to International Financial Reporting Standards |
| |||||
(iii) Interpretations | ||||||
01/01/2019 |
The application of standards, amendments, interpretations and improvementsthese accounting pronouncements as of January 1, 2019, had no material impactsignificant effects on the consolidated financial statements of the Company.Company; with the exception of those originated by the application of IFRS 16: Leases described below.
During the year, the Company has recognized the changes, in the consolidated financial statements, as a result of the adoption of IFRS 16 retrospectively; restating the comparative figures, in accordance with the provisions of IAS 8 Accounting policies, changes in accounting estimates and errors.
The Company has modified the initial balances corresponding to January 1, 2018. The disclosures corresponding to the initial application of IFRS 9 and IFRS 15, which also originated changes, have been maintained in the consolidated financial statements.
The impacts of the adoption of IFRS 9 Financial Instruments, IFRS 15 Revenue from contracts with customers and IFRS 16 Leases are as follows:
Consolidated statement of financial position (extract)
a) As of January 1, 2017:
As of | Adoption | As of | ||||||||||||
December 31 | impact | January 1, | ||||||||||||
Note | 2016 | IFRS 16 | 2017 | |||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||||
Restated | ||||||||||||||
Current assets | ||||||||||||||
Other non-financial assets, current | 12 | 212,242 | (25,567 | )(9) | 186,675 | |||||||||
Non-current assets | ||||||||||||||
Properties, plants and equipment | 17 | 10,498,149 | 2,931,101 | (9) | 13,429,250 | |||||||||
Current liabilities | ||||||||||||||
Other current financial liabilities | 7 - 19 | 1,839,528 | 311,307 | (11) | 2,150,835 | |||||||||
Non-current liabilities | ||||||||||||||
Other non current financial liabilities | 7-19 | 6,796,952 | 2,881,149 | (11) | 9,678,101 | |||||||||
Accounts payable commercial and other | 7 - 24 | 359,391 | 20,065 | (9) | 379,456 | |||||||||
Deferred tax liability | 18 | 915,759 | (61,343 | )(10) | 854,416 | |||||||||
Equity | ||||||||||||||
Equity attributable to the owners of the parent | ||||||||||||||
Accumulated earnings | 25 | 366,404 | (460,173 | )(12) | (93,769 | ) | ||||||||
Other reserves | 25 | 580,870 | 215,299 | (12) | 796,169 | |||||||||
Non-controlling interest | 14 | 88,644 | (771 | )(12) | 87,873 |
b) As of January 1, 2018:
As of | Adoption | As of | Adoption | As of | ||||||||||||||||||||||
December 31, | impact | January 1 | impact | January 1, | ||||||||||||||||||||||
Note | 2017 | IFRS 9 | IFRS 15 | 2018 | IFRS 16 | 2018 | ||||||||||||||||||||
ThUS$ | THUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||||
Restated | ||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||
Other non-financial assets, current | 12 | 221,188 | - | 54,361 | (4) | 275,549 | (30,771 | )(9) | 244,778 | |||||||||||||||||
Trade debtors and other accounts receivable, current | 7 - 8 | 1,214,050 | (11,105 | )(1) | - | 1,202,945 | - | 1,202,945 | ||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||
Other non-financial assets, non current | 12 | 220,807 | - | - | 220,807 | (8,604 | )(9) | 212,203 | ||||||||||||||||||
Properties, plants and equipment | 17 | 10,065,335 | - | - | 10,065,335 | 2,865,317 | (9) | 12,930,652 | ||||||||||||||||||
Deferred tax assets | 18 | 364,021 | 89 | (2) | 6,005 | (7) | 370,115 | 449 | (10) | 370,564 | ||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||
Other current financial liabilities | 7 - 19 | 1,300,949 | - | - | 1,300,949 | 319,030 | (11) | 1,619,979 | ||||||||||||||||||
Trade and other accounts payables | 7 - 20 | 1,695,202 | - | (22,192 | )(5) | 1,673,010 | (4,398 | )(9) | 1,668,612 | |||||||||||||||||
Other non-financial liabilities, current | 22 | 2,823,963 | - | 77,640 | (6) | 2,901,603 | - | 2,901,603 | ||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||
Other non current financial liabilities | 7 - 19 | 6,605,508 | - | - | 6,605,508 | 2,827,942 | (11) | 9,433,450 | ||||||||||||||||||
Accounts payable commercial and other | 7 - 24 | 498,832 | - | - | 498,832 | 60,611 | (9) | 559,443 | ||||||||||||||||||
Deferred tax liability | 18 | 949,697 | (1,021 | )(2) | 4,472 | (5) | 953,148 | (75,400 | )(10) | 877,748 | ||||||||||||||||
Equity | ||||||||||||||||||||||||||
Equity attributable to the owners of the Accumulated earnings | 25 | 475,118 | (9,995 | )(3) | 446 | (8) | 465,569 | (506,581 | )(12) | (41,012 | ) | |||||||||||||||
Other reserves | 25 | 554,884 | - | - | 554,884 | 205,877 | (12) | 760,761 | ||||||||||||||||||
Non-controlling interest | 14 | 91,147 | - | - | 91,147 | (690 | )(12) | 90,457 |
c) As of December 31, 2018:
As of | Adoption | As of | ||||||||||||
December 31, | impact | December 31, | ||||||||||||
Note | 2018 | IFRS 16 | 2018 | |||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||||
Restated | ||||||||||||||
Current assets | ||||||||||||||
Other non-financial assets, current | 12 | 320,977 | (30,501 | )(9) | 290,476 | |||||||||
Non-current assets | ||||||||||||||
Other non-financial assets, non current | 12 | 233,741 | (6,200 | )(9) | 227,541 | |||||||||
Properties, plants and equipment | 17 | 9,953,365 | 2,548,444 | (9) | 12,501,809 | |||||||||
Deferred tax assets | 18 | 273,328 | 201 | (10) | 273,529 | |||||||||
Current liabilities | ||||||||||||||
Other current financial liabilities | 7 - 19 | 1,430,789 | 363,497 | (11) | 1,794,286 | |||||||||
Non-current liabilities | ||||||||||||||
Other non current financial liabilities | 7 - 19 | 5,864,910 | 2,494,552 | (11) | 8,359,462 | |||||||||
Accounts payable commercial and other | 7 - 24 | 483,656 | 45,621 | (9) | 529,277 | |||||||||
Deferred tax liability | 18 | 872,121 | (85,550 | )(10) | 786,571 | |||||||||
Equity | ||||||||||||||
Equity attributable to the owners of the Accumulated earnings | 25 | 597,676 | (378,705 | )(12) | 218,971 | |||||||||
Other reserves | 25 | (76,926 | ) | 72,561 | (12) | (4,365 | ) | |||||||
Non-controlling interest | 14 | 79,940 | (32 | )(12) | 79,908 |
- Application of standards as of January 1, 2018.
- Effects of adopting IFRS 9
(1) | Expected credit losses: The Company modified the calculation of the impairment provision to comply with the expected credit loss model, established in IFRS 9 Financial Instruments, which replaces the current loss impairment model incurred. To calculate percentage of credit losses, a risk matrix was used, grouping the portfolio, according to similar characteristics of risk and maturity. This change resulted in the recognition of an increase in the provision for impairment losses of US$11.1 million. |
This standard also includes requirements related to the classification and measurement of financial assets and liabilities and an expected credit loss model that replaces the current loss impairment model incurred.
As of January 1, 2018, the calculation of the impairment losses provision is as follows:
Portfolio maturity | ||||||||||||||||||||||||
Up to | Up to | More than | ||||||||||||||||||||||
Up to | 91 to | 181 to | 360 | |||||||||||||||||||||
Up to date | 90 days | 180 days | 360 days | days | Total | |||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||||||||
Expected loss rate | 1 | % | 21 | % | 46 | % | 67 | % | 94 | % | 8 | % | ||||||||||||
Gross book value | 1,046,909 | 36,241 | 12,001 | 14,623 | 66,022 | 1,175,796 | ||||||||||||||||||
Impairment provision | (13,570 | ) | (7,774 | ) | (5,499 | ) | (9,803 | ) | (61,787 | ) | (98,433 | ) |
(2) | Deferred tax adjustments originated by the application of IFRS 9. |
(3) | Net effect on accumulated results of the adjustments indicated above. |
In addition to the impacts on the consolidated statement of financial position, the application of IFRS 9: Financial Instruments requires the classification of financial instruments according to the business model, to determine the form of measurement of financial instruments, after their initial recognition.
The Company analyzed the business models and classified its financial assets and liabilities according to the following:
Classification IAS 39 | Classification IFRS 9 | |||||||||||||||||||||||||||
Initial | ||||||||||||||||||||||||||||
Loans | Hedge | Held | as fair value | At fair value | ||||||||||||||||||||||||
and | and | for | through profit | Cost | with changes | |||||||||||||||||||||||
Assets | receivables | derivatives | trading | and loss | amortized | in results | Total | |||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||
Balance as of December 31, 2017 | 2,446,864 | 62,867 | 1,915 | 501,890 | - | - | 3,013,536 | |||||||||||||||||||||
Cash and cash equivalents | (1,112,346 | ) | - | - | (29,658 | ) | 1,112,346 | 29,658 | - | |||||||||||||||||||
Other financial assets, current | (23,918 | ) | - | (1,421 | ) | (472,232 | ) | 23,918 | 473,653 | - | ||||||||||||||||||
Trade debtors and other accounts receivable, current | (1,214,050 | ) | - | - | - | 1,214,050 | - | - | ||||||||||||||||||||
Accounts receivable from entities related, current | (2,582 | ) | - | - | - | 2,582 | - | - | ||||||||||||||||||||
Other financial assets, non-current | (87,077 | ) | - | (494 | ) | - | 87,077 | 494 | - | |||||||||||||||||||
Accounts receivable, non-current | (6,891 | ) | - | - | - | 6,891 | - | - | ||||||||||||||||||||
Balance as of January 1, 2018 | - | 62,867 | - | - | 2,446,864 | 503,805 | 3,013,536 |
Classification IAS 39 | Classification IFRS 9 | |||||||||||||||
Others | Held | |||||||||||||||
financial | hedge | Cost | ||||||||||||||
Liabilities | liabilities | derivatives | amortized | Total | ||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | |||||||||||||
Balance as of December 31, 2017 | 10,086,434 | 14,817 | - | 10,101,251 | ||||||||||||
Other current financial liabilities | (1,288,749 | ) | - | 1,288,749 | - | |||||||||||
Trade accounts payable and other accounts payable, current | (1,695,202 | ) | - | 1,695,202 | - | |||||||||||
Accounts payable to related entities, current | (760 | ) | - | 760 | - | |||||||||||
Other financial liabilities, not current | (6,602,891 | ) | - | 6,602,891 | - | |||||||||||
Accounts payable, not current | (498,832 | ) | - | 498,832 | - | |||||||||||
Balance as of January 1, 2018 (*) | - | 14,817 | 10,086,434 | 10,101,251 |
(*) Balances as of January 1, 2018 do not contain the re-expression effects originated by IFRS 16.
- Effects of adopting IFRS 15
(4) Contract costs: The Company has capitalized the costs related to the revenues from air transport of passengers, corresponding to the commissions charged by the credit card administrators for US$22.0 million and the air ticket booking services through the GDSs for US$15.6 million. Additionally, there is a reclassification of commissions from travel agencies for US$16.8 million, these previously were presented, according IAS 18, net of the liability to fly in other non-financial liabilities.
(5) Contract liabilities: The Company has adjusted certain concepts that were recorded as obligations with suppliers and customers, which must now be treated as contract liabilities; therefore, they must be deferred until the benefit of the service have been rendered. These concepts are mainly related to ground transportation service for US$15.6 million and travelers checks (US$6.6 million).
(6) Performance Obligations: The Company analyzed the moment at which the performance obligations identified in the contracts with customers must be recognized in the consolidated result. During this analysis, some concepts were identified which must be deferred until the moment of service provision, mainly related to land transportation services, charges for modifications to the initial contract in the sale of tickets and redemption of some products associated with loyalty programs for US$60.8 million. Additionally, there is the reclassification detailed in numeral (4) for US$ 16.8 million.
(7) Deferred tax adjustments originated by the application of IFRS 15.
(8) Net effect on accumulated results of the adjustments indicated above.
Additionally, the Company concluded that, in the rendering of certain services, it acted as agent in the provision of these services, therefore some reclassifications were made in the consolidated income statement to reflect the corresponding commission.
- Effects of adopting IFRS 16
(9) Company recognized under Property, plant and equipment right of use assets for US$2,865.3 million as of January 1, 2018 and US$2,548.4 as of December 31, 2018, associated with contracts that meet the definition of lease (note 2.21 & 17).
The Company decreased other financial assets related to advance payments for leases for US$39.4 million as of January 1, 2018 and US$36.7 as of December 31, 2018, since with the application of the standard these amounts are considered in the initial measurement of the right of use of asset.
The Company increased the cost of restoration associated with the return of aircraft and engines for US$56.2 million as of January 1, 2018 and US$45.6 million as of December 31, 2018. With the application of the standard, the net present value of this cost was included in the right of use of asset and its counterpart in the line of accounts payable, current or non-current, depending on the return date of the aircraft or engines.
(10) Deferred taxes: adjustments originated by the application of IFRS 16.
(11) Lease liabilities: The Company recognized within the Other financial liabilities for lease for US$3,147.0 million as of January 1, 2018 and US$2,858.0 million as of December 31, 2018, associated with contracts that meet the definition of lease (note 2.21 & 19).
(12) The effect of the recognition of the leases under IFRS 16 generated a decrease in retained earnings of US$506.6 million as of January 1, 2018 (US$378.7 million as of December 31, 2018). The increase in Other reserves of US$205.9 million as of January 1, 2018 (decrease of US$72,5 million as of December 31, 2018), was caused by the Cumulative translation adjustment of those subsidiaries with functional currencies other than the US dollar. The application of IFRS 16 also affected non-controlling interests.
The effects of the changes recognized in the application of IFRS 15 and IFRS 16 as of December 31, 2017 are presented in the consolidated income statement:
For the year ended december 31, 2017 | ||||||||||||||
Reconciliation income | Adjustments for reconciliation | |||||||||||||
Results | Adoption | Results | ||||||||||||
under | impact | under | ||||||||||||
Nota | IAS 17 | IFRS16 | IFRS 16 | |||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||||
Published | Restated | |||||||||||||
Revenue | 26 | 9,613,907 | - | 9,613,907 | ||||||||||
Cost of sales | (7,441,849 | ) | 162,491 | (7,279,358 | ) | |||||||||
Gross margin | 2,172,058 | 162,491 | 2,334,549 | |||||||||||
Other income | 28 | 549,889 | - | 549,889 | ||||||||||
Distribution costs | (699,600 | ) | 2,816 | (696,784 | ) | |||||||||
Administrative expenses | (938,931 | ) | (13,837 | ) | (952,768 | ) | ||||||||
Other expenses | (368,883 | ) | 3,423 | (365,460 | ) | |||||||||
Other gains (losses) | (7,754 | ) | - | (7,754 | ) | |||||||||
Income from operation activities | 706,779 | 154,893 | 861,672 | |||||||||||
Financial income | 78,695 | - | 78,695 | |||||||||||
Financial costs | 27 | (393,286 | ) | (185,947 | ) | (579,233 | ) | |||||||
Foreign exchange gains (losses) | 29 | (18,718 | ) | (29,780 | ) | (48,498 | ) | |||||||
Result of indexation units | 748 | - | 748 | |||||||||||
Income (loss) before taxes | 374,218 | (60,834 | ) | 313,384 | ||||||||||
Income (loss) tax expense / benefit | 18 | (173,504 | ) | 14,506 | (158,998 | ) | ||||||||
NET INCOME (LOSS) FOR THE YEAR | 200,714 | (46,328 | ) | 154,386 | ||||||||||
Income (loss) attributable to owners of the parent | 155,304 | (46,408 | ) | 108,896 | ||||||||||
Income (loss) attributable to non- controlling interest | 14 | 45,410 | 80 | 45,490 | ||||||||||
Net income (loss) for the year | 200,714 | (46,328 | ) | 154,386 |
The effects of the changes recognized in the application of IFRS 15 and IFRS 16 as of December 31, 2018 are presented in the consolidated income statement:
For the year ended december 31, 2018 | ||||||||||||||||||||||||||||||
Reconciliation Revenue | Adjustments for reconciliation | |||||||||||||||||||||||||||||
Results | Adoption | Results | Deferred revenues | Results | ||||||||||||||||||||||||||
under | impact | under | Contract | recognition | under | |||||||||||||||||||||||||
Nota | IFRS 15 | IFRS16 | IFRS 15 | costs (4) | [(5), (6)] | Reclassifications | IAS 18 | |||||||||||||||||||||||
ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ThUS$ | ||||||||||||||||||||||||
Published | Restated | |||||||||||||||||||||||||||||
IFRS 16 | ||||||||||||||||||||||||||||||
Revenue | 26 | 9,895,456 | - | 9,895,456 | - | 48,561 | 31,501 | 9,975,518 | ||||||||||||||||||||||
Cost of sales | (7,962,843 | ) | 189,411 | (7,773,432 | ) | - | (34,986 | ) | - | (7,808,418 | ) | |||||||||||||||||||
Gross margin | 1,932,613 | 189,411 | 2,122,024 | - | 13,575 | 31,501 | 2,167,100 | |||||||||||||||||||||||
Other income | 28 | 472,758 | - | 472,758 | - | - | 42,563 | 515,321 | ||||||||||||||||||||||
Distribution costs | (619,200 | ) | 3,986 | (615,214 | ) | (43 | ) | - | (20,003 | ) | (635,260 | ) | ||||||||||||||||||
Administrative expenses | (721,270 | ) | (15,063 | ) | (736,333 | ) | (806 | ) | - | (54,061 | ) | (791,200 | ) | |||||||||||||||||
Other expenses | (359,781 | ) | 3,531 | (356,250 | ) | - | - | - | (356,250 | ) | ||||||||||||||||||||
Other gains (losses) | 53,499 | - | 53,499 | - | - | - | 53,499 | |||||||||||||||||||||||
Income from operation activities | 758,619 | 181,865 | 940,484 | (849 | ) | 13,575 | - | 953,210 | ||||||||||||||||||||||
Financial income | 53,253 | - | 53,253 | - | - | - | 53,253 | |||||||||||||||||||||||
Financial costs | 27 | (356,269 | ) | (182,868 | ) | (539,137 | ) | - | - | - | (539,137 | ) | ||||||||||||||||||
Foreign exchange gains (losses) | 29 | (157,709 | ) | 119,639 | (38,070 | ) | - | - | - | (38,070 | ) | |||||||||||||||||||
Result of indexation units | (865 | ) | - | (865 | ) | - | - | - | (865 | ) | ||||||||||||||||||||
Income (loss) before taxes | 297,029 | 118,636 | 415,665 | (849 | ) | 13,575 | - | 428,391 | ||||||||||||||||||||||
Income (loss) tax expense / benefit | 18 | (83,782 | ) | 9,903 | (73,879 | ) | (23 | ) | (1,030 | ) | - | (74,932 | ) | |||||||||||||||||
NET INCOME (LOSS) FOR THE YEAR | 213,247 | 128,539 | 341,786 | (872 | ) | 12,545 | - | 353,459 | ||||||||||||||||||||||
Income (loss) attributable to owners of the parent | 181,935 | 127,876 | 309,811 | (872 | ) | 12,545 | - | 321,484 | ||||||||||||||||||||||
Income (loss) attributable to non- controlling interest | 14 | 31,312 | 663 | 31,975 | - | - | - | 31,975 | ||||||||||||||||||||||
Net income (loss) for the period | 213,247 | 128,539 | 341,786 | (872 | ) | 12,545 | - | 353,459 |
In the income statement, with the implementation of the IFRS16 standard, restatements were made in the following lines:
| - | Cost of sale, distribution costs, administrative expenses: net effect of derecognized of rental cost and |
- | Financial Costs: interest expense corresponding to the lease liability. |
Impact recognized as a result of the adoption of IFRS 16 for the year ended December 31, 2017 and 2018 are presented in the consolidated statement of cash flows:
For the year ended | Adoption | For the year ended | ||||||||||
December 31 | impact | December 31, | ||||||||||
2017 | IFRS 16 | 2017 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Restated | ||||||||||||
Payments to suppliers for goods and services | (6,722,713 | ) | 520,082 | (1) | (6,202,631 | ) | ||||||
Net cash flows from operating activities | (6,722,713 | ) | 520,082 | (6,202,631 | ) | |||||||
Loans repayments | (1,829,191 | ) | (344,901 | )(2) | (2,174,092 | ) | ||||||
Payments of finance lease liabilities | (344,901 | ) | 344,901 | (2) | - | |||||||
Payments of lease liabilities | - | (338,179 | )(1) | (338,179 | ) | |||||||
Interest paid | (389,724 | ) | (181,903 | )(1) | (571,627 | ) | ||||||
Net cash flows (used in) financing activities | (2,563,816 | ) | (520,082 | ) | (3,083,898 | ) |
For the year ended | Adoption | For the year ended | ||||||||||
December 31 | impact | December 31, | ||||||||||
2018 | IFRS 16 | 2018 | ||||||||||
ThUS$ | ThUS$ | ThUS$ | ||||||||||
Restated | ||||||||||||
Payments to suppliers for goods and services | (7,331,390 | ) | 556,387 | (1) | (6,775,003 | ) | ||||||
Net cash flows from operating activities | (7,331,390 | ) | 556,387 | (6,775,003 | ) | |||||||
Loans repayments | (1,045,662 | ) | (692,687 | )(2) | (1,738,349 | ) | ||||||
Payments of finance lease liabilities | (692,687 | ) | 692,687 | (2) | - | |||||||
Payments of lease liabilities | - | (373,439 | )(1) | (373,439 | ) | |||||||
Interest paid | (357,355 | ) | (182,948 | )(1) | (540,303 | ) | ||||||
Net cash flows (used in) financing activities | (2,095,704 | ) | (556,387 | ) | (2,652,091 | ) |
(1) Correspond to the reclassification of lease payments, principal to payment of lease liability and interest to interest paid.
(2) Correspond to the reclassification of leases payments previously classified as financial lease.
(b) Accounting pronouncements not yet in force for financial years beginning on January 1, 2019 and which has not been effected early adoption:
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Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures. | September 2014 | To be determined |
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October 2018 | January 1, 2020 | |||||
Amendment to IFRS 9: Financial instruments; IAS 39: Financial instruments: Recognition and measurement; Y IFRS 7: Financial instruments: Disclosures | ||||||
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The |
IFRS 15 – “Revenue from Contracts with Customers” supersedes the standard for revenue recognition currently used by the Company i.e. IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. The core principle of IFRS 15 isestimates that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 supersedes the following standards and interpretations: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers; andSIC-31 Revenue—Barter Transactions Involving Advertising Services.
We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements.standards, amendments and Interpretations areon-going and could have a significant impact on our implementation. We currently believe the adoptiondescribed above, will not have a significant impact on passenger and cargo revenue recognition. However, the impact on revenue and liability for our frequent flyer program is still being analyzed.
We are currently evaluating how the adoptionconsolidated financial statements of the leases recognition standard will impact our Consolidated Financial Statements. Interpretations areon-going and could have a material impact on our implementation. Currently, we expect thatCompany in the adoptionapplication of its first adoption. At the close consolidated financial statements, the Company is analyzing the possible effects of the new lease standard will have a material impact on our consolidated balance sheet dueamendment issued in September 2019 to IFRS 9, IAS 39 and IFRS 7 for the recognitionreform ofright-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. interest rates of reference.
LATAM Airlines Group S.A. and affiliates are still assessing these standards to determine the effect on their Financial Statements, covenants and other financial indicators.
IFRS/Non-IFRS Reconciliation
We use “Cost perASK-equivalent” ASK” and “Cost perASK-equivalent ASK 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.flown across our network. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our “total costs”total Operating Expenses by our totalASK-equivalents. “Total costs” are calculated by starting with operating expenses as defined under IFRS and making certain adjustments for interest costs and other revenues. ASKs. The cost component is further adjusted to obtain “costs perASK-equivalents ASK excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost perASK-equivalent” ASK” and “Cost perASK-equivalent ASK 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 2016, 2015 and 2014 to costs used in the calculation of “Cost perASK-equivalent” and “Cost perASK-equivalent excluding fuel price variations” for such periods.
2016 | 2015 | 2014 | ||||||||||
Cost perASK-equivalent | ||||||||||||
Operating expenses (US$ thousands) | 8,959,185 | 9,611,907 | 11,957,780 | |||||||||
+ Interest expense (US$ thousands) | 416,336 | 413,357 | 430,034 | |||||||||
– Interest income (US$ thousands) | 74,949 | 75,080 | 90,500 | |||||||||
Divided by system’sASK-equivalents (million) | 205,537.5 | 208,722.5 | 206,197.9 | |||||||||
= Cost per ASK equivalent (US$ cents) | 4.52 | 4.77 | 5.96 | |||||||||
Cost perASK-equivalent excluding fuel price variations | ||||||||||||
Operating expenses (US$ thousands) | 8.959,185 | 9,611,907 | 11,957,780 | |||||||||
+ Interest expense (US$ thousands) | 416,336 | 413,357 | 430,034 | |||||||||
– Interest income (US$ thousands) | 74,949 | 75,080 | 90,500 | |||||||||
– Aircraft fuel (US$ thousands) | 2,056,643 | 2,651,067 | 4,167,030 | |||||||||
Divided by system’s ASK equivalents (millions) | 205,537.5 | 208,722.5 | 206,197.9 | |||||||||
= Cost perASK-equivalent excluding fuel price variations (US$ cents) | 3.52 | 3.50 | 3.94 |
2019 | 2018 | 2017 | ||||||||||
Cost per ASK | ||||||||||||
Operating expenses (US$ thousands) | 9,689,325 | 9,481,230 | 9,291,672 | |||||||||
Divided by ASK (million) | 149,111.9 | 143,264.7 | 136,398.4 | |||||||||
= Cost per ASK (US$ cents) | 6.50 | 6.62 | 6.81 | |||||||||
Cost per ASK excluding fuel price variations | ||||||||||||
Operating expenses (US$ thousands) | 9,689,325 | 9,481,230 | 9,291,672 | |||||||||
– Aircraft fuel (US$ thousands) | 2,929,008 | 2,983,028 | 2,318,816 | |||||||||
Divided by ASK (million) | 149,111.9 | 143,264.7 | 136,398.4 | |||||||||
= Cost per ASK excluding fuel price variations (US$ cents) | 4.53 | 4.54 | 5.11 |
64
Other Operating Measures
LATAM uses revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis. 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 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.
2019 | 2018 | 2017 | ||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Passenger Revenues (US$ million) | 7,877.72 | 8,410.61 | 10,380.12 | |||||||||||||||||||||
Passenger Revenues (US$ thousands) | 9,005,629 | 8,708.988 | 8,494.477 | |||||||||||||||||||||
ASK (million) | 134,967.69 | 134,167.14 | 130,200.94 | 149,111.9 | 143,264.7 | 136,398.4 | ||||||||||||||||||
Passenger Revenues/ASK (US$ cents) | 5.84 | 6.27 | 7.97 | 6.04 | 6.08 | 6.23 | ||||||||||||||||||
Cargo Revenues (US$ million) | 1,110.63 | 1,329.43 | 1,713.38 | |||||||||||||||||||||
Cargo Revenues (US$ thousands) | 1,064,434 | 1,186,468 | 1,119,430 | |||||||||||||||||||||
ATK (million) | 6,704.13 | 7,082.76 | 7,219.71 | 6,356.7 | 6,497.6 | 6,230.3 | ||||||||||||||||||
Cargo Revenues/ATK (US$ cents) | 16.57 | 18.77 | 23.73 | 16.75 | 18.26 | 17.97 |
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 generally higher demand for air transportation services in the second half of the year, making the second quarter the weakest for the Company. However, seasonality is partially mitigated by LATAM’s having higher-than-market average concentration offocus on business travelpassengers (which isare less sensitive to seasonality). Additionally, the expansion of the Company into other countries with different seasonal patterns has also moderated the overall seasonality of the passenger business.
B. Liquidity and Capital Resources
LATAM’s cash and cash equivalents totaledamounted to US$949.31,072.6 million as of December 31, 2016,2019, US$753.51,081.6 million as of December 31, 20152018 and US$989.41,142.0 million as of December 31, 2014.2017. Additionally, the Company had short term marketable securities totaling US$537.0386.7 million as of December 31, 2016,2019, US$606.4322.4 million as of December 31, 20152018 and US$544.4472.2 million as of December 31, 2014. In the aggregate,2017. LATAM’s cash and cash equivalents and marketable securities totaled US$1,486.31,459.2 million as of December 31, 2016,2019, US$1,361.11,404.1 million as of December 31, 20152018 and US$1,533.81,614.2 million as of December 31, 2014.2017.
The US$126.455.1 million increase in our cash and cash equivalents and marketable securities from 20152018 to 2016 is the result of a reduction2019 can be explained mainly by an increase in the cash flowproceeds from operation that was offest bya US$560 million inflow frompre-delivery payments during 2016 and the subscriptionsales, partially offset by Qatar Airways of a capital increase of US$608.5 million into LATAM.expenditures in aircraft acquisitions.
The US$173.9210.2 million decrease in our cash and cash equivalents and marketablemarketables securities from 20142017 to 2015 is2018 can be explained mainly by the result of positive cash flows from operations of US$1,715.5 million used to pay financial obligations and investment commitments, and to initiatives including LATAM’s liability management of its TAM notes together with the financing of its arriving fleet through the issuance of Enhanced Equipment Trust Certificates (“EETC”). In June 2015, LATAM executed a liability management transaction in which the Company redeemed US$300.0 million senior unsecured notes issued by TAM’s subsidiary, Tam Capital 2 Inc. and issued LATAM’s inaugural US$500.0 million senior unsecured notes. Additionally in June 2015, LATAM issued Enhanced EquipmentTrust Certificates (“EETC”) for an aggregate face amount of approximately US$1,020.8 million to finance 17 new aircraft deliveries. LATAM recognized the EETCs as debt upon delivery of each Aircraft. At December 31, 2015 the escrow of proceeds from the issuancedepreciation of the EETC amounted US$345.1 correspondingBrazilian and Argentinian currencies.
We believe that our working capital will be sufficient during the next 12 months to five aircraft received during 2016 and one to be received in 2016.meet our liquidity requirements.
Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2016, 20152019, 2018 and 20142017 and our total cash position as of December 31, 2016, 20152019, 2018 and 2014.2017.
2019 | 2018 | 2017 | ||||||||||||||||||||||
2016 | 2015 | 2014 | (in US$ million) | |||||||||||||||||||||
Net cash flow from operating activities | 2,826.7 | 2,073.3 | 2,186.8 | |||||||||||||||||||||
Net cash flow from (used in) investing activities | (1,419.2 | ) | (358.4 | ) | (293.9 | ) | ||||||||||||||||||
Net cash flow from (used in) financing activities | (1,343.5 | ) | (1,608.6 | ) | (1,692.7 | ) | ||||||||||||||||||
Effects of variation in the exchange rate on cash and cash equivalents | (73.0 | ) | (166.7 | ) | (7.7 | ) | ||||||||||||||||||
(in US$ millions) | ||||||||||||||||||||||||
Net cash flows from operating activities | 992.1 | 1,715.5 | 1,331.4 | |||||||||||||||||||||
Net cash flow from (used in) investing activities | (443.0 | ) | (1,739.1 | ) | (899.1 | ) | ||||||||||||||||||
Net cash flows from (used in) financing activities | (396.3 | ) | (128.4 | ) | (1,320.2 | ) | ||||||||||||||||||
Effects of variation in the exchange rate on cash and cash equivalents | 43.0 | (83.9 | ) | (107.6 | ) | |||||||||||||||||||
Cash and cash equivalents at the beginning of the year | 753.5 | 989.4 | 1,984.9 | 1,081.6 | 1,142.0 | 949.3 | ||||||||||||||||||
Cash and cash equivalents at the end of the year | 949.3 | 753.5 | 989.4 | 1,072.6 | 1,081.6 | 1,142.0 |
In addition to cash and marketable securities, LATAM has access to short term uncommited credit lines. As of December 31, 2016,2019, LATAM also had long-term working capital uncommitted credit facilities for a total amount of US$1,193.0 million, of which US$830.0 million was drawn as of December 31, 2016, and committed credit lines in the form of a fully undrawn revolving credit facility (“RCF”) for an amount of US$325.0600 million of which $0 was drawn. The Company’s plan is to maintain the RCF undrawn, in line with maintaining adequate levels of liquidity considering the current volatile market conditions.1. The RCF is secured by spare parts, engines, and aircraft.aircrafts. See Note 32 to our audited consolidated financial statements for a more detailed discussion of these commitments.
