As filed with the Securities and Exchange Commission on April 1, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
OR
For the fiscal year ended December 31, 2013
Commission File Number: 1-14728
LATAM Airlines Group S.A.
(Exact name of registrant as specified in its charter)
Presidente Riesco 5711, 20th Floor
Las Condes
Santiago, Chile
(Address of principal executive offices)
Gisela Escobar Koch
Tel.: 56-2-565-3944 — E-mail: gisela.escobar@lan.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
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:
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: 545,558,101.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer x Accelerated filer ¨ Non-Accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨
International Financial Reporting Standards as issued
by the International Accounting Standards Board x
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
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PRESENTATION OF INFORMATION
In this annual report on Form 20-F, 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 subsidiaries: Transporte Aéreo S.A. (which does business under the name “LAN Express”), LAN Perú S.A. (“LAN Peru”), Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. (“LAN Ecuador”), LAN Argentina S.A. (“LAN Argentina,” previously Aero 2000 S.A.), Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), TAM S.A. (“TAM”), LAN Cargo S.A. (“LAN Cargo”) and its respective regional affiliates: Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Linea Aerea Carguera de Colombia S.A. (“LANCO”) in Colombia and Aerolinhas Brasileiras S.A. (which does business under the name of “TAM Cargo” and/or “ABSA”) in Brazil, as well as Multiplus S.A. (“Multiplus”). All references to “Chile” are references to the Republic of Chile.
On June 22, 2012, LATAM was formed following the completion of the business combination between LAN Airlines S.A. and its consolidated subsidiaries (“LAN”) with TAM S.A. and its consolidated subsidiaries (“TAM”). Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of Holdco I S.A. (“Holdco I”) and a subsidiary of LATAM Airlines Group. LATAM’s consolidated financial statements for the year ended December 31, 2012 include TAM’s financial results from June 23, 2012. As LATAM Airlines Group S.A. is the owner of substantially all the economic rights in TAM, TAM and its consolidated subsidiaries are for the purposes of this annual report and LATAM’s consolidated financial statements treated as being subsidiaries of LATAM Airlines Group S.A. See “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.”
Throughout this annual report on Form 20-F we make numerous references to “LAN”. Some references to “LAN” are to LAN Airlines S.A., currently known as LATAM Airlines Group S.A. and its consolidated subsidiaries, in connection with circumstances and facts occurring prior to June 22, 2012. Other references to “LAN”, however, are to the LAN brand which was launched in 2004 and brings together, under one internationally recognized name, all of the affiliate brands such as LAN Chile, LAN Peru, LAN Argentina, LAN Colombia, LAN Ecuador and LAN Cargo.
In this annual report on Form 20-F, unless the context otherwise requires, references to “TAM” are to TAM S.A., and its consolidated subsidiaries, including TAM Linhas Aereas S.A., the operating entity, Multiplus S.A. (“Multiplus”), Pantanal Linhas Aéreas S.A. (“Pantanal”), Fidelidade Viagens e Turismo Limited (“TAM Viagens”), and Transportes Aéreos Del Mercosur S.A. (“TAM Mercosur”).
This annual report contains conversions of certain Chilean peso and Brazilian real amounts into U.S. dollars at specified rates solely for the convenience of the reader. These conversions should not be construed as representations that the Chilean peso and the Brazilian real amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless we specify otherwise, all references to “$,” “US$,” “U.S. dollars” or “dollars” are to United States dollars, references to “pesos,” “Chilean pesos” or “Ch$” are to Chilean pesos. References to “reais,” “Brazilian reais,” or “R$” are to Brazilian reais, and references to “UF” are to Unidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate. Unless we indicate otherwise, the U.S. dollar equivalent for information in Chilean pesos is based on the “dólar observado” or “observed” exchange rate published by Banco Central de Chile (which we refer to as the Central Bank of Chile) on December 31, 2014, which was Ch$607.38 = US$1.00. The observed exchange rate on March 24, 2015, was Ch$627.00= US$1.00. Unless we indicate otherwise, the U.S. dollar equivalent for information in Brazilian reais is based on the “dólar observado” or “observed” exchange rate published by Banco Central do Brasil (which we refer to as the Central Bank of Brazil) on December 31, 2014, which was R$2.656 = US$1.00. The observed exchange rate on March 24, 2015, was R$3.130 =US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos nor Brazilian reais. See “Item 3. Key Information—Selected Financial Data—Chilean Peso Exchange Rates” and “Item 3. Key Information—Selected Financial Data—Brazilian Exchange Rates.”
LATAM Airlines Group and the majority of our subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars. Some of our other subsidiaries, however, maintain their accounting records and prepare their financial statements in Chilean pesos, Argentinean pesos, Colombian pesos or Brazilian reais. In particular, TAM maintains its accounting records and prepares its financial statements in Brazilian reais. Our audited consolidated financial statements include the results of these subsidiaries translated into U.S. dollars. International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), require assets and liabilities to be translated at period-end exchange rates, while revenue and expense accounts are translated at each transaction date, although a monthly rate may also be used if exchange rates do not vary widely.
LATAM’s audited consolidated financial statements for the periods ended December 31, 2010, 2011, 2012, 2013 and 2014 were prepared in accordance with IFRS.
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We have rounded percentages and certain U.S. dollar, Chilean peso and Brazilian reais amounts contained in this annual report for ease of presentation. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
This annual report contains certain terms that may be unfamiliar to some readers. You can find a glossary of these terms on page 4 of this annual report.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other similar expressions. Forward-looking statements, including statements about our beliefs and expectations, are not statements of historical facts. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to:
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them, whether in light of new information, future events or otherwise. You should also read carefully the risk factors described in “Item 3. Key Information—Risk Factors.”
GLOSSARY OF TERMS
The following terms, as used in this annual report, have the meanings set forth below.
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“MiSchDynamicDT”
“Diio Mi”
Market Intelligence Schedule Dynamic Table.
Data In Intelligence Out Market Intelligence.
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PART I
Not applicable.
A. Selected Financial Data
LATAM’s Historical Financial Information
The summary consolidated annual financial information of LATAM as of December 31, 2014, 2013, 2012, 2011 and 2010 has been prepared in accordance with IFRS(*). On June 22, 2012, LATAM Airlines Group was formed through the combination of LAN and TAM. Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM Airlines Group. Financial statements for LATAM fully consolidate TAM’s results since June 23, 2012.
LATAM’s Annual Financial Information
Operating revenues
Passenger
Cargo
Total operating revenues
Cost of sales
Gross margin
Other operating income(3)
Distribution costs
Administrative expenses
Other expenses
Other gains/(losses)
Financial income
Financial costs
Equity accounted earnings
Exchange rate differences
Result of indexation units
Income (loss)before income taxes
Income (loss) tax expense/benefit
Net (loss) income for the period
Income (loss) attributable to the parent company’s equity holders
Income (loss) attributable to non-controlling interests
Net income (loss) for the year
Earnings per share
Average number of Shares
Basic earnings (loss) per share (US$)
Diluted earnings (loss) per share(US$)
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Balance Sheet Data:
Cash, and cash equivalents
Other current assets in operation
Non-current assets and disposal groups held for sale
Total current assets
Property and equipment
Other non-current assets
Total non-current assets
Total assets
Total current liabilities
Total non-current liabilities
Total liabilities
Issued Capital
Net equity attributable to the parent company’s equity holders
Non-controlling interest
Total net equity
Shares Outstanding
(*) In connection with the financial information as of December 31, 2014, 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 within “Retained earnings” instead of the income statement as required by IAS 12. In order to comply with IAS 12, the financial statements for the period ended December 31, 2014 are different to those presented to the SVS as the aforementioned effect has been recognized within the income statement. For more information on the reconciliation of such differences see Note 2.1 and see Note 17 in our audited consolidated financial statements.
The table below presents unaudited operating data of LATAM as of and for the year ended December 31, 2010, 2011 (which represents LAN’s historical unaudited operating data), as of and for the year ended December 31, 2012 (which includes TAM’s unaudited operating data since June 23, 2012), and as of and for the years ended December 31, 2013 and December 31, 2014. LATAM believes this operating data is useful to report 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.
ASKs (million)
RPKs (million)
ATKs (million)
RTKs (million)
ASK Equivalent (million)
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Dividend Policy
In accordance with the Ley sobre Sociedades Anónimas No. 18,046 (Chilean Corporation Act) and Reglamento de Sociedades Anónimas (Regulation to the Chilean Corporation Act) (collectively, the “Chilean Corporation Law”), we must pay annual cash dividends equal to at least 30.0% of our annual consolidated distributable net income each year (calculated in accordance with IFRS), subject to limited exceptions. 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 an interim dividend regarding periods 2013 and 2014
We declare cash dividends in U.S. dollars, but make dividend payments in Chilean pesos, converted from U.S. dollars at the observed exchange rate two days prior to the day we first make payment to shareholders. Payments of cash dividends to holders of ADRs, if any, are made in Chilean pesos to the custodian, which converts those Chilean pesos into U.S. dollars and delivers U.S. dollars to the depositary for distribution to holders. In the event that the custodian is unable to convert immediately the Chilean currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by a devaluation of the Chilean currency that may occur before such dividends are converted and remitted.
LATAM’s Dividend Payments
The table below sets forth the cash dividends per common share and per ADS paid by LATAM, as well as the number of common shares entitled to such dividends, for the years indicated. Dividends per common share amounts and reflect common share amounts outstanding immediately prior to the distribution of such dividend.
Dividend for year:
Payment date(s)
2010
2011
2012
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Chilean Peso Exchange Rates
The following table sets forth, for the periods indicated, the high, low, average and period-end observed exchange rate for the purchase of U.S. dollars, expressed in Chilean pesos per U.S. dollar. The rates have not been restated in constant currency units. On March 24th, 2015 the observed exchange rate was Ch$ 627.00= US$1.00.
Year Ended December 31,
2013
2014
September
October
November
December
2015
January
February
March(2)
Source: Central Bank of Chile
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Brazilian Exchange Rates
TAM maintains its accounting records and prepares its financial statements in Brazilian reais. The following tables set forth, for the periods indicated, the high, low, average and period-end observed exchange rate for the purchase of U.S. dollars, expressed in Brazilian reais per U.S. dollar. The rates have not been restated in constant currency units. On March 24th, 2015 the observed exchange rate was R$3.1304 = US$1.00.
Source: Central Bank of Brazil
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with, the Securities and Exchange Commission (“SEC”) among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are a non-U.S. company, there are risks associated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this document, including the following risk factors.
Risk Factors Relating to our Company
LATAM does not control the voting shares or board of directors of TAM
Following the combination of LAN and TAM:
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As a result of this ownership structure:
LATAM and TEP Chile and other parties have entered into shareholders’ agreements that establish agreements and restrictions relating to corporate governance. 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 subsidiaries of TAM. Actions requiring supermajority shareholder approval of Holdco I or TAM include, among others, certain changes to the by-laws of Holdco I, TAM or TAM’s subsidiaries or any dissolution/liquidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of certain assets, creation of 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.”
LATAM assets include a significant amount of goodwill.
The assets of the LATAM Airlines Group included US$3,313.4 million of goodwill as of December 31, 2014, US$3,168.7 million of which results from the combination with TAM. Under IFRS, goodwill is subject to an annual impairment test and may be required to be tested more frequently if events or circumstances indicate a potential impairment. Any impairment could result in the recognition of a significant charge to earnings in LATAM’s statement of income, which could materially and adversely impact our consolidated results for the period in which the impairment occurs.
A failure to successfully implement LATAM’S strategy would harm its business and the market value of its ADSs and common shares.
LATAM has developed a new strategic plan with the goal of becoming one of the best group of airlines in the world and renewing our commitment to sustained profitability and superior returns to shareholders. We based our strategic plan on five central factors: Customer Experience, Network, Efficiency and Cost Reduction, Organization Strength and Proactive Risk Management. Our new 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. Our strategic plan also anticipates strengthening our network and requires us to identify cities with adequate infrastructure and sufficient demand. There can be no assurances, however, that we will be able to correctly identify cities and regions in which to expand our operations, or that we will be able to attract sufficient passengers and cargo traffic to make our operations profitable. Difficulties in implementing our strategy and expanding our operations may adversely affect our business, results of operation and the market value of our ADSs and common shares.
A failure to successfully implement the new single brand may adversely affect LATAM business and the market value of its ADSs and common shares.
Since the combination, LAN and TAM have continued to operate with their original brands. LATAM Airlines Group has begun the transition of LAN and TAM into a single brand by gradually harmonizing the product and services offered by both airlines, although tge launch date for the new brand has not yet been determined. LAN and TAM currently have 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 the new single brand. 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.
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It may take time to combine the frequent flyer programs of LAN and TAM
LAN and TAM each previously ran their own frequent flyer programs. While LATAM has integrated these programs so that passengers can use frequent flyer miles earned with either LAN or TAM interchangeably, there is no guarantee that the full integration will be completed in the near term or at all. Even if the integration occurs, the successful integration of these programs will involve some time and expense. Until LATAM effectively combines these programs, passengers may prefer frequent flyer programs offered by other airlines, which may adversely affect our business.
The financial results of LATAM are exposed to foreign currency fluctuations.
