Industry Overview

In 2014, the global airline industry was impacted by both positive and negative factors.

In 2014, the global airline industry was impacted by both positive and negative factors. The former included a drop in fuel prices to an average of US$113/barrel (jet fuel) and a slight expansion of the eurozone after its crisis of previous years, while the negative factors included the important depreciation of many local currencies against the dollar and the deceleration of some major economies, particularly China and Brazil.

Despite these opposing forces, 2014 was a good year for the industry as a whole. This was reflected in a 5.9% increase in passenger traffic - above the average for the last ten years and with increases in demand in all the world's different regions - and a significant improvement in the industry's operating results and profits which are estimated to have reached US$19.9 billion (as compared to US$10.6 billion in 2013).

This improvement in airlines' results was possible thanks to the consolidation and capacity discipline seen in most regions which have been key for the success of operations.

At a domestic and regional level, there continues to be a trend towards the low-cost model, which has shown a significant expansion, and greater segmentation of passengers according to their travel needs.

There also continues to be a trend towards the strengthening of alliances and cooperation agreements among the world's airlines which has improved connectivity for passengers.

North American airlines performed well in 2014 and, with their strengthened position and focus on profitability, once again achieved the best results globally, in a much less fragmented and more disciplined industry, with better labor relations and supported by the creation of increased ancillary revenues.

In Europe, growth of traffic was driven by low-cost airlines while the major airlines showed greater capacity discipline, focusing on implementation of their cost restructuring programs. Although the economic context was a little more favorable than in previous years, difficulties persisted, principally due to the crisis between Russia and the Ukraine.

Traffic growth was highest in the Asia-Pacific region, where it was also driven by low-cost airlines and increased domestic demand.

Traffic growth was highest in the Asia-Pacific region, where it was also driven by low-cost airlines and increased domestic demand, principally in China, despite the deceleration of this country's economy. Currencies depreciated strongly against the dollar and competition intensified, principally with Middle Eastern operators on routes to Europe.

The deceleration of Latin American economies, with the resulting strong depreciation of local currencies, and increased competition due to the arrival of new operators to the region, exerted pressure on operators' unit revenues in 2014. The crisis in Venezuela also meant that some operators diverted capacity to other countries in the region with the resulting pressure on tariffs. Despite this challenging context - which also included the Football World Cup in Brazil in June and July - Latin American operators reported positive results in which capacity discipline, principally in Brazil, was a key factor.

In the case of the cargo business, traffic showed a significant improvement, accelerating from 1.4% growth in 2013 to 4.5% in 2014, driven by stronger international trade in the second half of the year

In the case of the cargo business, traffic showed a significant improvement, accelerating from 1.4% growth in 2013 to 4.5% in 2014, driven by stronger international trade in the second half of the year. However, this improvement occurred principally in Asia-Pacific and the Middle East while cargo traffic in Latin America remained weak, due mainly to lower imports in Brazil.

One of the key events of 2014 was the drop in the price of jet fuel in the latter part of the year, which meant an annual average of US$113/barrel, down by more than 8% on the previous year. The impact of this drop, although positive for the airline industry as a whole, differed by region depending on the strength/weakness of their economies and currencies and the level of competition. In some cases, hedging also meant that much of the benefit of lower fuel prices was not captured. In 2015, fuel prices are expected to remain low, benefiting airlines.

Given the industry's current structure and the fuel price outlook, the International Air Transport Association (IATA) anticipates an increase in global returns in 2015, with the industry's profits reaching US$25 billion. It is important to note that global traffic growth would continue to be driven by emerging economies, principally in Asia-Pacific, the Middle East and Latin America. Due to their economic growth outlook and the still low penetration of air travel in these countries, this trend is expected to persist over the next 20 years.


Regulatory Framework

Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation.

CHILE´S AERONAUTICAL REGULATION

Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority.

Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management.

We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.

Chile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport.

The ICAO establishes technical standards for the international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations.

In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.

ROUTE RIGHTS

Domestic Routes.

Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to comply with the technical and insurance requirements established respectively by the DGAC and the JAC. There are no regulatory barriers that would prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary. On January 18, 2012 the Secretary of Transportation and the Secretary of Economics of Chile announced the unilateral opening of the Chilean domestic skies. This was confirmed in November 2013 and is valid as of today

International Routes.

As an airline providing services on international routes, LAN is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.

International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations.

In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.

AIRFARE PRICING POLICY.

Chilean airlines are permitted to establish their own domestic and international fares without government regulation. For more information, see “—Antitrust Regulation” below.

In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the Antitrust Commission’s directive to maintain a competitive environment.

According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on routes deemed “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least twenty days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least ten days in advance.