Net cash flowsflow from operating activities
Cash flow from operations is derivedderives primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to expenses of airline operations, including fuel consumption. Net cash inflows from operating activities in 2016 decreased2019 increased by US$723.3753.3 million, or 42.2%36.3%, up from US$1,715.52,073.3 million, mainly due to changesan increase in working capital.
The main impacts on working capital were the reduction in prepayments of credit card receivablesproceeds from sales explained by a stronger performance in Brazil inand Peru and from the amount of US$255.4 and the US$ 108.0 millioncompensation received from Delta Air Lines related to thenon-payment in 2015 transition costs for the implementation of the performance bonuses of 2014. Other impacts include the appreciation of the Brazilian Real contingencies,framework agreement between LATAM and contingencies reflected the payment of a guarantee to continue certain legal proceedings at the tax courts in Brazil.Delta Air Lines.
Net cash inflows
Cash flow from operating activities in 2015 increased2018 decreased by US$384.1113.5 million, or 28.8%5.2%, down from US$1,331.42,186.8 million, mainly driven bydue to a significant reductiondecrease in operating costs due to lowermargin, driven higher fuel prices as well asand the depreciation of the Brazilian and Argentinian currencies. In turn, this impact was partially offset by the Company’sLATAM’s ongoing cost savings initiatives. Net cash from operations was negatively affected by fuel hedging, hedging margin guaranteesefficiency initiatives such as headcount reduction and other guarantees by US$ 184.6 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements).
Net cash flow used in investing activities
Net cash used in investing activities in 2016 decreased US$1,296.1 million from US$1,739.1 million in 2015 to US$443.0 million in 2016, due to a reduction in purchases of property, plant and equipment. This reduction resulted mainly from a US$559.5 million inflow from pre delivery payments during 2016, as opposed to an outflow of US$128.4 million during 2015. In addition, during 2016, there was a net inflow of US$263.0 million from sale and purchase of debt instruments of other entities, in constrast to an outflow of US$184.7 million during 2015.
Net cash used in investing activities in 20152019 increased to US$840.0 1,419.2 million from US$899.1358.4 million in 20142018. The increase is explained mainly by capital expenditures in aircraft, higher maintenance expenses and investment projects related to US$1,739.1 million in 2015, due primarily to aone-time impactcabin retrofit.
The inflow related to the sale and leasebacknet predelivery payments received by LATAM reached US$ 263.4 million for year 2019, higher than the net predelivery payments outflows of four B777 aircraft recognized during 2014 as an asset sale of US$510.5 million. Capital expenditures54.7million for aircraftyear 2018. For further details, please refer to Note 35 to our audited consolidated financial statements.
Net cash used in investing activities in 2018 increased to US$127.0 358.4 million from US$293.9 million in 2015 compared2017, due to 2014,an increase in purchases of property, plant and equipment including costscabin retrofit, IT, and digital investments. In 2018, as in 2017, the company did not incur in any capital expenditures in aircraft. In 2018, the outflow related to acquire eight narrow body aircraft and four wide body aircraft, comparedthe net predelivery payments reached US$ 54.7 million for year 2018, a 43.2% lower than the net predelivery payments outflows of US$126.5 million for year 2017. For further details, please refer to nine narrow body aircraft and three wide body aircraft in 2014.Note 35 to our audited consolidated financial statements.
Net cash flows used in financing activities
In 2016,2019, net cash used in financing activities totaledamounted to US$396.31,343.5 million, a decrease of US$265.1 million from the US$1,608.6 million in cash used in financing activities in 2018. In 2019, the company paid US$1,860.5 million in loan repayments and issued US$1,781.7 million in new debt. Total debt issuances in year 2019 amounted to US$1,781.7 million, an increase of US$267.91,002.7 million as compared to US$779.1 million issued in 2018.
In 2018, net cash used in financing activities amounted to US$1,608.6 million, an increase of US$84.0 million from the US$128.41,692.7 million in cash generated by financing activities in 2015. The variation resulted primarily from a significant increase2017. In 2018, the Company paid US$1,738.3 million in loan repayments fromwhich were offset by US$1,263.8779.1 million in debt issuances. Total debt issuances in year 2018 amounted to US$2,121.1 million, which was compensated by the capital increase of US$608.5 million subscribed and paid during 2016.
In 2015, net cash used in financing activities totaled US$128.4779.1 million, a decrease of US$1,191.8526.3 million from thecompared to US$1,320.21,305.4 million issued in cash used in financing activities in 2014. This reduction reflects the conclusion of the liability restructuring and reduction plan executed during the same period in 2014, whereby the Company reduced its financial obligations by approximately US$ 1,049.0 million.2017.
1 | Subject to borrowing base availability |
66
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 fleet financing, please refer to certainthe information below and to “—F. Long Term Indebtedness—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 includingsuch as equity or debt, either secured or unsecured, securitization of ticket receivables or the securitization of fleet and engines or the issuance of additional debt or equity securities.engines.
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, 2016,2019, we maintainedhas an outstanding stock of US$ 1,518340 million in short-term credit linesloans with both local and foreign banks, including US$325 million of committed credit lines of which $0 was drawn as of December 31, 2016.international banks.
We have diversified our sources of short term financing to include the following: PAE (“Prestamos a Exportadores”Exportadores”), which are foreign currency short term loans granted to exporting parties in Chile mainly to finance working capital; Creditand credit card advances,discounting in Brazil, a financialfinancing alternative where thea bank advancesprovides in advance to the Company a percentage of the cash inflows related to the credit card sales on installments.installment sales.
Capital expenditures
Our capital expenditures are related to the acquisition of aircraft, aircraft-related equipment, IT equipment, support infrastructure and the funding ofpre-delivery deposits. LATAM’s capital expenditures totaled US$694.4 1,276.6 million in 2016,2019, US$1,569.7660.7 million in 20152018 and US$1,440.4403.7 million in 2014,2017, and purchases of intangible assets totaled US$88.6 140.2 million in 2016,2019, US$52.596.2 million in 20152018 and US$55.887.3 million in 2014.2017. See “—Sources of financing” above.
The following chart sets forth the Company’s estimated capital expenditures for 2017, 20182020, 2021 and 20192022 calendar years:years(1):
Estimated capital expenditures by year, as of December 31, 2016 | Estimated capital expenditures by year, as of December 31, 2019 | |||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2020 | 2021 | 2022 | ||||||||||||||||||||||
(in US$ millions) | (in US$ millions) | |||||||||||||||||||||||||||
Fleet Commitments(1) | 469 | 555 | �� | 1,589 | 1,503 | 408 | 773 | 574 | ||||||||||||||||||||
PDPs (2) | 135 | 269 | (41 | ) | (18 | ) | 42 | (23 | ) | (39 | ) | |||||||||||||||||
Other expenditures(3) | 524 | 504 | 530 | 531 | 1,050 | 950 | 930 | |||||||||||||||||||||
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(1) | The amount of Fleet Commitments presented includes all the |
(2) | Representspre-delivery payments made by LATAM, or inflows received by LATAM after the delivery of the aircraft is made. |
(3) | Other Expenditures include estimates of capital expenditures on spare engines and parts, maintenance of on balance fleet, projects and others, plus purchases of intangible assets. LATAM can give no assurance that these estimates and expected costs and prices are correct; and actual costs, expenses and prices may differ from these original estimates. |
At this time, LATAM is not able to fully determine the adjusted levels of estimated capital expenditures in light of the expected lower demand on air travel. The actual amount and timing of our future capital expenditures may be materially lower than our estimates as a result of the impact of the spread of coronavirus (COVID-19) on demand for air travel in the regions we operate.
C.Research and Development, Patents and Licenses, etc.
During 2019 LATAM has registered the trademarks “LATAM,” “LATAM Airlines Chile,” “LATAM Airlines Peru,” “LATAM Airlines Argentina” and “LATAM Airlines Ecuador”continued with the trademark office registration of its brands to guarantee its protection worldwide, thus strengthening the presence of the brand.
TrademarkLATAMin Chile,Argentina, Bolivia, Canadá, China, Colombia, South Korea, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Hong Kong, India, Japan, Mexico, Nicaragua, New Zealand, Panama, Paraguay, Peru, Dominican Republic, Taiwan, European Union, Uruguay, USA and Venezuela; TrademarkLATAM AIRLINESin Argentina, Bolivia, China, Colombia, South Korea, Cuba, Ecuador, El Salvador, Spain, Guatemala, Honduras, India, Japan, Mexico, Nicaragua, Panama, Paraguay, Peru, Portugal, Dominican Republic, Taiwan, European Union, Uruguay and Venezuela.
LATAM AIRLINES ARGENTINAin Argentina;LATAM AIRLINES COLOMBIA in Colombia;LATAM AIRLINES ECUADOR in Ecuador;LATAM AIRLINES PARAGUAY in Paraguay andLATAM AIRLINES PERU in Peru.LATAM CARGOhas been registered and/or renewed in Argentina, Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, Uruguay, USA, Venezuela and Australia.LATAM CARGO BRAZILin Brazil;LATAM CARGO COLOMBIAin Colombia;LATAM CARGO MEXICOin Mexico.
LATAM CORPORATEin Argentina, Bolivia, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico,Nicaragua, Panama, Paraguay, Peru, Dominican Republic, European Union and Uruguay.LATAM FIDELIDADEin the following countries, Argentina, Australia, Bolivia, Colombia, Ecuador, Mexico, New Zealand, Paraguay, Peru, European Union, Uruguay, USA and Venezuela.LATAM LINEAS AEREASin Argentina, Colombia, Ecuador and Peru;LATAM MROin Argentina; Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, Uruguay, USA, Venezuela and Australia.LATAM PASSin Argentina, Australia, Bolivia, Canada, Colombia, Ecuador, Mexico, New Zealand, Paraguay, Peru, European Union, Uruguay, USA, Venezuela and Australia.LATAM PASS MILESin New Zealand and Australia.LATAM TOURS inArgentina, Colombia, Ecuador and Peru.LATAM TRADEin Argentina, Bolivia, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, European Union and Uruguay. TrademarkLATAM TRAVELin Argentina, Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, Uruguay, USA, Venezuela and Australia; trademarkLATAM TRAVEL SOLUTIONSin Panama;LATAM VIAGENSin Brazil;LATAM, JUNTOS MÁS LEJOSin Argentina and Ecuador.LATAM, TOGETHER, FURTHERin Australia, New Zealand, European Union and USA.
LATAMPLAYin Argentina, Colombia and Ecuador.LATIN AIRLINE NETWORKin Mexico, Nicaragua, New Zealand and European Union.LIBREVOLADORin Bolivia, Ecuador, respectively. We license certain brands, logosParaguay and trade dress under the alliance agreement withPeru.oneLIBREVOLADORESworld® related to LATAM’s alliance. As long as LATAM is a member ofin Bolivia, Ecuador, Paraguay and Peru.oneLIDERES DEL SERVICIOworld®, it will have the right to continue to use current logos on its aircraft.in Argentina,LINEA AEREA CARGUERA DE COLOMBIAin Colombia.
TAM holds or has filed for trademark registration, applications for 216registered or renewed the following trademarks before the Instituto Nacional da Propriedade Industrial (“INPI”), the body with jurisdiction for registering trademarks and patents in Brazil,LATAM;LATAM AIRLINES;LATAM AIRLINES BRAZIL;LATAM CARGO, LATAM CARGO BRAZIL;LATAM FIDELIDADE;LATAM MRO,LATAM PASS; LATAM TRADE; LATAM TRAVEL LATAM VIAGENS;LATAM TRADE; LATAM TRAVEL; LATAMPLAY;MEGA PROMO;MERCADO LATAM;VAMOS LATAM.
FIDELIDAD in Argentina;FIDELIDAD TAM in Paraguay;LATAM AIRLINES ARGENTINAin Argentina;LATAM AIRLINES COLOMBIA in Colombia;LATAM AIRLINES ECUADOR in Ecuador;LATAM AIRLINES PARAGUAY in Paraguay and 100 trademarks before the bodies with jurisdiction for registering trademarksLATAM AIRLINES PERU in other countries in which TAM operates. Currently, TAM is aware of one opposition filed by a third party challenging one of these applications.Peru.
D. Trend Information
For 2017, LATAM expects total passenger ASK growth to be between 0% and 2%. International passenger ASK growth for full year 2017 is expected to be between 0% and 2%.
On March 12, 2020, LATAM Airlines Brazil’s domestic passenger ASKsannounced the suspension of its guidance for 2020 in light of the Brazilian market are expecteduncertainty due to decrease between 2% and 0%. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.
Regarding cargo operations, LATAM expects cargo ATKs to decrease between 12% and 10%the COVID-19 (coronavirus) outbreak that is affecting the demand for full year 2017, driven by the withdrawalsair traffic. As of two of four Boeing 777s-200F, which are currently classified as held for sale, and, two Boeing767-300F, during 2017.
In a context of increasing competitive pressures from different players across the region, including low cost operators,this date, it is our goalnot possible to continuequantify the exact impact on demand or how long it may take to increaserecover, making it impossible to estimate results for the efficiencyfull year.
LATAM is taking immediate measures to minimize possible effects of our operations, allowing usthe current scenario, including cost reduction and capacity adjustments. Along these lines, and in addition to provide the best and most convenient options for our customers with the distinctive customer experience LATAM passengers expect. In this context, LATAM has undertaken an important project to introduce a new travel model for domestic operations in the six domestic markets where we operate in South America, in order to address the changing dynamics of customers and the industry. The main objective of this project is to increase our competitiveness and ensure the sustainability of our domestic operations business model in the long term. For more information on this new travel model, see “Item 4. Information on the Company—B. Business Overview—Passenger Operations—Business Model for Domestic Operations”.
Over the last year, we have implemented significant changes with the objective of transforming LATAM into a simpler, leaner and more efficient group. We haveefforts being made these changes amidst a challenging and volatile macroeconomic scenario in the region. At the same time, the Company continues to strengthen its network, taking advantage of specific opportunities for profitable growth in LATAM’s South American Spanish-speaking markets (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador). During 2016, we inaugurated new routes connecting our Lima hub with secondary cities (mainly in Argentina), as well as launched a new flight from Lima to Washington, DC. In addition, in October 2016 we launched the route between São Paulo and Johannesburg, becoming the first airline in Latin America to connect our region with a country in the African continent. We have also announced the launch of our longestnon-stop flight (between Santiago, Chile and Melbourne, Australia), starting in October 2017.
During 2016, we also announced joint business agreements with American Airlines and British Airways and Iberia, subject to regulatory approval in different countries, which will allow our passengers access to a wider network, more flight options with better connection times, more competitive fares to destinations not served by LATAM increased potentialto protect the health and safety of its passengers and workers, the LATAM group announces a decrease in capacity of approximately 30% of international operations for developing new routesApril and adding more direct flightsMay 2020.
On March 16, 2020, LATAM Airlinesand its affiliatesupdated the decrease in capacity to new destinations,approximately 70% of total operations, corresponding 90% to international operations and 40% to domestic operations.
At this time, LATAM is not able to fully determine the impact on financial results in light of the expected lower demand on air travel as well as to destinations already served by LATAM, among other initiatives.
In response toa result of the macroeconomic slowdown in South America andimpact of the resulting deceleration in growthspread of coronavirus (COVID-19) on demand for air travel in the regions we are currently working on rightsizing our fleet, targeting a decrease of US$2.0 to US$3.0 billion in our expected fleet assets for 2018 through postponements, cancellations, redeliveries and asset sales. During 2016, the Company achieved a total asset reduction of US$ 2.2 billion and expects to continue with further adjustments for the upcoming years.operate.
Regarding fuel, we will continue to use fuel hedging programs and fuel surcharge mechanisms in both our passenger and cargo businesses to help minimize the impact of short-term movements in crude oil prices. LATAM has hedged approximately 33%, 45% and 19% of its estimated fuel consumption for the first, second and third quarters of 2017 respectively.
E.Off-Balance Sheet Arrangements
As of December 31, 2016 the Company had 102 aircraft (of which 19 are obligations of TAM and 83 are obligations of LATAM) and 10 aircraft engines under operating leases. These operating leases provide us with flexibility to adjust our
The company does not currently have off-balance sheet 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, 2016 was US$ 3,255 million, for all remaining periods through maturity (the latest of which expires in 2028). See “—F. Long Term Indebtedness—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 12 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, 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. Of LATAM’s total tax leases, nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2016.
As of December 31, 2016, 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.adoption of IFRS 16. See Note 3317 to our audited consolidated financial statements for a more detailed discussion of these commitments.
For other commitments, see Note 32 - (b) Other commitments - to our consolidated financial statements.
F. Long Term Indebtedness
Long Term Indebtedness
Secured Debt
Aircraft Debt
1. | ECA/EX-IM: Bank bonds guaranteed |
2. | Enhanced Equipment Trust Certificates (“EETC”): In June 2015, LATAM issued the first EETC in Latin America for an aggregate |
3. | Commercial Bank Loans: As of December 31, 2019, secured commercial bank loans debt totalled US$1,744 million. |
4. | Tax Leases: LATAM has secured debt |
Non Aircraft Debt
1. | 2013-1 Series Note: |
OthersOther
1. | Pre-Delivery Payments (“PDP”) financing: As of December 31, |
Unsecured Debt
1. | LATAM |
2. | 2026 Notes: On February 4, 2019, LATAM Finance Limited, an affiliate of LATAM Airlines Group S.A., issued long-term bonds in the international markets in the amount of US$600 million, maturing in 2026 with an annual interest rate of 7.000% (the “2026 Notes”). On July 11, 2019, LATAM Finance Limited, an affiliate of LATAM Airlines Group S.A., issued a re-opening of the 2026 notes in the amount of US$200 million, maturing in 2026 with an annual interest rate of 7.000%. As of December 31, 2019, the outstanding amount under the 2026 Notes was US$822 million |
3. | Local Bonds: On August 17, 2017, LATAM Airlines Group S.A. issued |
4. | Commercial Bank Loans: As of December 31, |
As of December 31, 2016,2019, the average interest rate of our debt was 4.01%4.63%. Out of the total debt, 63.1%61.6% accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.
As of December 31, 2016,2019, LATAM had US$ 1,7731,367 million in current debt liabilities. Of this amount, US$ 228340 million consisted of short-term debt, which represents 13%25% of our total current debt liabilities.
VariousEX-IM Bank loans signed by LATAM for
The Company entered into loan agreements in connection with the financing of Boeing 767, 767 freighter, 777 freighter and 787 aircraft containthat are guaranteed by the United States Export–Import Bank, which include covenant based on financial covenants and other restrictions, including restrictionsindicators on a consolidated basis, in shareholder composition and disposalrespect of assets. which, in any case, non-compliance does not result in the acceleration of the payment of the loans. For more information, please see Note 32 to our audited consolidated financial statements.
As of December 31, 2016,2019, we also had purchase obligations totaling US$ 7.03.4 billion (US7.4 billion according to manufacturer’s list price), with deliveries between 20172020 and 2022,2026, as set forth below:
· | Airbus A320-Family, passenger aircraft deliveries: 42 |
· | Wide-body passenger aircraft deliveries (which includes the Airbus A350 1000XWB and the Boeing 787-9): 8 |
Tabular Disclosure of Contractual Obligations
The following table sets forth our material expected obligations and commitments as of December 31, 2016:2019:
Payments due by period, as of December 31, 2016 | Payments due by period, as of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
(US$ in millions) | Total(2) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||
Financial debt obligations(1) | US$ | 8,714 | US$ | 1,773 | US$ | 2,241 | US$ | 2,544 | US$ | 2,156 | US$ | 7,194 | US$ | 1,367 | US$ | 2,007 | US$ | 1,637 | US$ | 2,183 | ||||||||||||||||||||
Operating lease obligations | US$ | 3,255 | US$ | 533 | US$ | 838 | US$ | 621 | US$ | 1,263 | ||||||||||||||||||||||||||||||
Fleet Commitments(3) | US$ | 6,966 | US$ | 469 | US$ | 2,144 | US$ | 4,002 | US$ | 351 | ||||||||||||||||||||||||||||||
Lease obligations | US$ | 3,955 | US$ | 596 | US$ | 1,040 | US$ | 942 | US$ | 1,377 | ||||||||||||||||||||||||||||||
Fleet Commitments | US$ | 3,402 | US$ | 408 | US$ | 1,348 | US$ | 1,271 | US$ | 376 | ||||||||||||||||||||||||||||||
TOTAL | US$ | 18,935 | US$ | 2,775 | US$ | 5,223 | US$ | 7,167 | US$ | 3,770 | | US$ | 14,551 | US$ | 2,371 | US$ | 4,395 | US$ | 3,850 | US$ | 3,936 |
(1) | Financial debt obligations reflect principal payments on outstanding debt obligations, including aircraft debt, senior notes, |
20162019 Fleet AcquisitionsAdditions
During 2016,2019, LATAM completed the acquisitionaddition of the following wide body aircraft:
· | Three Airbus A350-900 through leases, one Airbus A350-900 through cash payment and two Boeing 787-9 through a tax lease. |
The Boeing787-9 aircraft financed through an operating lease has a 12 year term and monthly payments. The four Boeing787-9 and two Airbus350-900 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. Aircraft financed through EETC are under the terms described above. The three Airbus350-900 financed through commercial loans have a Senior and Junior tranche, which have terms of 12 and 7 years, respectively.
During 2016,2019, LATAM completed the acquisitionaddition of the following narrow body aircraft:
· | Fourteen Airbus A320-200 and three A320 Neo through leases and six Airbus A320 Neo thorugh tax leases. |
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Narrow body 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. Aircraft financed through EETC are under the terms described above. The A320neo passenger aircraft financed through commercial loans has a Senior and Junior tranche, which have terms of 12 and 7 years, respectively.
TheECA-guaranteed loans have an advance rate equal to 80% of the net purchase price of the aircraft for a12-year period, with the remaining 20% of the aircraft being financed by the Company’s available cash flows.
20152018 Fleet AcquisitionsAdditions
During 2015,2018, LATAM completed the acquisitionaddition of the following wide body aircraft:
· | Two Airbus A350-900 passenger aircraft, financed through sale and leaseback transactions with a 12-year term. |
The four Boeing787-9 aircraft financed through operating lease transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments. Aircraft financed through EETC are under the terms described above.
During 2015,2018, LATAM completed the acquisitionaddition of the following narrow body aircraft:
· | Two Airbus A321 passenger aircraft, financed through leases with 10.5 year terms. |
The aircraft financed under commercial financing is part of the 2014 facility under a12-year floating rate amortizing loan. Narrow body 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. Finally, aircraft financed through EETC are under the terms described above.
TheECA-guaranteed loans have an advance rate equal to 80% of the net purchase price of the aircraft for a12-year period, with the remaining 20% of the aircraft being financed by the Company’s available cash flows.
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 fortwo-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may bere-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. Extraordinary meetings can be summonedcalled by the chairman, or when requested by one or more directors if the need for such a meeting is previously approved by the chairman, unless the meeting is requested by a majority of the directors, in which case the meeting must be held without the previous approval of the chairman.
On September 10, LATAM announced that the CEO of the LATAM Airlines Group, Enrique Cueto, after 25 years of service, will leave his position of CEO as of March 31, 2020 and will be replaced by the current Chief Commercial Officer, Roberto Alvo, effective on March 31, 2020.
The current board of directors was elected at the ordinary shareholders’ meeting held on April 28, 2015. Its term expires in April 2017. On June 7, 2016, Mr. Ricardo J. Caballero resigned as25, 2019 for a member of the board of directors, which elected on January 24th, 2017 Mr. Giles Agutter in his place.two-year period.
The following are LATAM Airlines Group’s directors:
Directors | Position | |
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Carlos Heller(2) | Director | |
Juan José Cueto(1) | Director | |
Nicolás Eblen(3) | Director | |
Henri Philippe Reichstul | Director | |
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Senior Management | Position | |
Enrique Cueto(1) | CEO LATAM | |
Ramiro Alfonsín | CFO LATAM | |
Roberto Alvo | CCO LATAM | |
Paulo Miranda | VP Customers LATAM | |
Hernán Pasman | VP Operations, Maintenance and Fleet LATAM | |
Emilio del Real | VP Human Resources | |
Juan Carlos Menció | VP Legal |
Messrs. Ignacio, Enrique and Juan José |
(2) | Mr. Carlos Heller is a member of the |
(3) | Mr. |
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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 April 28, 2015 for atwo-year term, which expires in April 2017,are Chilean citizens, with the exception of Mr. Giles Agutter who was elected by the Board of Directors to fill the vacancy left by Mr. Ricardo J. Caballero due to his resignation.three members.
Directors
Mr. Ignacio Cueto Mauricio Rolim Amaro,has served as a member of LATAM Airlines Group’s board of directors and as Chairman since June 2012. HeApril 2017 and was reelectedre-elected to the board of directors of LATAM in April 2015 and has served as Chairman since September 2012.2019. 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 Aviação Executiva e Taxi Aéreo S.A. As of January 31, 2017, according to shareholder registration data in Chile, Mr. Amaro shared in the beneficial ownership of 18,342,913 common shares of LATAM Airlines Group (3.02% of LATAM Airlines Group’s outstanding shares), held directly by TEP Chile S.A. and 35,292,908 common shares of LATAM Airlines Group (5.82% of LATAM Airlines Group’s outstanding shares), held indirectly by TEP Chile. 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 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 his roles as Administrative Board member of TAM and LATAM Group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen, AES Brasil, 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 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., Inversiones del Buen Retiro S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A., Valle Escondido S.A., Fundación Colunga and Universidad San Sebastián. 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, 2017, Mr. Cueto shared in the beneficial ownership of 171,430,090 common shares of LATAM Airlines Group (28.27% 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. Georges de Bourguignon, 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 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1993. He is currently member of the board of directors K+S Chile S.A. andEmbotelladora Andina S.A. In the past he has served on several other boards of public and private companies, as well as of boards of non profit organizations. Between 1990 and 1993, 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 31, 2017, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0005%) of LATAM Airlines Group outstanding shares).
Mr. Ramón Eblen Kadis, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM 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, 2017, The Eblen Group had the beneficial ownership of 35,945,199 common shares of LATAM Airlines Group (5.93% of LATAM Airlines Group’s outstanding shares). For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Giles Agutter is the owner and Chief Executive Officer of Southern Sky Ltd, an airline consultant company specializing in airline strategy, fleet planning, aircraft acquisition and aircraft financing. Mr. Agutter has had vast experience in advising airlines, including Qatar Airways, on significant Merger and Acquisition projects within the airline industry. Mr Agutter has a degree in Aerospace Engineering from Manchester University and he currently resides in England.
Mr. Carlos Heller Solari, joined the board of LAN in May 2010 and wasre-elected to the Board of Directors of LATAM in April 2015. Mr. Heller has vast experience in retail, communications, transport and agriculture industries. Mr. Heller is president of Bethia S.A. (“Bethia”) (parent company of Axxion S.A. and Inversiones HS SpA). He is also President of the Boards of Falabella Retail S.A., Red Televisiva Megavision S.A., Club Hípico de Santiago S.A., Sotraser S.A., Blue Express S.A., Aero Andina S.A. and “Azul Azul S.A.” concessionaire of the Corporación de Fútbol Profesional de la Universidad de Chile. He is also a member of the Board of Directors of S.A.C.I Falabella, Viña Indómita S.A., Viña Santa Alicia S.A. and Viña Dos Andes S.A. On January 31, 2017, Mr. Heller indirectly held 33,367,357 ordinary shares of LATAM Airlines Group through Axxion S.A. and Inversiones HS Spa (5.50% of the shares of LATAM Airlines Group).
Mr. Gerardo Jofré Miranda, joined LATAM Airlines’ Board of directors on May 2010 and was reelected to the board of directors of LATAM in April 2015. Mr. Jofré is member of the board of directors of Codelco, Enel Chile and member of the Real Estate Investment Council of Santander Real Estate Funds. From 2010 to 2014 he served as president of the board of directors of Codelco. 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 31, 2017, Mr. Jofré held 106,843 common shares of LATAM Airlines Group (0.017% 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 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 and served as Independent Director at Willis Group between June 2013 and January 2016. 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 S.A. 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.
Senior Management
Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”) and has been in this position since the combination between LAN and TAM in June 2012. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. From 1993 to 1994, Mr Cueto was a member of the board of LAN Airlines. Thereafter, Mr. Cueto held the position of CEO of LAN until June 2012. Mr. Cueto hasin-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 30 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 Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile, and president of the Latin American and Caribbean Air Transport Association (ALTA). Mr. Cueto is the brother of Messrs. 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, 2017, Mr. Cueto jointly shared in the beneficial ownership of 171,430,090 common shares of LATAM Airlines Group (28.27% 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. HisCueto’s career in the airline industry extends over 30 years. In 1985, Mr. Cueto assumed the position of Vice President of Sales at Fast Air Carrier, the biggesta national cargo company of that time. In 1985, Mr. Cueto assumed asbecame Service Manager and Commercial Manager for the Miami sales office. Mr. Cueto later served on the board of directors of Ladeco (from 1994 to 1997) and LAN (from 1995 to 1997). 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 later served as LAN’s CEO until April 2017. Mr. Cueto also led the establishment of the different affiliates that the Company has in South America, as well as the implementation of key alliances with other airlines. 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).Group. As of January 31, 2017,February 29, 2020, Mr. Cueto shared in the beneficial ownership of 171,430,090130,165,390 common shares of LATAM (28.27%Airlines Group (21.46% of LATAM’sLATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information, see “Item 7. ControllingMajor Shareholders and Related Party Transactions.”
Mr. Carlos Heller, joined the board of LAN in May 2010 and was re-elected to the board of directors of LATAM in April 2019. Mr. Heller has vast experience in retail, communications, transport and agriculture industries. Mr. Heller is president of Bethia S.A. (“Bethia”) (parent company of Axxion S.A. and Inversiones HS SpA). He is also President of the Boards of Falabella Retail S.A., Red Televisiva Megavision S.A., Club Hípico de Santiago S.A., Sotraser S.A., and Blue Express S.A. On February 29, 2020, Mr. Heller indirectly held 25,662,136 ordinary shares of LATAM Airlines Group through Axxion S.A. and Inversiones HS Spa (4.23% of the shares of LATAM Airlines Group). For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Juan José Cueto, has served on LAN’s board of directors since 1994 and was reelected to the board of directors of LATAM in April 2017. 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., Inversiones del Buen Retiro S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A., Valle Escondido S.A. and Fundación Colunga. Mr. Cueto is expected to leave the Company’s senior management team inmid-April 2017brother of Messrs. Enrique and Ignacio Cueto, LATAM Airlines Group CEO and Chairman, respectively. Mr. Cueto is applying to become a member of the Cueto Group. As of February 29, 2020, Mr. Cueto shared in the beneficial ownership of 130,165,390 common shares of LATAM Airlines Group (21.46% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Nicolás Eblen, has served on LATAM’s board of directors.directors since April 2017 and was re-elected to the board of directors of LATAM in April 2019. Mr. Eblen currently serves as CEO of Inversiones Andes SpA, a position he has held since 2010. In addition, he serves on the board of directors of Granja Marina Tornagaleones S.A., Río Dulce S.A., Patagonia SeaFarms Inc., SalmonChile A.G., and Sociedad Agrícola La Cascada Ltda. Mr. Eblen holds a Bachelor’s degree in Industrial Engineering, major in Computer Science from Pontificia Universidad Católica de Chile and a Master in Business Administration from Harvard Business School. As of February 29, 2020, the Eblen Group had the beneficial ownership of 27,644,702 common shares of LATAM Airlines Group (4.56% of LATAM Airlines Group’s outstanding shares). For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Armando Valdivieso Montes Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014 and was reelected to the board of directors of LATAM in April 2019. Mr. Reichstul is Senior Commerciala Brazilian citizen and 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 his roles as Administrative Board member of TAM and LATAM Group, he is also a member of the board of directors of Peugeot Citroen and chairman of the board of Fives, 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. Patrick Horn, has served on LATAM Airlines Group’s board of directors since 2015. AfterApril 2019. He is currently a Member of the Economic Council of theUniversidad de los Andes and director of non-profits such asAportes Chile. He has more than 35 years’ experience as an executive, both in Chile and abroad, in companies including British American Tobacco Co., Unilever, Compañía Sudamericana de Vapores and Grupo Ultramar, where he was also director of subsidiaries. Mr. Horn graduated as an Industrial Civil Engineer from thePontificia Universidad Católica de Valparaiso and holds a Master of Science in Industrial Engineering from the Georgia Institute of Technolgy, USA. He has participated in executive programs at the training centers of British American Tobacco Co. and Unilever in London, and at Kellogg Business School. He also completed a business management program (PADE) at theUniversidad de los Andes business school (ESE).
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Mr. Giles Agutter has served on LATAM Airlines Group’s board of directors since January 2017 and was reelected to the board of directors of LATAM in April 2019. Mr. Agutter is the owner and Chief Executive Officer of Southern Sky Ltd, an airline consultant company specializing in airline strategy, fleet planning, aircraft acquisition and aircraft financing. He is also currently a member of the board of directors of Air Italy. Mr. Agutter has had vast experience in advising airlines, including Qatar Airways, on significant Merger and Acquisition projects within the airline industry. Mr Agutter is a British citizen and has a degree in Aerospace Engineering from Manchester University.