LATAM prepares and presents its consolidated financial statements in U.S. dollars. Because of LATAM’s presence in several Latin American markets, a portion of its consolidated net assets, revenues and income is denominated in non-U.S. dollar currencies, primarily Chilean pesos and Brazilian reais. In particular, the majority of TAM’s revenues are denominated in Brazilian reais, while a significant portion of its operating expenses are denominated in, or linked to, the U.S. dollar or other foreign currencies. The consolidated financial condition and results of operations of LATAM is therefore sensitive to movements in exchange rates between the U.S. dollar and other currencies. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have an adverse impact on the financial condition, results of operations and prospects of LATAM.
LATAM’S depend on strategic alliances or commercial relationships in many of the countries in which it operates and it business may suffer if any of its strategic alliances or commercial relationships terminates.
In many of the jurisdictions in which we operate, we have found it in our interest to maintain a number of alliances and other commercial relationships. These alliances or commercial relationships allow us to enhance our network and, in some cases, to offer our customers services that we could not otherwise offer. If any of our strategic alliances or commercial relationships and, in particular, with American Airlines, Iberia, Qantas or oneworld®, Japan Airlines, Korean Airlines, Cathay Pacific, Alaska Airlines deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be negatively affected.
LATAM’S business and results of operation may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits.
LATAM’S business depends upon our access to key routes and airports. Our operations could be constrained by any delay or inability to gain access to key routes or airports, including:
LATAM operates numerous international routes, subject to bilateral agreements, and also internal flights within Chile, Peru, Brazil, Argentina, Ecuador, Colombia and other countries, subject to local route and airport access approvals. Bilateral aviation agreements as well as local aviation approvals frequently involve political and other considerations outside of our control. See “Item 4. Information on the Company—Business Overview—Regulation.”
There can be no assurance that existing bilateral agreements between the countries in which our companies are based and permits from foreign governments will continue. A modification, suspension or revocation of one or more bilateral agreements could have a material adverse effect on our business, financial condition and results of operations. The suspension of our permission to operate in certain airports, destinations or 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 restricts our route, airport or other access may have a material adverse effect on our business, financial condition and results of operations.
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 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 negatively affect the production or trade of these goods may adversely affect the volume of goods that we transport and may have a significant impact on our results of operations. Some of our cargo products are sensitive to foreign exchange rates and, therefore, traffic volumes could be impacted by the appreciation or depreciation of local currencies.
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Our operations are subject to fluctuations in the supply and cost of jet fuel, which could negatively impact our business.
Higher jet fuel prices or a shortage in the supply of fuel could cause a reduction in our scheduled service and could have a materially negative effect on our business, financial condition and results of operations. Jet fuel costs have historically accounted for a significant amount of our operating expenses, and accounted for approximately 35% of our operating expenses in 2014. Both the cost and availability of fuel are subject to many economic and political factors and events that we can neither control nor predict. We have entered into fuel hedging arrangements, but there can be no assurance that such arrangements will be adequate to protect us from a significant increase in fuel prices in the near future or in the long term. Also, while these hedging arrangements are designed to limit the effect of an increase in fuel prices, some of our hedging methods may also limit our ability to take advantage of any decrease in fuel prices as was the case during the second half of 2014. Although we have implemented measures to pass a portion of incremental fuel costs to our customers, our ability to lessen the impact of any increase using these types of mechanisms may be limited.
We rely on maintaining a high daily aircraft utilization rate to increase our revenues, which makes us especially vulnerable to delays.
One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate, which measures the number of flight hours we use our aircraft per day. High daily aircraft utilization allows us to maximize the amount of revenue we generate from our aircraft and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to increase the average hours flown per day. Our rate of aircraft utilization could be adversely affected by a number of different factors that are beyond our control, including air traffic and airport congestion, adverse weather conditions and delays by third-party service providers relating to matters such as fueling and ground handling. If an aircraft falls behind schedule, the resulting delays could cause a disruption in our operating performance.
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.
As our fleet has grown, our reliance on Airbus and Boeing has also grown. As of December 31, 2014, we operated a fleet of 247 Airbus, 73 Boeing and 7 Dash aircraft. Risks relating to Airbus and Boeing include:
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.
Any delays Airbus A350 aircraft could disrupt our fleet plan.
During 2015 LATAM Airlines expects to receive its first Airbus A350 aircraft out of an order of 27 aircraft of this model, becoming the first airline in Latin America to operate this modern new technology aircraft. Any delays in the reception of the aircraft or unanticipated operational issues with this new aircraft model could adversely affect 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.
A large portion of our aircraft is subject to long-term operating leases. Our operating leases typically run from three to twelve years from the date of delivery. We may face more competition for, or a limited supply of, leased aircraft, making it difficult for us to negotiate on competitive terms upon expiration of our current operating leases or to lease additional capacity required for our targeted level of operations. If we are forced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, our profitability could be adversely affected.
Our business may be adversely affected if we are unable to meet our significant future financing requirements.
We require significant amounts of financing to meet our aircraft capital requirements and may require additional financing to fund our other business needs. We cannot guarantee that we will have access to or be able to arrange for financing in the future on favorable terms. Following the combination of LAN and TAM, Fitch Ratings Inc. and Standard and Poor’s downgraded LATAM Airline Group S.A.’s credit rating to levels that are below investment grade. These downgrades and any further securities rating
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agencies downgrades could increase LATAM’s financing costs. If we are unable to obtain financing for a significant portion of our capital requirements, our ability to acquire new aircraft or to expand operations could be impaired and our business negatively affected.
Our business may be adversely affected by our high degree of debt and aircraft lease obligations compared to our equity capital.
We have a high degree of debt and payment obligations under our aircraft operating leases compared to equity capital. In order to finance our debt, we depend in part on our cash flow from operations. We cannot assure you that in the future we will be able to meet our payment obligations. In addition, the majority of our property and equipment is subject to liens securing our indebtedness. In the event that we fail to make payments on the secured indebtedness, creditors’ enforcement of liens could limit or end our ability to use the affected property and equipment to fulfill our operational needs and thus generate revenue.
Variations in interest rates may have adverse effects on our interest payments business, financial condition, results of operations and prospects and the trading price of our ADRs and BDRs and preferred shares.
We are exposed to the risk of interest rate variations, principally in relation to the U.S. dollar London Interbank Offer Rate (“LIBOR”). Many of our operating and financial leases are denominated in U.S. dollars and bear interest at a floating rate. Approximately 38% of LATAM’s outstanding consolidated debt as of December 31, 2014 bears interest at a floating rate. After giving effect to interest rate hedging agreements, approximately 32% of LATAM’s outstanding consolidated debt is exposed to floating rates.
Volatility in LIBOR or the TJLP could increase our periodic interest and lease payments and have an adverse effect on our total financing costs. We may be unable to adequately adjust our prices to offset any increased financing costs, which would have an adverse effect on our revenues and our results of operations.
Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.
Major events affecting the aviation insurance industry (such as terrorist attacks, hijackings or airline crashes) may result in significant increases of the airlines’ insurance premium or in significant decreases of insurance coverage, as occurred after the September 11, 2001 terrorist attacks. Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations and increases the risk that we experience uncovered losses.
Problems with air traffic control systems or other technical failures could interrupt our operations and have a material adverse effect on our business.
Our operations, including our ability to deliver customer service, are dependent on the effective operation of our equipment, including our aircraft, maintenance systems and reservation systems. Our operations are also dependent on the effective operation of domestic and international air traffic control systems and the air traffic control infrastructure in the markets in which we operate. Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our operations and financial results as well as our reputation.
Our business relies extensively on third-party service providers. Failure of these parties to perform as expected, or interruptions in our relationships with these providers or their provision of services to us, could have an adverse effect on our financial position and results of operations.
We have engaged an increasing number of third-party service providers to perform a large number of functions that are integral to our business, including regional operations, operation of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, provision of aircraft maintenance and repairs, provision of various utilities and performance of aircraft fueling operations, among other vital functions and services. We do not directly control these third-party service providers, although we do enter into agreements with many of them that define expected service performance. Any of these third-party service providers, however, may materially fail to meet their service performance commitments, may suffer disruptions to their systems that could impact their services, or the agreements with such providers may be terminated. For example, flight reservations booked by customers and/or travel agencies via third-party GDSs may be adversely affected by disruptions in our business relationships with GDS operators. Such disruptions, including a failure to agree upon acceptable contract terms when contracts expire or otherwise become subject to renegotiation, may cause the carriers’ flight information to be limited or unavailable for display, significantly increase fees for both us and GDS users, and impair our relationships with customers and travel agencies. The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services, may reduce our revenues and increase our expenses or prevent us from operating our flights and providing other services to our customers. In addition, our business, financial performance and reputation could be materially harmed if our customers believe that our services are unreliable or unsatisfactory.
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Disruptions or security breaches of our information technology infrastructure could interfere with our operations, compromise passenger or employee information and expose us to liability, possibly causing our business and reputation to suffer.
A serious internal technology error or failure impacting systems hosted internally at our data centers or externally at third-party locations, or large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network. Our technology systems and related data may also be vulnerable to a variety of sources of interruption, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial and reputational consequences to our business.
In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our passengers and employees and information of our business partners. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. Hardware or software we develop or acquire may contain defects that could unexpectedly compromise information security. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers’, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business.
Our financial success depends on the availability and performance of key personnel, who are not subject to non-competition restrictions.
Our success depends to a significant extent on the ability of our senior management team and key personnel to operate and manage our business effectively. Our employment agreements with key personnel do not contain any non-competition provisions applicable upon termination. If we lose any executive officer, senior manager or other key employee and are not able to obtain an adequate replacement, or if we are unable to attract and retain new qualified personnel, our business, financial condition and results of operations could be materially adversely affected.
Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees.
As of December 31, 2014 approximately 67% of LATAM’s employees, including administrative personnel, cabin crews, flight attendants, pilots and maintenance technicians are members of unions and have contracts and collective bargaining agreements which expire on a regular basis. Our business, financial condition and results of operations could be materially adversely affected by a failure to reach agreement with any labor union representing such employees or by an agreement with a labor union that contains terms that are not in line with our expectations or that prevent us from competing effectively with other airlines.
Collective action by employees could cause operating disruptions and negatively impact our business.
Certain employee groups such as pilots, flight attendants, mechanics and our airport personnel have highly specialized skills. As a consequence, actions by these groups, such as strikes, walk-outs or stoppages, could severely disrupt our operations and negatively impact our operating and financial performance, as well as our image.
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 (20% in 2014) and at times in our operating history we have experienced pressure to increase wages and benefits for our employees. A significant increase in our labor costs above the assumed costs could result in a material reduction in our earnings.
We may experience difficulty finding, training and retaining employees.
Our business is labor intensive. We employ a large number of pilots, flight attendants, maintenance technicians and other operating and administrative personnel. The airline industry has, from time to time, experienced a shortage of qualified personnel, specifically pilots and maintenance technicians. In addition, as is common with most of our competitors, we may, from time to time, face considerable turnover of our employees. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, our training costs will be significantly higher. A failure to recruit, train and retain qualified employees at a reasonable cost could materially adversely affect our business, financial condition and results of operations.
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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.
Passenger and cargo demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations, among other things. Our business has been negatively affected by global economic recessionary conditions, weak economic growth in Chile, in Brazil, recession in Argentina and poor economic performance in certain emerging market countries in which we operate. The occurrence of similar events in the future could adversely affect our business. We will continue to work on operations based in Latin America and our performance will, therefore, continue to depend heavily on economic conditions in the region. Any of the following factors could adversely affect our business, financial condition and results of operations in the countries in which we operate:
No assurance can be given that capacity reductions or other steps we may take in response to weakened demand will be adequate to offset any future reduction in our cargo and/or air travel demand. Sustained weakened demand may adversely impact our revenues, results of operations or financial condition.
Our business is highly regulated and changes in the regulatory environment in which we operate may adversely affect our business and results of operations.
Our business is highly regulated and depends substantially upon the regulatory environment in the countries in which we operate or intend to operate. For example, price controls on fares may limit our ability to effectively apply customer segmentation profit maximization techniques (“passenger revenue management”) and adjust prices to reflect cost pressures. High levels of government regulation may limit the scope of our operations and our growth plans, and the possible failure of aviation authorities to maintain the required governmental authorizations or our failure to comply with applicable regulations, may adversely affect our business and results of operations.
Losses and liabilities in the event of an accident involving one or more of our aircraft could materially affect our business.
We are exposed to potential catastrophic losses in the event of an aircraft accident, terrorist incident or any other similar event. There can be no assurance that, as a result of an aircraft accident or significant incident:
Substantial claims resulting from an accident or significant incident in excess of our related insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Moreover, any aircraft accident, even if fully insured, could cause the negative public perception that our aircraft are less safe or reliable than those operated by other airlines, which could have a material adverse effect on our business, financial condition and results of operations.
Insurance premiums may also increase due to an accident or incident affecting one of our alliance partners or other airlines.
High levels of competition in the airline industry may adversely affect our level of operations.
Our business, financial condition and results of operations could be adversely affected by high levels of competition within the industry, particularly the entrance of new competitors into the markets in which we operate. Airlines compete primarily over fare levels, frequency and dependability of service, brand recognition, passenger amenities (such as frequent flyer programs) and the availability and convenience of other passenger or cargo services. New and existing airlines (and companies providing ground cargo transportation) could enter our markets and compete with us on any of these bases, including by offering lower prices, more attractive services or increasing their route capacities in an effort to gain greater market share.