In addition, the Chilean authorities now require that we justify any modification that we make to our fares on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.

REGISTRATION OF AIRCRAFT

Aircraft registration in Chile is governed by the Chilean Aeronautical Code (“CAC”). In order to register or continue to be registered in Chile, an aircraft must be wholly owned by either:

  • a natural person who is a Chilean citizen; or
  • a legal entity incorporated in and having its domicile and principal place of business in Chile and a majority of the capital stock of which is owned by Chilean nationals, among other requirements established in article 38 of the CAC.
  • The Aeronautical Code expressly allows the DGAC to permit registration of aircraft belonging to non-Chilean individuals or entities with a permanent place of business in Chile. Aircraft owned by non-Chileans, but operated by Chileans or by an airline which is affiliated with a Chilean aviation entity, may also be registered in Chile. Registration of any aircraft can be cancelled if it is not in compliance with the requirements for registration and, in particular, if:
  • the ownership requirements are not met; or
  • the aircraft does not comply with any applicable safety requirements specified by the DGAC.

SAFETY

The DGAC requires that all aircraft operated by Chilean airlines be registered either with the DGAC or with an equivalent supervisory body in a country other than Chile. All aircraft must have a valid certificate of airworthiness issued by either the DGAC or an equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue maintenance permits to a Chilean airline until the DGAC has assessed the airline’s maintenance capabilities.

The DGAC renews maintenance permits annually, and has approved our maintenance operations. Only DGAC-certified maintenance facilities or facilities certified by an equivalent non-Chilean supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Chilean airlines.

Aircraft maintenance personnel at such facilities must also be certified either by the DGAC or an equivalent non-Chilean supervisory body before assuming any aircraft maintenance positions.

SECURITY

The DGAC establishes and supervises the implementation of security standards and regulations for the Chilean commercial aviation industry.

Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Chile must submit an aviation security handbook to the DGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN has submitted its aviation security handbook to the DGAC. Chilean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.

AIRPORT POLICY

The DGAC supervises and manages airports in Chile, including the supervision of take-off and landing charges. The DGAC proposes airport charges, which are approved by the JAC and are the same at all airports.

Since the mid-90s, a number of Chilean airports have been privatized, including the Comodoro Arturo Merino Benítez International Airport in Santiago. At the privatized airports, the airport administration manages the facilities under the supervision of the DGAC and JAC.

ENVIRONMENTAL AND NOISE REGULATION

There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Chile, except for environmental laws and regulations of general applicability. There is no noise restriction regulation currently applicable to aircraft in Chile. However, Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile.

The proposed regulation will require all such aircraft to comply with certain noise restrictions, referred to in the market as Stage 3 standards.

LAN’s fleet already complies with the proposed restrictions so we do not believe that enactment of the proposed standards would impose a material burden on us.

ANTITRUST REGULATION

The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law.

The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position.

An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law.

The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.

Since October 1997, LAN Airlines S.A. and LAN Express follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court) in July 2005, and further in September, 2011.

In February 2010, the Fiscalía Nacional Económica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made.

By means of Resolution No. 37/2011, issued on September 21, 2011 (the “Resolution”), the Tribunal de Defensa de la Libre Competencia de Chile (“TDLC”) approved the merger between LAN and TAM and imposed 14 mitigation measures on LATAM, which scope and details are set out in said Resolution and which, for convenience only, are briefly described below:

  1. To exchange 4 pairs of daily slots at the Guarulhos Airport of São Paulo to be exclusively operated in non-stopflights servicing the SCL – GRU route
  2. To extend its frequent flyer program for a term of 5 years in favor of airlines operating (or expressing their intention to operate) the Santiago – São Paulo, Santiago – Río de Janeiro, Santiago – Montevideo, and Santiago – Asunción routes, in the event that the airlines ask for LATAM to extend the referred program in connection with the above-stated routes.
  3. To enter into interline agreements covering the Santiago – São Paulo, Santiago – Río de Janeiro and/or Santiago – Asunción routes with interested airlines operating those routes which approach LATAM for that purpose.
  4. To observe certain temporary capacity and offer restrictions on the Santiago – São Paulo route.
  5. To implement certain amendments to LATAM’s Self-Regulatory Fare Plan applicable to its domestic business.
  6. To renounce before June 22, 2014, from either of the two global alliances to which LAN and TAM belonged as of the date of the Resolution.
  7. To comply with certain restrictions in signing and maintain some code-sharing agreements, without prior consultation with the TDLC, for specific routes with carriers which are members or partners of an alliance other than that to which LATAM belongs.
  8. To abide by certain restrictions to participate in future allocations of third, fourth and fifth freedom traffic rights between Santiago and Lima, and to abandon 4 fifth freedom frequencies to Lima.
  9. To express to the relevant air transportation authorities its favorable opinion to the unilateral opening of the sky for domestic flights within Chile, operated by airlines based in foreign States, without reciprocity requirements.
  10. To commit, to the extent applicable, to promoting the growth and regular operation of the Guarulhos airport in São Paulo and the Arturo Merino Benítez airport in Santiago.
  11. To comply with certain directives in granting incentives to travel agencies.
  12. To temporarily maintain, except upon the occurrence of a force majeure event: i) at least 12 weekly non-stop round-trip flights directly operated by LATAM and covering the routes between Chile and the U.S.; and ii) at least 7 weekly non-stop round-trip flights directly operated by LATAM and covering the routes between Chile and Europe.
  13. To comply with certain restrictions on average revenues from air tickets for passenger transport on the Santiago – São Paulo and Santiago – Río de Janeiro routes; and on published airfares effective as of the date of the Resolution for cargo transport on each of the routes between Chile and Brazil.
  14. To hire an independent consultant for a term of 3 years to provide advisory services to the Federal Economic Prosecutor’s Office in overseeing LATAM’s compliance with the Resolution.