Mr. Eduardo Novoa has served on LATAM’s board of directors since April 2017 and was reelected to the board of directors of LATAM in April 2019. In addition, Mr. Novoa serves on the board of directors of Cementos Bio-Bio, Grupo Ecomac, ESSAL and is a member of the advisory board of STARS and Endeavor. He was also a member of the board of directors of Esval, Soquimich, Grupo Drillco, Techpack, Endesa-Americas, Grupo Saesa, Grupo Chilquinta, and several companies in the region that were subsidiaries of Enersis and AFP Provida. He has also been a member of the board of Amcham-Chile, the Association of Electric Companies, YPO-Chile, Chile Global Angels and several Start-Ups. Between 1990 and 2007 he was an executive of several companies such as CorpGroup, Enersis, Endesa, Blue Circle, PSEG and Grupo Saesa. Mr. Novoa has a Bachelor of Business and Administration from the Universidad de Chile and a Master in Business Administration from the University of Chicago. He has participated in executive programs at Harvard, Stanford and Kellogg and was professor of finance and economics at several universities in Chile.
Mrs. Sonia J.S. Villalobosjoined the Board of LATAM Airlines in August 2018 and was reelected to the board of directors of LATAM in April 2019. Mrs. Villalobos is a Brazilian citizen and a regular member of the board of directors of Petrobras and Telefónica Vivo. She is a founding partner of the company Villalobos Consultoria since 2009 and a professor of post-graduate courses in finance at Insper since 2016. Between 2005 and 2009, she was the Manager of Funds in Latin America, in Chile, managing mutual and institutional funds of Larrain Vial AGF. From 1996 to 2002, she was responsible for Private Equity investments in Brazil, Argentina and Chile for Bassini, Playfair & Associates, LLC. As of 1989 she was Head of Research of Banco Garantia. She graduated in Public Administration from EAESP / FGV in 1984 and obtained a Master in Finance from the same institution in 2004. She was the first person to receive the CFA certification in Latin America, in 1994. As a volunteer, she participates in the Board of the CFA Society Brazil, a non-profit association that brings together nearly 1,000 professionals who hold the CFA (Chartered Financial Analyst) certification in Brazil.
Senior Management
Mr. Enrique Cueto, is LATAM Airlines Group’s Chief Executive Officer (“CEO”) and has held this position since the combination between LAN and TAM in 2012,June 2012. From 1983 to 1993, Mr. ValdiviesoCueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. From 1993 to 1994, Mr Cueto was a member of the board of LAN Airlines. Thereafter, Mr. Cueto held the position of CEO of LAN until June 2012. Mr. Cueto is member of the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile, and Executive Member of the Latin American and Caribbean Air Transport Association (ALTA). Mr. Cueto is the brother of Messrs. Juan José and Ignacio Cueto, members of the board. Mr. Cueto is also a member of the Cueto Group. As of February 29, 2020, Mr. Cueto shared in the beneficial ownership of 130,165,390 common shares of LATAM Airlines Group (21.46% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Ramiro Alfonsín, is LATAM’s Chief Financial Officer (“CFO”), a position he holds since July 2016. Over the past 16 years, before joining LATAM, he worked for Endesa, a leading utility company, in Spain, Italy and Chile, having served as General ManagerDeputy Chief Executive Officer and Chief Financial Officer for their Latin American operations. Before joining the utility sector, he worked for five years in Corporate and Investment Banking for several European banks. Mr. Alfonsín holds a degree in business administration from Pontificia Universidad Católica de Argentina.
Mr. Roberto Alvois LATAM’s Chief Commercial Officer (“CCO”), a position he holds since May 2017 being responsible of the Group’s passenger and cargo revenue management, with all the commercial units reporting to him. Previously, he was Senior Vice-President of International and Alliances at LATAM Airlines since 2015, and Vice-President of Strategic Planning and Development since 2008. Mr Alvo joined LAN and from 2006 until 2012Airlines in November 2001, where he served as Chief Financial Officer of LAN Argentina, as Manager of Development and Financial Planning at LAN Airlines, and as Deputy Chief Financial Officer of LAN Airlines. Before 2001, Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading Chilean non-metallic mining company. He is a civil engineer, and holds an MBA from IMD in Lausanne, Switzerland.
Mr. Paulo Miranda, is LATAM’s Customers Vice-President, a position he holds since May 2019. Mr. Miranda has over 20 years of experience in the General Manager-Passenger.aviation industry with different positions first at Delta Air Lines in the United States and then at Gol Linhas Aereas in Brazil. In his last role, Mr. Miranda was responsible for customer experience, having previously worked in finance, alliances as well as on the negotiation and implementation of joint ventures. Mr. Miranda holds a Business Administration degree from the Carlson School of Management at the University of Minnesota, USA.
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Mr. Hernán Pasman, has been the Vice-President of Operations, Maintenance and Fleet of LATAM airlines group since October, 2015. He joined LAN Airlines in 2005 as a head of strategic planning and financial analysis of the technical areas. Between 19972007 and 20052010, Mr. Pasman was the Chief operating officer of LAN Argentina, then, in 2011 he served as Chief Executive Officer-Cargo Business of LAN. From 1995 to 1997, Mr. Valdivieso was President of Fast Air, and from 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. Mr. Valdivieso is a civil engineer and obtained an AMP (Advance Managements Program) from Harvard Business School. Mr. Valdivieso will leave the Company during August 2017 as was announced by the Company on March 16, 2017. As of January 31, 2016, Mr. Valdivieso owned 95,859 common shares of LATAM (0.016% 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 ofTAM-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.Officer for LAN Colombia. Prior to joining LATAM Airlines, shethe company, between 2001 and 2005, Mr. Pasman was Marketing Vice-President at Whirlpool Latin America for seven years. She also worked as a consultant at BainMcKinsey & Company developing projects for large companiesin Chicago. Between 1995 and 2001, Hernan held positions at Citicorp Equity Investments, Telefonica de Argentina and Argentina Motorola. Mr. Pasman holds a Civil Engineering degree from ITBA (1995) and an MBA from Kellogg Graduate School of Management (2001).
Mr. Emilio del Real, is LATAM’s Vice-President of Human Resources, a position he assumed in August 2005. Between 2003 and 2005, Mr. del Real was the Human Resources Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various industries,positions at Unilever, including TAM AirlinesHuman Resources Manager of Unilever Chile, and other playersManager of the global aviation sector. SheTraining and Recruitment and Management Development for Latin America. Mr. del Real has a bachelor’s degree in Chemical EngineeringPsychology from the Polytechnic School at the University of São Paulo (“USP”) and a MBA from Harvard Business School.
Mr. Juan Carlos MencioMenció, is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group a position he holds since September 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. Ramiro Alfonsín, is LATAM’s Chief Financial Officer (“CFO”), a position he holds since July 2016. Over the past 16 years, before joining LATAM, he worked for Endesa, a leading utility company, in Spain, Italy and Chile, having served as Deputy Chief Executive Officer and Chief Financial Officer for their Latin American operations. Before joining the utility sector, he worked for 5 years in Corporate and Investment Banking in large European banks. Mr. Alfonsín holds a degree in business administration from Pontificia Universidad Católica de Argentina.
Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. 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. del Real has a Psychology degree from Universidad Gabriela Mistral.
During 2017, the Company will implement a new organizational structure focused on four basic areas –Clients, Revenue, Operations and Fleet, and Finance– which will be the pillars of the Company’s business strategy and will report directly to the CEO LATAM. The new structure will be simpler, more efficient and more functional, and will enable the Company to face an increasingly competitive environment. With this reorganization that will focus on functions instead of business units, the Company expects to optimize its internal synergies and strengthen its structure.
The Clients area will be initially led by Claudia Sender. This area will focus on providing the client with a complete experience. The Revenues area, focused on maximizing revenues for the Company, will be initially led by Roberto Alvo Milosawlewitsch, who will be LATAM’s Chief Commercial Officer. The Operations and Fleet area will be initially led by Hernan Pasman, who will be responsible for the Operations and Fleet Vice-presidency. The Finance area will preserve its existing organization and structure, and will be led by Ramiro Alfonsín, the current Chief Financial Officer of the Company
B. Compensation
In 2016,2019, the Company paid its principal executives (considering(executives who define the levelsCompany’s policies and major guidelines and who directly affect the results of Vice Presidents, General Managers,the business, including Vice-Presidents, Chief Executives and Senior Director and Directors as defined above)Directors) a total gross remuneration of US$40,194,453. After the incentives for performance paid during 2015, the Company paid its principal executives total gross remunerations of US$55,174,744.60.4 million.
Under Chilean law, LATAM Airlines Group must disclose in its annual report details of all compensation paid to its directorsboard members 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”),CMF, 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 participated in any stock option plans.
LATAM Airlines Group’s directorsboard members are paid 5060 UF per meeting (100(120 UF for the chairman of the board) and 4048 UF for assistanceattendance to the subcommittee of Directors meetings. LATAM Airlines Group also provides certain benefits to its directorsboard members and executive officers, such as free and discounted airline tickets and health insurance. We do not have contracts with any of our directorsboard members to provide benefits upon termination of employment.
As set forth in further detail in the following table, in 20162019 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$282,364.413,219.
Board Members | Fees (US$)(1) | |||
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Total | 413,219 |
(1) | Includes fees paid to members of the board of directors’ committee, as described below. |
All of
Former board member, leaving the board on April 25, 2019.The above-mentioned directorsboard members were elected to the LATAM board of directors inon April 2015.25, 2019.
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 2017.2021. See “—Directors and Senior Management” above.
Committees
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,directors’ Committee, which, among other duties, is responsible for:
● | examining the reports of LATAM Airlines Group’s external auditors, the balance sheets and other financial statements submitted by 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; |
● | 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 LATAM Airlines Group’s senior management. |
Under Chilean Corporation Law we are required, to the extent possible, to appoint a majority of independent directorsboard members to the Boardboard of Directorsdirectors Committee. A directorboard member is considered independent when he or she can be elected regardless of the voting of the controlling shareholders. See “Item 16. Reserved—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 Rule10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Boardboard of Directors’directors’ Committee and the audit committee, our Boardboard of Directors’directors’ Committee serves as our Audit Committee for purposes of Rule10A-3 under the Exchange Act.
As of December 31, 2016,2019, all of the members of our Boardboard of Directors’directors’ Committee, which also serves as our Audit Committee, were independent under Rule10A-3 of the Exchange Act. As of December 31, 2016,2019, the committee members were Mr. Gerardo Jofré Miranda,Eduardo Novoa Castellón, Mr. RamónNicolás Eblen KadisHirmas and Mr. Georges de Bourguignon.Patrick Horn García. We pay each member of the committee 6780 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 & Sustainability Committee, a Leadership Committee, a Finance Committee and a Brand, ProductCustomers and Frequent Flyer ProgramBusinesses Committee. The Strategy & Sustainability 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 optimizationtaxation strategy and the quality and reliability of financial information. Finally, the BrandCustomers and Frequent Flyer ProgramBusinesses Committee is responsible for brandsetting the competitive 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 strategyCustomers and key program featuresCommercial Vice Presidencies with a focus on sales, marketing, network and regular audit of brand performance.fleet initiatives, customer experience and revenue management.
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, 2014December, 2019, LATAM Airlines Group filed for the first time the Company’s Corporate Practices Report prepared according to General Rule N° 385, previously N°341, current N°385 of the Securities and InsuranceChilean Financial Market Commission (“CMF”) issued November 29, 2012.June 8, 2015. 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:
● | how the Board works; |
● | the relationship between the company, shareholders and the public in general; |
● | how senior officers are replaced and compensated; and |
● | the definition, implementation and supervision of internal control and risk management policies and procedures inside the company. |
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, | As of December 31, | ||||||||||||||||||||||
2016(1) | 2015 | 2014 | 2019(1) | 2018 | 2017 | |||||||||||||||||||
Administrative | 8,010 | 9,118 | 10,077 | 6,966 | 6,380 | 6,922 | ||||||||||||||||||
Sales | 4,235 | 5,022 | 5,246 | 2,505 | 3,106 | 3,332 | ||||||||||||||||||
Maintenance | 4,895 | 5,990 | 6,986 | 4,911 | 4,928 | 4,742 | ||||||||||||||||||
Operations | 15,924 | 16,878 | 17,517 | 13,538 | 13,391 | 15,126 | ||||||||||||||||||
Cabin crew | 8,970 | 9,383 | 9,237 | 9,511 | 9,196 | 9,016 | ||||||||||||||||||
Cockpit crew | 3,882 | 4,022 | 4,009 | 4,298 | 4,169 | 3,957 | ||||||||||||||||||
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Total | 45,916 | 50,413 | 53,072 | 41,729 | 41,170 | 43,095 | ||||||||||||||||||
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(1) |
Our salary structure is comprised of: (a) fixed payments (base salary and other fixed payments such as legal gratifications, local bonus, company seniority and others, depending on each country’s law and market practice); (b) short term incentives (associated with corporate, area and individual performance), applicable to our ground staff; (c) long term incentives (applicable to our senior executives (Senior Directors and above)).
According to the local law requirements, we make pension and social security contributions on behalf of our employees. Additionally, for our air staff and specialized professionals such as mechanics, we have fixed and variable payments, subject to the local collective agreements.
Regarding benefits, we usually provide life insurance and medical insurance, complementary of the coverage provided by the legal system. We also grant other benefits, according to local market practice (meal, transportation, maternal and paternal leave, etc.). Additionally, we have a global staff travel program, which grants free and discounted tickets to our permanent employees.
Long Term Incentive Compensation Program
1. Compensation plan 2011
On December 21, 2016, the subscription and payment period of the 4,800,000 shares corresponding to the compensation plan approved at the Extraordinary Shareholders Meeting held on December 21, 2011 (the “2011 Compensation Plan”), expired. Of the total shares allocated to the 2011 Compensation Plan, only 10,282 shares were subscribed and paid and were placed on the market in January 2014. At the expiration date, the 2011 Compensation Plan had a balance of 4,789,718 unsubscribed and unpaid shares, which was deducted from the authorized capital of the Company.
2. Compensation plan 2013
At the Extraordinary Shareholders Meeting held on June 11, 2013, the Company’s shareholders approved a capital increase and the allocation of 1,500,000 shares to compensation plans for employees of the Company pursuant to Article 24 of the Chilean Corporations Law. The Company has not defined a date for implementation of this compensation plan yet.
3.
1. | Compensation plan 2016-2018 |
The Company implemented a long-term retention plan for executives, with an end date of December 2018 and a vesting period between October 2018 and March 2019. The plan contemplates an extraordinary bonus to be paid in cash, whose calculation formula based on the variation of the value of the Company’s shares over time.
2. | LP2 compensation plans (2019-2020) |
The company implemented a certain periodlong-term retention plan for executives effective between October 2019 and March 2020 that expires in March 2020, which consists of time.an extraordinary bonus based on the the value of the shares of LATAM. To date no payments have been made under this plan.
3. | LP3 compensation plans (2020-2023) |
The Company implemented a program for a group of executives effective between October 2020 and March 2023 tha expires in March 2023, which consists of a extraordinary bonus that may be paid anually or subject to accrual and is based on target prices of the shares of LATAM.
4. | Subsidiary’s compensation plans |
a. | As consequence of the resignation of the executives of Multiplus, the option plans granted in respect of Multiplus S.A. were canceled (as of December 31, 2018, the options for current shares amounted to 247,500 shares for Multiplus S.A.). |
b. | As of December 31, 2019, payment contracts based on restricted shares signed with the executives of Multiplus were canceled. |
For more information, please see noteNote 34 Note to our consolidated financial statements.
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
As
During the year 2019, ten collective bargaining processes were carried out, all of them anticipated or not regulated, which implies that the union renounces the possibility of a general labor relations policystrike as a means of exerting legal pressure in Chile, we negotiate labor contracts with unions in anticipation of their scheduled expirations. As anon-negotiable clause, allthe negotiations. All the collective bargaining agreements are signed forthat were entered into have a duration of three years, which is the maximum legal term namely, four years. During 2016, we renegotiated our collective bargaining agreements with the following unions: Transporte Aéreo (LATAM Airlines Chile) Pilots’allowed and, allows job stability for that time.
In parallel, during 2019s two new unions were formed: Labor Union of Workers of Easter Island, and Workers Union of LATAM maintenance union, LATAM airport union, Transporte Aéreo maintenance union and LATAM Cargo administrative union.All these collective agreements will beTravel, forming a total of 20 unions in force for the maximum legal term.Chile.
LATAM Cargo pilots’ union, in the context of a ruled negotiation, rejected the Company’s last offer, and the negotiation ended by in a unilateral extension of the collective agreement’s validity for 18 months. Thus, a new negotiation process should take place during the first quarter of 2018.
Ecuador
In |
Additionally, in 2011 a union previously exclusive to cabin crew became general.employees was integrated into the general employee’s union. This group maintains relations with the Company, but does not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law because less than 50%half of our employees eligible for membership are members of this union.
Additionally, three employee associations were formed in 2012, including pilots, other general employees but composed mostly of maintenance employees and other composed mostly by employees of airport administration. In July 2019, the Company renewed the voluntary agreement with the pilot’s association, valid until July 2023.
Argentina
In Argentina, 75.9% percent of LATAM employees are affiliated in at least in one of nine unions.
In November 2016September 2019, we startedbegan salary negotiations with unions with respect to negotiate the annual adjustment for inflation with the seven unions. In January 2017, weand reached an agreement with the unions.on January 17, 2020.
LATAM CARGO international operations based in EZEIZA Airport were outsourced during last September despite a labor union disagreement.
In 2016September 2019, we succeeded in implementingimplemented an Aircraft Interchange Agreement as a new operational model. This new operation process was supported by most of the Company’s planned changes to reduce operational laborpilots despite APLA (Asociación de Pilotos de Líneas Aéreas), disagreement. As a result of this action, a new trade union was created (UPAL - Unión de Pilotos Aviadores de LATAM).
In 2020 we will continue working on different initiatives based on productivity and overhead costs, without significant protestsefficiency, avoiding conflicts or union intervention.strikes, focusing on transforming LATAM Airlines Argentina into a more efficient company.
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Colombia
In Colombia we have 4five different unions. The company held negotiations with them, as follows:with: (i) with the Technicians Union (ACMA), in 2014,2018, and itreached an agreement that will be in force until June of 2018,2021, (ii) With the Cabin Crew Union (ACAV), in 2014,2018, and itreached an agreement that will be in force until DecemberJune of 2018,2021, (iii) with the Industrial Union of Aviation Workers (SINTRATAC), held in June of 20162018, and itreached an agreement that will be in force until MayJune of 2021, (iv) the Pilots’ Latam Colombia Union (ADALAC), in 2018, and (iv) in October 2016,reached an arbitration court ruledagreement that the negotiation with the Pilots Union (ACDAC) will be in force until NovemberJanuary of 2021 and (v) the pilots’ union, ACDAC, in an arbitration during the last quarter of 2017.
Peru
LATAM Airlines Peru will begin negotiations with the pilots’ union during the second quarter of 2016. Negotiations are expected to conclude with a collective agreement in June 2017.In 2017, negotiations will begin with the cabin crew’s union and the aircraft technicians’ union.
In Peru, we have in totalthere are six unions representingthat represent workers from different functional areas: pilots, cabin crew, aircraft technicians, flight dispatchers and airport workers. Our current collective agreements have a term of four years.
In 2019, LATAM Airlines Peru concluded negotiations with the cabin crew union and one of our aeronautical technicians' unions. Collective bargaining with the cabin crew union concluded through arbitration and with the aeronautical technician union in direct agreement.
During 2019, negotiation continued with the flight dispatchers’ union (negotiation began in September 2018). These negotiations are expected to conclude with a collective bargaining agreement in the first half of 2020.
Brazil
Under Brazilian law, the term of collective bargaining agreements is limited to two years. TAM’sLATAM Airlines Brazil’s collective bargaining agreements are valid for one year (for the economic clauses) and for two years (for social clauses). TAMyear. LATAM Airlines Brazil has historically negotiated
collective bargaining agreements with teneleven unions in Brazil—one crew flight union, which represents pilots, copilots and flight attendants, and nineten ground staff unions. In December 2016, TAM2019, LATAM Airlines Brazil renegotiated collective bargaining agreements with all the unions, which included a wage increase of 7.4%3.37%, in line with the inflation rate of the last 12 mounths. For ground staff workers with salaries up to ten thousand dollars, the increase was R$ 739.00.months.
E. Share Ownership
As of December 31, 2016,2019, the members of our Boardboard of Directorsdirectors and our executive officers as a group owned 47.7%30.3% of our shares. See “Item 7. ControllingMajor Shareholders and Related Party Transactions.”
For a description of stock options granted to our executive officers, see “—D. Employees—Long Term Incentive Compensation Program.”
ITEM 7. |
A. Major Shareholders
Mr. Ignacio Cueto Plaza (the CEO(Chairman of LAN)the Board of LATAM), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other Cueto family members and entities controlled by them, comprise the Cueto Group. As of January 31, 2017February 29, 2020 the Cueto Group beneficially owned (as defined in Rule13d-3 under the Securities Exchange Act) 28.27%21.46% 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. In connection with our combination with TAM, members of the Cueto Group (which we also refer to collectively as the “LATAM Controlling Shareholders”) entered into a shareholder’s agreement with the Amaro Family, acting through TEP Chile, and TEP Chile entered into shareholder’s agreements with LATAM and TAM. See “—Shareholders’ Agreements.”
Following ourthe combination with TAM, the Amaro Group is alsobecame a major shareholder of LATAM Airlines Group. Through their 100% ownership of TEP ChilePlease see Item 4. Information on the Company – History and majority ownershipDevelopment of the voting shares of Holdco I, which in turn owns 100% of the common shares of TAM,the Amaro Group, are controlling shareholders of TAM. This is the case even though LATAM is entitled to substantially all the economic rights arising from the operations of TAM by virtue of LATAM’s ownership of 100% of Holdco I and TAMnon-voting shares. Members of the Amaro Group’ include our chairman, Mauricio Rolim Amaro and our former director Maria Claudia Amaro.Company. As of January 31, 2017,February 29, 2020, the Amaro Group owned 3.02%1.98%(2) of LATAM Airlines Group’s common shares. The terms of the shareholders’ agreement among the Amaro Group, LATAM and the LATAM Controlling ShareholdersCueto Group require the LATAM Controlling ShareholdersCueto Group and the Amaro Group to vote to elect individuals nominated to our board of directors in accordance with the direct and indirect shareholder interests in LATAM. See “—Shareholders’ Agreements.”
In addition to the Cueto Group and the Amaro Group, threefour other groups or entities are major shareholders of LATAM. As of January 31, 2017,February 29, 2020, the Eblen Group, which includes our director RamónNicolás Eblen, Cádiz, owned 5.93%4.56% of our common shares; the Bethia Group, which includes our directorvice-president of the board of directors, Carlos Heller, Solari, owned 5.50%4.23% of our common shares; and Qatar Airways Investments (UK) Ltd., whose nominee, Giles Agutter, becameis one of our directors, effective January 24, 2017, owned 10.03%10.00%(4)of our outstandingcommon shares and Delta Air Lines owned 20.00% of our common shares.
The table below sets forth additional information regarding the beneficial ownership of our common shares, as of January 31, 2017,February 29, 2020, by our controlling shareholders, other major shareholders or shareholder groups, and minority shareholders.
Beneficial ownership (as of January 31, 2017) | ||||||||
Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | |||||||
Shareholder | ||||||||
Cueto Group(1) | 171,430,090 | 28.27 | % | |||||
Costa Verde Aeronautica S.A(2) (3) | 90,427,620 | 14.91 | % | |||||
Inversiones Costa Verde Aeronautica Tres SpA | 35,300,000 | 5.82 | % | |||||
Inversiones Nueva Costa Verde Aeronautica Ltda. | 23,578,077 | 3.89 | % | |||||
Costa Verde Aeronautica SpA | 12,000,000 | 1.98 | % | |||||
Others | 10,124,393 | 1.67 | % | |||||
Qatar Airways(4) | 60,837,452 | 10.03 | % |
Beneficial ownership (as of February 29, 2020) | ||||||||||||||||
Beneficial ownership (as of January 31, 2017) | Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | ||||||||||||||
Shareholder | ||||||||||||||||
Number of shares of common stock beneficially owned | Percentage of common stock beneficially owned | |||||||||||||||
Cueto Group(1) | 130,165,390 | 21.46 | % | |||||||||||||
Costa Verde Aeronautica S.A(2) (3) | 67,878,651 | 11.19 | % | |||||||||||||
Costa Verde Aeronautica Tres SpA | 27,148,493 | 4.48 | % | |||||||||||||
Inversiones Nueva Costa Verde Aeronautica Ltda. | 18,133,406 | 2.99 | % | |||||||||||||
Costa Verde Aeronautica SpA | 9,228,949 | 1.52 | % | |||||||||||||
Others | 7,775,891 | 1.28 | % | |||||||||||||
Delta Air Lines | 121,281,538 | 20.00 | % | |||||||||||||
Delta Air Lines, Inc. | 121,281,538 | 20.00 | % | |||||||||||||
Qatar Airways(4) | 60,640,768 | 10.00 | % | |||||||||||||
Qatar Airways Investments (UK) Ltda. | 60,837,452 | 10.03 | % | 60,640,768 | 10.00 | % | ||||||||||
Eblen Group. | 35,945,199 | 5.93 | % | |||||||||||||
Amaro Group(2)(3) | 12,009,257 | 1.98 | % | |||||||||||||
TEP Chile S.A. | 12,009,257 | 1.98 | % | |||||||||||||
Eblen Group | 27,644,702 | 4.56 | % | |||||||||||||
Inversiones Andes SpA. | 17,146,529 | 2.83 | % | 13,187,037 | 2.17 | % | ||||||||||
Inversiones Andes II SpA | 8,000,000 | 1.32 | % | 6,152,633 | 1.01 | % | ||||||||||
Inversiones PIA SpA. | 5,403,804 | 0.89 | % | 4,155,953 | 0.69 | % | ||||||||||
Comercial las Vertientes SpA | 5,394,866 | 0.89 | % | 4,149,079 | 0.68 | % | ||||||||||
Bethia Group. | 33,367,357 | 5.50 | % | |||||||||||||
Bethia Group | 25,662,136 | 4.23 | % | |||||||||||||
Axxion S.A. | 18,473,333 | 3.05 | % | 14,207,454 | 2.34 | % | ||||||||||
Inversiones HS SpA. | 14,894,024 | 2.45 | % | 11,454,682 | 1.89 | % | ||||||||||
Amaro Group(2)(3) | 18,342,913 | 3.02 | % | |||||||||||||
TEP Chile S.A. | 18,342,913 | 3.02 | % | |||||||||||||
All other minority shareholders | 288,484,682 | 47.24 | % | 229,003,902 | 37.76 | % | ||||||||||
Total | 606,407,693 | 100.00 | % | 606,407,693 | 100.00 | % |
(1) | The ownership figures for the Cueto Group in this table exclude shares held directly by TEP Chile S.A. which are subject to the shareholders’ agreements described below. |
(2) | Members of the Amaro Group also hold a 21.88% economic interest in Costa Verde Aeronáutica S.A. |
(3) | The ownership figures for the Amaro Group in this table exclude shares held by the Cueto Group which are subject to the shareholders’ agreements described below. |
(4) | Qatar owns 9.999999918% of |
As of January 31, 2017, 4.55%February 29, 2020, 3.32% of our capital stock was held in the form of ADSs. Chilean pension funds held 19.41%17.32% of our capital stock and other minority investors held 23.28%17.12% 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, 2017,February 29, 2020, we had 1,5851,315 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—A. History and Development of the Company—Combination of LAN and TAM,” following
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 Amaro Group (acting through TEP Chile) and Holdco I, establishing 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 those of the Amaro Group 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 combination of LAN and TAM.
Governance and Management of LATAM Airlines Group
We refer to the shareholders’ agreement among the LATAM Controlling Shareholders and the Amaro Group (acting through TEP Chile), which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Airlines 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 LATAM Airlines Group S.A. and TEP Chile, which sets forth agreements concerning the governance, management and operation of the LATAM Airlines Group, as the “LATAM AirlinesGroup-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM AirlinesGroup-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Airlines Group following the effective time.
This section describes the key provisions of the control group shareholders’ agreement and the LATAM AirlinesGroup-TEP shareholders’ agreement. The description of the LATAM AirlinesGroup-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form20-F is qualified in its entirety by reference to the full text of such shareholders’ agreement,agreements, which has been filed as exhibit to this annual report on Form20-F.
Composition of the LATAM Airlines Group Board
Mr. Maurício Rolim Amaro was reelected to
Since April 2017, there are no restrictions in the control group shareholders’ agreement nor in the LATAM Airlines GroupGroup-TEP shareholders’ agreement regarding the composition of LATAM Airlines Group’s board of directorsdirectors. Therefore, once elected in April 2014 and April 2015. If Mr. Amaro vacates this position for any reason before April 2017, TEP Chile hasaccordance with Chilean regulation, members of the right to select a replacement to complete his term. Thereafter, LATAM Airlines Group’s board of directors willhave the right to appoint any of its membersmember as the chairman of LATAM Airlines Group’s board of directors, from time to time, in accordance with the LATAM Airlines Group’sby-laws. Mrs. Maria Cláudia Oliveira Amaro Accordingly, on May, 2017 and on May 14, 2019, Mr. Ignacio Cueto Plaza was elected toelgected as President of the Board.
On August 2018, Mr. Antonio Pizarro resigned from the LATAM Airlines GroupAirline’s Group’s board of directors, in June 2012, and resigned this position in September 2014. Also in September 2014, pursuant to Chilean law, Mr. Henri Philippe Reichstulas his replacement, the board of directors appointed Mrs. Sonia Villalobos, who was appointedelected by the board to fill her seat untilshareholders on the next general shareholders meeting. Mr. Reichstul wasre-elected to the board inOrdinary Meeting of April, 2015.25th 2019
Management of the LATAM Airlines Group
Mr.
On September 10, 2019, LATAM announced that Enrique Cueto Plaza, has served as CEOChief Executive Officer of LATAM (“CEO LATAM”) since June 2012.2012, will leave this position as of March 31, 2020, being replaced as of such date by Mr. Roberto Alvo, current Chief Commercial Officer of LATAM. 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 AirlinesGroup-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 Airlines Group, excluding those conducted by Holdco I, TAM and its affiliates, and the international passenger business of the LATAM Airlines Group. The CEO LAN, together with Mrs. Claudia Sender, the current 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 Airlines 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 Airlines 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. Mr. Cueto will leave the Company’s senior management team inmid-April 2017 and is applying to become a member of LATAM’s board of directors.
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 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 the Holdco I shareholders’ agreement and the TAM shareholders’ agreement summarized below and elsewhere in this annual report on Form20-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 Form20-F.
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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).
The control group shareholders’ agreement provides that the persons elected by or on behalf of the LATAM Controlling Shareholders or the Amaro Group 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
Theday-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. Theday-to-day business and affairs of TAM will be managed by the TAM 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, 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 Airlines 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
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, 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, 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 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 Director 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, or 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 LATAM Controlling Shareholders and TEP Chile have agreed in the control group shareholdersshareholder’s agreement to vote their respective LATAM Airlines Group common shares as follows:
● | the parties agree to vote their LATAM 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 on all actions (other than actions requiring supermajority approval under Chilean law) to be taken by the LATAM board of directors or the LATAM shareholders, and if unable to reach such agreement, to follow the proposal made by our board of directors; |
● | 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 LATAM Controlling Shareholders, which we refer to as a “directed vote.” |
The parties to the Holdco I shareholdersshareholder’s 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.
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Transfer Restrictions
Pursuant to the control group shareholders’ agreement, the LATAM 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 shareholdersControlling Shareholders nor TEP Chile were permitted to sell any of their LATAM Airlines Group common shares, and TEP Chile was not permitted to sell its voting shares of Holdco I, until June 2015. Since then, 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. On or after December 31, 2021, 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,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 shareholdersControlling 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 December 21, 2021 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any24-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 shareholdersControlling Shareholders is not elected to the board of directors of LATAM Airlines Group.
In addition, after December 31, 2021 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 shareholdersControlling Shareholders and (y) the restrictions on sales of LATAM Airlines Group common shares more than once in a12-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 Ibeneficially 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 ofnon-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). In February 2019, we completed the procedures for the exchange of shares of Holdco I S.A., through which LATAM Airlines Group SA increased its indirect participation in TAM S.A., from 48.99% to 51.04%. This transaction was undertaken pursuant to the Provisional Measure 863/2018 of December 13, 2018, through which the participation of up to 100% of foreign capital in airlines in Brazil is permitted.