Chile has opened its domestic aviation industry to foreign airlines without restrictions, which may change the competitive landscape of the domestic Chilean aviation sector and affect our business and results of operations.
Since November 2013, Chilean laws and regulations have permitted foreign airlines to operate domestic flights in Chile without necessarily setting up a Chilean subsidiary first.
The Chilean Domestic Unilateral Open Skies Rule may change the competitive landscape of the Domestic Chilean Aviation Sector, as it will be easier for foreign companies in the future to freely operate in the Chilean territory, which may subject us to further competition. Competition from international carriers in the Chilean market may affect the competitive dynamics of our industry by reducing our passenger traffic and cargo demands, forcing us to reduce our fare levels, which could have a material adverse effect on our revenues and level of operations.
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The reallocation of any of our slots to other market participants could adversely affect our operations.
The Brazilian government has proposed and in some cases already implemented, regulations to reallocate existing takeoff and landing slots at major airports in Brazil from TAM and our competitor, GOL, to smaller airlines and new market entrants, in order to stimulate small airline access to airport infrastructure. In the case of the Congonhas airport in Sao Paulo, slots were increased in October 2014 and given to new entrants (Azul and Avianca Brazil); and in a second stage slots could be reallocated, if current operators don’t comply with measures regarding on-time performance and regularity of service. We rely on access to takeoff and landing slots at Congonhas airport and other airports throughout Brazil, to conduct our Brazilian passenger operations. The reallocation of any of our slots to other market participants could adversely affect our operations.
Some of our competitors may receive external support which could negatively impact our competitive position.
Some of our competitors may receive support from external sources, such as their national governments, which may be unavailable to us. Support may include, among others, subsidies, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our operations and financial performance.
The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations.
Scheduled air transportation services are considered public utilities in Brazil and are subject to extensive regulation by the Brazilian government. Over recent years, the Brazilian regulatory authorities have taken a more proactive role in monitoring the development of the Brazilian civil aviation market. For example, in an effort to prevent excess supply, the authorities have established rigorous criteria for air transport companies to follow when creating new routes or increasing flight frequencies.
Operation of air transportation services, as well as airport infrastructure, is an exclusive right of the Brazilian government, which may choose to provide these services directly or through third parties by means of concessions or permits. TAM’s concession to operate public air transportation was first obtained on December 9, 1996, and is valid until December 9, 2021. We cannot assure you that we will be able to automatically renew TAM’s concession when it expires. See “Item 4. Information on the Company—Business Overview—Regulation—Brazil—Aeronautical Regulation.”
Additionally, our capacity to grow our Brazilian operations is dependent on receiving the necessary authorizations from ANAC and the Bureau of International Relations (Superintendência de Relações Internacionais, or “SRI”). We cannot assure you that we will obtain all necessary authorizations in the future and any failure to do so would require us to re-evaluate our strategies.
Our operations are subject to local, national and international environmental regulations; costs of compliance with applicable regulations, or the consequences of noncompliance, could adversely affect our results, our business or our reputation.
Our operations are covered by environmental regulations at local, national and international levels. These regulations cover, among other things, emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other activities incident to our business. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and adversely affect our operations and financial results. In addition, failure to comply with these regulations could adversely affect us in a variety of ways, including adverse effects on our reputation.
The European Union (“EU”) had proposed a directive under which the existing emissions trading scheme (the “ETS”) in each EU member state was to be extended to all airlines. This directive would require us to submit annual emission allowances in order to operate routes to and from EU member states. As of the date of this Annual Report, this proposal has been postponed for evaluation in 2016 and the directive affects only intra-European flights (which are not material to LATAM’s operation but there is a possibility that the directive could be extended to all flights in the future. Currently, we operate 6 routes to and from Europe, and service additional destinations through our code-share agreements. Although it is uncertain if this directive will be approved in 2016, it is increasingly likely that we will be required to participate in some form of an international aircraft emissions program in the future, which may involve significant costs. Our business may be adversely affected by a downturn in the airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, weather conditions and natural disasters, war or terrorist attacks.
Demand for air transportation may be adversely impacted by exogenous events, such as adverse weather conditions and natural disasters, epidemics (such as Ebola), terrorist attacks, war or political and social instability. Situations such as these in one or more of the markets in which we operate could have a material impact on our business, financial condition and results of operations. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items.
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Revenues for airlines depend on the number of passengers carried, the fare paid by each passenger and service factors, such as the timeliness of flight departures and arrivals. During periods of fog, ice, low temperatures, storms or other adverse weather conditions, some or all of our flights may be cancelled or significantly delayed, reducing our revenues. In addition, fuel prices and supplies, which constitute a significant cost for us, may increase as a result of any future terrorist attacks, a general increase in hostilities or a reduction in output of fuel, voluntary or otherwise, by oil-producing countries. Such increases may result in both higher airline ticket prices and decreased demand for air travel generally, which could have an adverse effect on our revenues and results of operations.
Developments in Latin American countries and other emerging market countries may adversely affect the Chilean and Brazilian economies, negatively impact our business and results of operations and cause the market price of our common shares and ADSs to decrease.
We conduct a significant portion of our operations in emerging market countries, particularly in Latin America. As a result, economic and political developments in these countries, including future economic crises and political instability, could impact the Chilean or Brazilian economies and have a material adverse effect on our business, financial condition and results of operations and the market value of our securities. Although economic conditions in other emerging market countries may differ significantly from economic conditions in Chile and Brazil, we cannot assure that events in other countries, particularly other emerging market countries, will not adversely affect the market value of, or market for, our common shares or ADSs.
Changes in the Chilean corporate tax rate or tax regime could adversely affect our financial results.
On October 2014, President Bachelet’s government approved a gradual increase in the Chilean corporate tax, from 20% to 25% or 27% (depending on the tax system chosen by the Chilean corporate tax payer) from 2014 to 2018. This increase, affected the tax provision for Chilean companies, including LATAM whose corporate tax rate will increase to 27%, and has required adjustments in deferred taxes to reflect the higher tax rate. Currently LATAM has losses resulting from its investment plan, but if LATAM records net income and no longer has tax losses available, our effective tax rate could increase and our net income could decrease. For more information on taxation see Note 17 in our audited consolidated financial statements
Fluctuations in the value of the Brazilian real, Chilean peso and other currencies in the countries in which we operate may adversely affect our revenues and profitability.
We operate in numerous countries and face the risk of variation in foreign currency exchange rates against the U.S. dollar or between the currencies of these various countries. Changes in the exchange rate between the U.S. dollar and the currencies in the countries in which we operate could adversely affect our business, financial condition and results of operations. Approximately 97% of our indebtedness at December 31, 2014 was denominated in U.S. dollars, and we are expecting than 42% of our revenues and 35% of our operating expenses in 2015 are denominated in currencies other than the U.S. dollar, mainly the Brazilian real and the Chilean peso. If the value of the Brazilian real, Chilean peso or other currencies, in which revenues are denominated, declines against the U.S. dollar, we will need a greater amount of these currencies to repay the same amount of U.S. dollars. The Brazilian Real and the Chilean peso, respectively, experienced average nominal depreciations against the U.S. dollar of 16.7% and 0.7% in 2012, 10.5% and 1.8% in 2013 and 9.1% and 15.2% in 2014. The exchange rate of the Chilean peso, Brazilian real and other currencies against the U.S. dollar may fluctuate significantly in the future.
Changes in Chilean, Brazilian and other governmental economic policies affecting foreign exchange rates could also adversely affect our business, financial condition, results of operations and the return to our shareholders on their common shares or ADSs. Exchange controls in Venezuela delay our ability to repatriate cash generated from operations in Venezuela. They also increase our exposure to exchange rate losses due to potential devaluations of the Venezuelan bolivar vis à vis the U.S. dollar during the period of time between the time we are paid in Venezuelan bolivares and the time we are able to repatriate such revenues in U.S. dollars. During 2014, the company modified the exchange rate used in determining equivalence of United States Dollar in cash and cash equivalents held in strong Bolivar, from 6.3 VEF/US$ to 12.0 VEF/US$, which represented a loss by foreign exchange of US$61 million on our results.
The Brazilian government has exercised, and 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.
The Brazilian economy has been characterized by the significant involvement of the Brazilian government, which often changes monetary, credit, fiscal and other policies to influence Brazil’s economy. 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. We have no control over, and cannot predict what measures or policies the Brazilian government may take in the future.
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We are not required to disclose as much information to investors as a U.S. issuer is required to disclose and, as a result, you may receive less information about us than you would receive from a comparable U.S. company.
The corporate disclosure requirements that apply to us may not be equivalent to the disclosure requirements that apply to a U.S. company and, as a result, you may receive less information about us than you would receive from a comparable U.S. company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The disclosure requirements applicable to foreign issuers under the Exchange Act are more limited than the disclosure requirements applicable to U.S. issuers. Publicly available information about issuers of securities listed on Chilean or Brazilian stock exchanges also provides less detail in certain respects than the information regularly published by listed companies in the United States or in certain other countries. Furthermore, there is a lower level of regulation of the Chilean and Brazilian securities markets and of the activities of investors in such markets as compared with the level of regulation of the securities markets in the United States and in certain other developed countries.
Risks Related to our Common Shares and ADSs
Our controlling shareholders may have interests that differ from those of our other shareholders.
We have two groups of major shareholders—the Cueto Group (the “LATAM Controlling Shareholders”) and the Amaro Group (the “TAM Controlling Shareholders”). As of January 31, 2015, the LATAM Controlling Shareholders, in the aggregate, beneficially owned 25.5% of our voting common shares, and the TAM Controlling Shareholders, in the aggregate, beneficially owned 12.0% of our voting common shares. The LATAM Controlling Shareholders are in a position to elect three of the nine members of our board of directors and are in a position to direct our management. In addition, the LATAM Controlling Shareholders have entered into a shareholders agreement with the TAM Controlling Shareholders, pursuant to which these controlling shareholders have agreed to vote together to elect individuals that the TAM Controlling Shareholders nominate to our board of directors. See “Item 7. Controlling Shareholders and Related Party Transactions—Major Shareholders.”
Under the terms of the deposit agreement governing the ADSs, if holders of ADSs do not provide JP Morgan Chase Bank, N.A., in its capacity as depositary for the ADSs, with timely instructions on the voting of the common shares underlying their ADRs, the depositary will be deemed to have been instructed to give a person designated by the board of directors the discretionary right to vote those common shares. The person designated by the board of directors to exercise this discretionary voting right may have interests that are aligned with our controlling shareholders, which may differ from those of our other shareholders. Historically, our board of directors has designated its chairman, who currently is Mauricio Amaro, to serve in this role.
Trading of our ADSs and common shares in the securities markets is limited and could experience further illiquidity and price volatility.
Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. In addition, Chilean securities markets may be materially affected by developments in other emerging markets, particularly other countries in Latin America. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying ADSs in the amount and at the price and time 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 ADSs may be adversely affected by currency devaluations and foreign exchange fluctuations.
If the Chilean peso exchange rate falls relative to the U.S. dollar, the value of the ADSs and any distributions made thereon from the depositary could be adversely affected. Cash distributions made in respect of the ADSs are received by the depositary (represented by the custodian bank in Chile) in pesos, converted by the custodian bank into U.S. dollars at the then prevailing exchange rate and distributed by the depositary to the holders of the ADRs evidencing those ADSs. In addition, the depositary will incur foreign currency conversion costs (to be borne by the holders of the ADRs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to the ADSs.
Future changes in Chilean foreign investment controls and withholding taxes could negatively affect non-Chilean residents that invest in our shares.
Equity investments in Chile by non-Chilean residents have been subject in the past to various exchange control regulations that govern investment repatriation and earnings thereon. Although not currently in effect, regulations of the Central Bank of Chile have in the past required, and could again require, foreign investors acquiring securities in the secondary market in Chile to maintain a cash reserve or to pay a fee upon conversion of foreign currency to purchase such securities. Furthermore, future changes in withholding taxes could negatively affect non-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
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imposed or required in the future, nor could we make an assessment as to the duration or impact, were any such restrictions to be imposed or required. For further information, see “Item 10. Additional Information—Exchange Controls—Foreign Investment and Exchange Controls in Chile.”
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.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
General
LATAM Airlines Group is a Chilean-based airline holding company formed by the combination of LAN of Chile and TAM of Brazil in 2012. Following the combination, LAN Airlines S.A. became “LATAM Airlines Group S.A.” and TAM continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM. The Company is primarily involved in the transportation of passengers and cargo and operates as one unified, combined business enterprise with two separate brands: LAN and TAM.
LATAM’s airline holdings include LAN and its affiliates in Peru, Argentina, Colombia and Ecuador, and LAN Cargo and its affiliates MasAir (in Mexico) and LANCO (in Colombia), as well as TAM S.A and its subsidiaries TAM Linhas Aereas S.A, TAM Transportes Aereos del Mercosur S.A, (TAM Airlines (Paraguay)), TAM Cargo, and Multiplus. LATAM is a publicly traded corporation listed in the Santiago Stock Exchange (“SSE”), the Valparaiso Stock Exchange, the Chilean Electronic Exchange, the New York Stock Exchange (“NYSE”) and the Brazilian Stock Exchange (“Bovespa”).