The Brazilian Council for Economic Defense – CADE has approved the LAN/TAM merger by unanimous decision during the hearing session of December 14, 2011, subject to the conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance or oneworld); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago do Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.

Furthermore, the association was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The merger was filed with the Argentinean antitrust authorities, which approval is still pending.


Financial results

LATAM Airlines Group reported an operating income of US$513.4 million in 2014, representing a drop of 20.3% as compared to the previous year. Operating margin stood at 4.1%, down by 0.7 percentage points as compared to operating margin for 2013.

LATAM Airlines Group reported an operating income of US$513.4 million in 2014, representing a drop of 20.3% as compared to the previous year. Operating margin stood at 4.1%, down by 0.7 percentage points as compared to operating margin for 2013. These lower results reflected a weaker macroeconomic environment, with slower growth in South American countries and depreciation of local currencies; as well as a more challenging competitive environment for LATAM's international operations, and the Football World Cup, which was held in Brazil in June and July, with a negative impact on results of some US$140 million to US$160 million.

Total revenues in 2014 reached US$12,471.1 million as compared to US$13,266.1 million in 2013. This 6.0% drop was explained by reductions of 6.2% and 8.0% in passenger and cargo revenues, respectively, which was partly offset by a 10.6% increase in other revenues. These results include the negative impact on revenues denominated in Brazilian reais of this currency's 9.1% average depreciation in 2014.

As of 31 December 2014, passenger and cargo revenues accounted for 83% and 14% of total revenues, respectively. The 6.2% reduction in passenger revenues reflected a 1.9% increase in passenger traffic that was offset by a 7.9% drop in yields. In 2014, the load factor reached 83.4%, up by 2.5 percentage points on the previous year, with the increase driven by higher traffic accompanied by a 1.1% reduction in capacity.

Consolidated revenues per ASK (RASK) were down by 5.1% on 2013, mainly due to lower yields which, in turn, were affected by intense competition in the international market.

Consolidated revenues per ASK (RASK) were down by 5.1% on 2013, mainly due to lower yields which, in turn, were affected by intense competition in the international market, the depreciation of local currencies (principally the Brazilian real and the Chilean peso) and the impact of the Soccer World Cup on business demand in June and July.

The reduction of capacity in 2014 as compared to 2013 was explained mainly by a 2.4% reduction in the LATAM's international business as it continued to rationalize capacity on these routes, and ongoing discipline in the Brazilian domestic market where LATAM reduced its capacity for third consecutive year, in this case by 1.4%. Capacity in Spanish-speaking domestic markets continued to expand but at a slower pace, with an increase of only 3.7%, and in line with slower economic growth, mainly in Chile and Peru.

The 8.0% drop in cargo revenues in 2014 reflected a drop of 3.3% in traffic and of 4.8% in yields. This was a result of the still weak global cargo markets, the weakness of imports from the region (mainly from Brazil) and greater competition in South America from other regional and international airlines. In response, LATAM reduced its cargo capacity by 5.6% in 2014, focusing on optimizing the utilization of the bellies of its passenger aircraft, while it gradually phases out of the fleet some of its cargo dedicated freighters, one of which was phased out in March 2014. The drop in yields also reflected the negative impact of the 9.1% depreciation of the Brazilian real on cargo revenues in that domestic market.

Operating costs reached US$11,957.8 million in 2014, down by 5.3% as compared to 2013, resulting in a 2.4% reduction of the cost per ASK equivalent (including net financial costs).