On or after December 31, 2021, and after we have fully converted all of our shares ofnon-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 December 31, 2021, we have the right under applicable law in Brazil and other applicable law to fully convert all the shares ofnon-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 any of their respective subsidiaries from and after the effective time of the 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 companiescompanies’ services of various types, including aircraft leases, aircraft interchanges, freight transportation and reservation services. Such transactions, none of which is individually material, are summarized in Note 3533 to our audited consolidated financial statements for the fiscal year ended December 31, 2016.2019.
On August 2, 2016, the Boardboard of Directors recentlydirectors approved the Policy on Control of Related-Party Transactions of LATAM Airlines Group S.A. and its subsidiaries, which states:
· | Related-party means, among others, subsidiaries, affiliates, natural persons or legal entities with control of 10% or more of the Company’s voting stock, vice presidents, directors or senior executives as well as their respective spouses, relatives, and companies in which said persons are either direct or indirect owners of 10% or more of the Company’s voting stock, or in which they have held a position over the last 18 months. |
· | Related-Party Transactions can only be executed if said transactions are in LATAM’s interest and adjust to price, terms and conditions prevalent in the market for similar transactions with other third parties at the time of its approval. |
· | Any and all negotiations, acts, contracts or operations in which a company of the LATAM Group and a party related to such company serve as the participants will be subject to the Policy. |
ITEM 8. | FINANCIAL INFORMATION |
A. Consolidated Financial Statements and Other Financial Information
See “Item 3. Key Information—A. Selected Financial Data,” “Item 18. Financial Statements” and pagesF-1 throughF-194. F-142.
Legal and Arbitration Proceedings
We are involved in routine litigation and other proceedings relating to the ordinary course of our business. The following is a description of all the material legal and arbitration proceedings.
In February 2006 the European Commission (“EC”), the 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) for possible price fixing of cargo fuel surcharges and other fees in the European and United States air cargo markets. As previously announced, LAN Cargo reached plea agreements with the DOJ and the CCB, which included the payment of fines, in relation to such investigation. On November 9, 2010, the EC imposed fines on 11 air carriers for a total amount of €799.4 million (equivalent to approximately US$1.1 billion). The fine imposed against LAN Cargo and its parent company, LAN, totaled €8.2 million (equivalent to approximately US$10.99.4 million). LAN 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 EC, which includes a significant reduction due to LAN’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 to the General Court in Luxembourg. Any judgment by the General Court may also be appealed to the Court of Justice of the European Union. The European Court of Justice overtuned overturnedthe Commission’s decision on December 16, 2015. On May 20 2016 the EC confirmed that they havehad decided not to appeal the case and to issue a new decision with the aim of correcting the faults identified in the judgement by the European Court of Justice. On March17, March 2017, the ECre-adopted its decision and imposed on LAN Cargo and its parent company, LATAM, a fine in the same amount, €8.2 million, as the original fine.
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). In the particular case of Great Britain there was a mediation process, at the end of the year 2018, with the participation of all airlines involved to try to reach an agreement. LATAM Airlines Group S.A., reached an agreement for approximately GBP 636,000. A settlement was signed in December 2018 and payment was made in January 2019. This mediation process concluded the claim for all class actions except one, for which a settlement was negotiated during the year 2009, and which settled in December 2019 for the amount of approximately GBP 222,469.63. The payment was made during the month of January 2020. This concluded the claim for all class-actions in Great Britain.
On September 3, 2013, CADE published its decision to impose a fine of US$51.0 million against ABSA, after an investigation, commenced in 2008, against several cargo airlines and airlines officers over allegations of anticompetitive practices regarding fuel surcharges in the air cargo business. CADE also imposed fines upon a former Director and two former employees in the amounts of US$1.0 million and US$510,000 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 fine against ABSA to US$15,382,082 9,823,135 (based on an exchange rate of US$ 1 = R$ 3.2591)3.3080). CADE also reduced the fines against ABSA’s Director and employees to US$251,616 247,896 and US$125,800, 123,040, respectively (also based on an exchange rate of US$ 1 = R$ 3.2591)3.3080). ABSA has initiated a judicial appeal against the Union Federal seeking an additional reduction of the fine amount. In December 2018, a Federal Court Judge ruled against ABSA, indicating that it will not apply an additional reduction to the light of said pending judicial appeal,fine imposed. The court’s decision was published in March 12, 2019. On March 13, we cannot predict the ultimate outcome of this matter at this time.
The investigations by the DOJ, CCB and the EC prompted the filing of civil actions and claims by freight forwarding and shipping companies against many airlines, including LAN Cargo and LATAM Airlines Group. LAN Cargo and ABSA reachedfiled a settlement agreement with the class action plaintiffs /non-class action claimants in the United States on August 6, 2012, and in Canada on August 20, 2013.
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 now directly contingent upon the decisionmotion seeking clarification of the EC to issue a new decision correcting the faults identified in the judgement. We cannot predict the ultimate outcome of these cases at this time.federal court’s decision.
Agreements with the DOJ and the SEC. In 2011, authorities in Chile and the United States initiated investigations relating to certain payments by LATAM Airlines Group S.A. (formerly LAN Airlines S.A.) to a consultant who assisted in the resolution of labor issues in Argentina in 2006-2007. The Company voluntarily reported this situation to the Securities and Exchange Commission (“SEC”) and the Justice Department of the United States (“DOJ”) and actively cooperated in those investigations. On February 4, 2016, Ignacio Cueto, the former CEO of LAN, consented to entry of acease-and-desist order by the SEC relating to the payments described above. Mr. Cueto agreed to pay a US$75,000 penalty to the SEC, to remain in compliance with LATAM’s compliance structure and internal accounting controls and to comply with the SEC’s books and records requirements. In July 2016, after multiple and prolonged exchanges of opinions and conversations with the DOJ and the SEC, LATAM also reached definitive agreements with both authorities.
In the case of the DOJ, the agreement took the form of a Deferred Prosecution Agreement (“DPA”), pursuant to which the DOJ will dismiss the charges after the expiration of a three-year period if LATAM complies with all terms of the DPA. Pursuant to the DPA, LATAM has admitted that the accounting for the payments made to the consultant in Argentina was incorrect and that, at the time that such payments were made (2006-2007), it lacked adequate internal controls. LATAM has also accepted an independent consultant, for 27 months, whose function will be to monitor, evaluate, and report to the DOJ on the effectiveness of LATAM’s compliance program. LATAM also committed to reporting to the DOJ on the effectiveness of the aforementioned compliance program for 9 months after the work of the independent consultant is finished. Lastly, LATAM also agreed to paypaid a fine of US$12,750,000 to the DOJ.
The settlement with the SEC included the issuance by the SEC of acease-and-desist order, which is an administrative order closing the investigation whereby LATAM has accepted certain obligations and statements of fact. The order also refers to the obligations related to the monitorship agreed under the DPA with the DOJ. LATAM also agreed to pay an amountpaid a fine of US$6,700,000 plus6.74 million and interest of US$2.69 million to the SEC. AsOn May 15, 2019, the external consultant certified that the anti-corruption compliance program of DecemberLATAM Airlines Group S.A. LATAM’s anti-corruption program was reasonably designed and implemented to prevent and detect violations within LATAM to anti-corruption laws. On July 23, 2019, the DOJ approved the certification made by the consultant on May 15, 2019 regarding the anticorruption compliance program of LATAM Airlines Group S.A. On January 31, 2016,2020, the Florida Court approved the motion of the DOJ regarding the withdrawal of the criminal action against LATAM Airlines Group SA, in response to compliance with all the conditions of the DPA by LATAM, closing the process before the DOJ.
On September 27, 2019 a balancelawsuit was filed against LATAM Airlines Group S.A. in the U.S. District Court for the Southern District of US$ 4,718,894Florida under the Cuban Liberty and Democratic Solidarity Act, 22 U.S.C. Section 6021 et seq., (the "Helms-Burton Act"). Plaintiff Jose Ramon Lopez Regueiro alleged in the complaint that he holds an interest in the Jose Marti Airport which was payableconfiscated by the Cuban government in 1959, and that LATAM Airlines Group S.A. unlawfully "trafficked" in the said property. The plaintiff seeks all available statutory remedies, including the award of damages for the alleged trafficking in the expropriated property, plus reasonable attorney's fees and costs incurred, treble damages, post-judgment interest, and any other relief deemed appropriate by the court. LATAM is in the process of defending the claim, having filed motion to dismiss followed by a motion to stay discovery pending a ruling on the SEC. .motion to dismiss. The matter is still in preliminary stages, and very little precedent has yet to be established to predict the final outcome of litigation should the matter proceed to trial and/or to determine the amount of reserve, if any.
85
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 Fokker 100 aircraft, which crashed during departure, in addition to 22 actions filed by residents of the region where the accident occurred, who are claimingclaimed pain and suffering, and a class action related to this crash.accident. All suits have now been concluded except one suit brought by the association of residents of a local street in respect of which TAM has been found liable by the 2nd Instance Court for damages to be assessed, subject to an appeal to the Superior Court. Most residents of the relevant street appear to have already been compensated through individual claims, which have been satisfied and thus should not be entitled to further compensation. No steps have been taken by any residents to try to obtain further compensation through the decision in favor of the residents association. Any further damages resulting from the aforementioned legal claimsclaim are covered by the civil liability guarantee provided for in TAM’s insurance policy with Itaú Unibanco Seguros S.A. We believe that the(now Chubb Seguros). The cap of US$400 million in that insurance policy is sufficient to cover any further potential penalties and judicial or extrajudicial agreements arising as a result of this matter.matter
Insurance coverage has been sufficient
In relation to cover the liabilities arising from an accident that occurred in July 2007 involving an Airbus A320 aircraft from(PR-MBK) accident of TAM Linhas Aereas. Settlements have been madeAéreas (TAM) at CGH on July 17, 2007, settlements were concluded directly between the insurance companyinsurers/reinsurers and the victims’ families. Asfamilies, third parties and ex-employees. Almost all claims and suits have now been concluded and there is ongoing litigation against TAM relating to only one fatal victim and one third party land owner. The administrative action regarding the extent of December 31, 2013, approximately 196 settlements have occurred and others are under negotiation between the insurance company and victims’ families. Management believes that theprimary insurance coverage payable regarding victims on board the aircraft remains on appeal by TAM and the other defendants to the Superior Court in Brasília. No steps have been taken by any party to attempt preliminary execution of the 2nd Instance decision and there should be good arguments to defend any such action based on the releases signed by all claimants upon receiving final compensation. The insurance coverage with Itaú Unibanco Seguros S.A. (now Chubb Seguros) is adequate to cover any further liabilities arising and that TAMLATAM Airlines Brazil will not incur any expenses that were not contemplated by the scope of the insurance policypolicy.
On January 31, 2018, Airbus S.A.S., Airbus North America Customer Services, Inc. and Allianz Corporate & Specialty SE (France) filed an arbitration claim with the International Centre for Dispute Resolution against AIG Europe Limited (“AIG”), TAM S.A. (“TSA”) and TAM Linhas Aéreas S.A. (“TLA”) seeking a decision on the validity of a shared-defense agreement that would resulthad been discussed but never finalized or executed by the parties. The plaintiffs allege that the parties exchanged enough correspondence and drafts to reflect the terms of a contract. Based on this alleged contract, they are demanding that TAM reimburse Airbus a sum of approximately US$9,200 for settlement costs and US$3,000 for legal fees, in TAM’s obligationaddition to pay damages.
Tax related
TAM Linhas Aereas and other plaintiffs filed an ordinary actionclaim with a request for injunctive relief fornon-payment of the Airline Workers Fund, a tax charged monthly at the rate of 2.5% of an airline’s total payroll. Currently, judgment is pending on an appeal that TAM lodged challenging the initial decision (which was ruled in favor of the Brazilian National Institute of Social Security (“INSS”)). InRegarding the period between 2004 and 2011,2012, the INSS issued ana tax assessment notice tolling the Statute of Limitations of the social security creditcharging amounts as a result of TAM Linhas Aereas’non-payment of the Airline Workers Fund. The company made deposits with the Court of total amounts required to guarantee the debts potentially owed. The administrative proceedings have been suspended until completionthe conclusion of the judicial process.claim. The approximate adjusted value of thisamounts potentially due in such proceeding as of December 31, 2012 was US$43.3 million. In the opinion of our legal advisors, the chance of losing in this proceeding is possible.probable. Assuming payment of this tax is required by law, we have established a provision in the amount of US$43.387,4 million pending(R$ 352.220.015,07) related to the final outcomeTAM’s part as of the matter.
December 31, 2019. TAM Linhas Aereas is a plaintiff in an action filedjudicial claim against the Brazilian government infrom 1993 seeking indemnity for damages forsuffered because of thebreak-up of an air transportation 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 process is currently being heard before the Federal Regional Court and judgment is pending an appeal by TAM requesting clarification of the initial decision.TAM. The estimated value of the action on December 31, 2019 is R$245US$197.3 million based on a calculation made by an expert witness of the court.(R$795million). 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 of Justice in favor of airlines in similar cases (specifically, actions filed by Transbrasil and Varig), we believe that TAM’s likelihood of success is probable.probable once the second judicial level court issued decision denying the claim. The Company filed a motion for clarification on the basis of omitted points in the judgment, which is pending in the Court. We have not recognized these credits in our financial statements and will only do so if and when the aforementioned decision is final.rendered final by the Court.
TAM Linhas Aereas filed an ordinary claim, with a request for early judgment, in relation to a dispute concerningdiscuss the legality of charging the Adicional das Tarifas Aeroportuárias (“Additional Airport Tariffs,” or “ATAERO”), which are charged at a rate of 50% on the value of tariffs and airport tariffs. A decision by the superior court is pending. The total amount involved, adjusted for inflation, as of December 31, 2012 totaled R$1,696 million.potential recovery is indeterminate at this time.
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 a leased aircraft. The total amount involved in this administrative proceeding is 2.794 million. Since February 2016 theUS$2.33 million as of December 31, 2017. The administrative proceeding awaits a decision. In the opinion of our legal advisors, the chance of losing in this proceeding is possible.
A tax assessment was issued by the Brazilian IRS for the collection of Income Tax ("IRPJ") and Social Contribution on Net Income ("CSLL"), and a fine of 150% and interest was imposed on TAM. In summary, the Brazilian IRS intends to levy IRPJ and CSLL on the alleged capital gain earned by TAM S/A, as a result of the reduction of the capital stock of the controlled company Multiplus S/A. On December 31, 2019 the updated amount of the assessment and fees discussed was approximately US$132.2 million (R$ 533 million). The Administrative Court issued a second level decision canceling the tax assessment. This decision can still be challenged by the Brazilian IRS before the third level – Administrative Superior Court
A tax assessment was issued by the São Paulo Municipality in order to charge tax (ISS) on tour packages sold by Fidelidade Viagens e Turismo S/A between 2010 and 2015. On December 31, 2019 the updated amount of the assessment discussed was approximately US$95 million (R$ 383 million). The Company believes that a favorable outcome is probable. A first level decision was issued favorable to the company, but remains subject to appeal by the counterparty.
A tax assessment of PIS/COFINS credits was issued by the Brazilian IRS on International Air Freight Shipping Services in the amount of US$65.76 million (R$244.65 million) as of December 31, 2019. The Administrative Court issued decisions canceling the total penalty and the major part of the amounts owed. The remaining amount is still under determination by the Brazilian IRS.
Federal Revenue Service issued a tax assessment notice against TLA in the amount of US$121 million (R$485 million) as of December 31, 2019, due to alleged irregularities of the Company related to the social security contribution on the risks of work accident (GILRAT - former "SAT"), in the term from November 2013 until December 2017. TLA has presented their defense to the Administrative Court, but on February 7, 2019 the court denied the defense and kept the tax assessment. The proceedings are now pending the judgment on the appeal filed before second level Court (CARF). In the opinion of our legal advisors, losing in this proceeding is probable. It is important to highlight that the Company recently won a similar case where the Brazilian IRS was seeking the same contribution related the years 2011-2012. This assessment was canceled by the Administrative Court.
On December 12, 2019 Brazilian IRS issued a Tax Assessment of PIS COFINS credits related to 2014 on the amount of US$ 42 million (R$170million). The company will file defense in the same ground of the case reported above.
It is important to highlight that TAM Linhas Aereas has other relevant legal cases involving tax issues.
In addition, there are a few claims made to, and/or legal proceedings filed against the Company, though those are not expected to have a material impact on the Group’s financial situation or profitability. While it is not feasible to predict the outcome of the pending claims, proceedings, and investigations described with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company’s financial position, cash flows, or results of operations.
For additional Legal Proceedings relating to the ordinary course of our business, please see Note 3031 – Contingencies – to our audited consolidated financial statements.
Dividend Policy
In accordance with the Chilean Corporation Law, LATAM must distribute cash dividends equal to at least 30% of its annual consolidated net income calculated in accordance with IFRS subject to the terms ofOficio Circular No. 856 issued on October 17, 2014 by the Chilean Superintendency of Securities and Insurance.Financial Market Commission. If there is no net income in a given year, LATAM 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 LATAM’sby-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 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— E. 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 SSE.Santiago Stock Exchange (“SSE”). The common shares have been listed on the SSE under the symbol “LAN” since 1989, and the ADSs have beenwere listed on the NYSE under the symbol “LFL” sinceon November 7, 1997. On May 15, 2017, LATAM changed the symbol of its ADSs listed on the NYSE from “LFL” to “LTM”, as well as its shares listed on the SSE from “LAN” to “LTM”. The common shares also trade on the Bolsa de Valores de Valparaíso and the Bolsa Electrónica de Chile. The outstanding ADSs are identified by the CUSIP number 501723100. The following table sets forth, for the periods indicated, the high and low closing sale prices on the SSE 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 | Ch$ per Common Share | US$ per ADS | R$ per BDR | |||||||||||||||||||||
Low | High | Low | High | Low | High | |||||||||||||||||||
2012(1) | 10,481.4 | 14,230.5 | 21.89 | 29.11 | 44.86 | 52.79 | ||||||||||||||||||
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2013 | 5,967.3 | 11,755.4 | 11.62 | 24.84 | 26.53 | 49.00 | ||||||||||||||||||
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2014 | 6,533.3 | 8,791.6 | 10.60 | 16.36 | 25.00 | 38.00 | ||||||||||||||||||
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2015 | ||||||||||||||||||||||||
Quarters: | ||||||||||||||||||||||||
First | 5,123.7 | 7,198.3 | 8.06 | 11.82 | 26.35 | 29.50 | ||||||||||||||||||
Second | 4,521.3 | 6,163.4 | 6.88 | 10.02 | 21.41 | 29.05 | ||||||||||||||||||
Third | 3,320.8 | 4,596.5 | 4.64 | 7.11 | 17.50 | 21.69 | ||||||||||||||||||
Fourth | 3,270.2 | 4,150.5 | 4.70 | 6.07 | 18.06 | 24.00 | ||||||||||||||||||
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Annual: | ||||||||||||||||||||||||
Annual 2015 | 3,270.2 | 7,198.3 | 4.64 | 11.82 | 17.50 | 29.50 | ||||||||||||||||||
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2016 | ||||||||||||||||||||||||
Quarters: | ||||||||||||||||||||||||
First | 3,276.4 | 4,730.5 | 4.49 | 7.00 | 19.80 | 23.00 | ||||||||||||||||||
Second | 4,163.5 | 4,893.4 | 5.86 | 7.40 | 20.00 | (2) | 22.68 | |||||||||||||||||
Third | 4,350.6 | 5,855.8 | 6.53 | 8.96 | — | — | ||||||||||||||||||
Fourth | 5,341.6 | 6,460.4 | 8.18 | 9.86 | — | — | ||||||||||||||||||
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Months: | ||||||||||||||||||||||||
September | 5,243.1 | 5,499.6 | 7.66 | 8.38 | — | — | ||||||||||||||||||
October | 5,341.6 | 6,460.4 | 8.22 | 9.86 | — | — | ||||||||||||||||||
November | 5,827.4 | 6,393.9 | 8.59 | 9.80 | — | — | ||||||||||||||||||
December | 5,549.8 | 6,091.8 | 8.18 | 9.40 | — | — | ||||||||||||||||||
Annual: | ||||||||||||||||||||||||
Annual 2016 | 3,276.4 | 6,460.4 | 4.49 | 9.86 | 19.80 | 23.00 |
Period 2017 Months: January February Ch$ per Common Share US$ per ADS R$ per
BDR Low High Low High Low High 5,574,1 6,166.0 8.18 9.45 — — 5,931.8 6,663.2 9.19 10.45 — —
Source: Santiago Stock Exchange, the New York Stock Exchange and the Bovespa
As of December 31, 2016,2019, a total of 606,407,693 million common shares were outstanding, including common shares represented by ADSs.
B. Plan of Distribution
Not applicable.
C. Markets
Trading
Chile
The Chilean stock market, which is regulated by the SVSCMF 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 andnon-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 from 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 SSEOff-Shore Market began operations. In theOff-Shore Market, publicly offered foreign securities are traded and quoted in U.S. dollars.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. | ADDITIONAL INFORMATION |
This Item reflects legal amendments effected by Chilean Law No. 20,382 on Corporate Governance, which was enacted on October 13, 2009, and came into effect on October 20, 2009, and Chilean Law No. 20,552, which modernized and encouraged competition in the financial system, was enacted on November 6, 2011 and came 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 ourby-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 ourby-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 ourby-laws, a copy of which is included as Exhibit 1.1 to this annual report on Form20-F.
Organization and Register
LATAM Airlines Group is a publicly held stock corporation (sociedad anónima abierta) incorporated under the laws of Chile. LATAM 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. 31.75931,759 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 de Santiago) for the year 1983. Our corporate purpose, as stated in ourby-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 companycorporation are generally governed by the company’sby-laws and the Chilean Corporation Law. Article 22 of the Chilean Corporation LawAct states that the purchaser of shares of a companycorporation implicitly accepts itsby-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 LawAct provides that the provisions of the Chilean Corporation LawAct take precedence over any contrary provision in a corporation’sby-laws. The Chilean Corporation Law and ourby-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 hasit is forbidden for 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 LawAct sets forth the rules and requirements under which a corporation is deemed to be “publicly held.” Article 2 of the Chilean Corporation LawAct defines publicly held corporations as corporations that register their shares with theRegistro de Valores (Securities Registry) of the SVS,CMF, 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; |
● | one in which 100 or more shareholders own at least 10% of the subscribed capital (excluding any direct or indirect individual holdings exceeding 10%); and |
● | one in which the shareholders agreed voluntarily to be registered. |
The framework of the Chilean securities market is regulated by the SVSCMF 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 General Rule 269 issued by the SVS in 2009, certain information regarding transactions in shares of publicly held corporations must be reported to the SVSCMF 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 LATAM Airlines Group, or that reach or exceed such percentage through an acquisition, are required to report to the SVSCMF 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 LATAM Airlines Group’s shares. |
These obligations are extended (i) to certain individuals (immediate family, next of kin and others) if the ADS holder is a natural person; (ii) to any entity controlled by the holder, if the ADS is a legal 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 SVSCMF 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 SVSCMF 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 LATAM 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 SVSCMF regulations provide that the following transactions shall be carried out through a tender offer:
● | an offer which allows the taking 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 acquiringtwo-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 60stock-exchange-business-day period between the 30th and the 90th |
● | an offer for a controlling percentage of the shares of a publicly traded company if the acquirer 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 12 months from the date of the transaction that granted it control of the publicly traded company, a number of shares equal to or higher than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on the floor of a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
Title XV of the Securities Market Law sets forth the basis for determining what constitutes a controlling power, a direct holding and a related party.
Capitalization
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 theby-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’sby-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.subscription and payment. As of January 1, 2010, the board of directors of LATAM 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 LATAM Airlines Group.
As of February, 28, 2017, our shareDecember 31, 2019, the Company's statutory capital consisted of 608,374,525 commonis represented by 606,407,693 ordinary shares of which 606,407,693without nominal value. All shares are subscribed and fully paid shares and 1,966,832 shares are pendingconsidering the capital reduction that occurred in full, after the legal period of subscription and payment. The unsubscribedthree years to subscribe the balance of 466,832 outstanding shares, include (i) 1,500,000 shares allocated to stock option compensation plans and (ii) 466,832 that remain unsubscribed following our most recent capital increase. The current share capital amount reflects the expiration of stock options, covering 4,789,718 shares that had been granted under employee compensation plans. Upon the expiration of the stock options on December 21, 2016,last capital increase approved in August of the Company’s capital stock was reduced to 608,374,525 shares.
year 2016. Chilean law recognizes the right of corporations to issue shares of common and preferred shares.stock. To date, we have issued and are authorized by our shareholders to issue only shares of common shares.stock. Each share of common stock is entitled to one vote. Pursuant to one employee compensation plan 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 subscribed shares arising from the capital increase which may be designated to employee compensation pursuant to article 24 of the Corporation Law.Act. 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 a30-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 LATAM 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 such30-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 that30-day
period and an additional30-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 additional30-day period, Chilean publicly held corporations are authorized to sellnon-subscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange.
Directors
Ourby-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 ourby-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 anarm’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 .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’sby-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 18 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 anarm’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 are disclosed at the next shareholders’ meeting, and (vi) in case the majority of the board is disqualified to vote, the majority of thenon-involved directors have approved the transaction, or two thirds of the voting shares have approved the transaction).
If, as noted in clause (vi) of the preceding paragraph, the transaction is to be approved by the shareholders’ 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 thenon-involved directors may appoint a second independent appraiser, (iii) the appraiser’s reports shall be made available for 15 days, (iv) the receipt and availability of the reports shall be disclosed as a material fact and (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 is deemed that 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$96,55479,352 as of the date of this annual report on Form20-F) unless such a transaction exceeds 20,000 UF (for this calculation all similar transactions carried out within a consecutive12-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 Boardboard of Directorsdirectors of LATAM 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 LATAM 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). LATAM Airlines Group’sby-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 August 18, 2016,April 27, 2017, and the most recent ordinary annual meeting of our shareholders was held on April 26, 2016.2018.
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.CMF. In addition, as from January 1, 2010 there are two new rules in this regard: (i) the SVSCMF may directly call for an extraordinary shareholders’ meeting in case of a publicly-traded company, 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 15 days and not more than 20 days in advance of the scheduled meeting. Notice also must be mailed not less than 15 days in advance of the meeting to each shareholder and to the SVSCMF 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 45 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.
Theby-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 atwo-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 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; |
● | 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; |
● | 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 13 items listed above; |
● | the institution of the right of the controlling shareholder who has purchased 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; and |
● | the approval or ratification of transactions with related parties, as per article 147 of the Corporation Law (described above). |
Amendments to theby-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 oftwo-thirds of the shares of the affected series. As noted above, LATAM 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 the15-day period before a scheduled meeting. No later than 15 business days of the first notice summoning an ordinaryscheduled shareholder’s meeting, the board of directors of a publicly held corporation is 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, and publish such notice on its website. The board is also required to make available to the shareholders the annual report and the financial statements of the company, and to publish such information in the company’s webpage at least 10 days in advance of the scheduled shareholders meeting. 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, LATAM 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, LATAM 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 LATAM 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, LATAM Airlines Group may grant an option to its shareholders to receive those dividends in cash, or in shares issued by either LATAM 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 is 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, 30 days after declaration; as to additional dividends, the date set for payment at the time of declaration) are adjusted to reflect the change in the value of the UF. The UF is a daily indexed, Chilean peso-denominated accounting unit designed to discount the effect of Chilean inflation and it is based on the previous month’s inflation rate as officially determined. Such dividends also accrue interest at the then-prevailing rate forUF-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 anon-profit organization, theCuerpos de Bomberos de Chile(the National Corporation of Firefighters).
In the event of 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 60 days from the date of that meeting. If the shareholders reject the new financial statements, the entire board of directors is deemed removed from office and a new board is to be elected at the same meeting. Directors who approved such financial statements are disqualified forre-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 any of the situations enumerated below takes place, 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 a debtor in a bankruptcy liquidation proceeding, or if we are subject to a reorganization agreement approved in accordance with Chilean law No. 20,720, unless such agreement allows the right to withdraw, or unless it is terminated by the issuance of a liquidation resolution.Suchresolution. 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 30 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 to be 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 during the 60stock-exchange-business-day period elapsed between the 30th and the 90th stock-exchange-business-days-preceding the eventshareholder meeting giving rise to the withdrawal right. If, because of the volume, frequency, number and diversity of the buyers and sellers, the SVSCMF determines that the shares are not shares actively traded on a stock exchange (acciones de transacción bursátil), the price to be paid to the dissenting shareholder is the book value.value of the shares. 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; |
● | 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, if the subsidiary represents at least 20% of our assets; |
● | 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 publicly held corporation in 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 CMF, 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 acquirestwo-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 30 days after acquisition.
Under article 69 bis of the Chilean Corporation Law,Act, 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 30 days of the date of the publication of the new rating by two independent rating agencies. If the withdrawal right is exercised by a shareholder invoking Article 69 bis, the price paid to the dissenting shareholder shall be the weighted average of the sales price for the shares as reported on the stock exchanges on which the company’s shares are quoted for thesix-month period preceding the publication of the new rating by two independent rating agencies. If, as previously described, the SVSCMF 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 maybuy-out the existing ownership participations pursuant to the provisions of article 71 bis of the Corporation Law)Act).
Registration and Transfers
TheDepósito Central de Valores (“DCV”), a local depository corporation, acts as LATAM Airlines Group’s registration agent. In the case of jointly owned common shares, anattorney-in-fact must be appointed to represent the joint owners in dealings with us.