LAN was founded in 1929 by the Chilean government. In 1989, the Chilean government sold 51.0% of LAN’s capital stock to Chilean investors and to Scandinavian Airlines System. In 1994, controlling shareholders together with other major shareholders acquired 98.7% of LAN’s stocks, including the remaining stocks held by the Chilean government. In 1997, LAN was listed on the New York Stock Exchange, becoming the first Latin American airline to trade its ADRs on this financial market. Over the past decade, LAN has significantly expanded its operations in Latin America, initiating services in Peru in 1999, Argentina in 2005, Ecuador in 2009, and in Colombia in 2010 through the acquisition of Aerovias de Integracion Regional, Aires S.A. (dba “LAN Colombia”).
TAM is a leading domestic and international airline, offering flights throughout Brazil with a strong domestic market share, international passenger services and significant cargo operations. The company was founded in 1997 (under the name CIT—Companhia de Investimentos em Transportes), for the purpose of participating in, managing and consolidating shareholdings in airlines. In 2002, the name was changed to TAM S.A. and its shares began to be publicly traded on Bovespa in June 2005. From 2006 until the combination with LAN in 2012, TAM American Depositary Shares were was 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) 565-2525. 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, Senior Vice President Corporate Controller and Investor Relations, at gisela.escobar@lan.com.
Combination of LAN and TAM
On June 22, 2012, LAN and TAM successfully completed an exchange offer resulting in the combination of the two businesses and the creation of LATAM Airlines Group.
Following the combination, on July 18, 2012, the registration of TAM as a publicly listed company in Brazil was cancelled and TAM was delisted from Bovespa.
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In order to implement this combination, the TAM controlling shareholders formed four newsociedades anónimas cerradas with limited liability under the laws of Chile: TEP Chile, Holdco I, Holdco II and Sister Holdco. After the transaction was completed, Holdco II and Sister Holdco ceased to exist, and the ownership and organizational structure of LATAM Airlines Group as of December 31, 2014 was as follows:
TAM S.A., the holding company, has two significant operating subsidiaries, TAM Linhas Aéreas S.A. (“TLA”) and Multiplus S.A.
Capital Expenditures
For a description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures.”
B. BUSINESS OVERVIEW
The association of LAN and TAM created the largest passenger and cargo airline groups in South America. We are also one of the largest airline groups in the world in terms of network connections, providing passenger transport services to approximately 135 destinations in 22 countries and cargo services to approximately 144 destinations in 26 countries, with a fleet of 327 aircraft and a set of bilateral alliances. In total, LATAM Airlines Group has more than 52,000 employees. LATAM currently provide domestic and international passenger services in Chile, Peru, Ecuador, Argentina, Colombia and Brazil. LATAM carry’s out its cargo operations through the use of belly space on the passenger flights and dedicated cargo operations using freighter aircraft through the cargo airlines in Chile, Brazil, Colombia and Mexico. We also offer other services, such as ground handling, courier, logistics, and maintenance.
As of January 31, 2015, LATAM serviced 16 destinations in Chile, 16 destinations in Peru, 5 destinations in Ecuador, 14 destinations in Argentina, 20 destinations in Colombia, 40 destinations in Brazil, 11 destinations in other Latin American countries and the Caribbean, 5 destinations in the North America, 5 destinations in Europe and 3 destinations in the South Pacific. In addition, as of January 31, 2015, through the various code-share and interline agreements, LATAM offered service to 117 destinations in Latin America, 435 destinations in North America, 395 destinations in Europe, and more than 800 destinations in Asia, Pacific, Africa and Middle East
Competitive Strengths
Our strategy is to maintain LATAM Airlines Group as the leading airline group in South America and to maximize shareholder value by increasing profitability through leveraging our unique position in the airline industry. LATAM Airlines Group is the only airline group in the region with a local presence in seven markets, as well as intra-regional and long haul operations. As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges.
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Moreover, LATAM’s unique leadership position in a region with growth potential and the focus on our existing competitive strengths will allow us to continue building our business model and fuel our future growth. We believe our most important competitive strengths are:
Leading Presence in South America
Through a successful regional expansion strategy, LATAM Airlines Group has become the leading international and domestic passenger airline group in South America, as well as the largest cargo operator in Latin America. LATAM has domestic passenger operations in Chile, Brazil, Peru, Argentina, Colombia and Ecuador. These six countries are the most significant passenger markets in South America (excluding Venezuela) and represent approximately 90% of the passengers in the region. LATAM is also the largest operator of intra-regional routes, connecting the main cities in South America. Furthermore, through the significant presence in the largest hubs in South America—Lima and Sao Paulo—LATAM is able to offer the best connectivity between South America and the rest of the world. Finally, the cargo companies of LATAM Airlines Group are the largest air cargo operators within, to and from Latin America, particularly in Brazil, where we consolidated our position during 2013.
Geographically Diversified Revenue Base, including both Passenger and Cargo Operations
The operations of the LATAM Airlines Group are highly geographically diversified, including domestic operations in six different countries, as well as operations within South America and connecting South America with various international destinations. This provides resilience to external shocks that may occur in any particular market. Furthermore, we believe that one of our distinct competitive advantages is our ability to profitably integrate our scheduled passenger and cargo operations. We take into account potential cargo services when planning passenger routes, and also serve certain dedicated cargo routes using our freighter aircraft, when needed. By adding cargo revenues to our existing passenger service, we are able to increase the productivity of our assets and maximize revenue, which has historically covered fixed operating expenses per flight, lowered break-even load factors and enhanced per flight profitability. Additionally, this revenue diversification helps offset seasonal revenue fluctuations and reduces the volatility of our business over time. For the year ended December 31, 2014, passenger revenues accounted for 86% of total revenues and cargo revenues accounted for 14% of total revenues.
Modern Fleet and Optimized Fleet Strategy
The average age of our fleet is less than 7 years, making our fleet one of the most modern in Latin America and in the world. A younger fleet makes us more cost competitive because it reduces fuel consumption and maintenance costs, and enables us to enjoy a high degree of performance reliability. In addition, a modern and fuel efficient fleet reflects our strong commitment to the environment as new aircraft incorporate the industry’s latest technology, allowing for a substantial reduction in emissions, while also decreasing noise levels. Finally, a modern fleet also allows us to provide the best passenger experience.
We optimize our fleet structure through the careful selection of modern aircraft models and staggered lease maturities. We select our aircraft based on their ability to effectively and efficiently serve our short- and long-haul flight needs, while still striving to minimize the number of different aircraft types we operate.
The Company’s current fleet plan involves a short-haul fleet formed exclusively by aircraft from the A320 family, with a focus on A321s and A320neos, whose use represents a saving per ASK of around 6% in comparison to A320ceos. In 2014, LATAM incorporated 11 Airbus A321s, the largest model in this family, for use on the busiest regional routes and for some domestic routes in Chile as well as in Brazil, ending the year with 21 aircraft of this type. Additionally, the Company has placed orders for 36 A320neos, with delivery dates between 2016 and 2018.
For long-haul passenger flights, we operate the Boeing 767-300, Airbus A330, Airbus A340-300 and Boeing 777 aircraft, and the modern and efficient Boeing 787 Dreamliner. This aircraft has new technologies in aerodynamics, materials and coatings which allows us to achieve important savings on fuel consumption and also achieve sustainable expansion of our fleet (as the Dreamliner produces up to 20% less CO2 than similar aircraft), while incorporating modern technology to deliver the best travel experience for LATAM’s passengers. Our current fleet plan also includes the delivery starting in 2015, of the first of a total of 27 Airbus A350 passenger aircraft, a new aircraft type that is expected to further improve the efficiency of the existing long-haul fleet.
In 2014, the Company took out of service it’s Dash Q400s and Boeing 737s (inherited from the Aires airline in Colombia) as well as seven A330s and three A340s and expects to conclude the withdrawal of these older models by 2016.
Overall, the Company’s continuous renewal of its fleet seeks to incorporate the best technology and position LATAM as a leader in fleet efficiency.
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Strong Brands Teamed with Key Global Strategic Alliances
Following the business combination, both LAN and TAM continue to operate under their existing brands. We believe that both the LAN and TAM brands are associated with superior service, aircraft and technologically-advanced operations, and are well recognized and respected in their respective markets. In 2014, LAN and TAM Airlines were recognized as the “Best Airlines in South America” in first and second places respectively by the SkyTrax World Airline Awards. The awards are considered the global barometer for customer satisfaction within the industry, thanks to their exclusive reliance on the opinion of passengers.
The strategic global alliances and existing commercial agreements provide the LATAM customers with access to more than 1700 destinations worldwide, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market. In addition, in March 2014 TAM Airlines and LAN Colombia joined oneworld marking one of the most important steps to achieve the entry of all of the airlines of LATAM Airlines Group into oneworld. To the passengers of the carries part of LATAM Airlines Group, this means greater convenience when traveling, since they will have the same standard of high-quality customer service, regardless of their international destination.
Financial Flexibility
We have historically managed our business to maintain financial flexibility and a strong balance sheet in order to accommodate our growth objectives while having the ability to respond to changing market conditions. Our financial flexibility has allowed us to secure large aircraft orders, including an important part of our current re-fleeting program, at attractive financing rates.
Recognized Loyalty Programs
TAM Fidelidade and LANPASS together represent the leading frequent flyer programs in South America, with strong participation rates and brand recognition by our customers. Customers in each program earn points or kilometers based on distance flown and class of ticket purchased, or by using other services of partners in the program. In addition, TAM’s Multiplus program, which was launched in 2009, allows members to accumulate points not just by flying with TAM, but also by making purchases through credit cards or using services and products at partner establishments, and to redeem points for TAM flights and other products at partner establishments. Following the business combination between LAN and TAM, we have begun to harmonize the two airlines’ frequent flyer programs to make them fully fungible for our customers, and have advanced cost initiatives related to the contract renegotiations and process standardization.
We regard our frequent flyer programs as strong relationship tools and we believe that these flexible programs are attractive to customers because they do not impose restrictions on flights for which points can be redeemed or the number of seats available to members using the loyalty program for any particular flight. LANPASS and TAM Fidelidade members can also accrue and redeem points for oneworld® flights.
Business Strategy
Our mission is to connect people with safety, operational excellence and warmth, seeking to become one of the best airlines groups in the world. In order to reach our mission the principal areas in which we plan to focus our efforts going forward are as follows:
Strengthen our Network
LATAM currently intends to strengthen its route network in South America, thereby offering the best connectivity within the region at a competitive price, in order to become by far the most convenient option for our passengers.We are the only airline group in South America with a local presence in seven home markets and an international and intra-regional operation. This position is strengthened by improved infrastructure in some of our main hubs, allowing us to further strengthen our network and improve connection times. We intend to leverage our position to create a diversity of options and destinations and build a platform that will allow us to continue growing in the long term.
Brand leadership and customer experience:
We will always seek to be the preferred choice of passengers in this region. Our efforts are driven by a differentiated passenger experience, and our leveraging of mobile digital technologies. We are currently working on a single, unified brand, culture, product and value proposition for our passengers. Additionally, we will focus on defining LATAM’s digital strategy including applications to achieve ancillary revenues, and improving the management of contingencies, so that we are able to provide information and solutions to our customers in a timely and transparent manner. We continually assess opportunities to incorporate service improvements in order to respond effectively to our customers’ needs.
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Focus on Efficiency and Cost Competitiveness
We are currently working to establish a competitive cost structure to further improve our effectiveness, simplify our organization and increase flexibility and speed in decision making. The target is to reduce total costs by approximately 5% over the next 4 years (2015 to 2018). These savings are in addition to the efficiencies we expect to obtain from our new fleet technologies. Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has already started work on cost initiatives in all these areas. We currently are working to install behavior of austerity at all levels within the Company to continuously reduce costs.
Organizational Strength
We aspire to be a group of passionate people, working in a simple and aligned manner, with inspiring leaders making agile decisions. This will allow us to deliver a distinctive value to our customers, surpass our competitors in a consistent way and have a healthy and sustainable company.
Proactive risk management
We are working to incorporate a holistic and responsible view of risk in decision making, starting with risks that have high potential impact and low probability of occurrence, which could significantly affect LATAM’s strategic objectives.
Airline Operations and Route Network
The following tables sets forth our operating revenues by activity and point of sale for the periods indicated:
Total passenger revenues
Total cargo revenues
Total traffic revenues
Peru
Argentina
U.S.A.
Europe
Colombia
Brazil
Ecuador
Chile
Asia Pacific and rest of Latin America
Total Operating Revenues
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Passenger Operations
As of December 31, 2014, both domestic and international passenger services, were operated by LAN, TAM, LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia.
The following table sets forth certain of our passenger operating statistics for international and domestic routes for the periods indicated:
ASKs (million) (at period end)
International
SSC
Domestic Brazil
Total
Passengers (thousands)
Passenger RASK (passenger revenues/ASKs, in US cents)
International(3)
SSC(3)
Domestic Brazil(3)
Combined RASK(1)
Passenger load factor (%)
Combined load factor
International Passenger Operations
Our international network combines the international operations of the Chilean, Peruvian, Ecuadorian, Argentinean, Colombian and Brazilian subsidiaries. LATAM has operated international services out of Chile since 1946 and have greatly expanded our international services, offering flights out of Peru, Ecuador, Argentina, Colombia and Brazil. As of December 31, 2014, we now offer 24 international destinations.