Operating costs reached US$11,957.8 million in 2014, down by 5.3% as compared to 2013, resulting in a 2.4% reduction of the cost per ASK equivalent (including net financial costs). This decrease mainly reflected a reduction in expenditure on fuel and wages and the positive impact of the depreciation of local currencies on certain components of costs.

At US$4,167.0 million, expenditure on fuel represented a drop of 5.6% from US$4,414.2 million in 2013. This was explained by both lower consumption and lower fuel prices.

In 2014, fuel consumption measured in gallons was down by 3.7% in line with the Company's strategy of rationalization of its passenger and cargo operations (as reflected in a 2.8% reduction in ASK-equivalents) and the initiatives it implemented during the year in order to achieve efficiency gains, principally related to the fleet.

In the case of fuel prices, the reduction reflected a 4.9% drop in the fuel price (without hedging) in 2014. In addition, LATAM recognized a fuel hedging loss of US$108.7 million as compared to a fuel hedge gain of US$22.1 million in 2013.

In the case of fuel prices, the reduction reflected a 4.9% drop in the fuel price (without hedging) in 2014. In addition, LATAM recognized a fuel hedging loss of US$108.7 million as compared to a fuel hedge gain of US$22.1 million in 2013. In the case of exchange-rate hedging, LATAM Airlines Group reported a gain of US$3.8 million on hedging for the Brazilian real in 2014, also recognized in the fuel cost line.

Wages and benefits showed a drop of 5.7% in 2014, due principally to the decrease of 0.3% in the number of employees and the impact on wages of the depreciation of currencies, mainly the 9.1% depreciation of the Brazilian real and the 15.2% depreciation of the Chilean peso as compared to 2013. In the last quarter of 2014, LATAM also reported a recognized again of US$108 million related to the reversal of performance bonuses for the year.

In 2014, LATAM Airlines Group reported one-time costs arising from the fleet restructuring plan it began to implement in the second half of 2013. This plan seeks to meet LATAM's needs after the business combination and consists on reducing the number of aircraft models operated, gradually phasing out less efficient models and allocating the most appropriate planes to each of its markets.

As a result, LATAM Airlines Group recognized a provision for fleet restructuring costs for US$112 million in the first quarter of 2014.

As a result, LATAM Airlines Group recognized a provision for fleet restructuring costs for US$112 million in the first quarter of 2014 as part of the process of gradually phasing out of its fleet all of its A330s, A340s, B737s, Dash 8-Q400s and Dash 8-200s. These one-time costs were mainly related to estimated fines resulting from the early delivery of aircraft and maintenance expenses for redelivery.

Finally, LATAM Airlines Group reported a net loss of US$109.8 million in 2014 as compared to a net loss of US$281.1 million in 2013. This result implied a net margin of -0.9% which represented an improvement of 1.2 percentage points on its net margin in 2013.

LATAM's net loss in 2014 was affected by the fleet restructuring costs discussed above for US$112 million and an exchange-rate loss of US$130.2 million mainly due to the depreciation of the Brazilian real between 31 December 2013 and 31 December 2014. This compares to an exchange-rate loss of US$482.2 million recognized in 2013 when the imbalance of TAM’s assets and liabilities in Brazilian reais was higher.