C. Material Contracts
Table of Material Contracts for the Purchase of Aircrafts
Agreement | Date | Aircraft (number purchased) | Estimated Gross Value of Aircraft at List Price |
Boeing 767-300 Fleet | |||
Purchase Agreement No. 2126 with the Boeing Company | January 30, 1998 | ⮚ Boeing 767-300 passenger aircrafts (2) | US$200,000,000 |
Supplemental Agreement No. 16 to Purchase Agreement No. 2126 | November 11, 2004 | ⮚ Boeing 767-300 passenger aircrafts (3) ⮚ Boeing 767-300 freighter aircraft (1) | US$140,000,000 |
Supplemental Agreement No. 20 to Purchase Agreement No. 2126 | April 28, 2005 | ⮚ Boeing 767-300 passenger aircraft (1) ⮚ Boeing 767-300 freighter aircrafts (2) | US$300,000,000 |
Supplemental Agreement No. 21 to Purchase Agreement No. 2126 | July 20, 2005 | ⮚ Boeing 767-300 passenger aircrafts (3) | US$410,000,000 |
Supplemental Agreement No. 22 to Purchase Agreement No. 2126 | March 31, 2006 | ⮚ Boeing 767-300 (3) ⮚ Converted two (2) Boeing 767-300 freighter aircrafts to two (2) Boeing 767-300 passenger aircrafts | US$430,000,000 |
Supplemental Agreement No. 23 to Purchase Agreement No. 2126 | December 14, 2006 | ⮚ Boeing 767-300 passenger aircrafts (3) | US$460,000,000 |
Supplemental Agreement No. 24 to Purchase Agreement No. 2126 | November 10, 2008 | ⮚ Boeing 767-300 passenger aircrafts (4) ⮚ Two (2) aircrafts delivered in 2011, and two (2) aircrafts delivered in 2012 ⮚ Two purchase rights for Boeing 767-300 aircraft | US$636,000,000 |
Supplemental Agreement No. 28 to the Purchase Agreement No. 2126 | March 22, 2010 | ⮚ Accelerate the delivery of ten 787-8 aircraft, substitute four aircraft from 787-9 to 787-8 and substitute three 767-316ER to 767-316F freighter aircraft |
Supplemental Agreement No. 29 to the Purchase Agreement No. 2126 | November 10, 2010 | ⮚ Accelerate the delivery of three Aircraft and substitute those three aircraft from 767-316F to 767-316ER. | |
Supplemental Agreement No. 30 to Purchase Agreement No. 2126 | February 15, 2011 | ⮚ Boeing 767-300 passenger aircrafts (3) ⮚ Delivery was scheduled to take place in 2012 | US$510,000,000 |
Supplemental Agreement No. 31 to Purchase Agreement No. 2126 | May 10, 2011 | ⮚ Boeing 767-300 passenger aircrafts (5) ⮚ Four purchase rights for Boeing 767-300 passenger aircraft ⮚ Delivery was scheduled to take place in 2012 | US$780,000,000 |
Supplemental Agreement No. 32 to Purchase Agreement No. 2126 | December 22, 2011 | ⮚ Exercise two purchase options for Boeing 767-300 aircrafts (2) ⮚ Delivery was scheduled to take place in 2012 ⮚ Remaining purchase options deleted | US$340,000,000 |
Boeing 787-8/9 Fleet | |||
Purchase Agreement No. 3256 with the Boeing Company | October 29, 2007 | ⮚ Boeing 787-8 aircrafts (18) ⮚ Boeing 787-9 aircrafts (8) ⮚ Option of purchasing fifteen additional aircraft to be delivered in 2017 and 2018 | US$3,200,000,000 |
Supplemental Agreement No. 1 to the Purchase Agreement No. 3256 | March 22, 2010 | ⮚ Advance scheduled delivery date of ten Boeing 787-8 aircraft and substitute four Boeing 787-9 aircraft into four Boeing 787-8 aircraft. | |
Supplemental Agreement No. 3 to the Purchase Agreement No. 3256 | August 24, 2012 | ⮚ Replace two Boeing 787-8 aircraft with two Boeing 787-8 aircraft with a later delivery. | |
Delay Settlement Agreement to the Purchase Agreement No. 3256 | September 16, 2013 | ⮚ Agreed to update delivery dates, settle consequences of delays and convert several future deliveries of B787-8 aircraft to B787-9 aircraft. This agreement was amended on April 22, 2015 to update delivery dates of certain aircraft. | |
Supplemental Agreement No. 4 to the Purchase Agreement No. 3256 | April 22, 2015 | ⮚ Reschedule the delivery dates of four Boeing 787-8 aircraft and replace four Boeing 787-8 aircraft with four Boeing 787-9 aircraft. | |
Supplemental Agreement No. 6 to the Purchase Agreement No. 3256 | May 27, 2016 | ⮚ Convert four Model 787-8 Aircraft to four Model 787-9 Aircraft, and Defer of two Model 787-9 Aircraft from 1Q 2018 and 2Q 2018 to 3Q 2018 and 4Q 2018 respectively. |
Supplemental Agreement No. 13 to the Purchase Agreement No. 3256 | July 3, 2019 | To include certain letter agreements | |
Supplemental Agreement No. 14 to the Purchase Agreement No. 3256 | October 11, 2019 | Reschedule the delivery dates of four Boeing 787-8 aircraft | |
Supplemental Agreement No. 15 to the Purchase Agreement No. 3256 | October 11, 2019 | To incorporate Exhibit A1 | |
Supplemental Agreement No. 16 to the Purchase Agreement No. 3256 | October 11, 2019 | Deferral of PDPs. | |
Boeing 777 Freighter Fleet | |||
Purchase Agreement No. 3194 with the Boeing Company | July 3, 2007 | ⮚ Boeing 777 freighter aircrafts (2) ⮚ Delivery was scheduled to take place in 2011 and 2012 | US$545,000,000 |
Letter Agreement 6-1162-KSW-6454R2 to the Purchase Agreement No. 3194 | March 22, 2010 | ⮚ Transfer two purchase rights from Purchase Agreement No. 2126 to Purchase Agreement No. 3194. | |
Supplemental Agreement No. 2 to Purchase Agreement No. 3194 | November 2, 2010 | ⮚ Exercise purchase option for Boeing 777 freighter aircraft (1) | US$280,000,000 |
Supplemental Agreement No. 4 to the Purchase Agreement No. 3194 | August 9, 2012 | ⮚ Reflect the configuration of the aircraft covered under such Purchase Agreement. | |
Airbus A320-Family Fleet | |||
Second A320-Family Purchase Agreement with Airbus S.A.S. | March 20, 1998 | ⮚ Airbus A320-Family aircrafts (5) | US$230,000,000 |
Amendment No. 1 to the Second A320-Family Purchase Agreement | November 14, 2003 | ⮚ Exercise three purchase rights for Airbus 319 aircraft, among other things. | |
Amendment No. 2 to the Second A320-Family Purchase Agreement | October 4, 2005 | ⮚ Acquire 25 additional Airbus 320 family aircraft and 15 purchase rights for Airbus A320-Family aircraft. | |
Amendment No. 3 to the Second A320-Family Purchase Agreement | March 6, 2007 | ⮚ Exercise 15 purchase rights for 15 Airbus A320-Family Aircraft. ⮚ 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. | |
Amendment No. 5 to the Second A320-Family Purchase Agreement | December 23, 2009 | ⮚ Airbus A320-Family aircrafts (30) | US$2,000,000,000 |
Amendment No. 6 to the Second A320-Family Purchase Agreement | May 10, 2010 | ⮚ Convert the aircraft type of three aircraft and advance the scheduled delivery date of 13 aircraft. | |
Amendment No. 8 to the Second A320-Family Purchase Agreement | September 23, 2010 | ⮚ Convert the aircraft type of one aircraft and advance the scheduled delivery date of four aircraft. | |
Amendment No. 9 to the Second A320-Family Purchase Agreement | December 21, 2010 | ⮚ Airbus A320-Family aircrafts (50) | US$2,600,000,000 |
Amendment No. 10 to the Second A320-Family Purchase Agreement | June 10, 2011 | ⮚ Convert the aircraft type of three aircraft, to select sharklets for some aircraft and to notify delivery dates for some aircraft. | |
Amendment No. 11 to the Second A320-Family Purchase Agreement | November 3, 2011 | ⮚ Convert the aircraft type of three aircraft and defer the scheduled delivery date of four aircraft. | |
Amendment No. 12 to the Second A320-Family Purchase Agreement | November 19, 2012 | ⮚ 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. | |
Amendment No. 13 to the Second A320-Family Purchase Agreement | August 19, 2013 | ⮚ Convert several A320 aircraft to A321 aircraft and to postpone the scheduled delivery dates of several aircraft. | |
Amendment No. 16 to the Second A320-Family Purchase Agreement | July 15, 2014 | ⮚ Covering cancellation and substitution of certain Aircraft. | |
Novation Agreement to the Second A320-Family Purchase Agreement | October 30, 2014 | ⮚ Novation of the original TAM A320/A330 Family Purchase Agreement from TAM to LATAM. | |
Amendment No. 17 to the Second A320-Family Purchase Agreement | December 11, 2014 | ⮚ Covering the substitution of certain Aircraft. | |
Airbus A320 NEO-Family Fleet | |||
A320 NEO Purchase Agreement | June 22, 2011 | ⮚ Airbus 320 NEO Family aircraft (20) ⮚ Delivery scheduled to take place in 2017 and 2018 | US$1,700,000,000 |
Amendment No. 1 to the A320 NEO Purchase Agreement | February 27, 2014 | ⮚ Covering the advancement of the date by which LATAM selects the propulsion systems. | |
Amendment No. 2 to the A320 NEO Purchase Agreement | July 15, 2014 | ⮚ Covering the order of incremental A320 NEO Aircraft. |
Amendment No. 3 to the A320 NEO Purchase Agreement | December 11, 2014 | ⮚ Covering the order of incremental A320 NEO Aircraft and A321 NEO Aircraft. | |
Amendment No. 4 to the A320 NEO Purchase Agreement | April 15, 2016 | ⮚ Covering the reschedule of the delivery of eight Original NEO Aircraft and the conversion of four Original NEO Aircraft into A321 NEO Aircraft | |
Amendment No. 5 to the A320 NEO Purchase Agreement | April 15, 2016 | ⮚ Changes in the technical specifications of the aircraft to be received under this agreement. | |
Amendment No. 6 to the A320 NEO Purchase Agreement | August 8, 2016 | ⮚ Covering the cancellation of the delivery of four A320 NEO Aircraft. | |
TAM Material Contracts – A320/A330 Family Purchase Agreement | |||
Purchase Agreement with Airbus S.A.S. | November 2006 | ⮚ Airbus A320-Family aircrafts (31) ⮚ Airbus A330-200 aircrafts (6) ⮚ Delivery was scheduled to take place between 2007 and 2010 | US$3,300,000,000 |
New Purchase Agreement with Airbus S.A.S. | January 2008 | ⮚ Airbus A320-Family aircrafts (20) ⮚ Airbus A330-200 aircrafts (4) ⮚ Delivery was scheduled to take place between 2007 and 2014 | US$2,140,000,000 |
New Purchase Agreement with Airbus S.A.S. | July 2010 | ⮚ Airbus A320-Family aircrafts (20) ⮚ Delivery was scheduled to take place between 2014 and 2015 | US$1,450,000,000 |
New Purchase Agreement with Airbus S.A.S. | October 2011 | ⮚ Airbus A320-Family aircrafts (10) ⮚ Airbus A320 NEO Family aircrafts (22) ⮚ Delivery scheduled to take place between 2016 and 2018 ⮚ Ten option rights for Airbus A320 NEO Family aircraft | US$1,730,000,000 |
Amendment No. 13 to the A320/A330 Purchase Agreement | November 2012 | ⮚ Convert the aircraft type of A320 family aircraft. | |
Amendment No. 14 to the A320/A330 Purchase Agreement | December 2012 | ⮚ Convert the aircraft type of an A320 family aircraft and reschedule the delivery date of such aircraft. | |
Amendment No. 15 to the A320/A330 Purchase Agreement | February 2013 | ⮚ Changes to the scheduled delivery month of certain A320 Family Aircraft. | |
Amendment No. 16 to the A320/A330 Purchase Agreement | February 2013 | ⮚ Change to the aircraft type of certain A320 Family Aircraft, to the scheduled delivery month/quarter of certain A320 Family Aircraft and make certain changes to the dates by which TAM will select the propulsion systems and NEO propulsion systems for certain Aircraft. | |
Amendment No. 17 to the A320/A330 Purchase Agreement | August 2013 | ⮚ 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. | |
Amendment No. 20 to the A320/A330 Purchase Agreement | June 2015 | ⮚ Change to the schedule delivery month of one A321 Aircraft. | |
Amendment No. 21 to the A320/A330 Purchase Agreement | December 2015 | ⮚ Change to the schedule delivery month of two A320 NEO Aircraft. | |
Amendment No. 23 to the A320/A330 Purchase Agreement | April 15, 2016 | ⮚ Reflect the changes in the technical specifications of the aircraft to be received under this agreement. | |
Amendment No. 24 to the A320/A330 Purchase Agreement | August 8, 2016 | ⮚ Cancel the delivery of eight A320 NEO Aircraft. | |
Amendment No. 26 to the A320/A330 Purchase Agreement | December 21, 2018 | ⮚ Reschedule of the delivery of five A320 NEO Aircraft and eleven A321 NEO Aircraft. ⮚ Cancel the delivery of one A321 Aircraft. |
TAM Material Contracts – A350 Family Purchase Agreement | |||
Purchase Agreement with Airbus S.A.S. | January 2008 | ⮚ Airbus A350 aircrafts (22) ⮚ Ten option rights for Airbus A350 aircraft | US$6,480,000,000 |
Amendment No. 1 to the A350 Purchase Agreement | July 2010 | ⮚ Exercise its option of five A350 XWB options. | |
Amendment No. 2 to the A350 Purchase Agreement | July 2014 | ⮚ Reschedule the delivery of certain A350-900XWB and to amend certain provisions to reflect the latest aircraft specification. | |
Novation Agreement to the A350 Purchase Agreement | July 2014 | ⮚ Novating the A350 purchase agreement from TAM to LATAM. | |
Amendment No. 4 to the A350 Purchase Agreement | September 2015 | ⮚ Modify certain terms and conditions of such agreement and to convert a number of A350-900 XWB Aircraft into A350-1000 XWB Aircraft. | |
Amendment No. 5 to the A350 Purchase Agreement | November 2015 | ⮚ Convert a number of A350-900 XWB aircraft into six A350-1000 XWB aircraft and to reschedule the delivery of certain A350-900 XWB. | |
Amendment No. 7 to the A350 Purchase Agreement | August 8, 2016 | ⮚ Change aircraft type, from two A350-900 XWB Aircraft to two A350 - 1000 XWB Aircraft. | |
Amendment No. 9 to the A350 Purchase Agreement | September 22, 2017 | ⮚ Convert two A350-1000 XWB Aircraft into A350-900 XWB Aircraft | |
Amendment No. 10 to the A350 Purchase Agreement | December 21, 2018 | ⮚ Convert four A350-1000 XWB Aircraft into A350-900 XWB Aircraft. ⮚ Reschedule of six A350-900 XWB Aircraft and eight A350-1000 XWB. | |
Amendment No. 11 to the A350 Purchase Agreement | April 29, 2019 | ⮚ Reschedule of two A350-900 XWB Aircraft | |
Amendment No. 12 to the A350 Purchase Agreement | August 5, 2019 | ⮚ Reschedule of one A350-900 XWB Aircraft | |
TAM Material Contracts – Boeing 777 Purchase Agreement | |||
Purchase Agreement with Boeing | February 2007 | ⮚ Boeing 777-32WER aircrafts (4) | US$1,070,000 |
Supplemental Agreement No. 1 to the Purchase Agreement | August 2007 | ⮚ Exercise four option aircraft and to define certain aircraft configuration. | |
Supplemental Agreement No. 2 to the Purchase Agreement | March 2008 | ⮚ Document its agreement on the descriptions and pricing of some options and master changes related to certain aircraft. | |
Supplemental Agreement No. 3 to the Purchase Agreement | December 2008 | ⮚ Purchase of two incremental 777 aircraft. | |
Supplemental Agreement No. 5 to the Purchase Agreement | July 2010 | ⮚ Reschedule the delivery of certain aircraft. | |
Supplemental Agreement No. 6 to the Purchase Agreement | February 2011 | ⮚ Purchase of two incremental 777 aircraft. | |
Supplemental Agreement No. 7 to the Purchase Agreement | May 2014 | ⮚ Substitute two 777-300ER aircraft originally scheduled for delivery in 2014 for two 777-F aircraft for scheduled delivery in 2017. | |
Supplemental Agreement No. 8 to the Purchase Agreement | April 2015 | ⮚ Reschedule the delivery of certain aircraft. | |
Supplemental Agreement No. 11 to the Purchase Agreement | October 11, 2019 | ⮚ Option to cancel two Aircraft |
102
Other Material Contracts
Boeing
Boeing767-300 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.
Boeing Aircraft Holding Company
On January 30, 1998,May 8, 2018, we also entered into Purchasean Aircraft Lease Common Terms Agreement No. 2126 with The Boeing Aircraft Holding Company (“Purchase Agreement No. 2126”) to acquirefor the lease of two Boeing767-300 passenger aircraft.
On November 11, 2004, we entered into supplemental agreement No. 16 to the Purchase Agreement No. 2126 to acquire one additional Boeing767-300 freighter aircraft and three Boeing767-300 passengerB777-200ER 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 Boeing767-300 freighter aircraft and one Boeing767-300 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 Boeing767-300 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 Boeing767-300 aircraft. Furthermore, we converted two Boeing767-300 freighter aircraft to two Boeing767-300 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 Boeing767-300 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 Boeing767-300 passenger aircraft and two purchase rights for Boeing767-300 aircraft. Two of these aircraft were delivered in 2011, while the other two aircraft had 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 ten787-8 aircraft, substitute four aircraft from787-916 to787-816 and substitute three767-316ER to767-316F 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 from767-316F to767-316ER.
On February 15, 2011, we entered into supplemental agreement No. 30 to the Purchase Agreement No. 2126 to acquire three additional Boeing767-300 passenger aircraft. Delivery was 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. 31 to the Purchase Agreement No. 2126 to acquire five additional Boeing767-300 passenger aircraft and four purchase rights for Boeing767-300 passenger aircraft. Delivery was 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. 32 to the Purchase Agreement No. 2126 to exercise two purchase options for two additional Boeing767-300 passenger aircraft, while the remaining purchase options were deleted. Delivery was scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$340 million.
Boeing787-8/9 Fleet
On October 29, 2007, we entered into Purchase Agreement No. 3256 with the Boeing Company (“Purchase Agreement No. 3256”) to acquire 18 Boeing787-8 aircraft and eight Boeing787-9 aircraft to be delivered between 2012 and 2016. This purchase agreement provides us with the option of purchasing 15 additional aircraft to be delivered in 2017 and 2018. The estimated gross value (at list prices)average term of the Boeing aircraft for which we had firm commitments to take delivery under this contractlease 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 scheduled delivery date of ten Boeing787-8 aircraft and substitute four Boeing787-9 aircraft into four Boeing787-8 aircraft.
On July 8, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3256 to advance the scheduled delivery date of two Boeing787-8 aircraft.
On August 24, 2012, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3256 to replace two Boeing787-8 aircraft with two Boeing787-8 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 ofB787-8 aircraft toB787-9 aircraft. This delay settlement agreement was amended on April 22, 2015 to update delivery dates of certain aircraft.
On April 22, 2015, we entered into Supplemental Agreement No. 4 to Purchase Agreement No. 3256 to reschedule the delivery dates of four Boeing787-8 aircraft and replace four Boeing787-8 aircraft with four Boeing787-9 aircraft.
On July 3, 2015, we entered into Supplemental Agreement No. 5 to Purchase Agreement No. 3256 to reschedule the delivery date of one Boeing787-8 aircraft.
On May 27, 2016, we entered into Supplemental Agreement No. 6 to Purchase Agreement No. 3256 to (i) convert four Model787-816 Aircraft to four Model787-916 Aircraft, and (ii) defer of two Model787-916 Aircraft from 1Q 2018 and 2Q 2018 to 3Q 2018 and 4Q 2018 respectively.
On December 20, 2016, we entered into Supplemental Agreement No. 7 to Purchase Agreement No. 3256 to reschedule the delivery of four Model787-916 Aircraft and document the actual delivery months for two Model787-916 Aircraft in 2019.12 months.
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 agreement6-1162-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 scheduled 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 scheduled 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-Family Purchase Agreement with Airbus S.A.S. (“Second A320-Family Purchase Agreement”) to acquire five Airbus A320-Family Aircraft.
On November 14, 2003, we entered into amendment No. 1 to the Second A320-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-Family Purchase Agreement to acquire 25 additional Airbus 320 family aircraft and 15 purchase rights for Airbus A320-Family aircraft.
On March 6, 2007, we entered into amendment No. 3 to the Second A320-Family Purchase Agreement to exercise 15 purchase rights for 15 Airbus A320-Family Aircraft.
On December 23, 2009, we entered into amendment No. 5 to the Second A320-Family Purchase Agreement to acquire 30 additional Airbus A320-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-Family Purchase Agreement to convert the aircraft type of three aircraft and advance the scheduled delivery date of 13 aircraft.
On May 19, 2010, we entered into amendment No. 7 to the Second A320-Family Purchase Agreement to advance the scheduled delivery date of three aircraft.
On September 23, 2010, we entered into amendment No. 8 to the Second A320-Family Purchase Agreement to convert the aircraft type of one aircraft and advance the scheduled delivery date of four aircraft.
On December 21, 2010, we entered into amendment No. 9 to the Second A320-Family Purchase Agreement to acquire 50 additional Airbus A320-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-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-Family Purchase Agreement to convert the aircraft type of three aircraft and defer the scheduled 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 postpone 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 covering cancellation and 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 for approximately US$107 million.
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 for approximately US$102 million.
Airbus A320NEO-Family Fleet
On June 22, 2011, we entered into A320 NEO Purchase Agreement (“A320 NEO Purchase Agreement”) to acquire 20 Airbus 320 NEO family aircraft with scheduled delivery dates in 2017 and 2018. The estimated gross value (at list prices) of these aircraft is US$1.7 billion.
On February 27, 2014, we entered into amendment No. 1 to the A320 NEO Purchase Agreement covering the advancement of the date by which 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 to the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft and A321 NEO Aircraft.
On April 15, 2016, we entered into amendment No. 4 to the A320 NEO Purchase Agreement covering the reschedule of the delivery of eight Original NEO Aircraft and the conversion of four Original NEO Aircraft into A321 NEO Aircraft.
On April 15, 2016, we entered into amendment No. 5 to the A320 NEO Purchase Agreement to reflect the changes in the technical specifications of the aircraft to be received under this agreement.
On August 8, 2016, we entered into amendment No. 6 to the A320 NEO Purchase Agreement covering the cancellation of the delivery of four A320 NEO Aircraft.
Aercap Holdings N.V.
On May 28, 2013, we entered into a framework deed with Aercap Holdings N.V. for the sale and leaseback of several used A330-200 aircraft, already in fleetwhich were returned to the lessor, and several new aircraft to be received from the manufacturer includingA350-900,B787-8 andB787-9 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 the lease of four B777-300ER already in fleet. The four aircraft were manufactured in 2012 and the estimated market value (at list prices) of these aircraft is US$580 million. The average term of the original leases iswere 60 months, and the agreement was extended for another 84 months.
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.
GE Engine Services LLC
On June 12, 2014, we (and TAM Linhas Aereas S.A.) entered into engine services agreement with GE Engine Services, LLC and GE Celma Ltda. for the provision of maintenance services ofCF6-80C2B6F engines (which powers our B767 fleet) during 200 shop visits or 10 years, whichever occurs first.
On July 28, 2009, TAM Linhas Aereas S.A. entered into an engine services agreement with GE Engine Services, Inc. for the provision of maintenance services of GE90-115BL engines, which power 10 B777 passenger fleet and 4 spare engines, for a period of 12 years per engine.
Société AIR FRANCE
On February 22, 2010, we entered into an engine services agreement with Société AIR FRANCE for the provision of maintenance services for GE90-110BL engines, which power 2 B777 freighter fleet and 1 spare engine, for a period of eight years per engine.
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 ofCFM56-5B engines to power 70 A320 family aircraft and up to 14CFM56-5B spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with CFM for the provision by CFM of maintenance services for the above-mentioned installed and spare engines.
On December 31, 2014, we entered Letter Agreement No. 2 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM ofCFM56-5B engines to power 20 A320 family aircraft and one spare engine.
On March 15, 2006, TAM Linhas Aereas S.A. entered into an engine services agreement with GE Celma Ltda. for the provision of maintenance services forCFM56-5B engines, which power 47 A320 Fam passenger fleet and 6 spare engines, for a period of 15 years per engine.
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PW1100G-JM Engine Maintenance Agreement
In February 2014, we entered into an engine support and maintenance agreement with United Technologies InternationInternational Corporation, Pratt & Whitney Division (“PW”) for the sale, support and maintenance by PW ofPW1100G-JM engines to power 42 A320NEO family aircraft and nine spare engines. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for LATAM.
Rolls-Royce PLC & Rolls-Royce TotalCare Services Limited
On September 30, 2009, we entered into General Terms Agreement No. DEG5307 (the “GTA”) with Rolls-Royce PLC for the sale and support by Rolls-Royce of Trent 1000 engines to power 32 B787 family aircraft and up to 10 Trent 1000 spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with Rolls-Royce TotalCare Services Limited for the provision by Rolls-Royce of maintenance services for the above-mentioned installed and spare engines, for a period of 15 years per engine.
On January 11, 2011, TAM Linhas Aereas S.A. entered into General Terms Agreement No. DEG5292 (the “GTA”) with Rolls-Royce PLC for the sale and support by Rolls-Royce of Trent XWB engines to power 27 A350XWB family aircraft and up to 7 Trent XWB spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with Rolls-Royce TotalCare Services Limited for the provision by Rolls-Royce of maintenance services for the above-mentioned installed and spare engines, for a period of 12 years per engine. Subsequently, on July 31, 2015, the aforementioned agreements were novated,assigned, so that LATAM Airlines Group S.A. replaces TAM Linhas Aereas S.A. in both agreements.
International Aero Engines AG
On October 12, 2006, we entered into an engine services agreement with IAE International Aero Engines AG for the provision of maintenance services ofV2500-A5 engines, which power 53 A320 Fam passenger fleet and 9 spare engines, for a period of 12 years per engine.
On October 21, 2010, TAM Linhas Aereas S.A. entered into an engine services agreement with IAE International Aero Engines AG for the provision of maintenance services ofV2500-A5 engines, which power 26 A320 Fam passenger fleet and 7 spare engines, for a period of 12 years per engine.
CFM International
On June 29, 2016, we entered into a Rate Per Flight Hour Agreement for Engine Shop Maintenance Services with CFM International, Inc., covering the maintenance, repair and overhaul of certainCFM56-5B engines.
PAAL Gemini Company Limited – PAAL Aquila Company Limited
During 2016, we entered into operating lease agreements with PAAL Gemini Company Limited and PAAL Aquila Company Limited, for the sale and lease back of four Airbus A321 received in our fleet in 2016. The term of each of the leases is 10 years and the estimated market value (at list prices) of these aircraft is US$200 million.
Jackson Square
During 2016, we entered into operating lease agreements with JSA Aircraft 7126, LLC, JSA Aircraft 7128, LLC, JSA Aircraft 7239, LLC and JSA Aircraft 7298, LLC, for the sale and lease back of three Airbus A321 and one Airbus A320 Neo received in our fleet in 2016. The term of each of the leases is 10 years and the estimated market value (at list prices) of these aircraft is US$200 million.
SABRE Contract
In November 2009,Avolon Aerospace
On May 10, 2017, we entered into a master agreementFramework Agreement with Avolon Aerospace for the assignment of two A350-900 aircraft. The estimated market value of these aircraft is US$ 246,000,000.
On September 8, 2017, we entered into a Lease Agreement with Avolon Aerospace for the Sale and Leaseback of five A320 neo aircraft. The estimated market value of these aircraft is US$ 241,000,000. The average term of the leases is 144 months.
On January 16, 2018, we entered into a Lease Agreement with Avolon Aerospace of two A321-200 aircraft. The estimated market value of these aircraft is US$ 88,600,000. The average term of the lease is 124 months.
Aircastle
On January 11, 2019, we entered into lease agreements with Aircastle for the lease of 10 A320 aircraft. The lease agreements are for a duration of approximately seven to eight years.
Vermillion
On September 2019, we entered into lease agreements with Vermillion for the lease of 4 A320 aircraft. The lease agreements are for a duration of approximately seven and eight years.
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, onContract
On May 4, 2015, we entered into a Master Services License Agreement with SABRE Inc. Pursuant to this agreement SABRE Inc., will grant LATAM access and use of certain reservation systems. This agreement will enter into force after the expiration of Work Order No. 1 to the agreement entered in November 2009 by LATAM and SABRE Inc. and will be effective for an initial period of 10 years.
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 sixA330-200 aircraft, with deliveries between 2007 and 2010.
In January 2008, TAM entered into a new purchase agreement for 20 A320-Family Aircraft and fourA330-200 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, plus 10 options rights for A320 NEO Family Aircraft.
In January 2012, TAM entered into Amendment No. 12 to the A320/A330 Purchase Agreement to reschedule the delivery dates of certain aircraft.
In November 2012, TAM entered into Amendment No. 13 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.
In June 2015, TAM entered into Amendment No. 20 to the A320/A330 Purchase Agreement to make a change to the schedule delivery month of one A321 Aircraft.
In December 2015, TAM entered into Amendment No. 21 to the A320/A330 Purchase Agreement to make a change to the schedule delivery month of two A320 NEO Aircraft.
On April 15, 2016, we entered into amendment No. 22 to the A320/A330 Purchase Agreement covering the rescheduling of the delivery of one A321 Aircraft.
On April 15, 2016, we entered into amendment No. 23 to the A320/A330 Purchase Agreement to reflect the changes in the technical specifications of the aircraft to be received under this agreement.
On August 8, 2016, we entered into amendment No. 24 to the A320/A330 Purchase Agreement to cancel the delivery of eight A320 NEO Aircraft.
A350 Family Purchase Agreement
In January 2008, TAM entered into a purchase agreement with Airbus S.A.S. for the purchase of 22 A350 aircraft plus 10 options rights for A350 aircraft.
In July 2010, TAM entered into amendment No. 1 to the A350 purchase agreement to exercise its option of five A350 XWB options.
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 scheduled delivery month of a certain A350-900XWB aircraft.
In September 2015, we entered into amendment No. 4 to the A350 purchase agreement to modifiy certain terms and conditions of such agreement and to convert a number ofA350-900 XWB Aircraft into A350-1000 XWB Aircraft.
In November 2015, we entered into amendment No. 5 to the A350 purchase agreement to convert a number ofA350-900 XWB aircraft into six A350-1000 XWB aircraft and to reschedule the delivery of certainA350-900 XWB.
On February 3, 2016, we entered into amendment No. 6 to the A350 purchase agreement to reschedule the delivery of two A350—900 XWB Aircraft.
On August 8, 2016, we entered into amendment No. 7 to the A350 purchase agreement to change aircraft type, from twoA350-900 XWB Aircraft to two A350—1000 XWB Aircraft.
On September 9, 2016, we entered into amendment No. 8 to the A350 purchase agreement to reschedule the delivery of two A350—900 XWB Aircraft.
Boeing 777 Purchase Agreement
In February 2007, TAM entered into a purchase agreement with Boeing for the purchase of four Boeing777-32WER aircraft.
In August 2007, TAM entered into supplemental 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 two 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 two incremental 777 aircraft.
In May 2014, TAM entered into supplemental agreement No. 7 to the 777 purchase agreement to substitute two777-300ER Aircraft originally scheduled for delivery in 2014 for two777-F aircraft for scheduled delivery in 2017.
In April 2015, TAM entered into supplemental agreement No. 8 to the 777 purchase agreement to reschedule the delivery of certain aircraft.
CFM56-5B Engine Maintenance 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 ofCFM56-5B engines to power 25 A320 family aircraft and four spare engines.
In March 2007 TAM entered into the Amendment 1 to the above-mentioned services agreement with GE Celma, extending the maintenance services to the engines powering additional 16 A320 family aircraft and two spare engines.
V2500-A5 Engine Maintenance Agreement
In 2000, TAM entered into an engine maintenance contract with MTUMotoren-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 105TAY650-15 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 AgreementRaizen
In June 2007, TAM Linhas Aéreas S.A.January 2013, we entered into an Aviation Fuel Supply Agreement with Raizen Combustiveis S.A. and a purchase and supportlocal agreement engine sale, support and maintenancefor services agreement with Pratt & Whitney covering 20 engines contained in TAM’sA330-200 fleet six aircraft plus two spares. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for TAM. Amendment 3 July 2010 10 aircraft 4 spares.
SABRE Contract
In October 2003, TAM entered into a general services agreement with SABRE Travel International Limited, pursuant to which TAM was granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup. The term of the agreement was tacitly and automatically extended to cover all Work Orders currently in force under the agreement and will expire at the same time with the expiration of the last Work Order. In addition, TAM has distribution agreements in place with SABRE as well as with other distribution providers.
In adittion, on May 4,Brazil. On December 28, 2015, we entered into a Master Services LicenseFirst Amendment to the agreement to extend its term and modify some commercial conditions for the services in Brazil. On November 19th 2018, we entered into a Second Amendment to the agreement to establish new commercial conditions, effective from January 2019 and valid for 3 years.
Petrobras
In April 2019, we entered into an Aviation Fuel Supply Agreement with SABRE Inc. Pursuant to thisPetrobras Distribuidora S.A. and a local agreement SABRE Inc., will grant TAM access and use of certain reservation systems.for services in Brazil. This agreement will enter into force after the expiration of that Work Order No. 1 to the November 2009 agreement between LATAM and SABRE Inc., andAgreements will be effective until December 31, 2021.
In addition, we entered into an Aviation Fuel Supply Agreement with Esmax Distribuidora S.A (Ex Petrobras Chile) and a local agreement for an initial period of 10 years.services in Chile, in January 2019. These Agreements will be effective until December 31st 2021.
Amadeus ContractAir BP-Copec
In July 2009, TAM2018, we entered into an Aviation Fuel Supply Agreement with Air BP Copec S.A. for services in Chile. These Agreements will be effective until December 31st 2021.
Pure Biofuels
In November 2014, we entered into a generalGeneral Terms and Conditions of a Contract Confirmation with Pure Biofuels del Peru S.A.C. for fuel supply services in Peru. Later, in 2016 and 2017, the agreement with Amadeus IT Group S.A., pursuant to which TAM was grantedmodified by a license (relatingfirst and second amendment.
On January 1st 2018, we entered into a Third Amendment to the provision of maintenance services) for electronic reservation technologyagreement to establish new commercial conditions, effective from January 2018 and database backup. The term of this agreement was ten years, unless terminated early by either party. On March 1, 2016, as part of LATAM’s plan to unify the Passenger Service Platform and migrate to a single service provider, TAM sent Amadeus an early termination notice to be effective during 2017. In addition, TAM has distribution agreements in place with Amadeus as well as with other distribution providers.valid until November 11, 2020.
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 arenon-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.
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 |
● | mandatory return of foreign currency to Chile; and |
● | mandatory conversion of foreign currency into Chilean pesos. |
Under the Formal Exchange Market.
● | 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 or 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 LATAM Airlines Group, the Central Bank of Chile and the ADS depositary, or the “Foreign Investment Contract”), remained in full force and effect and continued to be governed by the provisions, and continued to be subject to the restrictions, set forth in former Chapter XXVI at the time of its abrogation. Our Foreign Investment Contract guaranteed 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).
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.
On October 17, 2012, the Central Bank of Chile, the depositary and LATAM Airlines Group entered into a termination agreement in respect of LATAM’s existing foreign investment contract. ADR holders were notified about this termination in accordance with Section 16 of the Deposit Agreement. Upon termination of the foreign investment contract, holders of ADSs and the depositary 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.” According to Chapter XIV, the establishment or maintenance of an ADS 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 ADS facility. The establishment or maintenance of an ADS 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.