Our strategy to generally expand our international network is aimed at enhancing our value proposition by offering customers more destinations and routing alternatives, and promoting tourism in South America. Our sustained development of our international network has been a crucial factor in our long-term strategy. LATAM provides long-haul services out of Santiago, Lima, Guayaquil, Buenos Aires, Bogota, Sao Paulo and Rio de Janeiro. LATAM also provides regional services from Chile, Peru, Ecuador, Argentina, Colombia and Brazil.
During year 2014, after the necessary infrastructure investments were made, we completed our move to the new Terminal 3 at Guarulhos Airport in Sao Paulo with new slotsfor takeoff and landing slots in this airport which allow us to significantly decrease our connection times. This is a key milestone in the development of our building our most important hub at Guarulhos airport. In addition, we have continued to consolidate our secondary hubs in Lima and Santiago.
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The following table sets forth the international destinations served from each of the aforementioned countries as of December 31, 2014:
Country of Origin
Destination
Australia
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During 2014, LATAM received five additional Boeing 787-8 Dreamliners, ending the year with ten aircraft of this model, out of an order of 32, and expanding the aircraft’s utilization to five new routes. The incorporation of the Boeing 787-8 Dreamliners into our international fleet will allow us to achieve important savings on fuel consumption and the sustainable expansion of our fleet (as the Dreamliner produces up to 20% less CO2 than similar aircraft), while incorporating modern technology to deliver the best travel experience for our passengers. In addition, during 2014, LATAM started a process of retrofitting some of the Company’s Boeing 777 aircraft, in order to include a new business class mainly in routes from Brazil to North America and also received additional Boeing 767 aircraft with fully flat business class seat.
As part of its mission, LATAM seeks to promote tourism to South America. Due to its large network of services, visitors from around the world can experience world renowned destinations such as Cusco, Easter Island, the Galapagos Islands, Iguazu Falls in Brazil, or Patagonia in Chile and Argentina, including the cities of Punta Arenas, Ushuaia, El Calafate and Bariloche.
According to the Chilean JAC data, Chilean international air passenger traffic increased 6.1% from 2013 to 2014 as measured in passengers transported, totaling more than 7.4 million passengers in 2014. We had 62.8% of the international market share in Chile in 2014 as measured in passengers transported, which was a decrease compared to 65.3% in 2013. Our Chilean international operations can be divided into four main segments based on destination: to North America, to Europe, to other countries in Latin America, and to the Pacific. As of January 31, 2015, our main competitors on direct routes between Chile and North America included American Airlines, Delta Airlines, Avianca-Taca, Air Canada and Aeromexico. COPA also participated in the Chile-North American markets with stopovers in its Central American hub in Panama City. Our main competitors on routes between Chile and Europe were Air France-KLM and Iberia. On regional routes our main competitors included Aerolineas Argentinas, Air Canada, Avianca-Taca and GOL.
According to our internal estimates (captured through MiSchDynamicDT), Peruvian international air passenger traffic increased by 3.1% from 2013 to 2014 measured in passengers transported, totaling approximately 7.7million passengers in 2014. In Peru, we had 33.7% share of the international market as measured in passengers transported in 2014, with no variations as compared to the passengers transported in 2013. Our Peruvian international operations can be divided into three main segments based on destination: to North America, to Europe and to other countries in Latin America. As of January 31, 2015, our main competitors on direct routes between Peru and North America included American Airlines, United Airlines, Delta Airlines, Avianca-Taca, Aeromexico and Air Canada. COPA also participated in the Peru-North American markets with stopovers in its respective Central American hub. On routes to Europe, our main competitors were Air France-KLM and Iberia. On regional routes our main competitors included Avianca-Taca and Aerolineas Argentinas.
According to our internal estimates and travel agency statistics (captured through MiSchDynamicDT), Ecuadorian international air passenger traffic increased 7.1% from 2013 to 2014, as measured in passengers transported totaling approximately 6.3 million passengers in 2014. According to the Diio Mi we had 23.0% of the international market share as measured in ASKs in LATAM routes from Ecuador in 2014, a decrease of 9.6 percentage points compared to 32.6% in 2013. Our Ecuadorian international operations can be divided into three main segments, based on the destination: to North America, Europe to other countries in Latin America. As of January 31, 2015, our main competitors on direct routes between Ecuador and North America included American Airlines, Continental Airlines, Delta Airlines; Avianca–Taca and COPA also participate in the Ecuador-North American markets with stopovers in their respective Central American hubs. On routes to Europe, our main competitors included Iberia, KLM and Avianca-Taca. On regional routes, our main competitors included Avianca-Taca and Copa.
According to our internal estimates (captured through MiSchDynamicDT), in 2014 the Argentinean international passenger capacity decreased by 0.5%, as compared to the previous year. LATAM Airlines had 11.8% of the international market share as measured in capacity (ASKs) in Argentina in 2014, which was a decrease as compared to 13.0% in 2013. The Argentinean international operations can be divided into two main segments based on destination: to North America and to other countries in Latin America. As of January 31, 2015, the main competitors on the Buenos Aires-Miami route included American Airlines and Aerolíneas
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Argentinas. Avianca-Taca and COPA also participated in the Argentina-North American markets with stopovers in their respective hubs. The main competitors on the Buenos Aires-Dominican Republic route included COPA and American Airlines. The main competitors on the Buenos Aires-Sao Paulo route included GOL and Aerolíneas Argentinas. The main competitors on the Buenos Aires-Lima route included Avianca-Taca and Aerolíneas Argentinas. The main competitors on the Buenos Aires-Santiago route included Aerolíneas Argentinas and Air Canada and Sky Airline.
According to Aeronautica Civil (Colombian Civil Aeronautics), the Colombian international market increased 9.8% from 2013 to 2014 as measured in passengers transported, from 9.9 million passengers to approximately 10.9 million passengers in 2014. LAN (including LAN Colombia, LAN Peru and LAN Airlines) had a 7.4% share of the international market share in Colombia in 2014, as measured in RPK which is an increase of 1.0 percentage point as compared to 6.4% in the same period 2013. The international operations in Colombia can be divided in two business segments based on destination: to North America and to other countries in Latin America. As of December 31, 2014, the main competitors on direct routes between Colombia and North America included Avianca-Taca, American Airlines, United Airlines, Air Canada, Delta Airlines and Aeromexico. COPA also participated in the Colombia-North American markets with stopovers in its Central American hub. On regional routes, the main competitors included Avianca-Taca and COPA.
According to Brazilian ANAC data, Brazilian international air passenger traffic increased 4.9% from 2013 to 2014 as measured in RPKs, totaling more than 6.4 million passengers in 2014. TAM had 84.6% of the international market share in Brazil in 2014 when considering only Brazilian airlines, which was a decrease compared to 87.5% in 2013. Our Brazilian international operations can be divided into three main segments, based on destination: to North America, to Europe and to other countries in Latin America. As of January 31, 2015, the main competitors on direct routes between Brazil and North America included American Airlines, United Airlines, Delta Airlines, Air Canada and Aeromexico. Avianca-Taca also participated in the Brazil-North American markets with stopovers in its Central American hub. On routes to Europe, the main competitors were Iberia, Air France-KLM, Lufthansa, TAP and Air Europa. On regional routes the main competitors included Aerolineas Argentinas, Avianca-Taca and GOL.
Domestic Passenger Operations
LATAM provides domestic passenger services within Chile, Peru, Ecuador, Argentina and Colombial. Said domestic passenger services are operated by LAN, LAN Express and the regional subsidiaries, including LAN Peru, LAN Ecuador, LAN Argentina and LAN Colombia. Additionally, TAM Linhas Aereas provides domestic passenger services within Brazil.
Business Model for Domestic Operations
LATAM operates on a low cost business model in all of our domestic operations. This model increases efficiency in the short-haul while encouraging increased domestic demand. A key element of this business model has been to significantly increase the utilization of the narrow body fleet, a goal that the company has been successfully achieving through modified itineraries including more point-to-point, faster turnarounds times and overnight flights. Additionally, the transition to a newer fleet has allowed decreases in unscheduled maintenance costs as well as in cost efficiencies achieved through operating fewer fleet types and in operational efficiencies, including lower fuel consumption.
Another key element of this business model is the reduction in sales and distribution costs through higher internet penetration and reduced agency commissions, and increased self-check-in service through web check-in and kiosks at airports. These initiatives, together with simplifications in back-office and support functions, will continue to allow us to expand operations while controlling fixed costs.. We have begun to pass on these operating efficiencies to consumers through significant fare reductions, which have a strong effect in stimulating new demand. We plan to continue working in the business model during 2015, as we look for ways to increase operational efficiency, encourage direct sales and self-check-in, and implement new sales strategies aimed at stimulating demand.
Operations within Chile
LAN and LAN Express, are the leading domestic passenger airline in Chile. We have operated domestic flights in Chile since LAN’s creation in 1929. During 2014, we flew to 16 destinations within Chile (including Santiago, but not including Easter Island, which we consider an international destination) as well as some seasonal destinations, with an average fleet of 28 Airbus A320-Family Aircraft. Domestic operations in Chile have been positively affected by the greater utilization of the latest-generation Airbus fleet and the retirement of the Airbus A318-100s.
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According to JAC data, the Chilean domestic market as a whole transported approximately 9.8 million passengers in 2014, an increase of 3.8% from 9.5 million passengers transported in 2013. Our domestic passenger market share in Chile was 77.9% in 2014 as measured in revenue passenger kilometer (RPK). During 2014, our main competitors in the domestic market were Sky Airlines domestic passenger market shares as measured in RPKs of 20.2%.
Operations within Peru
LAN Peru started operations in 1999 with both domestic and international flights from Lima. Since then LAN Peru has expanded consistently, consolidating its domestic operations with a continuous focus on improving our excellence for service.
During 2014 LAN Peru flew to 16 destinations, with 11 Airbus A319 and 7 Airbus A320 aircraft. With this, LAN Peru has one of the most modern fleets in Latin America, which is ideal for the characteristics of Peruvian routes, as it maximizes available payload in high-altitude airports. In 2014, a total of 5.7 million passengers traveled on LAN Peru’s domestic routes, which represented an increase of 8% compared to 2013. According to data provided by the Peruvian DGAC, our domestic market share was 63,2% in 2014, compared to 63.4% in 2013, as measured in number of passengers. Our main competitors in Peru include Avianca, Peruvian Airlines and Star Perú.
Operations within Argentina
Since 2005, LAN Argentina has increased its domestic destinations to a total of 14 Argentine cities. It currently operates the domestic network through a fleet of 10 Airbus A320 aircraft.
In the domestic Argentine market, LAN Argentina operates in a regulated environment in which fares sold to Argentine passengers are subject to minimum and maximum prices that vary per route. In 2014, the floor and ceiling of the regulated price range consistently increased-, by 12% in May 2014, by 12% in August 2014 and by 12% in December 2014-.
Based on internal estimates as of December 31, 2014, the domestic market share in Argentina in terms of capacity (ASKs) was approximately 27%. During this period of time LAN Argentina transported 2.3 million passengers, increase 0.5% compared to 2013. The main competitor of LAN Argentina is Aerolíneas Argentinas, a state owned company that has approximately 70% of the total Argentinean domestic capacity as measured in ASK.
Operations within Ecuador
Since beginning operations in 2008, LAN Ecuador has greatly expanded the number of destinations and frequency of flights. As of the end of 2014, LAN Ecuador operated in 5 domestic destinations-Guayaquil, Quito, Cuenca, Baltra and San Cristobal- with a fleet of 3 Airbus A319 aircraft.
In 2014, LAN Ecuador transported 1.1 million passengers in the domestic passenger market representing a decrease of 16% in number of passengers serviced in 2013, in a market that registered a decrease of more than 8% in domestic commercial flights. However, LAN Ecuador as the leading airline with a 36.5 percent of the market, outperforming its main competitors such as the flag carrier Tame, and Avianca-Taca.
Operations within Colombia
Following the acquisition of Aires in 2010, LAN Colombia has successfully restructured the Company’s previous operations in order to achieve LATAM’s standards in terms of security, punctuality, efficiency and service quality. LAN Colombia implemented the low cost model already operating in the other affiliates domestic markets of Chile, Peru, Argentina and Ecuador, to stimulate demand on domestic flights by providing more Colombian citizens the opportunity to use air transportation.
LAN Colombia continued to expand its network inside the domestic market in 2014, flying to 20 destinations and 24 routes. Additionally, LAN Colombia continues to advance in its fleet renewal plan, with the aim of phasing out less efficient models, by gradually replacing the Boeing B737 aircraft and Bombardier Dash aircraft inherited from Aires with aircraft from the Airbus A320 family. As of December 2014, LAN Colombia serviced its domestic destinations with 14 Airbus A320 aircraft and 7 Dash-200 aircraft. The company’s fleet renewal will be completed in 2015, when we will phase out all of the remaining Dash 8-200 aircraft.