For the year ended December 31
2014 2013 Var. % 2.014 2.013 Var. %
REVENUE
Passenger 10.380.122 11.061.557 -6.2%
Cargo 1.713.379 1.862.980 -8.0%
Other 377.645 341.565 10.6%
TOTAL OPERATING REVENUE 12.471.146 13.266.102 -6.0%
EXPENSES
Wages and Benefits -2.350.102 -2.492.769 -5.7%
Aircraft Fuel -4.167.030 -4.414.249 -5.6%
Comissions to Agents -365.508 -408.671 -10.6%
Depreciation and Amortization -991.264 -1.041.733 -4.8%
Other Rental and Landing Fees -1.327.238 -1.373.061 -3.3%
Passenger Services -300.325 -331.405 -9.4%
Aircraft Rentals -521.384 -441.077 18.2%
Aircraft Maintanence -452.731 -477.086 -5.1%
Other Operating Expenses -1.482.198 -1.642.146 -9.7%
TOTAL OPERATING EXPENSES -11.957.780 -12.622.197 -5.3%
OPERATING INCOME 513.366 643.905 -20.3%
Operating Margin 4 5 -0.7 pp
NET INCOME -109.790 -281.114 -60.9%
Net Margin -1 -2 1.2 pp
EBITDA 1.504.630 1.685.638 -10.7%
EBITDA Margin 12 13 -0.6 pp.
EBITDAR 2.026.014 2.126.715 -4.7%
EBITDA Margin 16 16 0.2 pp.
For the year ended December 31
2.014 2.013 Var. %
System
ASKs-equivalent (millions) 206.198 212.237 -2.8%
RPKs-equivalent (millions) 153.978 153.485 0.3%
Overall Load Factor (based on ASK-equivalent)% 75 72 2.4 pp
Yield based on RPK-equiv (US Cent) 8 8 -6.7%
Operating Revenues per ASK-equiv (US Cent) 6 6 -3.7%
Costs per ASK-equivalent (US Cent) 6 6 -2.4%
Fuel Gallons Consumed (millions) 1.220 1.267 -3.7%
Average Trip Length (thousands km) 2 2 0.2%
Total Number of Employees (End of Period) 53.072 52.997 0.1%
Passenger
ASKs (millions) 130.201 131.691 -1.1%
RPKs (millions) 108.534 106.466 1.9%
Passengers Transported (thousands) 67.833 66.696 1.7%
Load Factor (based on ASKs) % 83 81 2.5 pp
Yield based on RPKs (US Cents) 10 10 -7.9%
Revenues per ASK (US cents) 8 8 -5.1%
Cargo
ATKs (millions) 7.220 7.652 -5.6%
RTKs (millions) 4.317 4.467 -3.3%
Tons Transported (thousands) 1.102 1.171 -5.9%
Load Factor (based on ATKs) % 60 58 1.4 pp
Yield based on RTKs (US Cents) 40 42 -4.8%
Revenues per ATK (US Cents) 24 24 -2.5%
Passenger and cargo revenue breakdown by country
For the year ended December
2.014 2.013 % Change
Perú 660.057 646.217 2.1%
Argentina 813.472 950.595 -14.4%
EEUU 1.224.264 1.290.493 -5.1%
Europa 935.893 937.539 -0.2%
Colombia 391.678 387.999 0.9%
Brasil 5.361.594 5.572.884 -3.8%
Ecuador 248.585 273.712 -9.2%
Chile 1.589.202 1.698.476 -6.4%
Asia Pacific and rest Latin America 868.756 1.166.622 -25.5%
Total 12.093.501 12.924.537 -6.4%

Awards and recognitions

In 2014, the Airlines that make up LATAM Airlines Group received around 50 awards in various fields: Service on Board (excellence in wine and menu), Travel Experience (VIP Lounges, on board magazines) and Reputation, in addition to rankings that measure LATAM’s economic, social and environmental management.

Below we highlight the most important recognitions that LATAM Airlines Group received during 2014:

Dow Jones Sustainability Index 2014: LATAM joins the Global Dow Jones Sustainability Index, becoming the first airline in the Americas in having that recognition.

Skytrax 2014: Most recognized award in the industry.

  • LAN: First place in category “Best Airline in South America”
  • LAN: First place in category “Best Service in South America”
  • TAM: Second place in category “Best Airline in South America”

Best of 2014 Awards Gala / Premier Traveler USA
First place in category “Best Airline to South America”.

Premio Empresa Alas20 (sustainable leaders):

  1. Award Best of Best
  2. Best Investor Relations team, sustainability
  3. CEO Leader in Sustainability: Enrique Cueto

Corporate Transparency award / Universidad del Desarrollo y Chile Transparente LAN

21° World Travel Awards (WTA)
LAN: Best Airline in South America.

Best of 2014 Awards Gala / Premier Traveler USA
LAN: First place category “Best Airline to South America”.

Top of Mind Internet – DataFolha/UOL
TAM: First Place in category airlines.

Las Marcas más amadas – Centro de Inteligência Padrão (CIP)
TAM: First Place in category airlines.

Travelers’ Choice Favorites - TripAdvisor®
TAM: First Place in category airlines.

Wines on the Wing / Global Traveler
TAM: First place

  • Best International Business Class Champagne: Drappier Carte d`Or, NV, Champagne, France - TAM

Global Compart award: Program “I care for my destination”