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Investment in Our Shares and ADRs after the business combination with TAM
As a result of the combination with TAM, investments made in shares of our common stock are 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 “VoteCut-Off Date.” The depositary will try, as far as practical, subject to Chilean law and the provisions of ourby-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 (dó(dólar acuerdo)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 incorporated abroad 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 residedremains in Chile, whether continuously or not, for more than six consecutive months in one calendar yeara period or forperiods exceeding a total of six months 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.183 days, within any twelve-month period. 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 treaty will have to be approved by the U.S. Senate and before it may become effective.becomes effective (the Chilean Congress ratified it in 2017).
Law No. 20,780, enacted on September 29, 2014, in conjunction with Law No. 20,899, enacted on February 8, 2016 (both, the “Tax Reform Act”) introduced a comprehensive modification to the Chilean income tax system. 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), and introduced two new alternative general income tax regimes for Chilean taxpayers (Fully Integrated Regime and Partially Integrated Regime), 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. The Fully Integrated Regime and the Partially Integrated RegimeBoth regimes apply as from January 1, 2017. The mandatory regime for entities organized as stock corporations like Latam Airlines Group S.A. is the Partially Integrated System. TheSystem and the Corporate Income Tax rate for companies under this regime is 27% from 2018 onward.
In addition, on February 24, 2020 a new tax reform law was enacted which in general will be in force as of March 1, 2020 with some provisions entering into force at different dates. The main new rules are: (i) repealing both the Fully and the Partially Integrated Regimes. A transitionnew tax regime is established for small and medium enterprises (SMEs) whose sales do not exceed app US$2.55 million annually (the threshold might consider related party income) with a 25% rate Corporate Tax, and 100% of 25.5% appliescredit against final taxes (please note that amounts expressed in 2017.USD may be subject to change due to exchange rate fluctuations). The Partially Integrated regime would remain for companies exceeding such threshold; (ii) incorporating a surcharge of the current real estate tax applicable on the aggregate value of a taxpayer’s real estate higher than US$600,000 app; (iii) limiting and eventually impeding Chilean holding companies in a tax loss position from claiming a refund of the corporate taxes paid by local subsidiaries remitting dividends. Full implementation would occur in 2024; (iv) increasing the higher marginal personal income tax rate for Chilean domiciled individuals up to a 40% from the current 35%; and (v) modifying some requirements from the capital gain tax exemption in the sale of shares with high stock market presence, amongst other. We do not expect any material adverse effect on our business from this new tax reform law.
Cash Dividends and Other Distributions
Under the new Partially Integrated Regime, 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 corporate income tax rate of the year of distribution and provided a sufficient balance of accumulated corporate income tax credits is available. These credits correspond to corporate income tax we actually paid on the accumulated income (referred to herein as the First Category Tax or FCIT). However, this credit does not reduce the Withholding Tax on aone-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 may 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. If we register net income but taxable losses, no credit against the Withholding Tax may be available.
The Partially Integrated Regime reduces the amount of First Category Tax creditable against the Withholding Tax for certain
Foreign Holders. As a general rule, only 65% of the First Category Income Tax credit will actually offset the Withholding Tax. 35% of the credit must be added back to the Withholding Tax amount to be paid into the Treasury (referred to herein as First Category Tax Credit Restitution). However, if a tax treaty is in place between Chile and the country of domicile of a Foreign Holder and such Foreign Holder is entitled to treaty benefits in relation to the income, the full First Category Tax credit will continue to be available to offset against the Withholding Tax.
Under a transitory provision in force until December 31, 2019,2021, the full 27% First Category Tax will also be creditable against the 35% Withholding Tax if the recipient of a dividend distribution is a shareholder resident in a country with which Chile has a tax treaty signed before January 1st, 2017,2019, although such treaty is not yet in force. The tax reform modifies this provision in terms of allowing the full First Category Tax credit until December 31, 2026 for treaties signed before January 1, 2020.
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%, a First Category Tax rate of 27% and a distribution of 30% of the consolidated net income of the Company after payment of the First Category Tax:
Foreign Holder in Treaty Country | Foreign Holder in Non Treaty country | Foreign Holder in Treaty Country | Foreign Holder in Non Treaty Country | |||||||||||||
The Company’s taxable income | 100.00 | 100.00 | 100.00 | 100.00 | ||||||||||||
First Category Tax (27% of Ch$100)(*) | (27.00 | ) | (27.00 | ) | ||||||||||||
First Category Tax (27% of Ch$100) . | (27.00 | ) | (27.00 | ) | ||||||||||||
Net distributable income | 73.00 | 73.00 | 73.00 | 73.00 | ||||||||||||
Dividend distributed (*) | 21.90 | 21.90 | 21.90 | 21.90 | ||||||||||||
First category increase | 8.10 | 8.10 | 8.10 | 8.10 | ||||||||||||
Amount subject to Withholding Tax (**) | 30.00 | 30.00 | 30.00 | 30.00 | ||||||||||||
Withholding Tax | (10.50 | ) | (10.50 | ) | (10.50 | ) | (10.50 | ) | ||||||||
Credit for First Category Tax | 8.10 | 8.10 | 8.10 | 8.10 | ||||||||||||
Add back 35% of the First Category Tax | N/A | (2.84 | ) | N/A | (2.84 | ) | ||||||||||
Net tax withheld | (2.40 | ) | (5.24 | ) | (2.40 | ) | (5.27 | ) | ||||||||
Net dividend received | 19.5 | 16.66 | 19.5 | 16.64 | ||||||||||||
Effective dividend withholding rate | 11 | % | 24 | % | 11 | % | 24 | % |
(* | 30% of net distributable income. |
(**) | The dividend of Ch$21.90 grossed up with the First Category Tax credit of Ch$8.10. |
The effective rate of Withholding Tax to be imposed on dividends we pay will depend on the First Category Tax rate applicable in the year of distribution and on the balance of First Category Income Tax credits accumulated by the company. The First Category Tax rate will be 27% for 2018 and following years. Special considerations apply to a distribution in 2017. These considerations are set out in a separate paragraph further below. The First Category Income Tax credits generated under the new tax regime, i.e. as of 2017, will be allocated first. Once the balance of First Category Tax credits generated as of 2017 are exhausted, the First Category Tax credits accumulated until December 31, 2016 will be used. In that event the First Category Tax credit available against the Withholding Tax will not correspond to the First Category Tax rate of the year of distribution but to the average rate of First Category Tax credits accumulated until December 31, 2016. This average rate will be determined by dividing the aggregate First Category Tax Credits accumulated until December 31, 2016 by the aggregate retained taxable profits accumulated at the same date. The First Category Tax credits accumulated until December 31, 2016 are not subject to the First Category Tax Credit Restitution irrespective of whether a tax treaty is in place with the country of the Foreign Holder or not.
The First Category Tax credits accumulated until December 31, 2016 correspond to the First Category Tax we actually paid on the income generated in a given year. For earnings generated from 1991 until 2001, the First Category Tax rate was 15%. The rate was 16.0% in 2002, 16.5% in 2003, 17% from 2004 until 2010, 20% from 2011 until 2013, 21% in 2014, 22.5% in 2015, and 24% in 2016.2016 and 25.5% in 2017 for companies subject to the Partially Integrated Regime.
In the event that the accumulated First Category Tax credits are not sufficient to cover any particular dividend, we will generally withhold tax from the dividend at the full 35% rate.
Dividend distributions made in propertykind would be subject to the same Chilean tax rules as cash dividends based on the fair market value of such property.the relevant assets. Stock dividends and the distribution of preemptive rights are not subject to Chilean taxation.
Special Considerations for distributions in 2017
The First Category Tax rate for 2017 is 25.5%. However, in 2017 the First Category Tax credit available against the Withholding Tax will not correspond to the First Category Tax rate of the year but to the average rate of First Category Tax credits accumulated until December 31, 2016. This average rate will be determined by dividing the aggregate First Category Tax Credits accumulated until December 31, 2016 by the aggregate retained taxable profits accumulated at the same date. These credits are not subject to the First Category Tax Credit Restitution, irrespective of whether a tax treaty is in place with the country of the Foreign Holder or not.
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 by a Foreign Holder (as distinguished from sales or exchanges of ADRs evidencing ADSs representing such common shares) may be subject to a 35% Withholding Tax. Moreover, a gain not exceeding 10 Annual Tax Units (US$8,2787,310 as of December 31, 2016)February 28, 2020) recognized by a Foreign Holder without taxable presence in Chile in a sale to anon-related buyer will not be taxable.
The gain on the sale of shares of common stock by a Foreign Holder is subject to a withholding of 35% of the gain. If the gain subject to taxation cannot be determined, the Foreign Holder is subject to a provisional withholding of 10% of the total (sale price) amount, without any deduction, when the amounts are paid to, credited to, accounted for, put at the disposal of, or corresponding to, the Foreign Holder.TheHolder. 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 or within the process of a public tender of common shares governed by the Securities Market Law.
The common shares must have been acquired either in a local 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.
Please note that,Notwithstanding the foregoing paragraph, Chile’s IRStax authority Ruling No. 1,480 (issued on August 22, 2014) 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 ADRs comply with the requirements established by the Chilean Superintendence for Securities and Insurance (SVS)CMF for the public offering of securities in Chile (i.e. if the ADRs are registered in the Foreign Securities Registry of the SVS,CMF, or their registration has been exempted by the SVSCMF under a cooperation agreement signed with regulators of foreign markets), and the underlying shares have been registered in the Securities Registry of the SVSCMF and on a Chilean Stock exchange. 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 |
· | meet at least one of the following requirements: |
i. | have an adjusted presence equal to or above 25%; |
ii. | have a Market |
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 1,000 UF (US$39,35634,864 as of December 31, 2016)February 28, 2020) 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.
To meet the “Market Maker” requirement the issuer of the shares must execute a written contract with a stock broker incorporated in Chile that fulfills some additional requirements. The tax reform modifies this provision in those cases where the high stock market presence is given exclusively by virtue of a Market Maker. Under the proposed provision, the capital gain tax exemption would apply only for the term of one year from the first public offering of the securities.
A capital gains tax exemption for “foreign institutional investors” such as mutual funds and pension funds was repealed as from May 1, 2014 by Law 20,712. However, the law includes a grandfathering provision for shares acquired before May 1, 2014. This provision establishes an exemption on the capital gain obtained in the sale of shares that are publicly traded and have a high presence in a stock exchange when the sale is made by a foreign institutional investor, provided that the sale is made in a local stock exchange or in a public tender in accordance with the provisions of the Securities Market Law, or in the redemption of fund quotas, and the shares were acquired before May 1, 2014.
Pursuant to the regulations of the grandfathering rule, 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 registered with a regulatory authority of a EU or OECD country, or other country duly authorized by the CMF; |
a pension fund that is formed exclusively by natural persons that receive pensions out of an accumulated capital in the fund, regulated by an authority of the countries mentioned above; |
· | an insurance company regulated by the competent regulatory authority of the insurance business, as appropriate, which must be part of IAIS,International Association of Insurance Supervisors, or ASSAL,Asociación de Supervisores de Seguros de América Latina; |
· | a foreign State or a division with political autonomy recognized by Chile, whether they invest through its government, central bank, issuing bank or corresponding monetary authority. Moreover, the investment can be made through investment authorities, investment agencies, investment corporations or other entities, provided that its purpose is to provide financial resources for the exclusive benefit of the foreign State or territorial division, and provided that the vehicle is not used also for investments or resources other than those of the sovereign fund; or |
· | an endowment funds duly registered in a EU or OECD country, or other country duly authorized by the CMF. |
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 directly or indirectly 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 obtained by a Foreign Holder without taxable presence in Chile on the sale of preemptive rights relating to the common shares will be subject to 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 credit).
Material United States Federal Income Tax Considerations
This section describes the material United StatesU.S. federal income tax consequences to a U.S. holder (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 purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may be relevant to U.S holders with respect to their ownership and disposition of ADSs or common shares. Accordingly, it is not intended to be, and should not be construed as, tax advice. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:
● | a dealer in securities, |
● | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings, |
● | a tax-exempt organization, |
● | a financial institution, |
● | a regulated investment company, |
● | a real estate investment trust, |
● | a life insurance company, |
● | a person liable for alternative minimum tax, |
● | a person that directly, indirectly or constructively owns 10% or more of the vote or value of our stock, |
● | a person that holds common shares or ADSs as part of a straddle or a hedging or conversion transaction, |
● | a person that purchases or sells common shares or ADSs as part of a wash sale for tax purposes, |
● | a U.S. holder (as defined below) whose functional currency is not the U.S. dollar. |
● | a U.S. expatriate, |
● | a person who acquired our ADSs or common shares pursuant to the exercise of any employee share option or otherwise as compensation, or |
● | a partnership or other pass-through entity or arrangement treated as such (or a person holding our ADSs or common shares through a partnership or other pass through entity or arrangement treated as such). |
If you are a member of a special class of holders subject to special rules, you should consult your tax advisor with regard to the U.S. federal income tax treatment of an investment in the common shares or ADSs, including the potential impact of recently enacted legislation (P.L. 115-97) commonly referred to as partthe Tax Cut and Jobs Act (the “Act”). Moreover, this summary does not address the U.S. federal estate, gift, or alternative minimum tax considerations, or any U.S. state, local, or non-U.S. tax considerations of a straddle or a hedging or conversion transaction,
This section is based on the Internal Revenue Code of 1986, as amended, (the “Code”) its legislative history, existing and proposed Treasury regulations, published rulings and court decisions, all as currently in effect.of the date hereof. These laws are subject to change or differing interpretation, possibly on a retroactive basis. There is currently no comprehensiveNo ruling has been sought from the U.S. Internal Revenue Service with respect to any U.S. federal income tax treaty in effect betweenconsequences described below, and there can be no assurance that the U.S. Internal Revenue Service or a court will not take a contrary position. On February 4, 2010, representatives of the governments of the United States and Chile signed an income tax treaty but the Republic of Chile.treaty is not yet in effect since it has not yet been ratified by both the U.S. Senate and the Chilean Congress. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
If a partnership holds the common shares or ADSs, the United StatesU.S. 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 StatesU.S. federal income tax treatment of an investment in the common shares or ADSs.ADSs, including the potential impact of the Act.
You are a U.S. holder if you are a beneficial owner of common shares or ADSs and you are:
● | an individual who is a citizen or resident of the United States, |
● | a corporation (or other entity taxable as a corporation) created or organized under the laws of the United States, any state thereof or the District of Columbia, |
● | an estate whose income is subject to U.S. federal income tax regardless of its source, or |
● | a trust if (1) a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust or (2) a valid election is in effect under applicable Treasury regulations to treat the trust as a U.S. person. |
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 and ADSs in your particular circumstances.
ADSs
In general, and taking into account the earlier assumptions, for United StatesU.S. federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the beneficial owner of the common shares represented by those ADRs. Exchanges of common shares for ADRs, and ADRs for common shares, generally will not be subject to United StatesU.S. federal income tax.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security. Accordingly, the creditability of any foreign taxes paid and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. holders (as discussed below), could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and us if as a result of actions the holders of ADSs are not properly treated as beneficial owners of the underlying common shares.
Taxation of Dividends
Under the United StatesU.S. federal income tax laws, and subject to the passive foreign investment company (“PFIC”) rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United StatesU.S. federal income tax purposes) is subject to United StatesU.S. federal income taxation. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the common shares or ADSs, as the case may be, and thereafter as capital gain from the sale or exchange of the common shares or ADSs, as the case may be. However, we do not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Accordingly, you should expect to generally treat any distributions we make as dividend income for U.S. federal income tax purposes.
If you are a noncorporatean individual, trust, or estate U.S. holder, dividends paid on the ADSs or common shares that constitute qualified dividend income will be taxable to you at the preferential rates applicable to long-term capital gains if you hold the ADSs or common shares for more than 60 days during the121-day. period beginning 60 days before theex-dividend date and meet other holding period requirements. Dividends paid on the ADSs or common shares will be treated as qualified dividend income if:
● | (a) the ADSs or common shares are readily tradable on an established securities market in the United States; or (b) we are eligible for benefits of a comprehensive tax treaty with the United States, which the IRS determines is satisfactory for this purpose, which includes an exchange of information program; |
● | 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. |
● | you hold the ADSs or common shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirement; and the U.S. holder is not under an obligation to make related payments with respect to positions ● in substantially similar or related property. |
We believe that our common shares and ADSs should not be treated as stock of a PFIC for United StatesU.S. federal income tax purposes. See “—PFIC Rules” below.
The ADSs are listed on the New York Stock Exchange, and willshould 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.income (provided that the other conditions listed above are met). Because our common shares are not expected to be listed on any United States securities market, it is unclear whether dividends we pay with respect to the common shares will alsonot be qualified dividend income. If dividends we pay with respect to our common shares are not qualified dividendincome(as long as there is no income thentax treaty in effect between Chile and the United States), and therefore, the U.S. dollar amount of such dividends received by aan individual, trust, or estate U.S. holder (including dividends received by a noncorporate U.S. holder) will be subject to taxation at ordinaryU.S. federal income tax rates.
You must include any Chilean Corporate U.S. holders are taxed on dividend income at the U.S. federal corporate income tax withheld fromrate whether or not the dividend payment in this gross amount even though you do not in fact receive it. income is qualified dividend income.
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 or certain foreign 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 excessThe amount of current and accumulated earnings and profits, as determined for United States federal income tax purposes,any distribution of property other than cash will be treated as anon-taxable returnthe fair market value of capitalsuch property on the date of distribution.
The dividend income you have to include in gross income includes the extentamount of your basis inany Chilean tax withheld from the common shares or ADSs and thereafter as capital gain. However, wedividend payment even though you 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.
fact receive such amount.Subject to generally applicable limitations and conditions under the Internal Revenue Code, Chilean Withholding Tax withheld and paid over to the Chilean tax authorities (after taking into account the credit for the First Category Tax, when it is available) generally will be creditable or deductible against your United StatesU.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividendsqualified dividend income that areis subject to the preferential U.S. federal income 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 as described above under “—Taxation—Chilean Tax—Cash Dividends and Other Distributions,” the amount of tax withheld that is refundable will not be eligible 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, generally be either “passive” or “general” or “foreign branch” income for purposes of computing the foreign tax credit allowable to you. The rules relating to foreign tax credits and deductions are complex. U.S. holders should consult their tax advisors concerning the application of these rules in their particular circumstances.
Taxation of Capital Gains
Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your common shares or ADSs, you will recognize capital gain or loss for United StatesU.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your adjusted tax basis, determined in U.S. dollars, in your common shares or ADSs. Capital gain of a noncorporatean individual trust, or estate U.S. holder is generally taxed at preferential rates(i.e. a maximum U.S. federal income tax rate of 20% plus 3.8% “Net Investment Income Tax” if certain income thresholds are met; see “Net Investment Income Tax” below)where the property is held for more than one year.The deductibility of capital losses is subject to significant limitations.The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Consequently, you may not be able to use the foreign tax credit arising from any Chilean tax imposed on the disposition of common shares or ADSs unlessas a foreign tax credit against your U.S. federal income tax liability on such disposition, but you may apply such Chilean taxes as a foreign tax credit can be applied against U.S. federal income tax due on other income you may have that is treated as derived from foreign sources in the appropriate foreign tax credit limitation category.
If the consideration received for our common shares or ADSs is paid in foreign currency (which should not be the case in respect of our ADSs), the amount realized will be the U.S. dollar value of the payment received translated at the spot rate of exchange on the date of disposition. If our common shares or ADSs are treated as traded on an established securities market and the relevant U.S. holder is either a cash basis taxpayer or an accrual basis taxpayer who has made a special election (which must be applied consistently from year to year and cannot be changed without the consent of the U.S. Internal Revenue Service), such holder will determine the U.S. dollar value of the amount realized in a foreign currency by translating the amount received at the spot rate of exchange on the settlement date of the sale. If our common shares or ADSs are not treated as traded on an established securities market, or the relevant U.S. holder is an accrual basis taxpayer that is not eligible to or does not elect to determine the amount realized using the spot rate on the settlement date, such U.S. holder will recognize foreign currency gain or loss to the extent of any difference between the U.S. dollar amount realized on the date of disposition (as determined above) and the U.S. dollar value of the currency received at the spot rate on the settlement date. A U.S. holder’s initial tax basis in our common shares or ADSs will equal the cost of such ADSs or common shares. If a U.S. holder used foreign currency to purchase our common shares or ADSs, the cost of our common shares or ADSs will be the U.S. dollar value of the foreign currency purchase price on the date of purchase. If our common shares or ADSs are treated as traded on an established securities market and the relevant U.S. holder is either a cash basis taxpayer or an accrual basis taxpayer who has made the special election described above, such holder will determine the U.S. dollar value of the cost of such common shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase.
MedicareNet Investment Income Tax
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8%“net investment income”tax on the lesser of (1) the U.S. holder’s “net investment income” (or “undistributed net investment income” in the case of an estate or trust) for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on the individual’s circumstances). A holder’s net investment income generally includes its dividend income and its net gains from the disposition of common shares or ADSs, unless such dividend income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare“net investment income” tax to your income and gains in respect of your investment in the common shares or ADSs.
PFIC Rules
We believe that common shares and ADSs should not be treated as stock of a PFIC for United States federal income tax 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, gain realized on the sale or other disposition of your common shares or ADSs would in general not be treated as capital gain.gain that is eligible for preferential tax rates in the case of non-corporate U.S. holders. Instead, if you are a U.S. holder, unless you electmake a timely “mark-to-market” election electing to be taxed annually on amark-to-market basis with respect to your common shares or ADSs, or you electmake a timely “qualified electing fund” election electing to be taxed annually on the earnings and gains of the PFIC attributable to your shares or ADSs as a “qualified electing fund”(irrespective of distributions), you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period forin the common 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 except for the current year. With certain exceptions, your common sharesIn addition, unless you make a timely “mark-to-market” election or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your common shares or ADSs. Dividends“qualified electing fund” election, distributions that you receive from us as a direct or indirect U.S. holder will not be eligible for the specialpreferential 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 the tax rates applicable to ordinary income.income, and to the extent they are treated as “excess distributions” under the PFIC rules, they will also be subject to the PFIC interest charge described above. A U.S. holder will be required to make an annual filing with the U.S. Internal Revenue Service if such holder holds or ADSs or common shares in any year in which we are classified as a PFIC. With certain exceptions, your common shares or ADSs will continue to be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your common shares or ADSs even if we no longer meet the PFIC tests in a later year.
The U.S. federal income tax rules relating to PFICs are complex. Prospective U.S. investors are urged to consult their own tax advisers with respect to the application of the PFIC rules to their investment in the common shares or ADSs.
Information Reporting and Backup Withholding
U.S. information reporting and backup withholding tax requirements generally apply to certain payments to certain non-corporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, common shares or ADSs made within the United States to a holder of common shares or ADSs (other than an exempt recipient, including a corporation, a payee that is not a U.S. holder that provides an appropriate certification, and certain other persons).
A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, common shares or ADSs within the United States to you, unless you are an exempt recipient, if you fail to furnish your correct taxpayer identification number or otherwise fail to establish an exception from backup withholding tax requirements. U.S. holders who are required to establish their exempt status may be required to provide such certification on U.S. Internal Revenue Service Form W-9. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to you may be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is furnished timely to the U.S. Internal Revenue Service.
Foreign Asset Reporting
Certain U.S. holders who are individuals (and certain entities) that hold an interest in “specified foreign financial assets” (which may include the common shares or ADSs) with an aggregate value in excess of certain threshold amounts are required to report information relating to such assets, subject to certain exceptions (including an exception for stock held in accounts maintained by certain financial institutions). Penalties can apply if U.S. holders fail to satisfy such reporting requirements. U.S. holders should consult their tax advisors regarding the effect, if any, of this requirement on their ownership and disposition of common shares and ADSs.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
116
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 Form20-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 at1-800-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 at 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 Form20-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
Given the nature of its business, LATAM is exposed mainly to three types of market risk:
● | Fuel price fluctuations; |
● | Foreign exchange fluctuations; and |
● | Interest rate fluctuations. |
Management assesses the level of our exposure to these risks periodically to determine the extent to which weone should hedge against thembe hedged and the most effective mechanisms to implement the hedge.be implemented. LATAM purchases derivative instruments in foreign markets to offset market risk exposure, typically utilizing a mix of financial and commodity derivatives. LATAM does not enter into or hold derivative contracts for trading purposes.
For more information on Market Risk, see Note 3 “Financial Risk Management” to our audited consolidated financial statements.
Risk of Fluctuations in 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, natural disasters, climatic risk and geopolitical factors.
LATAM fuel consumption for 20162019 was 1,185.5 million gallons and the consumption forecast for 2017 is 1,179.61,272.7 million gallons. To manage its exposure to the cost of fuel, LATAM has a hedging program based on anour Fuel Hedging Policy, which is annually updated and approved policy. This policyby the board of directors. LATAM’s Fuel Hedging Policy aims to hedge approximately20-60% of our aggregate fuel consumption, using commodity derivatives formitigate the expected fuel consumptionliquidity risk in the shortshort/medium term,3-6 months, where the avoiding cash and financial distress. LATAM has established four hedging zones based on advance purchase behavior, pass-through of cost changes is limited.and fuel invoicing process.
Jet Fuel is not the only underlying asset that LATAM may use for hedging purposes. It may also consider derivative instruments in other underlying commodity assets such as crude oil (BRENT),ICE Brent, West Texas intermediateIntermediate (WTI) or heating oilNYMEX Heating Oil (HO).
To keep
LATAM has decided to use protective and non-speculative instruments to reduce the Company competitive, a portionoperating margin exposure. Also, LATAM will not use financial derivatives to speculate on financial markets and consequently obtain gains from these types of the fuel consumption istransactions, and will not hedged,receive premiums as cash from sold options (nevertheless LATAM could buy and sell options as a dropstructured product).
LATAM periodically reviews its exposure with each counterparty in fuel prices positively affects the Company through a reduction in costs.
We may be exposedorder to fuel hedging transaction losses if our counterparties default. To manage thismonitor its credit risk, we select counterparties based on their credit ratings and monitor our relative market position on a daily basis. We generally are not required to post collateral and do not require our counterparties to post collateral in respect of positions under our fuel hedging transactions.concentration. For more information, see “Item 3. Key Information— D. 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 adversely impact our business.”
During 2016, 20152019, 2018 and 20142017 we entered into a mix of swaps and option contracts on BRENT, WTINYMEX HEATING OIL and JET FUEL 54 USGC with investment grade banks and other financial entities for notional fuel purchases(non-delivery forward) (non-delivery). Details of the fuel hedging program are shown below:
LATAM Fuel Hedging Year ended December 31, | LATAM Fuel Hedging Year ended December 31, | |||||||||||||||||||||||
2016 LATAM | 2015 LATAM | 2014 LATAM | 2019 LATAM | 2018 LATAM | 2017 LATAM | |||||||||||||||||||
Gallons Purchased (million) | 781.2 | 544.7 | 684.3 | 779.8 | 521.9 | 441.1 | ||||||||||||||||||
% Total Annual Fuel Consumption | 66.7 | % | 43.6 | % | 55.6 | % | 61.5 | % | 40.8 | % | 37.7 | % | ||||||||||||
Combined Result of Hedges (in million of US$) | (48.0 | ) | (239.4 | ) | (108.7 | ) | (23.1 | ) | 29.7 | 15.1 |
As of December 31, 2016,2019, the fair value of our outstanding fuel related derivative contracts was estimated to be US$ 8.148.5 million (positive).
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 recorded as an expense at the time the contract expires.
Under IFRS, the fair value of the hedging derivatives is booked as anon-current asset or liability if the remaining maturity of the item is hedged for more than 12 months, and as a current asset or liability if the remaining term of the item is hedged for 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. 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; they are booked as cash flow hedge contracts, so a variation in fuel prices has an impact on the Company’s net equity.
The following table shows the sensitivity analysis of our hedging contracts to reasonable changes in fuel prices and their effect on equity. The term used for the projection was June 30, 2017,December 31, 2019, the last maturity date of our current fuel hedge contracts. The calculations were made considering a parallel movement of US$5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of December 2016, 20152019, 2018 and 2014.2017.
LATAM fuel price sensitivity (effect on equity) Position as of December 31, | ||||||||||||||||||||||||
LATAM fuel price sensitivity (effect on equity) Position as of December 31, | 2019 LATAM | 2018 LATAM | 2017 LATAM | |||||||||||||||||||||
2016 LATAM | 2015 LATAM | 2014 LATAM | (millions of US$ per barrel) | |||||||||||||||||||||
(millions of US$ per barrel) | ||||||||||||||||||||||||
BRENT or JET benchmark price | ||||||||||||||||||||||||
HO or JET benchmark price | ||||||||||||||||||||||||
+5 | +3.1 | +5.4 | +24.9 | +15.4 | +7.4 | +1.8 | ||||||||||||||||||
–5 | -4.8 | –2.8 | –25.1 | -34.5 | -5.5 | -3.3 |
During the periods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement pursuant to IFRS principles for recognizing and measuring financial instruments.
Given the fuel hedge structure as of December 31, 2016,2019, which reflects only a partial hedge of our expected fuel consumption, a vertical fall by US$5 in the BRENT and JET benchmark price (the monthly daily average) for each month would have meant savings of approximately US$ 116.3121.8 million in the cost of the Company’s total fuel consumption. A vertical increase by US$5 in the JET and BRENT benchmark price (the monthly daily average) for each month would have meant an additional cost of approximately US$ 114.5114.2 million of the Company’s total fuel consumption.
Risk of Variation in Foreign Exchange Rates
The functional currency of the LATAM holding company is the U.S. dollar. BecauseSince LATAM conducts its business in local currencies in several countries, it faces the risk of variations in multiple foreign currency exchange rates. Depreciation of these currencies against the U.S. dollar could have adverse effects both transactional and translational, because part of our revenues and expenses are denominated in those currencies.
At the same time, LATAM’s affiliates are exposed to foreign exchange risk, which could in turn impact the consolidated results of the Company.
The greatest exposure to future cash flows is mainly presented by the subsidiary TAM S.A.LATAM Airlines Brazil. and volatility in the R$/US$ exchange rate. TAM S.A.’sLATAM Airlines Brazil’s earnings are generated largely in R$. We actively manage the R$/US$ exchange rate risk by entering into FX derivative contracts and carrying out internal operations for obtaining natural hedging. Additionally, LATAM manages its economic exposures of future flows revenues on Great Britain Pound (GBP), by entering into FX derivative contracts.
In lower concentration, the company also faces foreign exchange risk relating to additional currencies such as: Great Britain Pound, Euro, Chilean Peso, Australian Dollars, Argentinean Peso, Paraguayan Guaraní, Mexican Peso, Peruvian Nuevo Sol, Colombian Peso and New Zealand Dollars.
Those currencies could be hedged as long as they turn relevant (higher exposure and volatility) to the LATAM’s market risk management. As of December 31, 2016, the fair value of our FX derivative contracts was estimated to be2019, LATAM has US$ 1.115 million (negative).current hedge instruments in its portfolio.
Because of changes in the values of existing FX derivative positions do not represent changes in cash flows, but a variation in the exposure of market value, the outstanding hedging positions do not impact results (they are registered as cash flow hedges under IFRS, therefore, a change in the foreign exchange rate has an impact on the equity of the Company).
The following table shows the sensitivity of the fair value of financial instruments as a result of reasonable changes in the exchange rates of British Pounds and Brazilian reais. The term projection is defined until the end of the last hedging contract in force:
LATAM foreign exchange sensitivity Derivatives Position as of December 31, 2016 | ||||
Appreciation | Effect on equity (Millions of US$) | |||
+10% | +3.4 | |||
-10% | -1.0 |
As of December 31, 2016,2019 the Company has FXentered into derivatives that are not registered under hedge accounting. The fair value of that derivatives was estimated to be US$60 0.04 million (notional) for FX BRL and US$10 million (notional) for FX GBP.
(negative). Balance sheet exposure of LATAM to the Brazilian Real is related to the functional currency of TAMLATAM Airlines Brazil and its balance sheet currency mismatch, as TAMLATAM Airlines Brazil has a net US$ liability position. When the balance sheet denominated in U.S. dollars is translated to Brazilian Real, the financial results of TAMLATAM Airlines Brazil may fluctuate and therefore could impact LATAM’s financial results.
The exposure to the Brazilian real on TAM’sLATAM Airlines Brazil balance sheet has been reduced from over US$4.0 billion since the combination in June 2012 to around US$1.20.1 billion as of December 31, 2016.2019. The Company continues working to mitigate this exposure through the execution of the fleet transfer from TAM to LATAMfinancial and payment of TAM’s debt denominated in USD.operational proposals.