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In its third year of operations LAN Colombia transported 4.4 million passengers on domestic passenger, 9.2% more than the previous year, ranking as the second largest operator in the country, with a 19% market share measured in passenger onboard , behind Avianca. Other important competitors are Satena and VivaColombia.
Operations within Brazil
TAM Linhas Aereas is the leading domestic passenger airline in Brazil.. TAM Linhas Aereas’ strategy is based on providing strong connectivity through a network based on the main Brazilian cities, offering a reliable and high quality service, and leveraging our strong brand position in Brazil and abroad. As of December 31, 2014 TAM Linhas Aereas operates flights to 40 destinations within Brazil as well as some seasonal destinations, with an average fleet of 115 aircraft of the Airbus A320 family, including 16 Airbus A321, aircraft that allows high-density routes meet greater efficiency
The domestic market in Brazil has historically suffered from overcapacity, resulting in very low load factors compared to industry standards, which has negatively impacted the financial results of domestic airlines in recent years. However, this trend began to change during 2012 and has significantly improved during the last two years, as major airlines have reduced domestic capacity, leading to general improvements in load factor and yields.
TAM has continued to make significant progress in the domestic Brazil passenger operation, improving profitability by increasing load factor and yield (in real) through the rationalization of capacity and improved revenue management through better segmentation of the market. During 2014, TAM reduced its capacity by 1.4% as measured in ASKs and increased traffic measured in RPK 1.1%, leading to an increase of 2.0 percentage points in load factors on a year-over-year basis, compared to the already high level reached by TAM in 2013, and higher than the occupancy factor of the industry which was 79.8% on average.
In 2014, TAM maintained leadership among business travelers and improved its punctuality indicators, resulting in greater customer satisfaction. In addition, TAM won - for the second consecutive year - the airline Top of Mind award.
According to ANAC, the Brazilian domestic market as a whole transported approximately 96 million passengers in 2014, an increase of 6.6% as compared to 90.0 million in 2013. As of December 31 2014, TAM Linhas Aereas lead the Brazilian domestic passenger with 38.1% of the market share as measured in RPKs. During 2014, TAM’s main competitors in the domestic market were GOL, Azul, and Avianca Brazil.
Passenger Alliances and Commercial Agreements
Prior to the combination between LAN and TAM, LAN, LAN Peru, LAN Ecuador and LAN Argentina were members of oneworld®, and TAM was member of Star Alliance®. In March 2013, LATAM Airlines Group chose oneworld® as the global alliance for all of its airlines. As a result of this decision, LAN Colombia became a member of oneworld® on October 1, 2013 and TAM became a member of oneworld® in March 31, 2014. Its affiliate TAM Mercosur will join in a future date. Currently, oneworld® is a global marketing alliance comprising of LAN, LAN Peru, LAN Argentina, LAN Ecuador, LAN Colombia, TAM, Air Berlin, American Airlines, British Airways, Cathay Pacific Airlines, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. The current members of the oneworld® alliance, including LATAM, serve more than 990 destinations, 154 countries, operating 14,000 daily departures.
The following are our passenger partnerships as of January 2015:
American Airlines Group. Since 1997, LAN has had an agreement with American Airlines to share carrier codes for certain flights on global reservations systems, thereby enabling American Airlines passengers to purchase seats on LAN flights and vice-versa (a “code-sharing agreement”). The U.S. Department of Transportation (DOT), granted LAN Airlines SA and American Airlines immunity from antitrust regulations in October 1999 for specific areas of cooperation. For more information see “—Regulation—United States of America—Authorizations and Licenses” below. In 2005, the DOT also granted antitrust immunity to LAN Peru and American Airlines for specific areas of cooperation. In 2007, LAN Peru and American Airlines established a code-sharing agreement between Peru and the U.S. with additional destinations in both countries. In the same year, LAN Argentina and American Airlines signed a code-sharing agreement expanding the cooperation between the companies. At the end of 2011, a code-sharing agreement between LAN Ecuador and American Airlines was signed. During 2013, two new code-sharing agreements were implemented between American Airlines and the LATAM Airlines Group; one between LAN Colombia and American Airlines and the other between
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TAM and American Airlines. .LATAM is currently expanding its code-share agreements with American Airlines in order to offer more destinations within the U.S. Before the merge between American Airlines and US Airways. In April 2010, before the merger between American Airlines and US Airways, TAM initiated a code-sharing agreement with US Airways to code-share between Brazil and USA. Through this agreement, TAM can access 23 domestic cities in the U.S. from Orlando, Miami and New York. US Airways became a member of oneworld® in March 31, 2014 after the merger with American Airlines.
Passenger Marketing and Sales
Since the combination between LAN and TAM in 2012, LATAM Airlines Group has operated under two brands, LAN and TAM. Within the “LAN” and “TAM” brands, we differentiate our marketing strategies between our long haul and short haul services.
Our long-haul marketing strategy emphasizes attributes valued by our international customers: a reliable, high-quality service centered on entertainment and comfort for long travel. We also highlight our extensive network covering the most important destinations in South America and the Caribbean and frequent service to major overseas gateways such as New York, Los Angeles, Miami, Orlando, London, Madrid, Paris, Frankfurt, Milan and Sydney. In a continuing effort to fulfill this promise, we continuously improve our cabins and review our service protocols. Our Business Cabin features a premium on-board service aimed to provide our customers with more time to rest. In our Economy Cabin, newly upgraded entertainment units make flying more enjoyable.
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In 2014, LATAM’s long haul fleet had 10 Boeing 787 of the 32 aircraft we ordered. The Company was the first airline in the Americas, and fourth in the world, to receive this model with the latest-generation technology that was an innovation breaking point for the airline industry. The 787 airplanes will allow us to reach new destinations and boost our existing services while increasing the efficiency of our operations and reduce our carbon footprint. Following this trend, in 2015 LATAM will be the first in the Americas to receive the Airbus A350, a new generation aircraft with new standards of efficiency –with capacity of approximately 348 seats- and with new levels of passenger comfort. See “—International Passenger Operations” for a description of recent improvements to our international fleet.
Our short-haul operations are designed to fit our customers’ need: punctuality, reliability, more frequencies, modern aircraft and efficient operations. To deliver this value proposition, we have been increasing our fleet and frequencies with more point-to-point flights, improved punctuality and streamlined processes including Internet sales, web and mobile check-in and airport self-check-in.
Additionally, our short haul fleet has also been renewed by the delivery of more Airbus A320 and A321. These aircraft also enhance our domestic and our regional by providing high security standards, improvements in the interior cabin design- the upper bins have mirrors that ensure visibility of carryon luggage, among other improvements - and more comfortable and technologically–advanced seating -with leather upholstery and more in-flight entertainment screens. Moreover, these aircraft are 13 percent lighter than the aircraft they will replace, resulting in lower fuel consumption and CO2 emissions. See “—Domestic Passenger Operations” for a description of recent initiatives to improve our domestic fleet, including the introduction of modern Airbus A320-Family Aircraft in most of our domestic operations.
Our main concern is to deliver our promise to our customers. Therefore, we constantly monitor our customer satisfaction with in-flight surveys and research, and measure our performance against the highest standard levels. This commitment to excellence has paid off with several prizes and recognitions given by customers and industry experts such as Skytrax’s “2013 best staff service”, Skytrax’s “2013 Best Airlines in South America”, Business Traveler’s “2013 Best Business Class in Latin America”(LAN), 2013 “Best travel Cellars in the sky” (TAM), Skytrax’s “2014 Best Airlines in South America (LAN first place and TAM second place)”,“2014 Best staff service (LAN)” and Business “2014 Best travel Cellars in the sky (TAM)”.
Branding
The “LAN” brand was launched in 2004 and brings together, under one strong international name, all of the affiliate brands such as “LAN Chile,” “LAN Peru,” “LAN Argentina” “LAN Colombia”, “LAN Ecuador” and “LAN Cargo.” The corporate image of LAN is based on two core concepts: reliability and warmth, which support our promise of the best travel experience to, from and within South America. We are also committed to offering our customers the best coverage to, from and within South America, and to promoting sustainable tourism, helping develop the regions where we operate. And by best, we mean providing our customers with an excellent connection network and service; being transparent and accessible; and promoting sustainable tourism in the countries where we do business.
Using a single brand enables LAN’s customers to better understand the common service and operating standards among its airlines. LAN’s unified image has improved its visibility, thereby enhancing flexibility and increasing the efficiency of its marketing efforts.
TAM launched the strategic platform for a single brand back in 2008, with TAM being the main brand that, through values, strategic positioning and language, guides other brands, services and business units, such as TAM Airlines, TAM Cargo, TAM Viagens, TAM Fidelidade, TAM nas Nuvens and others. Thus, we generate synergies among our businesses, always guided by the same values and the commitment to quality and relationships with our stakeholders.
In May 2013, TAM also launched the “A gente faz um mundo por você” (“We make a world for you”) campaign, which reinforced TAM’s focus on service. In line with this vision, TAM’s mission is to be the people’s preferred airline by using joy, creativity, respect and responsibility. Based on this strategic brand positioning, TAM seeks to offer accessibility to all of those who value an efficient, rewarding, safe and hassle-free experience.
In 2014 LAN and TAM began a process to redefine the future brand strategy. The Company plans to move towards a single brand, although the launch date for the new brand has not yet been determined.
Distribution Channels
In LAN and TAM we are aware of how important time is for our customers, which is why we are making efforts to minimize the curb to seat and seat to curb time for our customers. We are improving and optimizing our services and processes, in order to achieve a simple and digital end to end travel experience.
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To support this, we have our distribution structure divided into direct and indirect distribution channels, both focused on improving their respective platforms to allow for the easiest interaction for our clients, in sales and services alike. Indirect channels currently include travel agencies, general sales agencies and also new players, such as online agencies.
Direct channels owned by LATAM are comprised of city ticket offices, contact-centers and e-Business (includes website, mobile, and smart business). These direct channels support sales and service, before and after flight if the passenger so requires. We have an extensive sales and marketing network in over thirty countries consisting of more than 300 domestic and international points-of-sale owned by LATAM.
In this regard, our e-Business channel is an integral part of our commercial, marketing and service efforts. Together with other direct sales initiatives, the website provides an important tool by bringing more benefits to our passengers and also by giving them more flexibility in the future, reducing time on queue for example. Internet-related sales have increased, reaching more than a total of US$2,500 million sales in 2014.
We have also used our websites as tools to provide value-added content and enhance communications. We are continuously improving our websites, a key element of our new short-haul model, so that the technological platform will be able to support the expected future growth. We send weekly promotional e-mails to more than 16.9 million subscribers (8.7 million for LAN and 8.2 million for TAM). Members of our frequent flyer programs received their monthly balances and other information by e-mail and can access their data and redeem awards through our websites. In addition, we have an active online marketing program which brings visitors to the website from search engines and travel –related websites.
We are also developing several multi-platforms projects to improve passenger experience, both pre-and post-flight. We are continuously improving our website in order to more efficiently communicate flight status information, including information on available alternatives in case of change of schedules or other flight alterations. Another innovation is a smartphone app that enables both flight status verification and check in, providing an accessible electronic boarding pass to the passenger. To this date the app has over 1 million downloads in 20 different countries. Introduced in 2008, e-tickets have been issued for most LATAM routes and during 2010 we completed the implementation of interline e-ticketing with all of our oneworld® partners. By the end of 2013, we introduced electronic boarding passes accessible on smartphones currently operating in 72% of LAN routes and 88% of TAM routes.
We are continuously promoting the web-based check-in service for domestic and international flights. This system allows those passengers who are not checking-in bags to go directly to the gate, and the remaining checked-in passengers to leave their bags at a special bag drop counters and proceed to the gate. In addition to web-based check-in, we have self-check kiosks in Chile, Peru, Argentina, Ecuador, Venezuela, Uruguay, Brazil, Germany and Colombia. As of December 31, 2014, the airport kiosks and web check-in have high utilization rate in domestic routes of all countries (82% in Chile, 80% in Peru,70% in Ecuador, 65% in Argentina,60% in Brazil and 58% in Colombia).
LAN.com received “eCommerce Award Latam 2014” in Tourism. Additionally, TAM received the award Top of Mind Internet – DataFolha/UOLTravelers’ Choice Favorites - TripAdvisor® and LAN received an award in the airlines category “Company with the best online reputation” by the Mercado magazine in Argentina.
Our city ticket offices support the growth of ours operations, establishing a sales and service channel. We have approximately 100 city ticket offices, 78 airport ticket offices, 9 stands and 47 kiosks. In addition TAM significantly expanded its TAM Viagens store chain through franchises in the main cities across Brazil. LAN also expanded it direct channels through 27 general franchise sales agencies. We are developing a service system with a dedicated lobby to helps us deliver a better service to our customers and to promote the self-service in ours stands. Aiming to promote the e-Business channel, in almost all countries we charge a fee to customers for sales completed through our ticket offices or call centers, leaving the Internet as the only free-of-charge distribution channel.
Our contact-centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian) and handling more than 46,500 calls/contacts per day, which mainly originate from the regions where we fly (South America, North America, Europe and Australasia). We also have third-party service providers located in Santiago, Lima, Buenos Aires, Bogotá, Florianopolis and Sao Paulo.