Material Facts

Other / November 3, 2014

On September 29, 2014 was published in the Diario Oficial the Law No. 20.780 which “Amends the system of income taxation and introduces various adjustments in the tax system”. Among the major tax reforms that such Law contains, the rate of First Category Tax which shall be declared and paid starting the tax year 2015, is gradually modified from 2014 to 2018. Such tax rate will reach 27% when opted for the partially integrated system, or will reach 25% if opted for the imputed rent system. The Law stipulates that in case of not exercising the option, the partially integrated system will be applied by default to stock corporations, which may be modified only after five years. On October 17, 2014, the Superintendency of Securities and Insurance issued the Oficio Circular No. 856 which establishes that the registration of the properties on assets and liabilities for deferred taxes, resulting from the amendments introduced by Law No. 20.780, as described above, as for September 30, 2014, shall be accounted against capital. LATAM Airlines Group S.A. has estimated an impact on its Financial Statements of approximately US$150 million when using the rate of the partially integrated system, considering that this system is applied by default to stock corporations. The estimated impact will be recognized as a net debit in Capital, as defined in the Oficio Circular No. 856. LATAM Airlines Group S.A. presents its Financial Statements to the Securities and Exchange Commission (SEC) of the United States of America and to the Comissão de Valores Mobiliários (CVM) in Brazil, under the International Financial Reporting Standards (IFRS), which establishes in the International Standard Accounting No. 12 - Income Taxes, that the effects of rate changes shall be recognized in the net results. Due to the before mentioned, the Company will recognize the impact noted in the preceding paragraph, in the Financial Statements that will be filed to the SEC and CVM, as a charge in Expense for Income Tax on the results for the period ended September 30, 2014.

PDF: Other / November 3, 2014

Changes in the Administration / September 2, 2014

On this date Mrs. Maria Claudia Amaro has resigned as a member of the Board of Directors of the company, and in her place, the Board has elected Mr. Henri Philippe Reichstul. As a result, in the next annual general meeting of shareholders of LATAM Airlines Group S.A., its Board will be renewed and reelected.

PDF: Changes in the Administration / September 2, 2014

Changes in the Administration / April 29, 2014

An Ordinary Shareholders Meeting (Meeting) of LATAM Airlines Group S.A. (LATAM) held on April 29, 2014, LATAM’s shareholders elected the members of LATAM’s Board of Directors, who will hold office for two years.

The following individuals were elected Directors at the Meeting:

  1. Juan José Cueto Plaza.
  2. Mauricio Rolim Amaro.
  3. Maria Claudia Amaro.
  4. Ramón Eblen Kadis.
  5. Carlos Heller Solari.
  6. Francisco Luzón López.
  7. Ricardo J. Caballero.
  8. Juan Gerardo Jofré Miranda.
  9. Georges de Bourguignon Arndt.

The Directors named in numbers 7, 8 and 9 above were elected as independent directors, according to article 50-bis of Companies Law No. 18.046 of the Republic of Chile.

PDF: Changes in the Administration / April 29, 2014

Extraordinary Shareholders Meeting, Citations, agreements and propositions / April 29, 2014

At a Regular Meeting held April 4, 2014, the Board of Directors of LATAM Airlines Group S.A. (hereinafter the “Company”) resolved to convene a Regular Shareholders Meeting at 10:00 a.m. on April 29, 2014 at Regal Pacifico Hotel, Salón Pacífico, Av. Apoquindo 5680, Las Condes, Santiago, Chile, to discuss the following matters:

  1. Approval of the annual report, balance sheet and financial statements of the Company for the fiscal year ending December 31, 2013;
  2. Election of the members of the Company’s Board of Directors;
  3. The compensation to be paid to the Company’s Board of Directors for the fiscal year ending December 31, 2014;
  4. The compensation to be paid to the Company’s Audit Committee and its budget for the fiscal year ending December 31, 2014;
  5. The appointment of the external auditing firm and risk rating agencies for the Company; and the reports on the matters indicated in Section XVI of Companies Law 18,046;
  6. Information on the cost of processing, printing and sending the information indicated in Circular 1816 of the Securities and Insurance Commission;
  7. Designation of the newspaper in which the Company will make publications; and
  8. Other matters of corporate interest within the purview of a Regular Shareholders Meeting of the Company.
PDF: Extraordinary Shareholders Meeting, Citations, agreements and propositions / April 29, 2014

Other / January 10, 2014

Regarding the capital increase authorized by the Extraordinary Shareholder’s Meeting held last June 11, 2013: On this date and through an Order Book Auction procedure carried out in accordance to the provisions of Section 2.4A of the Share Operations Manual of the Santiago Stock Exchange, have been placed a total of 10.314.872 shares that were not subscribed during the preemptive period concluded on December 19, 2013. The placement price was US$15,17.- per share, according to the Observed Dollar’s exchange rate published by the Central Bank of Chile and in force as of Thursday January 9, 2014, equivalent to ChP$8.072,60.-; thus having raised an amount equivalent today to approximately US$156,5 million. Accordingly, the placement process of 100% of the 62,000,000 initially issued shares (which do not include the shares allocated to the Company and its subsidiaries’ worker compensation plans) placed by the Company and tied to aforementioned capital increase has concluded, having raised a total amount of US$ 940.5 million.