The following table shows the sensitivity of TAM’sLATAM Airlines Brazil’s financial results to changes in the R$/US$ exchange rate:
TAM exchange rate sensitivity Position effect onpre-tax earnings as of December 31, | LATAM Airlines Brazil exchange rate sensitivity Position effect on pre-tax earnings as of December 31, | |||||||||||||||||||||||
2016 | 2015 | 2014 | 2019 | 2018 | 2017 | |||||||||||||||||||
LATAM | LATAM | LATAM | LATAM | LATAM | LATAM | |||||||||||||||||||
(millions of US$) | (millions of US$) | |||||||||||||||||||||||
Appreciation (depreciation) of R$/US$ | ||||||||||||||||||||||||
–10% | +119.2 | +67.6 | +69.8 | +9.5 | +39.8 | +80.5 | ||||||||||||||||||
+10% | -119.2 | –67.6 | –69.8 | -9.5 | -39.8 | -80.5 |
Our foreign currency exchange exposure as of December 31, 20162019 was as follows:
LATAM foreign currency exchange exposure | LATAM foreign currency exchange exposure | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Dollars MUS$ | % of total | Brazilian real MUS$ | % of total | Chilean pesos MUS$ | % of total | Other currencies MUS$ | % of total | Total MUS$ | U.S. Dollars MUS$ | % of total | Brazilian real MUS$ | % of total | Chilean pesos MUS$ | % of total | Other currencies MUS$ | % of total | Total MUS$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current assets | 1,727,743 | 47.6 | % | 1,438,613 | 39,7 | % | 155,611 | 4,3 | % | 304,808 | 8.4 | % | 3,626,775 | 1,428,160 | 35.1 | % | 1,938,824 | 47.6 | % | 260,892 | 6.4 | % | 444,346 | 10.9 | % | 4,072,222 | ||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 10,140,422 | 65.1 | % | 5,285,025 | 33,9 | % | 11,475 | 0,1 | % | 134,497 | 0.9 | % | 15,571,419 | 12,425,903 | 72.8 | % | 4,415,997 | 25.9 | % | 31,202 | 0.2 | % | 184,780 | 1.1 | % | 17,057,882 | ||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 11,868,165 | 61.8 | % | 6,723,638 | 35,0 | % | 167,086 | 0,9 | % | 439,305 | 2.3 | % | 19,198,194 | 13,854,063 | 65.6 | % | 6,354,821 | 30.1 | % | 292,094 | 1.4 | % | 629,126 | 3.0 | % | 21,130,104 | ||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities | 3,582,543 | 57.6 | % | 2,121,915 | 34,1 | % | 257,405 | 4,1 | % | 260,328 | 4.2 | % | 6,222,191 | 3,516,716 | 51.1 | % | 1,640,092 | 23.8 | % | 708,145 | 10.3 | % | 1,017,626 | 14.8 | % | 6,882,579 | ||||||||||||||||||||||||||||||||||||||||||||||
Long-term liabilities | 11,400,803 | 75.9 | % | 2,919,683 | 19,4 | % | 413,118 | 2,8 | % | 279,286 | 1.9 | % | 15,012,890 | 9,736,143 | 87.6 | % | 661,063 | 5.9 | % | 704,087 | 6.3 | % | 17,067 | 0.2 | % | 11,118,360 | ||||||||||||||||||||||||||||||||||||||||||||||
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Total liabilities and shareholders’ equity | 14,983,346 | 70.6 | % | 5,041,598 | 23,7 | % | 670,523 | 3,2 | % | 539,614 | 2,5 | % | 21,235,081 | 13,252,859 | 73.6 | % | 2,301,155 | 12.8 | % | 1,412,232 | 7.8 | % | 1,034,693 | 5.7 | % | 18,000,939 | ||||||||||||||||||||||||||||||||||||||||||||||
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For more information on Market Risk, see Note 3 “Financial Risk Management” to our audited consolidated financial statements.
Risk of Fluctuations in Interest Rates
As of December 31, 2016,2019, LATAM had US$ 8,7107,194 million in outstanding interest bearing loans. LATAM uses interest rate derivatives to reduce the impact of an increase of interest rates. 63.1%61.6% of LATAM outstanding debt as of December 31, 20162019 was effectively at a fixed rate, either as fixed rate loans or variable rate loans hedged using a floating to fixed rate derivative instrument.
LATAM’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$ 3,2162,760 million, from which 84.2%82.7% is assigned to aircraft financing and 15.8%17.3% tonon-aircraft financing. The fixed interest rate debt amounts are US$ 5,4944,368 million of which 62.6%50.4% is assigned to aircraft financing and 37.4%49.6% tonon-aircraft financing. The interest rate hedged debt amounts to US$ 40666 million of which 100% is assigned to interest rate swaps.
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. As of December 31, 2016,2019, the fair value of all the interest rate swaps was US$ 17.22.6 million (negative)(positive).
The use of the aforementioned hedging instruments, combined with fixed interest rate financing for our aircraft financing, has enabled the Company to have predictable interest rate costs, reducing the cash volatility.
As of December 31, 2016,2019, the average interest rate of our entire outstanding interest-bearing long-term debt rate was 4.0%4.63%.
The following table summarizes our principal payment obligations on all of our interest-bearing debt as of December 31, 20162019 and the related average interest rate for such debt. The average interest rate has been calculated based on the prevailing interest rate on December 31, 20162019 for each loan.
LATAM’s principal payment obligations by year of expected maturity(1) | ||||||||||||||||||||||||||||
Average interest rate(2) | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 and thereafter | ||||||||||||||||||||||
(millions of US$) | ||||||||||||||||||||||||||||
Interest-bearing liabilities | 4.0 | % | 1,771 | 1,119 | 1,120 | 1,440 | 1,105 | 2,156 |
LATAM’s principal payment obligations by year of expected maturity(1) | ||||||||||||||||||||||||||||
Average interest rate(2) | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | ||||||||||||||||||||||
(millions of US$) | ||||||||||||||||||||||||||||
Interest-bearing liabilities | 4,63 | % | 1,367 | 1,168 | 839 | 555 | 1,082 | 2,183 |
(1) | At cost. |
(2) | Average interest rate means the average prevailing interest rate on our debt on December 31, |
The following table shows the sensitivity of changes in our 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.
LATAM’s interest rate sensitivity (effect on pre-tax earnings) Position as of December 31, | LATAM’s interest rate sensitivity (effect on pre-tax earnings) Position as of December 31, | |||||||||||||||||||||||
2016 LATAM | 2015 LATAM | 2014 LATAM | 2019 LATAM | 2018 LATAM | 2017 LATAM | |||||||||||||||||||
(millions of US$) | (millions of US$) | |||||||||||||||||||||||
Increase (decrease) in LIBOR | ||||||||||||||||||||||||
+100 basis points | -32.2 | -26.7 | –27.5 | -27.6 | -29.62 | –29.26 | ||||||||||||||||||
–100 basis points | +32.2 | +26.7 | +27.5 | +27.6 | +29.62 | +29.26 |
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 by increasing (decreasing) 100 basis points of the three-month Libor futures curve.
LATAM’s interest rate sensitivity (effect on equity) Position as of December 31, | LATAM’s interest rate sensitivity (effect on equity) Position as of December 31, | |||||||||||||||||||||||
2016 LATAM | 2015 LATAM | 2014 LATAM | 2019 LATAM | 2018 LATAM | 2017 LATAM | |||||||||||||||||||
(millions of US$) | (millions of US$) | |||||||||||||||||||||||
Increase (decrease) in three month LIBOR | ||||||||||||||||||||||||
Future rates | ||||||||||||||||||||||||
+100 basis points | +3,9 | +8.7 | +15.3 | +13.6 | +0,7 | +1,9 | ||||||||||||||||||
–100 basis points | -4,0 | +9.0 | –16.0 | -14.7 | -0,7 | –1,9 |
During the periods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement pursuant to 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.
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”). The Company plans to enter into a Deposit Agreement with CitiBank, N.A. pursuant to which Citibank N.A. will replace JP Morgan as the Company’s Depository bank.
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 providefee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: | For: | |
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
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US$ |
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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 |
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Persons depositing or withdrawing shares must pay: | For: | |
US$ |
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Registration or transfer fees |
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Expenses of the depositary |
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Taxes and other governmental charges the depositary or the custodian has to pay on any ADS or share underlying an ADS, such as stock transfer taxes, stamp duty or withholding taxes |
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Any charges incurred by the depositary or its agents for servicing the deposited securities |
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Fees and Direct and Indirect Payments Made by the Depositary to the Foreign Issuer
Past Fees and Payments
During 2016,2019, the Company received US$666,148 from the depositary US$443,339.9 for continuing annual stock exchange listing fees, standardout-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 depositary bank, has agreed to reimburse the Company for certain of our reasonable expenses related to our ADS program and incurred by us in connection with the program. The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form20-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 |
(a) Disclosure Controls and Procedures
Management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016.2019. 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 such evaluation, management, with the participation of the chief executive officer and chief financial officer concluded that the disclosure controls and procedures, as of December 31, 2016,2019, 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.
2 Withdrawing Deposited Securities; there are no such fees in respect of the Shares as of the date of the Deposit Agreement), and (iv) expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency). Such charges may at any time and from time to time be changed by agreement between the Company and the Depositary.
122
(b) 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 Rules13a-15(f) and15d-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. 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, 20162019 based on the criteria established in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, LATAM Airlines Group S.A.’s management has concluded that, as of December 31, 2016 ,2019, the Company’s internal control over financial reporting is effective. The company’s internal control over financial reporting effectiveness as of December 31, 20162019 has been audited by PricewaterhouseCoopers Consultores Auditores SpA, an independent registered public accounting firm, as stated in their report included herein.
(c)Attestation report of the registered public accounting firm.firm. See pageF-156 F-2 of our audited consolidated financial statements.statements
(d) Changes in internal controls over financial reporting.There have been no changes that have materiallyaffectedor are reasonably likely to materially affect the company’s internal control over financial reporting.
Our
We have adopted a code of ethics and conduct, as defined in Item 16B of Form20-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,
Audit andNon-Audit Fees The following table sets forth the fees paid to our independent registered public accounting firm, PricewaterhouseCoopers, during the fiscal years ended December 31,
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 Other fees in the table above Board of Directors’ CommitteePre-Approval Policies and Procedures Since January 2004, LATAM has complied with SEC regulations regarding the type of additional services our independent auditors are authorized to offer to us. In addition, our
None.
None.
None.
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 and the Chilean Electronic The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
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.latamairlinesgroup.net
Not applicable.
See “Item 18. Financial Statements.”
See our consolidated Financial Statements beginning on pageF-1.
126
Documents filed as exhibits to this annual
LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and shareholders of Latam Airlines Group S.A. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial position of Latam Airlines Group S.A. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income by function, comprehensive income, changes in equity and cash flows– direct method for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December, 31, 2019 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, 2019, based on criteria established inInternal Control - Integrated Framework(2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2.1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019. Basis for Opinions The Company's management is responsible for these consolidated 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 Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Latam Airlines Group S.A. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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. Definition and Limitations of Internal Control over Financial Reporting 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. 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Latam Airlines Group S.A. Goodwill and Intangible Assets with Indefinite Useful Life (airport slots and loyalty program) Impairment Assessments As described in Notes 2.8, 4(a), 15 and 16 to the consolidated financial statements, the Company’s consolidated goodwill and intangible assets with indefinite useful life (airport slots and loyalty program) balance at December 31, 2019 were US$2,210 million and US$1,110 million, respectively. Management conducts an impairment assessment annually or more frequently if events or changes in circumstances indicate potential impairment. An impairment loss is recognized for the amount by which the carrying amount of the cash generating unit exceeds its recoverable amount. The recoverable amount of the cash generating unit is the higher of value in use and fair value less costs to sell. The value in use is determined by management using a discounted cash flow model. Management’s cash flow projections included significant judgments and assumptions relating to revenue growth rates, exchange rates, discount rate, inflation rates and fuel price. The principal considerations for our determination that performing procedures relating to goodwill and intangible assets with indefinite useful life (airport slots and loyalty program) impairment assessments is a critical audit matter are there was significant judgment by management when developing the value-in-use calculation. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions, including the revenue growth rates, exchange rates, discount rate, inflation rates and fuel price. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and intangible assets with indefinite useful life (airport slots and loyalty program) impairment assessments, including controls over the valuation of the Company’s cash generating unit. These procedures also included, among others, testing management´s process for developing the estimate; evaluating the appropriateness of the discounted cash flow model; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including the revenue growth rates, exchange rates, discount rate, inflation rates and fuel price. Evaluating management’s assumptions related to revenue growth rates, exchange rates, discount rate, inflation rates and fuel price involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the cash generating unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and significant assumptions, including the discount rate. Latam Airlines Group S.A. Recoverability of Deferred Tax Assets As described in Notes 2.17, 4(c) and 18 to the consolidated financial statements, the Company has recorded US$236 million of deferred tax assets as of December 31, 2019. Management records deferred tax assets on the temporary differences arising between the tax bases of assets and their reported amounts. Deferred tax assets are recognized to the extent it is probable that future taxable profit will be available against which the temporary differences can be utilized. Management applied significant judgement in assessing the recoverability of these deferred tax assets. In determining the amount of deferred tax assets to be recognized, management considered historical profitability, projected future taxable profit, including assumptions related to the revenue growth rates, exchange rates, discount rate, inflation rates and fuel price, and the expected timing of the reversals of existing temporary differences. The principal considerations for our determination that performing procedures relating to the recoverability of deferred tax assets is a critical audit matter are there was significant judgment by management in assessing the available positive and negative evidence surrounding the recoverability of deferred tax assets. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions related to projected future taxable profit and application of tax law. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the recoverability of deferred tax asset, including controls over projected future taxable profit. These procedures also included, among others, evaluating management’s assessment of the recoverability of deferred tax assets, including evaluating the assumptions relating to the projected future taxable profit. Evaluating management’s assumptions related to the projected future taxable profit involved evaluating historical profitability as well as other audit evidence related to management’s forecasts. Professionals with specialized skill and knowledge were also used to assist in evaluating management’s application of income tax law and the recoverability of deferred tax assets. Valuation of Loyalty Programs Breakage As described in Notes 2.20, 4(e) and 22 to the consolidated financial statements, the Company has recorded deferred income of US$3,540 million as of December 31, 2019, of which US$1,687 million was related to deferred income associated with the loyalty programs. The deferred income of loyalty programs is determined based on the estimated stand-alone selling price of unused miles and points awarded to the members of the loyalty programs reduced for breakage. Management used statistical models to estimate the breakage which involved significant judgments and assumptions relating to the historical redemption and expiration activity and forecasted redemption and expiration patterns. Latam Airlines Group S.A. The principal considerations for our determination that performing procedures relating to the valuation of loyalty programs breakage is a critical audit matter are there was significant judgment by management to develop the breakage estimate. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the underlying assumptions used by the Company to estimate the historical redemption and expiration activity and forecasted redemption and expiration patterns. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s accounting for its loyalty programs, including controls over management’s review of the statistical models and resulting breakage estimates. These procedures also included, among others, testing management’s process for developing the breakage estimate; evaluating the appropriateness of the statistical models; testing the completeness, accuracy, and relevance of underlying data used in the models. Evaluating management’s assumptions used to develop the breakage estimate involved evaluating whether the assumptions used by management were reasonable considering (i) the available information regarding the miles and points redemption and expiration patterns, (ii) management’s actions to incentive holders of the loyalty programs to redeem their miles and points, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were also used to assist in the evaluation of the Company’s methodology and assumptions used to develop the breakage estimate.
March 16, 2020 We have served as the Company’s auditor since 1991. Contents of the
LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The accompanying Notes 1 to F-8 LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The accompanying Notes 1 to LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME BY FUNCTION
The accompanying Notes 1 to LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
The accompanying Notes 1 to LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements. LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
The accompanying Notes 1 to
LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
The accompanying Notes 1 to
LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD
The accompanying Notes 1 to LATAM AIRLINES GROUP S.A.AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, LATAM Airlines Group S.A. (the “Company”) is a public limited company registered with the Its The Company is located in Chile, in the city of Santiago,
As of December 31,
The
As of December 31, For the period ended December 31, The main subsidiaries included in these consolidated financial statements are as follows:
Additionally, All Changes occurred in the
The value of the acquisition of this transaction was ThUS $ 294,105.
Under the provisions of No. 2 of Art. 103 of Law No. 18,046 on Corporations, for having collected all the shares held by a single shareholder and for having elapsed the period of 10 days without having amended said situation, the company LATAM Travel Chile S.A. It has been fully dissolved on December 1, 2019. As a result of the dissolution of the company LATAM Travel Chile S.A., the company LATAM Airlines Group S.A.
The sale value of Andes Airport Services S.A.
The sale value of NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements.
These consolidated financial statements of LATAM Airlines Group S.A.
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 IFRS 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.
The
(a) Accounting pronouncements with implementation effective from January 1, 2019:
The application of During the year, the Company has recognized the changes, in the consolidated financial statements, as a result of the adoption of IFRS 16 retrospectively; restating the comparative figures, in accordance with the provisions of IAS 8 Accounting policies, changes in accounting estimates and errors. The impacts of the adoption of IFRS 9 Financial Instruments, IFRS 15 Revenue from contracts with customers and IFRS 16 Leases are as follows: Consolidated statement of financial position (extract) a) As of January 1, 2017:
b) As of January 1, 2018:
c) As of December 31, 2018:
- Effects of adopting IFRS 9
This standard also includes requirements related to the classification and measurement of financial assets and liabilities and an expected credit loss model that replaces the current loss impairment model incurred. As of January 1, 2018, the calculation of the impairment losses provision are as follows:
In addition to the impacts on the consolidated statement of financial position, the application of IFRS 9: Financial Instruments requires the classification of financial instruments according to the business model, to determine the form of measurement of financial instruments, after their initial recognition. The Company analyzed the business models and classified its financial assets and liabilities according to the following:
- Effects of adopting IFRS 15 (4) Contract costs: The Company has capitalized the costs related to the revenues from air transport of passengers, corresponding to: the commissions charged by the credit card administrators for US$ 22.0 million and the air ticket booking services through the system general distribution (GDS) for US$ 15.6 million. Additionally, there is a reclassification of commissions from travel agencies for US$ 16.8 million, which previously were presented, according IAS 18, net of the liability to fly in other non-financial liabilities. (5) Contract liabilities: The Company has adjusted certain concepts that were recorded as obligations with suppliers and customers, which must now be treated as contract liabilities; therefore, they must be deferred until the benefit of the service have been rendered. These concepts are mainly related to the ground transportation service for US $ 15.6 million and traveler’s checks for US $ 6.6 million. (6) Performance Obligations: The Company analyzed the moment in which the performance obligations identified in the contracts with customers must be recognized in the consolidated result. During this analysis, some concepts were identified which must be deferred until the moment of service provision, mainly related to land transportation services, charges for modifications to the initial contract in the sale of tickets and redeem of some products associated with loyalty programs for US$ 60.8 million. Additionally, there is the reclassification detailed in numeral (4) for US$ 16.8 million. (7) Deferred tax adjustments originated by the application of IFRS 15. (8) Net effect on accumulated results of the adjustments indicated above. Additionally, the Company concluded that, in the rendering of certain services, it acted as agent in the provision of these services, therefore some reclassifications were made in the consolidated income statement to reflect the corresponding commission. - Effects of adopting IFRS 16 (9) Company recognized under Property, plant and equipment right of use assets for US $ 2,865.3 million as of January 1, 2018 and US $ 2,548.4 as of December 31, 2018, associated with contracts that meet the definition of lease (Note 2.21 & 17). The Company decrease other financial assets related to advance payments for leases for US $ 39.4 million as of January 1, 2018 and US $ 36.7 as of December 31, 2018, since with the application of the standard these amounts are considered in the initial measurement of the right of use asset. The Company increased the cost of restoration associated with the return of aircraft and engines for US $ 56.2 million as of January 1, 2018 and US $ 45.6 million as of December 31, 2018. With the application of the standard, the net present value of this cost was included in the asset for right of use and its counterpart in the line of accounts payable, current or non-current, depending on the return date of the aircraft or engines. (10) Deferred taxes: adjustments originated by the application of IFRS 16. (11) Lease liabilities: The Company recognized within the Other financial liabilities for lease for US$ 3,147.0 million as of January 1, 2018 and US$ 2,858.0 million as of December 31, 2018, associated with contracts that meet the definition of lease (Note 2.21 & 19). (12) The effect of the recognition of the leases under IFRS 16 generated a decrease in retained earnings of US$ 506.6 million as of January 1, 2018 (US$ 378.7 million as of December 31, 2018). The increase in Other reserves of US$ 205.9 million as of January 1, 2018 (decrease of US$ 72,5 million as of December 31, 2018), was caused by the Cumulative translation adjustment of those subsidiaries with functional currencies other than the US dollar. The application of IFRS 16 also affected non-controlling interests. The effects of the changes recognized in the application of IFRS 15 and IFRS 16 as of December 31, 2017 are presented in the consolidated income statement: Impact recognized as a result of the adoption of IFRS 16 as of December 31, 2017 are presented in the consolidated income statement:
Impact recognized as a result of the adoption of IFRS 15 and IFRS 16 as of December 31, 2018 are presented in the consolidated income statement:
In the income statement, with the implementation of the IFRS16 standard, restated were made in the following lines:
Impact recognized as a result of the adoption of IFRS 16 for the year ended of December 31, 2017 and 2018 are presented in the consolidated statement of cash flows:
(b) Accounting pronouncements not yet in force for financial years beginning on January 1, 2019 and which has not been early adopted.
The
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. Balances, transactions 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. To account for and identify the financial information
The
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 loss 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 is subsequently accounted using the equity method.
Investees or associates are all entities over which LATAM Airlines Group S.A. and Subsidiaries have significant influence but have no control. This usually arises from holding between 20% and 50% of the voting rights. Investments in associates are booked using the equity method and are initially recognized at their cost.
The items included in the financial statements of each of the entities of LATAM 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 LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.
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 by function except when deferred in Other comprehensive income as qualifying cash flow hedges.
After July 1, 2018, the Argentine economy was considered, for purposes of IFRS, hyperinflationary. The financial statements of the subsidiaries whose functional currency is the Argentine Peso have been restated. The non-monetary items of the statement of financial position as well as the income statement, comprehensive incomes and cash flows of the group’s entities, whose functional currency corresponds to a hyperinflationary economy, are adjusted for inflation and re-expressed in accordance with the variation of the consumer price index (“CPI”), at each presentation date of its financial statements. The re-expression of non-monetary items is made from the date of initial recognition in the statements of financial position and considering that the financial statements are prepared under the historical cost criterion. Net losses or gains arising from the re-expression of non-monetary items and income and costs are recognized in the consolidated income statement under “Result of indexation units”. Net gains and losses on the re-expression of opening balances due to the initial application of IAS 29 are recognized in the consolidated retained earnings. Re-expression due to hyperinflation will be recorded until the period in which the economy of the entity ceases to be considered as a hyperinflationary economy, at that time, the adjustments made by hyperinflation will be part of the cost of non-monetary assets and liabilities. The comparative amounts in the Consolidated financial statements of the Company are presented in a stable currency and are not adjusted for subsequent changes in the price level or exchange rates.
The results and the financial (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. For those subsidiaries of the group whose functional currency
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. 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 closing exchange rate or period
The land of LATAM Airlines Group S.A. and Subsidiaries, The amounts of Subsequent costs (replacement of components, improvements, extensions, etc.) are included in the value of the initial asset or
The depreciation of The residual value and the useful life of the assets are reviewed and adjusted, if necessary, once When the Losses and gains
Airport slots and the 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 identified by the Company, in accordance with the premises that are applicable, included as follows: Airport slots – Air transport CGU Loyalty program – (See Note 16) 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., 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.
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, for which the Company has been defined useful lives between 3 and 10 years. Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. The personnel costs and others
The Brands were acquired in the business combination with TAM S.A. And Subsidiaries and recognized at fair value under IFRS. During the year 2016, the estimated useful life of the brands
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 or each time that there is evidence of impairment. 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.
Intangible assets that have an indefinite useful life and developing IT projects are not subject to amortization and are subject to annual
As of January 1, 2018, the Company classifies its financial The group reclassifies debt investments when, and only when, it changes its In the
The subsequent measurement of debt instruments depends on the group’s business model to manage the asset and cash flow characteristics of the asset. The Company has two measurement categories in which the group classifies its debt instruments: Amortized cost: the assets held for the collection of contractual cash flows where those cash flows represent only payments of principal and interest are measured at amortized cost. A Fair value through profit or
Changes in the
The Company evaluates in advance the expected credit losses associated with its debt instruments recorded at amortized
Derivatives are
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 Other 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 Other financial assets or liabilities.
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.
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 In case of variable interest-rate hedges, the amounts recognized in the statement of For fuel price hedges, the amounts shown in the statement of For foreign currency hedges, the amounts recognized in the statement of When hedging
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)”.
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 (WAC). The net realizable value is the estimated selling price in the normal course of business, less estimated costs necessary to make the sale.
Commercial accounts receivable are In the event that the Company The existence of significant financial difficulties on the part of the debtor, the probability that the debtor The carrying amount
Cash and cash equivalents include cash and bank balances, time deposits in financial institutions, and other short-term and highly 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 received from the placement of shares.
Trade payables and other accounts payable are initially recognized at fair value and subsequently at amortized cost.
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.
The tax expense The Deferred taxes are Deferred tax assets are recognized The tax (current and deferred) is recognized in statement of income by function, unless it relates to an item recognized in
The Company recognizes the expense for personnel vacations on an accrual basis.
The compensation plans implemented based on the shares of the Company are recognized in the consolidated financial statements in accordance with IFRS 2: Share-based payments, for plans based on the granting of options, the effect of fair value is recorded in equity with a charge to remuneration in a linear manner between the date of grant of said options and the date on which they become irrevocable, for the plans considered as cash settled award the fair value, updated as of the closing date of each reporting period, is recorded as a liability with charge to remuneration.
Provisions are made for these obligations by applying the method of the projected unit credit method, and
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.
Provisions are recognized when:
The Company
Compensations granted to clients for changes in the levels of services or billing of additional services such as additional baggage, change of seat, among others, are considered modifications of the initial contract, therefore, they are deferred until the corresponding service is provided.
The Company estimates in a monthly basis the probability of expiration of air tickets, with refund clauses, based on the history of use of the same. Air tickets without refund clause are expired on the date of the flight in case the passenger does not show up.
The costs related to the sale of
The Company Members of these programs accumulate miles when flying with LATAM Airlines Group or any other member airline of the oneworld® program, as well purchasing of products and services from network of non airlines partners. When the miles and points In addition, the Company has contracts with certain non-airline companies for the Deferred income of loyalty programs is determined based on the estimated stand-alone selling price of unused miles and points awarded to the members of the loyalty programs, reduced for breakage. The
Dividend income is
The Company Assets for right of use are measured at cost including the following:
The assets by right of use are recognized in the statement of financial position in Properties, plants and equipment Lease liabilities include the
The Company determines the present value of the
Lease liabilities are recognized in the statement of financial
Principal and interest are presented in the consolidated cash flow as “Payments of lease liability” and “Interest paid”, respectively, in cash flows use in financing activities. Payments associated with short-term leases without purchase options and leases of low-value assets are recognized on a straight-line basis The Company analyzes the financing agreements of aircrafts, mainly considering characteristics such as: (a) that the Company initially acquired the aircraft or took an important part in the process of direct acquisition with the manufacturers. (b) Due to the contractual conditions, it is virtually certain that the Company will execute the purchase option of the Since these financing agreements are “substantially purchases” and not leases, the related liability is considered as a financial debt classified under IFRS 9 and continue to be presented within the “other financial liabilities” described in Note 19. On the other hand, aircraft are presented in Property, plants and equipment as described in Note 17, as “own aircrafts”. The Group qualifies as sale and leaseback transactions, operations which lead to a sale according to IFRS 15. More specifically, a sale is considered as such if there is no repurchase option on the goods at the end of the lease term. If the sale of the seller-lessee is classified as a sale in accordance with IFRS 15, the underlying asset is derecognized and an asset is recognized for the right to use equal to the retained part of the net carrying amount of the asset. If the sale by the seller-lessee is not qualified as a sale in accordance with IFRS 15, the assets transferred are maintained in the financial statements and a financial liability is recognized equal to the sale price (received from the buyer-lessor).
Non-current assets (or disposal groups)
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 Additionally, some 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. NOTE
The Company is exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The program overall risk management of the Company aims to minimize the adverse effects of financial risks affecting the company.
Due to the nature of its operations, the Company is exposed to market factors such as: (i) fuel-price risk, (ii) exchange -rate risk (FX), and (iii) interest -rate risk. The Company has developed policies and procedures for managing market risk, which aim to identify, quantify, monitor and mitigate the adverse effects of changes in market factors mentioned above. For this, the Administration monitors the evolution of price levels, exchange rates and interest rates, and quantifies their risk exposures (Value at Risk), and develops and implements hedging strategies.
Exposition: For the execution of its operations the Company purchases a fuel called Jet Fuel grade 54 USGC, which is subject to the fluctuations of international fuel prices. Mitigation: To cover the risk exposure fuel, the Company operates with derivative instruments (swaps and options) whose underlying assets may be different from Jet Fuel, being possible use West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and Fuel Hedging Results: During the period ended
As of december 31, The following tables show the level of hedge for different periods:
Sensitivity analysis A drop in fuel price positively affects the Company through a reduction in costs. However, 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. The current hedge positions they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity. 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 The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the
Given the structure of fuel
Exposition: The functional and presentation currency of the The subsidiaries of LATAM
The largest operational exposure
Mitigation: The Company mitigates currency risk exposures by contracting derivative instruments or through natural hedges or execution of internal operations.
With the
As of december 31, During the period ended
As of During 2018 the company contracted FX Sensitivity analysis: A depreciation of the R$/US$ exchange rate,
FX derivatives are The following table
During 2018 and 2019, the Company contracted swap currency derivatives for debt coverage issued the same year for a notional UF 8.7 million and UF 5.0 million, respectively. As of December 31, 2019, the market value of the currency swaps derivative positions amounted to US $ 22.7 million (negative). At the end of December 2018, this market value was US $ 15.1 million (positive). In the case of TAM In order to reduce the The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:
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 19). 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 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$/US$:
Exposition: The Company is exposed to fluctuations in interest rates affecting the markets future cash flows of the assets, and current and future financial liabilities. The Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) and other interest rates of less relevance are Brazilian Interbank Deposit Certificate (“ Mitigation:
In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contracts. Currently a Rate Hedging
As of december 31 Sensitivity analysis: 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 each date.
Much of the current rate derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity. The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve, being both reasonably possible scenarios according to historical market conditions.
The assumptions of sensitivity calculation must assume that forward curves of interest rates do not necessarily reflect the real value of the compensation flows. Moreover, the structure of interest rates is dynamic over time. During the periods presented, the Company has no registered amounts by ineffectiveness in consolidated statement of income for this kind of hedging.
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
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 Cash and cash equivalents and 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.
The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by International Air Transport 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”), 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 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)
Liquidity risk represents the risk that the Company has no sufficient 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, the Company requires liquid funds, defined as cash and cash equivalents plus other short term financial assets, to meet its payment obligations. The liquid funds, the future cash generation and the capacity to obtain additional funding, through bond issuance and banking loans, will allow the Company to obtain sufficient alternatives to face its investment and financing future commitments.
At december 31 In addition to the balance of liquid funds, the Company has access to Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, Debtor: LATAM Airlines Group S.A. and Subsidiaries,
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, Debtor:
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, Debtor: LATAM Airlines Group S.A. and Subsidiaries,
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, Debtor: LATAM Airlines Group S.A. and Subsidiaries,
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2018 Restated Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
The Company has fuel, interest rate and exchange 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
The Company’s objectives, with respect to the management of capital, are (i) to comply with the restrictions of minimum equity and (ii) to maintain an optimal capital structure. The Company monitors its contractual obligations and the regulatory limitations in the different countries where the entities of the group are domiciled to assure they meet the limit of minimum net equity, where the most restrictive limitation is to maintain a positive net equity. Additionally, the Company periodically monitors the short and long term cash flow projections to assure the Company has adequate sources of funding to generate the cash requirement to face its investment and funding future commitments. The Company international credit rating is the consequence of the Company capacity to face its long terms financing commitments. As of December 31,
At
This category includes the following instruments:
This category includes the following instruments:
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 period 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 period end. The following table shows the classification of financial instruments at fair value, depending on the level of information used in the assessment:
Additionally, at
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 NOTE The Company has used estimates to value and record
As of december 31, 2019, goodwill amount to ThUS$ 2,209,576 (ThUS$ 2,294,072 as of december 31, 2018), while the intangible assets comprise the Airport Slots for ThUS$ 845,959 (ThUS$ 828,969 as of december 31, 2018) and Loyalty Program for ThUS$ 263,806 (ThUS$ 274,420 as of december 31, 2018). Management conducts an impairment test annually or more frequently if events or changes in circumstances indicate potential impairment. For this evaluation, the Company
The depreciation of assets is calculated based on the linear model, except for certain technical components depreciated on cycles and hours flown. These useful lives are reviewed on an annual basis according with the Company’s future economic benefits associated with them. Changes in circumstances such as: technological advances, business model, planned use of assets or capital strategy may render the useful life different to the lifespan estimated. When it is determined that the useful life of property, plant, and equipment must be reduced, as may occur in line with changes in planned usage of assets, the difference between the net book value and estimated recoverable value is depreciated, in accordance with the revised remaining useful life. Residual values are estimated in accordance with the market value that these assets will have at the end of their useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once a year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount
Management records deferred taxes Management applied significant judgment in assessing the recoverability of deferred tax As of December 31,
The Company
As of December 31, Management used statistical models to estimate the miles and
For LATAM Pass Brazil, the expiration occurs after a fixed period from the time of the For LATAM Pass there are rules that allow members to renew their miles, so the management in conjunction with an external specialist develop a predictive model of non-use miles, which
Known contingencies are recognized when:
The discount rate used to calculate the lease debt corresponds, for each aircraft, to the implicit interest rate induced by the contractual elements and residual market values. The implied rate of the contract is the discount rate that gives the aggregated present value of the minimum lease payments and the unguaranteed residual value. This present value should be equal to the sum of the fair value of the leased asset and any initial direct costs of the lessor. For those leases other than aircraft, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We consider to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. A 100 basis point decrease in our estimate of the rate at January 1, 2019 (the date the adoption of the standard) would increase our lease liability by approximately US$ 105 million.