Frequent Flyer Programs
During the year 2014, both LAN and TAM operated their loyalty independent programs, LANPASS and TAM Fidelidade, respectively, even though passengers enrolled in both programs were able to accumulate and redeem kilometers/points on any flight of the network managed by the two airlines and their associates.
Additionally, LATAM continued working on the cross recognition of these programs to offer its members similar features and benefits, in line with the process of harmonization of operations in which the company is committed in all areas. The initiatives include cross level recognition of all members, for example, by allowing LANPASS members to upgrade on TAM flights and TAM Fidelidade members to upgrade on LAN flights, in addition to having the same services at the airport, among other advances.
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TAM joined the oneworld® alliance on March 31, 2014 and TAM Fidelidade customers, as LANPASS customers, are able to accrue points and redeem flights on oneworld® carrier flights.
During 2015 LANPASS and TAM Fidelidade will continue their programs harmonization efforts and will offer new cross benefits for their members.
LANPASS
LAN’s frequent Flyer Program, is a key element of LAN’s marketing and loyalty strategy. The objective of LANPASS is to reward customer loyalty, and as a consequence, generate incremental revenue and customer retention. Worldwide, as of December 31, 2014, LANPASS had 9.8 million members, an increase of 15% than last year.
LANPASS members earn LANPASS kilometers in their accounts based on distance flown, class of ticket purchased and the elite level, or by using services of other partners in the LANPASS program. Customers can redeem kilometers for free tickets or other products in an online catalogue. Under our current frequent flyer program, our passengers are grouped in four different elite levels based on their flying behavior: Premium, Premium Silver, Comodoro and Black. These different groups determine which benefits customers are eligible to receive, such as free upgrades on a space-available basis, VIP lounge access and preferred boarding and check-in. These categories have their equivalent in the OneWorld alliance: Ruby for Premium, Sapphire for Premium Silver and Emerald for both Comodoro and Black.
In 2014 LANPASS had an increase of 18% in kilometers redeemed in award tickets, and 42% kilometers redeemed in non-flight products. LANPASS has highly rated partners, including other airlines, hotels, car rental agencies, retailers, and credit card issuers from the main financial institutions in Chile, Peru, Ecuador, Argentina Uruguay, United States and Colombia, including Banco de Bogotá and Occidente, who are both members of Grupo Aval. These partnerships give our customers the opportunity to earn additional kilometers for using their services. Regarding Chile, in 2014 Santander and LANPASS renewed its exclusive co-branding agreement for 5 more years, from 2016 to 2020, continuing a union which for 20 years has allowed thousands of members to accumulate kilometers to travel to Chile and the world.
In the non-banking segment, LANPASS continues to leverage its member’s purchase behavior to partner with leading players in the markets and become the most attractive loyalty program in the home markets. In past years, LANPASS has entered into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers.
The LANPASS frequent flyer program aims to be the leading loyalty program in all of LAN’s home markets. In the past few years, LAN has implemented a number of marketing initiatives to increase customer’s engagement and activity with the program in all of its markets. In 2014, membership in LANPASS continued growing by 28% in Chile, 21% in Perú, 20% in Argentina, 7% in Ecuador, 10% in Colombia and 5% in the U.S.
TAM Fidelidade
TAM’s frequent flyer program, TAM Fidelidade, was the first loyalty program launched by a Brazilian airline and represents a key element in TAM’s marketing strategy. LATAM believes TAM Fidelidade, as well as LANPASS, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flights or the number of seats available when members redeem accumulated points. TAM Fidelidade currently has more than 11.7 million members, which represents an increase of 8% compared to the 10.9 million members in 2013.
Similarly to LANPASS, members of TAM Fidelidade receive benefits and increased points for miles flown depending on their elite level; allowing them to accrue redeemable points for free travel more quickly. TAM Fidelidade customers are classified in four different elite levels Azul, Vermelho, Vermelho Plus and Black, being their equivalent in the oneworld® alliance: Ruby for Azul, Sapphire for Vermelho and Emerald for both Vermelho Plus and Black.
Multiplus
In 2009, TAM launched Multiplus, a company designed to create a broader network in which TAM’s customers can earn points through the TAM Fidelidade Program. Multiplus is a coalition of loyalty programs that permits the accrual of points for redemption from products and services offered by many different partner companies, not just TAM. We believe this expanded network helps to capture and retain customers and increase sales. It is attractive to our less frequent flyers because it allows them to accrue loyalty points in many ways besides flying. At the end of 2014, Multiplus had more than 400 partners and approximately 13.8 million participants that can accrue Multiplus points directly (Tam Fidelidade, cobranded cards, app, etc.) and indirectly (by transferring points from a partner program) in over 13,000 retail establishments.
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Multiplus became a publicly traded company in Brazil, following its initial public offering in February 2010. TAM continues to own 72.4% of the ordinary shares of Multiplus.
On December 10th, 2009, Multiplus entered into an Operating Agreement with TAM Linhas Aéreas (TLA), which established the terms and conditions governing the relationship with TLA and become effective as of January 1st, 2010. Under the Operating Agreement, Multiplus became responsible for, among other duties, processing information on accumulating and redeeming points under the TAM Loyalty Program and delivering awards to the members of said program, in accordance with the rules of the TAM Loyalty Program and the Multiplus network. The Operating Agreement is valid for 15 years.
On March 1, 2013, the companies approved a new amendment to the Operating Agreement (“11th Amendment”), effective as of June 1, 2013. This amendment extends the previously existing terms and conditions, but includes a more objective procedure for setting the ticket acquisition price to be paid by Multiplus and the point price to be paid by TLA. The amendment sets a fixed price to be paid by Multiplus during the initial transition and assessment phase, lasting from June 2013 until June 2014, such price being approximately 3% higher than the average price assessed in 2012. After this transition and assessment phase, the price to be paid by Multiplus per 10.000 points is adjusted to reflect the price variation of airline tickets in the market, but subject to a cap and floor of 5%. In case of major changes in the airline industry, the companies will have the right to negotiate in good faith a fair solution that takes into account such industry changes.
The remaining provisions established in the original Operating Agreement, including, without limitation, those relating to reciprocal exclusivity, term of effectiveness and situations for termination with or without cause, remained, in their essence, unchanged.
Cargo Operations
International and domestic cargo is operated by subsidiaries and affiliates under the LAN Cargo and TAM Cargo brands, which have significant market recognition. Our cargo business generally operates on the same route network used by our passenger airline business. It includes approximately 143 destinations, of which approximately 135 are served by passenger and/or freighter aircraft and approximately 9 are served only by freighter aircraft.
The following table sets forth certain of our cargo operating statistics for domestic and international routes for the periods indicated:
ATKs (millions)
RTKs (millions)
Weight of cargo carried (thousands of tons)
Total cargo yield (cargo revenues/RTKs, in US cents)
Total cargo load factor (%)
We derive our revenues roughly equally between the transport of cargo as follows:
In the bellies of our passenger aircraft. We consider our passenger network to be a key competitive advantage due to the synergies between passenger and cargo operations and, accordingly, we have developed a strategy to increase our competitiveness by enhancing our belly offering.
In our own dedicated freighter fleet. As of December 31, 2014, our dedicated freighter fleet consisted of 11 Boeing 767-300 freighters, with a capacity for 58 structural tons (52.7 tonnes) of freight each, and four Boeing 777-200 freighters, with a capacity of 102 structural tons (102 metric tons) of freight each. The aforementioned 11 Boeing 767-300, that considers two freighters sub-leased to an operator outside of Latin America, represents a decrease of 1 such aircraft relative to December 31, 2013. An additional 767-300F was also leased to the same operator and it is scheduled to leave our fleet during the first quarter of 2015 as part of our freighter fleet optimization program. Under this initiative, our freighter fleet was resized according to both the strategic objective of supporting our belly business and the need to maximize profitability. In Latin America, the principal origins of our cargo are Chile, Colombia, Perú, Ecuador, Brazil and Argentina, which represent a large part of our northbound traffic. This demand is mainly concentrated in a small number of product categories, such as exports of fish, sea products and fruits from Chile and asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia.
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For our southbound flights, Brazil is the main import market. Southbound demand is mainly concentrated in a small number of product categories including high-tech equipment, electronics, auto parts and pharmaceuticals.
Brazil is the largest of our cargo domestic operations where TAM Cargo remains the market leader, carrying cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export oriented companies and individual consumers. In order to maintain its leadership, TAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.
The United States accounts for the majority of the cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, the United States is also the main supplier of goods transported by air to Latin American countries.
Our international cargo operations are headquartered in Miami. This geographical location is a natural gateway for Latin American imports and exports to and from the United States. During 2013, LAN Cargo signed a contract with Miami Dade County to lease 66,000 square-feet to build a maintenance hangar with capacity to service a Boeing 777-200 freighter. Construction is underway and completion is expected for late 2015.
We transport cargo to and from six destinations in Europe: Amsterdam, Frankfurt, London, Madrid, Milan and Paris. The last five we serve via passenger aircraft, and additionally we serve Amsterdam and Frankfurt through freighter operations.
The evolution of our international cargo operations has always been affected by the flow imbalances of the Latin American cargo markets, resulting in a dramatic shift in the relative weight of southbound and northbound cargo flows throughout the years. We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a decline in demand on routes from the U.S to Latin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
Competition increased in the region as international and regional carriers added idle capacity to service cargo operations. Despite this increase in competition, we have been able to maintain solid market shares through an efficient utilization of our fleet and network. Today, on Latin America-United States routes, our main competitors are Centurion, AVIANCA Cargo, Atlas Air and American Airlines. On the Latin American-Europe routes, our main competitors are Cargolux, Lufthansa Cargo, Martinair, and Emirates Airlines.
Cargo Agreements
During 2014 we signed two Enhanced Cargo Transfer and Service Agreements with Korean Air and Cathay Pacific which aim to achieve more seamless interline transfers and improved service eventually leading to a larger Asia-Latin America market share, greater customer loyalty and improved belly load factors. We also have interline, code-sharing and other commercial agreements with other Asian carriers such as JAL, China Airlines, Air China and Nippon Cargo Airlines. Under these agreements we receive space allocations to move our cargo from the main gateways in Asia to hubs in the United States—Los Angeles, New York, Miami- and also in Europe where we can connect with our cargo network. In exchange, we provide these airlines with space from these same hubs in the United States and Europe to all Latin American destinations and also provide them with westbound cargo.
Since 2002, LAN Cargo and Lufthansa Cargo have operated pursuant to a block space agreement covering Europe and Latin America. As part of this agreement, we allocate space to Lufthansa Cargo on our flights between Frankfurt and Santiago, and Lufthansa Cargo allocates space to us on its flights between Frankfurt and Brazil.
Marketing and Sales
Our sales and marketing efforts are carried out directly where we have a local office, or through general sales agents. In Latin America we have our own offices in all key markets. In the United States, we have offices in Miami, New York and Los Angeles, and work with representatives in various other cities. In Europe, we have offices in Frankfurt, Amsterdam, Madrid and Paris and use agents in other key cities. In Asia, we added a new office in Hong Kong, and in other cities our sales efforts are conducted through general sales agents. In total, we maintain a network of more than thirty independent cargo sales agencies domestically and internationally.
Our cargo marketing strategy emphasizes the combination of our unique freighter and passenger aircraft cargo network, which offers a wide variety of reliable cargo routing possibilities with different pricing options; a strong connectivity to, from and within Latin America and a clear focus on providing a high-quality service for our clients. Our offering allows our customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh products, express shipments, and other types of cargo.
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During 2014 we focused on various aspects of our value chain to improve our customer experience. We improved connectivity and reception times at several key hubs, we became more electronically integrated with customers providing more accurate and timely information and we continued to improve our customer service through consolidation of our worldwide customer care teams and continuous improvement initiatives at our contact centers. Additionally we launched and improved specific products in certain routes, such as our Pharmaceuticals offering in the European market, providing our customers with a better air cargo service.
Cargo Related Investigations
See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”
Fleet
As of December 31, 2014, we operated a fleet of 327 aircraft, comprised of 313 passenger aircraft and 13 cargo aircraft, as set forth in the following chart:
Average
age (years)
lease remaining
(years)
Passenger aircraft(2)
Airbus A320 Family Aircraft
Airbus A319-100
Airbus A320-200
Airbus A321-200
Airbus A340 Family Aircraft
Airbus A340-300
Airbus A340-500
Airbus A330-200
Boeing Aircraft
Boeing 767-300ER
Boeing B787-800
Boeing B777-300ER
Dash Aircraft
Dash 8-200
Total passenger aircraft
Cargo aircraft
Boeing 767-300 Freighter (3)
Boeing 777-200 Freighter
Total cargo aircraft
Total fleet
The daily average hourly utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below.
Passenger aircraft
Boeing 767-300 ER
Boeing 787
Airbus A320 Family
Boeing 777
Airbus A330
Boeing 767-300 Freighter
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We operate different aircraft types as we perform various different services ranging from short-haul domestic and regional trips to long-haul trans-continental flights. We have selected our aircraft based on the ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.
For short-haul domestic and regional flights we principally operate the Airbus A320-Family aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to operating leases or has been purchased directly from Airbus pursuant to various purchase agreements since 1999.