PDF: Other / January 10, 2014

Stock market information

During 2014, LATAM Airlines Group’s share price showed a loss of 14.4% while LAN’s ADR and BDR showed losses of 26.5% and 13.5%, respectively. As of 31 December 2014, LATAM had a market capitalization of US$ 6,536 million. In 2014, LATAM Airlines Group’s shares performed below Chile’s IPSA share price index, which showed an annual gain of 4.2%. Regarding the movements of the stock, this year LATAM Airlines Group stock had a 100% of market presence in the Santiago Stock Exchange.

Quarterly volume of share trading (Santiago Stock Exchange)
2012
First Quarter 64.710.000 14.373 812.172.800.000
Second Quarter 107.445.492 13.097 1.006.390.000.000
Third Quarter 57.157.847 12.063 683.382.000.000
Fourth Quarter 38.877.169 11.286 438.423.700.000
2013
First Quarter 31.787.896 11.214 356.563.517.000
Second Quarter 47.046.121 9.209 431.735.536.000
Third Quarter 60.095.492 7.064 414.584.729.000
Fourth Quarter 68.677.913 8.167 567.710.204.600
2014
First Quarter 61.484.884 8.211 505.709.680.413
Second Quarter 35.965.643 8.131 289.601.577.406
Third Quarter 35.231.909 7.191 253.842.152.886
Fourth Quarter 44.766.542 6.939 310.758.809.345
Quarterly volume of ADR trading (NYSE)
2012
First Quarter 17.180.265 29 456.019.600
Second Quarter 27.871.128 25 725.219.500
Third Quarter 43.620.441 25 1.080.972.000
Fourth Quarter 23.579.847 23 560.725.400
2013
First Quarter 23.842.422 23 562.524.908
Second Quarter 35.452.685 19 665.938.101
Third Quarter 41.500.940 13 573.896.339
Fourth Quarter 51.531.434 15 822.930.239
2013
First Quarter 39.001.153 14 583.899.207
Second Quarter 37.203.364 14 543.101.797
Third Quarter 39.309.163 12 486.257.603
Fourth Quarter 25.321.250 11 406.290.235
Quarterly volume of BDR trading (Bovespa)
2012
Second Quarter 35.857.854 52 2.041.688.000
Third Quarter 5.982.600 50 301.911.500
Fourth Quarter 1.118.000 47 54.162.270
2013
First Quarter 1.581.895 45 73.304.033
Second Quarter 1.027.918 38 40.259.529
Third Quarter 1.214.565 30 38.707.827
Fourth Quarter 93.816 35 3.347.264
2014
First Quarter 223 34 7.371.941
Second Quarter 90 33 2.914.078
Third Quarter 147 26 4.280.666
Fourth Quarter 105 28 2.926.065

Additional information

In 2014, as in previous years, the main suppliers of LATAM Airlines Group were the Airbus and Boeing aircraft manufacturers.

SUPPLIERS

In 2014, as in previous years, the main suppliers of LATAM Airlines Group were the Airbus and Boeing aircraft manufacturers. Its other suppliers consist mainly of companies that produce aircraft accessories, spares and components such as: MTU Maintenance Hannover, Celma Companhia Electromecanica, Rolls Royce PLC, International Aero Engines, General Electric Co. y CFM International Inc. (maintenance); Zodiac Seats US, Recaro, BE Aerospace and Zodiac seats UK (seats); Honeywell and Rockwell Collins (avionics); Air France, LUFTHANSA Technik and Fokker Services (MRO components); Panasonic, Thales and Zodiaz (in-flight entertainment); Messier Bugatti (landing gear and brakes); UTC Aerospace (Molding); and Heico Corp, AMG (repairs). In addition, the Company has a number of fuel suppliers such as Raizen Combustiveis S.A., Petrobras, Air BP, Shell, World Fuel Services, Repsol, among others.

INSURANCE

Taking into account all those areas of its operations that involve potential risks, LATAM Airlines Group carries insurance that can be divided into three main categories: aviation, hull and liability insurance. These types of insurance cover all the risks inherent to commercial aviation such as aircraft, engines, spare parts and third-party liability for passengers, cargo, baggage, merchandise and airports, etc. Since the merger of LAN with TAM, insurance for both companies has been acquired by LATAM Airlines Group and the increased volumes negotiated have resulted in lower operational costs.

GENERAL INSURANCE

Insurance of this type provides coverage against all those risks that could affect the Company’s assets, particularly its physical goods and financial assets. These are protected through multi-risk policies (including fire, theft, computer equipment, transport of securities, window breakage and other all-risk coverage) as well as traditional coverage of motor vehicles, air and sea transport, corporate civil liability, etc. In addition, LATAM holds life and accident insurance on behalf of all its personnel including executives, staff in general and flight crews.