In determining the lease term, there are considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee.
The management has applied its judgment in determining that LATAM Airlines Group S.A. controls TAM S.A. and Subsidiaries, for accounting purposes, and has therefore consolidated the financial statements. The grounds for this decision are that LATAM issued ordinary shares in exchange for the majority of circulating ordinary and preferential shares in TAM, except for those TAM shareholders who did not accept the exchange, which were subject to a squeeze out, entitling LATAM to substantially all economic benefits generated by the LATAM Group, and thus exposing it to substantially all risks relating to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the controlling shareholders of TAM, thus Since the integration of LAN and TAM operations, the most critical airline operations in Brazil have been managed by the CEO of TAM while global activities have been managed by the CEO of LATAM, who is in charge of the operation of the LATAM Group as a whole and reports to the LATAM Board. The CEO of LATAM also evaluates the performance of LATAM Group executives and, together with the LATAM Board, determines compensation. Although Brazilian law currently imposes restrictions on the percentages of voting rights that may be held by foreign investors, LATAM believes that the economic basis of these agreements meets the requirements of accounting standards in force, and that the consolidation of the operations of LAN and LATAM is appropriate. These estimates were made based on the best information available relating to the matters analyzed. In any case, it is possible that events that may take place in the future could lead to their modification in future reporting periods, which would be made in a prospective manner. NOTE 5 - SEGMENTAL INFORMATION
As of December 31, 2019, the Company
Until June 2019, the Company presented two operating segments, the one corresponding to Air transport and the Multiplus coalition and loyalty program segment, discussed in Note 1, the Company Multiplus S.A. Administrator of the Coalition and Loyalty Program Multiplus merged into TAM Linhas Aereas S.A., ceasing to be an entity with independent administration. The Multiplus coalition and Loyalty program, which was defined as an operating segment, due to this independent administration, became part of
The company has restated the information corresponding to December 31, 2018 and 2017 for the presentation of a single segment of information.
The information by segments as of December 31, 2018 and 2017, which included the Multiplus Coalition and Loyalty Program segment has been restated to present its incorporation into the Air Transport segment. This restatement is presented in the following table:
(*) The Company does not have any interest income that should be recognized as income from ordinary activities by interest.
The Company’s revenues by geographic area are as follows:
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. NOTE 6 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents are denominated in the following currencies:
NOTE 7 - FINANCIAL INSTRUMENTS
As of December 31,
As of December 31, 2018 (Restated)
Liabilities information is detailed in the table within Note 3 Financial risk management. NOTE 8 - TRADE AND OTHER ACCOUNTS RECEIVABLE CURRENT, AND NON-CURRENT ACCOUNTS RECEIVABLE
The fair value of trade and other accounts receivable does not differ significantly from the book value.
To determine the expected credit losses, the Company groups accounts receivable for passenger and cargo transportation; depending on the characteristics of
(1) Corresponds to the expected average rate. (2) the gross book value represents the maximum growth risk value of trade accounts receivable. Currency balances that make up the Trade and other accounts receivable and non-current accounts receivable are the following:
The
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.
The historical and current 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.
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. NOTE 9 - ACCOUNTS RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES
Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties. The transaction times are between 30 and 45 days, and the nature of settlement of the transactions is monetary. The composition of Inventories is as follows:
The items included in this heading are spare parts and materials that will be used mainly in consumption in in-flight and maintenance services provided to the Company and third parties, which are valued at average cost, net of provision for obsolescence, as per the following detail:
The resulting amounts do not exceed the respective net
For the period ended December 31, NOTE 11 - OTHER FINANCIAL ASSETS The composition of
The NOTE 12 - OTHER NON-FINANCIAL ASSETS The composition of
(1) Movement of Contracts assets:
(2) Aircraft maintenance reserves reflect prepayment deposits made by the group to lessors of certain aircraft under operating lease agreements in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. These amounts are calculated based on performance measures, such as flight hours or cycles, are paid 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, (five 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. As of December 31, Aircraft maintenance reserves are classified as current or non-current depending on the dates when the related maintenance is expected to be performed (Note 2.23). NOTE 13 - NON-CURRENT ASSETS AND DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE Non-current assets and
The balances are presented at the lower of book value and fair value less cost to sell. The fair value of these assets
During 2019, four Airbus
Additionally, during 2019, the materialized. As a result The detail of the fleet classified as non-current assets
NOTE 14 - INVESTMENTS IN
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 LATAM Airlines Group S.A. and Subsidiaries. The consolidation also includes special-purpose entities. Detail of significant
The consolidated subsidiaries do not have significant restrictions for transferring funds to controller. Summary financial information of significant subsidiaries
F-79
Equity
Incomes
NOTE 15 - INTANGIBLE ASSETS OTHER THAN GOODWILL The details of intangible assets are as follows:
Movement in Intangible assets other than goodwill:
The amortization of
Goodwill Movement of Goodwill, separated by CGU:
As of December 31, 2019, the Company The CGU “Air transport” considers the transport of passengers and cargo, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil, The recoverable Management’s cash flow projections included significant judgements and assumptions related to annual revenue growth rates, discount rate, inflation rates, the exchange rate and price of
As of December 31,
(1) In line with the expectations of the Central Bank of Brazil The result of the impairment test, which includes a sensitivity analysis of
The calculation of the recoverable value of the CGU is most sensitive to
In none of the previous cases there was an impairment NOTE 17 - PROPERTY, PLANT AND EQUIPMENT The composition by category of Property, plant and equipment is as follows:
(1) One aircraft leased to Aerotransportes Mas de Carga S.A. de C.V. (2) Three aircraft leased to Salam Air and two to Sundair (3) Four aircraft leased to Qatar Airways, which are in assets by right of use.
The aircraft with remarketing clause (**) under modality of financial leasing, which are depreciated according to the duration of their contracts, between 12 and 18 years. Its residual values are estimated according to market value at the end of such contracts.
Description of Property, plant and equipment pledged as guarantee:
The amounts of Additionally, there are indirect guarantees As of December 31, 2019, the Company keeps valid letters of credit related to assets by right of use according to the following detail:
Fully depreciated assets and commitments for future purchases are as follows:
Purchase commitment of aircraft
As of December 31, dates delivery for 2026. The approximate amount, according to manufacturer’s list prices, is ThUS$
As of December 31, 2023. The approximate amount, according to
NOTE 18 - CURRENT AND DEFERRED TAXES In the period ended December 31,
Deferred taxes are recognized, on the
No deferred tax has been recorded for permanent difference, since they are caused by
The balances of deferred tax are the following:
The balance of deferred tax assets and liabilities are composed primarily of temporary differences to be reversed in the long term. Movements of Deferred tax assets and liabilities (a) From January 1 to December 31,
(b) From January 1 to December 31, 2018 Restated (Unaudited)
(c) From January 1 to December 31, 2019
Deferred tax assets not recognized:
Deferred tax assets on tax Deferred tax expense and current income taxes:
Composition of income tax expense (income):
Profit before tax by the legal tax rate in Chile
Deferred taxes related to items charged to net equity:
NOTE 19 - OTHER FINANCIAL LIABILITIES The composition of
Obligations with credit institutions and debt instruments:
(2) On June 6, 2019, LATAM Airlines Group S.A. has issued in the The total amount issued was UF 5,000,000 with an expiration date on April 15, 2029 and a 3.60% annual coupon rate with semiannual interest payments. The placement rate was 2.73%, equivalent to an amount of ThUS$ 215,093. The funds from the issuance were allocated 50% to the refinancing of liabilities, 30% for the financing of investments and 20% for general corporate purposes. (3) On July 11, 2019, LATAM Finance Limited, a company incorporated in Simultaneously, dated July 11, 2019, LATAM Airlines Group S.A. announced an offer for the repurchase of up to US $ 300 million of the unsecured LATAM 2020 bond, which was issued on June 9, 2015 for an amount of US $ 500 million at a coupon rate of 7.25% and The net proceeds obtained from the
On December 17, 2019, LATAM Airlines Group S.A. The repurchase of the remainder (US $ 262 million) of the unsecured bond LATAM2020 ended, which, added to the repurchase of July 11, 2019, ends the entire balance of the bond. The repurchase was carried out through the buy-back mechanism called “Make-Whole,” which is a right of the bond issuer to repurchase the entire outstanding balance of debt based on a price that is calculated using government treasury bonds. of the United States with maturity close to that of the bond and adding a spread. The repurchase price was 102,45 cents per dollar of nominal bond amount. (4) In the year ended December 31, 2019, the Company sold its participation in 8 permanent establishments. As a result of the above, the classification of financial liabilities associated with 41 aircraft of guaranteed obligations became financial leases. Currency balances that make the interest bearing loans:
Interest-bearing loans due in installments to December 31, Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
(*) Securitized bond with the future flows from the sales with credit card in United States and Canada, through the company Guanay Finance Limited. Interest-bearing loans due in installments to December 31, Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
Interest-bearing loans due in installments to December 31, Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
(*) Securitized bond with the future flows from the sales with credit card in United States and Canada, through the company Guanay Finance Limited. Interest-bearing loans due in installments to December 31, Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
The movement of the lease liabilities corresponding to the period reported is as follows:
The company recognizes the interest payments related to the lease liabilities in the consolidated result under Financial expenses (See Note 27 (d)).
The foreign currency derivatives Hedging operation The fair values of net assets/ (liabilities), by type of derivative, of the contracts held as hedging instruments are presented below:
During the periods presented, the Company only
All hedging operations 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. The amounts recognized in comprehensive income during the period and transferred from net equity to income are as follows:
NOTE 20 - TRADE AND OTHER ACCOUNTS PAYABLES The composition of Trade and other accounts payables is as follows:
The details of Trade and other accounts payables are as follows:
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 The labor contingencies correspond to different demands of labor order filed against the The Provisions are recognized in the consolidated income statement in administrative expenses or tax expenses, as appropriate.
Movement of provisions:
Provision constituted on the occasion of the With respect to Europe, the NOTE 22 - OTHER NON-FINANCIAL LIABILITIES
Deferred Income Movement
LATAM Pass is the frequent
For its part, TAM, thinking of people who travel constantly, Multiplus is a coalition of loyalty programs, After the merger of Multiplus S.A. described in Note1, the Latam Fidelidade programs and the Multiplus coalition and loyalty program become part of the Latam Pass Brazil Program. During 2018 the Company signed a renewal of the agreement with Banco Santander-Chile, which one extends its alliance in Chile to continue developing travel benefits to its respective clients during the next 7 years, and during 2019 signed a renewal of the agreement with Banco Crédito del Perú. On September 26, 2019, the Company signed a framework agreement with Delta Air Lines, Inc, in which the latter agreed to pay ThUS $ 350,000 for compensation of costs and revenues that the Company must incur or cease to receive, respectively, during the transition period until the implementation of the strategic alliance. ThUS$ 150,000 was received on September 2019. During December 2019, the Company sold its rights to receive future payments of the committed transition. The payments consisted of ThUS $ 200,000 payable in 8 quarterly installments of ThUS $ 25,000 as of January 2, 2020. On December 13, 2019, the Company received ThUS $ 194,068 for said sale. Account receivable was derecognized and ThUS$ 5,932 was recognized as financial cost on income statement.
Additionally, the Company maintains a balance of ThUS $ 30,340 in the Commercial accounts payable item of the Statement of Financial Position regarding to Delta compensation, for the cost already incurred.
The principal assumptions used in the calculation to the provision in Chile are presented below:
The discount rate The The
The participation in profits and bonuses correspond to an annual incentives plan for achievement of objectives.
NOTE 24 - ACCOUNTS PAYABLE, NON-CURRENT
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 paid capital of the Company at December 31, (*)
On August 18, 2016, the Company held an extraordinary shareholders’ meeting
into. The following table shows the movement of
Movement fully paid shares
At December 31,
Movement of Reserves of
These reserves are related to the “Share-based payments” explained in Note 34.
Movement of Other sundry reserves:
Balance of Other sundry reserves
(1) Corresponds to the difference between the value of the shares of TAM S.A., acquired by Sister Holdco S.A. (under the Subscriptions) and by Holdco II S.A. (by virtue of the Exchange Offer), which is recorded in the declaration of completion of the merger by absorption, and the fair value of the shares exchanged by LATAM Airlines Group S.A. as of June 22, 2012. (2) Corresponds to the technical revaluation of the fixed assets authorized by the Commission for the Financial Market in the year 1979, in Circular No. 1529. The revaluation was optional and could be made only once; the originated reserve is not distributable and can only be capitalized. (3) The balance as of December 31, 2019 corresponds to the loss generated by: Lan Pax Group S.A. e Inversiones Lan S.A. in the acquisition of shares of Aerovías de Integración Regional Aires S.A. for ThUS$ (3,480) and ThUS$ (20), respectively; the acquisition of TAM S.A. of the minority interest in Aerolinhas Brasileiras S.A. for ThUS$ (885), the acquisition of Inversiones Lan S.A. of the minority participation in Aires Integra Regional Airlines S.A. for an amount of ThUS$ (2) and the acquisition of a minority stake in Aerolane S.A. by Lan Pax Group S.A. for an amount of ThUS$ (21,526) through Holdco Ecuador S.A. The loss due to the acquisition of the minority interest of Multiplus S.A. for ThUS$ (184.135) (see Note 1).
Movement of Reserves with effect in other comprehensive income:
These originate from exchange differences arising from the translation of any investment in foreign entities (or Chilean investment with a functional currency different to that of the parent), and from loans and other instruments in foreign currency designated as hedges for such investments. When the investment (all or part) is sold or disposed and loss of control occurs, these reserves are shown in the consolidated statement of income as part of the loss or gain on the sale or disposal. If the sale does not involve loss of control, these reserves are transferred to non-controlling interests.
These originate from the fair value valuation at the end of each period of the outstanding derivative contracts that have been defined as cash flow hedges. When these contracts expire, these reserves should be adjusted, and the corresponding results recognized.
Correspond to the increase or decrease in the obligation present value for defined benefit plan due to changes in actuarial assumptions, and experience adjustments, which is the effects of differences between the previous actuarial assumptions and what has actually occurred.
Movement of Retained earnings:
The detail of revenues is as follows:
NOTE 27 - COSTS AND EXPENSES BY NATURE
The main operating costs and administrative expenses are detailed below:
(*) Lease expenses are included within this amount (See Note 2.21)
Depreciation and amortization are detailed below:
(*) Included within this amount is the depreciation of the Properties, plants and equipment (See Note 17 (a)) and the maintenance of the aircraft recognized as assets by right of use. The maintenance cost amount included in the depreciation line for the period ended December 31, 2019 is ThUS$ 445,680 and ThUS$ 366,393 for the same period 2018.
The costs for personnel expenses are disclosed in Note 23 liability for employee benefits.
The detail of financial costs is as follows:
Costs and expenses by nature presented in this
NOTE Other income by function is as follows:
NOTE The functional currency of LATAM Airlines Group S.A. is the US dollar, also it has subsidiaries whose functional currency is different to the US dollar, such as the The functional currency is defined as the currency of the primary economic environment in which an entity operates and in each entity and all other currencies are defined as foreign currency. Considering the above, the balances by currency mentioned in this
The foreign currency detail of balances of monetary items in current and non-current assets is as follows:
Other financial assets, non-current Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency Other non—financial assets, non-current Argentine peso Brazilian real U.S. dollar Other currency Accounts receivable, non-current Chilean peso U.S. dollar Other currency Deferred tax assets Colombian peso Other currency Total non-current assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency The foreign currency detail of balances of monetary items in current liabilities and non-current is as follows:
Non-current liabilities Other financial liabilities, non-current Chilean peso U.S. dollar Accounts payable, non-current Chilean peso U.S. dollar Other currency Other provisions, non-current Argentine peso Brazillian real Chilean peso Colombian peso Euro U.S. dollar Provisions for employees benefits, non-current Brazilian real Chilean peso U.S. dollar Other non-financial liabilities, non-current Colombian peso Total non-current liabilities Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Other currency General summary of foreign currency: Total assets Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Total liabilities Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency Net position Argentine peso Brazilian real Chilean peso Colombian peso Euro U.S. dollar Strong bolivar Other currency
The exchange differences recognized in
The exchange differences recognized in The following shows the current exchange rates for the U.S. dollar, on the dates indicated:
NOTE
1) On July 25, 2016, LATAM reached agreements with theU.S. Department of Justice (“DOJ”) and theU.S. Securities and Exchange Commission (“SEC”) regarding the investigation of payments for US$1,150,000 by Lan Airlines S.A. in 2006-2007 to a consultant advising it in the resolution of labor matters in Argentina. The purpose of the investigation was to determine whether these payments violated the U.S. Foreign Corrupt Practices Act (“FCPA”) that: (i) forbids bribery of foreign government authorities in order to obtain a commercial advantage; and (ii) requires the companies that must abide by the FCPA to keep appropriate accounting records and implant an adequate internal control system. The FCPA is applicable to LATAM because of its ADR program in effect on the U.S. securities market. After an exhaustive investigation, the DOJ and SEC concluded that there was no violation of the bribery provisions of the FCPA, which is consistent with the results of LATAM’s internal investigation. However, the DOJ and SEC consider that The agreements signed, included the following: (a) The agreement with the DOJ involves: (i) entering into a Deferred Prosecution Agreement (“DPA”), which is a public contract under which the DOJ files public charges alleging an infringement of the FCPA accounting regulations. LATAM is not obligated to answer these charges, the DOJ will not pursue them for a period of 3 years, and the DOJ will dismiss the charges after expiration of that 3-year period provided LATAM complies with all terms of the DPA. In exchange, LATAM (b) The agreement with the SEC involves: (i) accepting a Cease and Desist Order, which is an administrative resolution of the SEC closing the investigation, in which LATAM will accept certain obligations and statements of fact that are described in the document; (ii) accepting the same obligations regarding the consultant mentioned above; and (iii) On May 15, 2019, the external consultant certified that the Anticorruption program of LATAM Airlines Group S.A. It is reasonably designed and implemented to prevent and detect violations within LATAM to anti-corruption laws.
On July 23, 2019, the DOJ approved the certification made by the consultant on May 15, 2019 regarding the Anticorruption program of LATAM Airlines Group S.A. On January 31, 2020, the Florida Court sustained the DOJ’s motion to withdraw the criminal action filed against LATAM Airlines Group S.A. as LATAM had fulfilled all the conditions in the DPA. So, the DOJ case is closed. 2) On April 6, 2019, LATAM Airlines Group S.A. received notification of the resolution issued by the National Economic Prosecutor’s Office (FNE), which begins an investigation into the LATAM Pass frequent passenger program. The last move in the cause Role No. 2530-19 leading this investigation corresponds to LATAM Airlines Group S.A. response in May 2019. 3) On July 9, 2019, LATAM Airlines Group S.A. received the resolution issued by the National Economic Prosecutor’s Office (FNE), which begins an investigation into the Alliance Agreement between LATAM Airlines Group S.A. and American Airlines INC. The last move in the cause Role No. 2565-19 leading this investigation corresponds to a statement on September 11, 2019 4) On July 26, 2019, the National Consumer Service of Chile (SERNAC) issued the Ordinary Resolution No. 12,711 which proposed to initiate a collective voluntary mediation procedure on effectively informing passengers of their rights in cases of cancellation of flights or no show to boarding, as well as the obligation to return the respective boarding fees as provided by art. 133 C of the Aeronautical Code. The Company has voluntarily decided to participate in this procedure, the terms and conditions of which are being negotiated. 5) On October 15, 2019, LATAM Airlines Group S.A. received the resolution issued by the National Economic Prosecuting Authority (FNE) advising of the start of an investigation into the agreement between LATAM Airlines Group S.A. and Delta Airlines, Inc. (Case number 2585-19). The Company is cooperating in this investigation. 6) On December
The Company and its subsidiaries do not maintain
With respect to the various contracts concluded by the Company for the financing of Boeing 787 aircraft that have the guarantee of the Export - Import Bank of the United States of America, limits have been established for some financial indicators of the parent company on a consolidated basis, in respect of which, in any case, non-compliance does not accelerate payment of the loan. The established limits measured semiannually on the basis of the Consolidated Financial Statements are the following:
EBITDAR: It is defined as the net result, excluding interest, depreciation, amortization, rental income and profits or extraordinary losses not related to ordinary course of business.
Regarding the renewable credit line of credit (“Revolving Credit
As of December 31, 2019 this line of credit established with a consortium of twelve banks led by Citibank, is not used. As of December 31, 2019, the Company is in compliance with all the financial indicators detailed above.
Lessor MASL Sweden (7) AB MASL Sweden (8) AB Merlin Aviation Leasing (Ireland) 18 Limited NBB Cuckoo Co., Ltd NBB Grosbeak Co., Ltd NBB Redstart Co. Ltd NBB-6658 Lease Partnership NBB-6670 Lease Partnership Orix Aviation Systems Limited PAAL Aquila Company Limited PAAL Gemini Company Limited SASOF II (J) Aviation Ireland Limited Shenton Aircraft Leasing 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 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 Wells Fargo Bank Northwest National Association Wilmington Trust Company Total
In particular, the
Finally, we Note that (b) Other commitments At December 31,
The credit letters related to right of use assets are included in Note 17 letter (d) Additional information Property, Plant and Equipment, in numeral (i) Property Plant and equipment delivered under guarantee. NOTE
The balances of Accounts receivable and accounts payable to related parties are disclosed in Note 9. Transactions between related parties have been carried out
The Company has defined for these purposes that key management personnel are the executives who define the Company’s policies and
NOTE
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.
At the Extraordinary Shareholders’ Meeting held on June 11, 2013, the
On June 11, 2018, expired the term to subscribe said actions, which were neither subscribed nor paid, reducing the capital of full rights.
The This benefit is
The fair value has been determined on the basis of the best estimate of the future value of the Company share multiplied by the number of units granted bases.
As of December 31, We inform you that this Compensation Plan is finished (LP1).
The company implemented a long-term retention plan for executives that lasts until March 2020, with a period of enforceability between October 2019 and March 2020, which consists of an extraordinary bonus whose calculation formula is based on the variation of the value experienced by the action of LATAM Airlines Group SA for a certain period of time. At December 31, 2019 the required action price for its collection is under the initial target.
The Company implemented a program for a group of executives, which lasts until March 2023, with a period of enforceability between October 2020 and March 2023, where the collection percentage is annual and cumulative. The methodology is an allocation, of quantity of units, where a goal of the value of the action is set. The bonus is applicable, if the target of the price of the action defined in each year is met. In case the bonus is accumulated, until the last year, the total bonus is doubled (in the case of the share price is activated).
As indicated in Note 1, and the consequent resignation of the executives of Multiplus S.A.
The acquisition of the share’s rights, in both companies is as follows:
In accordance with IFRS 2 -
As of
NOTE
Below are the cash flows associated with aircraft purchases, which are included in the statement of consolidated cash flow, in the item Purchases of properties, plants and equipment:
LATAM Airlines Group One Within the
i. Carbon footprint ii. Eco Efficiency iii. Sustainable Alternative Energy iv. Standards and Certifications This is how, during 2019, the following initiatives have been carried out:
NOTE 37 - EVENTS SUBSEQUENT TO THE DATE OF THE FINANCIAL STATEMENTS Subsequent to the closing date of the financial statements as of December 31, 2019, there has been a significant variation in the exchange rate (Central Bank of Brazil) R $ / US $, from R $ 4.03 to US$ to R $ 4.85 per US$ to March 13, 2020, which represents a depreciation of 20.23% of the Brazilian currency. On As of this date, it is not possible to quantify the
The consolidated financial statements of LATAM Airlines Group S.A. and
Assets Current assets Cash and cash equivalents Other financial assets Other non-financial assets Trade and other accounts receivable Accounts receivable from related entities Inventories Tax assets Total current assets other than non-current assets (or disposal groups) classified as held for sale Non-current assets and disposal groups held for sale Total current assets Non-current assets Other financial assets Other non-financial assets Accounts receivable Accounts receivable from related parties Equity accounted investments Intangible assets other than goodwill Goodwill Property, plant and equipment Current tax assets, long term portion Deferred tax assets Total non-current assets Total assets Liabilities and shareholder’s equity Current liabilities Other financial liabilities Trade and other accounts payable Accounts payable to related parties Other provisions Tax liabilities Other non-financial liabilities Total current liabilities other than non-current liabilities (or disposal groups) classified as held for sale Non-current liabilities and disposal groups held for sale Total current liabilities Non-current liabilities Other financial liabilities Accounts payable Accounts payable to related parties Provision for losses on investments Other provisions Deferred tax liabilities Employee benefits Other non-financial liabilities Total non-current liabilities Total liabilities Equity Share capital Retained earnings Share premium Treasury shares Other reserves Parent’s ownership interest Non-controlling interest Total non-current liabilities Total liabilities Assets Current assets Cash and cash equivalents Other financial assets Other non-financial assets Trade and other accounts receivable Accounts receivable from related entities Inventories Tax assets Total current assets other than non-current assets (or disposal groups) classified as held for sale Non-current assets and disposal groups held for sale Total current assets Non-current assets Other financial assets Other non-financial assets Accounts receivable Accounts receivable from related parties Equity accounted investments Intangible assets other than goodwill Goodwill Property, plant and equipment Current tax assets, long term portion Deferred tax assets Total non-current assets Total assets As of December 31, ThUS$ As of ThUS$ As of December 31, ThUS$ As of ThUS$ As of December 31, ThUS$ As of ThUS$ As of ThUS$ Liabilities and shareholder’s equity Current liabilities Other financial liabilities Trade and other accounts payable Accounts payable to related parties Other provisions Tax liabilities Other non-financial liabilities Total current liabilities Non-current liabilities Other financial liabilities Accounts payable Accounts payable to related parties Provision for losses on investments Other provisions Deferred tax liabilities Employee benefits Other non-financial liabilities Total non-current liabilities Total liabilities Equity Share capital Retained earnings Share premium Treasury shares Other reserves Parent’s ownership interest Non-controlling interest Total non-current liabilities Total liabilities As of December 31, ThUS$ As of ThUS$ As of December 31, ThUS$ As of ThUS$ As of December 31, ThUS$ As of ThUS$ As of ThUS$ Revenue Cost of sales Gross margin Other income Distribution costs Administrative expenses Other expenses Other gains/(losses) Gains (losses) from operating activities Financial income Financial costs Revenue and losses from associated companies Exchange differences Resut for readjustable units Income / (loss) before taxes Income tax expense / benefit NET INCOME / (LOSS) FOR THE YEAR Income / (loss) attributable to owners of the parent Income / (loss) attributable to non-controlling NET INCOME / (LOSS) Total comprehensive income / (loss) Comprehensive income / (loss) attributable to owners of the parent Comprehensive income / (loss) attributable to non-controlling interest Total comprehensive income / (loss) As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ Revenue Cost of sales Gross margin Other income Distribution costs Administrative expenses Other expenses Other gains/(losses) Gains (losses) from operating activities Financial income Financial costs Revenue and losses from associated companies Exchange differences Resut for readjustable units Income / (loss) before taxes Income tax expense / benefit NET INCOME / (LOSS) FOR THE YEAR Income / (loss) attributable to owners of the parent Income / (loss) attributable to non-controlling NET INCOME / (LOSS) Total comprehensive income / (loss) Comprehensive income / (loss) attributable to owners of the parent Comprehensive income / (loss) attributable to non-controlling interest Total comprehensive income / (loss) As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ Revenue Cost of sales Gross margin Other income Distribution costs Administrative expenses Other expenses Other gains/(losses) Gains (losses) from operating activities Financial income Financial costs Equity accounted investments Exchange differences Resut for readjustable units Income / (loss) before taxes Income tax expense / benefit NET INCOME / (LOSS) FOR THE YEAR Income / (loss) attributable to owners of the parent Income / (loss) attributable to non-controlling NET INCOME / (LOSS) Total comprehensive income / (loss) Comprehensive income / (loss) attributable to owners of the parent Comprehensive income / (loss) attributable to non-controlling interest Total comprehensive income / (loss) As of ThUS$ As of ThUS$ As of December 31, 2016 ThUS$ As of 2016 ThUS$ As of ThUS$ As of 2016 ThUS$ As of 2016 Cash flows from operating activities Receipts from sales of goods and services Other receipts from operating activities Payments to suppliers for the supply of goods and services Payments to and on behalf of employees Other payments for operating activities Interest received Income taxes refunded (paid) Other inflows (outflows) of cash Net cash flows from operating activities Cash flows from (used in) investing activities Other cash receipts from sales of equity or debt instruments of other entities Other payments to acquire equity or debt instruments of other entities Loans to related parties Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment Amounts raised from sale of intangible assets Purchases of intangible assets Proceeds from related parties Dividends received Other inflows (outflows ) of cash Net cash flows from investing activities Cash flows from (used in) financing activities Proceeds from issue of shares Proceeds from term loans Proceeds from short term loans Loans from related parties Repayment of loans Payments of finance lease liabilities Repayment of loans to related parties Dividends Paid Interest paid Other inflows (outflows ) of cash Net cash flows from (used in) financing activities Net increase (decrease) in, cash and cash aquivalents before effect of exchange rate Effects of variation in the exchange rate on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of 2015 ThUS$ As of ThUS$ As of ThUS$ Cash flows from operating activities Receipts from sales of goods and services Other receipts from operating activities Payments to suppliers for the supply of goods and services Payments to and on behalf of employees Other payments for operating activities Interest received Income taxes refunded (paid) Other inflows (outflows) of cash Net cash flows from operating activities Cash flows from (used in) investing activities Cash flows used to obtain control of subsidiaries or other businesses Other cash receipts from sales of equity or debt instruments of other entities Other payments to acquire equity or debt instruments of other entities Other proceeds selling the shares of profit of investments accounted for using the equit Loans to related parties Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment Amounts raised from sale of intangible assets Purchases of intangible assets Proceeds from related parties Dividends received Other inflows (outflows) of cash Net cash flows from investing activities Cash flows from (used in) financing activities Proceeds from issue of shares Payments to acquire or redeem the entity’s shares Proceeds from term loans Proceeds from short term loans Loans from related parties Repayment of loans Payments of finance lease liabilities Repayment of loans to related parties Dividends Paid Interest paid Other inflows (outflows) of cash Net cash flows from (used in) financing activities Net increase (decrease) in, cash and cash aquivalents before effect of exchange rate Effects of variation in the exchange rate on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ As of ThUS$ Cash flows from operating activities Receipts from sales of goods and services Other receipts from operating activities Payments to suppliers for the supply of goods and services Payments to and on behalf of employees Other payments for operating activities Interest received Income taxes refunded (paid) Other inflows (outflows) of cash Net cash flows from operating activities Cash flows from (used in) investing activities Cash flows from losing control of subsidiaries or other businesses Cash flows used to obtain control of subsidiaries or other businesses Other cash receipts from sales of equity or debt instruments of other entities Other payments to acquire equity or debt instruments of other entities Loans to related parties Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment Amounts raised from sale of intangible assets Purchases of intangible assets Other cash receipts from related parties Dividends received Other inflows (outflows) of cash Net cash flows from investing activities Cash flows from (used in) financing activities Proceeds from issue of shares Payments to acquire or redeem the entity’s shares Proceeds from long term loans Proceeds from short term loans Loans from related parties Repayment of loans Payments of finance lease liabilities Repayment of loans to related parties Dividends Paid Interest paid Other inflows (outflows) of cash Net cash flows from (used in) financing activities Net increase (decrease) in, cash and cash aquivalents before effect of exchange rate Effects of variation in the exchange rate on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD
F-149 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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