TRADEMARKS AND PATENTS

LATAM and its subsidiaries use a number of trademarks. These are duly registered with the corresponding bodies in the different countries in which they operate or are the origin and/or destination of their operations in order to be able to differentiate and market their products and services in these countries.


Risk factors

LATAM does not control the voting shares or board of directors of TAM.

Risk Factors Relating to our Company

  • LATAM does not control the voting shares or board of directors of TAM
  • Our assets include a significant amount of goodwill.
  • A failure to successfully implement our strategy would harm our business and the market value of our ADSs and common shares.
  • A failure to successfully implement the new single brand may adversely affect our business and the market value of our ADSs and common shares.
  • It may take time to combine the frequent flyer programs of LAN and TAM
  • The financial results of LATAM are exposed to foreign currency fluctuations.
  • 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.
  • Our business and results of operation may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits.
  • A significant portion of our cargo revenues come from relatively few product types and may be impacted by events affecting their production or trade.
  • Our operations are subject to fluctuations in the supply and cost of jet fuel, which could negatively impact our business.
  • We rely on maintaining a high daily aircraft utilization rate to increase our revenues, which makes us especially vulnerable to delays.
  • 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 becomes unavailable or if the public negatively perceives our aircraft.
  • Any delays Airbus A350 aircraft could disrupt our fleet plan.
  • 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.
  • Our business may be adversely affected if we are unable to meet our significant future financing requirements.
  • Our business may be adversely affected by our high degree of debt and aircraft lease obligations compared to our equity capital.
  • Variations in interest rates may have adverse effects on our interest payments business, financial condition, results of operations and prospects and the trading price of our ADRs and BDRs and preferred shares.
  • Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.
  • Problems with air traffic control systems or other technical failures could interrupt our operations and have a material adverse effect on our business.
  • Our financial success depends on the availability and performance of key personnel, who are not subject to non-competition restrictions.
  • Our business relies extensively on third-party service providers. Failure of these parties to perform as expected, or interruptions in our relationships with these providers or their provision of services to us, could have an adverse effect on our financial position and results of operations.
  • Disruptions or security breaches of our information technology infrastructure could interfere with our operations, compromise passenger or employee information and expose us to liability, possibly causing our business and reputation to suffer.
  • Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees.
  • Collective action by employees could cause operating disruptions and negatively impact our business.
  • Increases in our labor costs, which constitute a substantial portion of our total operating expenses, could directly impact our earnings.
  • We may experience difficulty finding, training and retaining employees.

Risks Related the Airline Industry

  • Our performance is heavily dependent on economic conditions in the countries in which we do business and negative economic conditions in those countries could have an adverse impact on our business.
  • Our business is highly regulated and changes in the regulatory envirorment in which we operate may adversely affect our business and results of operations.
  • Losses and liabilities in the event of an accident involving one or more of our aircraft could materially affect our business.
  • High levels of competition in the airline industry may adversely affect our level of operations.
  • Chile has opened its domestic aviation industry to foreign airlines without restrictions, which may change the competitive landscape of the domestic Chilean aviation sector and affect our business and results of operations.
  • A recent proposal by the Brazilian government would result in the reallocation of certain takeoff and landing slots at Brazilian airports; if this proposal is enacted in its current form, it would reduce our access to important airport infrastructure and adversely affect our results of operations.
  • Some of our competitors may receive external support which could negatively impact our competitive position.
  • The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations.
  • 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 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.
  • Developments in Latin American countries and other emerging market countries may adversely affect the Chilean and Brazilian economies, negatively impact our business and results of operations and cause the market price of our common shares and ADSs to decrease.
  • Changes in the Chilean corporate tax rate or tax regime could adversely affect our financial results.
  • Fluctuations in the value of the Brazilian real, Chilean peso and other currencies in the countries in which we operate may adversely affect our revenues and profitability.
  • The Brazilian government has exercised, and may continue to exercise, significant influence over the Brazilian economy, which may have an adverse impact on our business, financial condition and results of operations.
  • 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.

Risks Related to our Common Shares and ADSs

  • Our controlling shareholders may have interests that differ from those of our other shareholders.
  • Trading of our ADSs and common shares in the securities markets is limited and could experience further illiquidity and price volatility.
  • Holders of ADSs may be adversely affected by currency devaluations and foreign exchange fluctuations.
  • Future changes in Chilean foreign investment controls and withholding taxes could negatively affect non-Chilean residents that invest in our shares.
  • Our ADS holders may not be able to exercise preemptive rights in certain circumstances.