For long-haul passenger and cargo flights we operate the Airbus A330-200 aircraft, the Airbus A340-300 aircraft, the Boeing 767-300 passenger and cargo aircraft, the Boeing 777 passenger and cargo aircraft and, since the fourth quarter of 2012, the Boeing B787-816 aircraft.
Fleet Leasing and Financing Arrangements
LATAM’s financing and leasing methods include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases. As of December 31, 2014, LATAM had 327 aircraft, of which one each were in the redelivery process, in storage and on ground, resulting in 324 aircraft in operation. Of these aircraft, 161 are operated by LAN and 163 aircraft are operated by TAM.
As of December 31, 2014, LATAM’s operating fleet was comprised of 203 financial leases, 17 tax leases, 99 operating leases and 5 aircraft as loan guarantees. Most of the LATAM’s financial and tax leases are structured for a 12 year period. LATAM has 44 aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 80 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities range from 3 to 12 years.
LATAM’s aircraft debt, which is comprised of financial and tax leases, is denominated in U.S. dollars and typically has quarterly amortization payments. Both the financial leases and tax leases have a bank (or group of banks) as counterparty; however, the latter has also a third party involved. In terms of interest rate, 68.2% of our aircraft debt has fixed rate and the balance has floating rate debt based on USD LIBOR. During 2014, LATAM refinanced all of its Boeing deliveries for the year with EX-IM guaranteed bonds.
Going forward, LATAM will be the entity that takes delivery and act as the lessee on all related leases of all aircraft for the group and has the ability to sublease them to other airlines of the group.
In order to reduce TAM’s balance sheet FX exposure to the Brazilian real, LATAM plans to transfer the majority of the TAM aircraft under financial leases up to the LATAM level. As of December 31, 2014, 33 aircraft were transferred to LATAM which helped to reduce the exposure to less than US$ 1 billion.See “Item 5—B. Liquidity and Capital Resources—Sources of financing” and “Item 5—B. Liquidity and Capital Resources—Capital Expenditures” for a description of expected sources of financing and expected expenditures on aircraft.
Maintenance
LATAM’s Maintenance
Our heavy maintenance, line maintenance and component shops are equipped and certified to service our entire fleet of Airbus, Boeing and Bombardier aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.
LATAM Line Maintenance
Our Line Maintenance Network operates in all the cities where LATAM operates, serviced by LATAM Maintenance staff in North and Latin America, and a mixed capacity between LATAM staff and external qualified outsourced providers in the rest of the world. LATAM Line Maintenance performs minor preventive and corrective maintenance tasks, which allows us to operate to all our destinations ensuring a safe operation of our aircraft and the compliance with local authorities’ regulation and the approved maintenance plans for each model.
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Our Line Maintenance Network comprises 133 stations in South America, 40 in North America and 17 in Europe and Oceania, which produced up to 2.4 million man-hours in 2014. Throughout the Network, Santiago, Sao Paulo and Miami are among the most extensive stations servicing our passenger and cargo fleet.We rely on third party services for certain maintenance support for our aircraft and engines, where we have long term partnerships with Lufthansa Technik, International Aero Engines, CFM International, Pratt & Whitney, General Electric and Air France KLM.
In 2014, we continued with the implementation of the LEAN philosophy in our engineering and maintenance organization, achieving results in reliability, availability and productivity. As part of this effort, we introduced iPads in our Santiago operation to allow a faster resolution of technical disruptions and to optimize resource management. Also, we launched an initiative to consolidate all LATAM technical documentation in one single portal, which can be accessed by mobile devices in any of our maintenance stations, which we expect to have up and running the first half of 2016. Finally, we continued with our continuous improvement program to encourage our staff to suggest and implement ideas that result in a safer workplace and more efficient processes.
All of our maintenance operations are supervised by the local authorities around the network, such as DGAC in Chile and ANAC in Brazil.These operations are subject to several recurrent external audits from civil aviation authorities and international entities, such as FAA, The International Air Transport Association Operational Safety Audit (“IOSA”) (from the International Air Transport Association or “IATA”) and the International Civil Aviation Organization (“ICAO”), among others, in order to strictly comply with applicable regulations. The audits are conducted in connection with each country’s certification procedures and enable us to continue to perform maintenance for aircraft registered in the certificating jurisdictions. Our repair station holds FAA Part-145 certifications under these approvals.
To ensure the best capabilities in our personnel needed for safe, accurate and on-time Line Maintenance, LATAM seeks to improve the technical, aeronautic regulatory, safety and documentation skills of its personnel. This is possible through their participation in extensive training programs at Technical Training LATAM Center and specific training programs designed and dictated by our partnerships. Also, the Fleet and Engineering teams participate actively in the periodical airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.
LATAM MRO
LATAM MRO Business Unit is responsible for our heavy maintenance (airframe) and components shops facilities that are equipped and certified to service our fleet of Airbus and Boeing aircrafts. One two MRO facilities, one in São Carlos (Brazil) and one in Santiago (Chile), provides 75% of all heavy maintenance services the entire group of airlines demands. The services not executed internally are contracted between our extensive network of MRO partners around the globe. Both MRO facilities are FAA Part-145 certified repair stations .We occasionally perform certain heavy maintenance and component services for other airlines or OEMs. LATAM MRO is also responsible for planning and execution of aircrafts redeliveries.
In MRO São Carlos (TAM MRO) we are prepared to service up to 9 (nine) aircrafts (narrowbody and widebodies) and 2 (two) regional/turboprop aircrafts simultaneously, with a dedicated hangar for stripping and painting. In that facility we also have 22 technical components shops, including full Landing Gear repair & overhaul shop, Hydraulics, Pneumatics, Electronics (ATEC), Electrical Components, Electroplating, Composites, Wheels & Brakes, Interiors and Emergency Equipment shops. This facility is also known as “São Carlos Technological Center” and has its own total area of 400 ha and hangar area of 100,000 m², with a dedicated runway of 1,720 meters. MRO São Carlos is certified and audited by major international aeronautical authorities such as FAA (USA), EASA (Europe), ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), DINAC (Paraguay), TC (Canada), among others, for Heavy Maintenance and Components Repair and Overhaul for Airbus A-320 family (A318, A319, A320 & A321) and Airbus A330, Boeing 767, ATR-42/72, and Embraer E-Jet 170/190 families. The MRO also has some minor capabilities for repair and overhaul of Airbus A340 and Boeing 777 components. MRO São Carlos includes its own support engineering capabilities, a full technical training center which develops MRO’s capabilities in terms of human skills with more than 6,000 students and 90,000 hours of training in 2014 providing 80 different basic courses, on-the-job training and special training such as structural, avionics, foreign language and leadership training and education.
In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have 2 hangars capable of servicing simultaneously 2 (two) widebody aircrafts and 1 (one) narrowbody aircraft in LAN Maintenance Base. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC (Chile), ANAC Argentina, DGCA (Ecuador), among others for Heavy Maintenance for Airbus A320 family (A319, A320 & A321), Boeing 767 and 787. MRO Santiago has 8 (eight) shops prepared to support hangar activities, to designing and manufacture galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including sophisticated IFE (in-flight entertainment) equipment, and blended winglets in the Boeing 767 fleet.
In 2014, we focused on the consolidation of the integration of MRO capabilities and processes started in 2013. In 2014, LATAM MRO effectively applied 2.5 million man-hours, serviced 274 aircrafts, including C, D and Special Checks for LATAM fleet and for third party customers, delivered approximately 60,000 components and performed 15 landing gear overhauls. In 2014, LATAM MRO serviced almost 100% of all LATAM’s Airbus A320 family and A330 demand for Heavy Maintenance, and 75% of demand for Components Repair & Overhaul. LATAM’s external maintenance and repair customers include Azul, Trip, Avianca, the Brazilian Air Force, Embraer, Goodrich, and Hamilton Sundstrand, among others.
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In 2011, we started a turn-around process to achieve international MRO competitive standards in terms of costs, quality, reliability and time of deliveries (TAT). In 2012 we began to implement the LEAN system and other activities, including continuous process improvement culture, redesign of the production methodology in productive cells and scheduling of task through CCPM methodology (Critical Chain Project Management), development of shop-floor control systems and carry out VSM process modeling for Landing Gear shop. 2013 was the year of consolidation of these initiatives and in 2013 we accomplished a significant 7% reduction in turnaround times, increased on time performance and improved quality of our services (as measured by reductions in post-check failures and premature components failures). In 2014, we celebrated our achievement of one year without any accidents with lost days in MRO São Carlos and reduced the accidents in MRO Santiago by 40%.
LATAM Safety and Security
Our most important priority is the safety of our passengers and employees. LATAM has been working to standardize LAN and TAM’s operational indicators regarding safety, audits and emergency response. This process of identifying synergies in LAN and TAM’s operational indicators has led to opportunities to improve processes and standardize operational processes and audits.
Prior to the combination, both LAN and TAM had internal divisions in charge of the management of safety and security matters related to Flight Operations, Operative and Administrative buildings, Organization and Coordination of Emergency Response matters, Safety and Security Audits and Safety and Occupational Health. Today, the diversions that support these functions - -: Safety Management, Security Management, Emergency Response Management, Safety & Security Audit Management and Safety and Occupational Health Management– function on the basis of uniform policies and procedures.
Safety Management
We give high priority to providing safe and reliable air service. We have unified our Safety Management under a single organization that is responsible for defining the processes and procedures for the LATAM SMS and for oversight for the subsidiaries that apply and implement those processes and procedures.
LAN and TAM have documentation regarding SMS that provide clear definitions of the functions and responsibilities regarding operational safety for all persons involved, from the top to the bottom of the operational structure in the airline.
Both systems are IOSA certified and have a Safety Senior Manager who is responsible for each system implementation and for setting standardized procedures for measuring the quality and safety of services provided by companies or professional contractors that affect the operational safety of this organization.
Our corporate operational safety organization consists of three main areas:
The Risk Management division has the following organization:
Flight Data Monitoring
The Flight Data Monitoring area is responsible for the maintenance and administration of recorded flight data and safety-related databases and software.
Flight Operations Quality Assurance—“FOQA” : LATAM has a Flight Data Monitoring (“FDM”) program implemented for collecting, processing and analyzing all flights for all LATAM’s fleet in all his AOCs. This program utilizes the data to produce statistical information to verify that recommended standard operational procedures are correctly done, and make changes if required as well as other safety-related measures. We have started the development of a maintenance variation for the same aircraft types which will monitor the engines, flight controls and general performance of the airplanes.
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Maintenance Safety Coordinator
The Maintenance Safety area oversees our maintenance safety measures and investigates maintenance-related incidents using the Maintenance Error Decision Aid (“MEDA”) methodology.
Cabin Safety Coordinator
The Cabin Safety area coordinator is responsible for managing the safety of aircraft cabins, cabin safety investigations, cabin passengers and flight attendants.
Investigation & Safety Information Management Coordination
All information regarding safety-related incidents is entered into dedicated software, where it is analyzed according to potential risk. Important incidents are investigated thoroughly. Each particular incident requiring corrective actions is addressed accordingly with the assistance of the corporate operational safety directory.
LOSA—Line Operations Safety Audit Coordinator
This program is recognized by the International Civil Aviation Organization (“ICAO”) and the National Civil Aviation Agencies, both of which oversee our operations, as a necessary tool for protecting passengers and employees.
The implementation of this program has been used to improve flight safety in the Company, by recording behaviors observed during normal flights for experienced pilots and through the preparation of a mandatory checklist (form) developed by experienced pilots familiar with the program. Observations by the Threat and Error Management (“TEM”) may even propose appropriate changes to the system and processes.
Security Management
The main policy and the essential principle of the Company is to ensure adequate security protection for all of its flights, aircraft, passengers, crew members, ground personnel, airport facilities and other services related to the commercial civil aviation against any threat or unlawful action.
We have implemented corporate policies and a quality management system through the planning of audits and inspections to detect any lack of security in our operations and to prevent acts of unlawful interference. Risk analysis is used to determine different levels of security to be implemented in international and domestic operations.
Security Corporate Managers in LAN and TAM have the responsibility of evaluating, analyzing and assigning risk levels (high, medium, low) to international and domestic operations, and proposing security procedures for each scenario. The security management is controlled and audited constantly.
Emergency Response Management
The emergency response management team is responsible for the administration of the Emergency Response Plan (ERP). It has been developed for the effective management of different kinds of emergencies (aircraft accidents, natural disasters, strikes, pandemics) with the purpose of mitigating impacts of emergencies on passengers and their relatives, as well as the Company’s operations. The ERP includes, among others, Emergency Process and Procedures, Emergency control centers, Relatives & Passengers Assistance Team, Notification Team, Aircraft Recovery, and a “Go Team” which is a special team that will be dispatched in the case of an emergency and will assume the responsibility of emergency management.
Safety and Security Audit Management
The Safety and Security Audit Management area has the mission of advising senior management on issues related to plan and control, design, implementation, maintenance, documentation and observation of the improvement of the LATAM Safety and Quality Management System. An annual audit program of the operational processes is coordinated and carried out ensuring that the internal auditors follow the Quality System procedures and detect proactively the way to address any possible untreated risk.
Safety and Occupational Health Management
The main objective of the Safety and Occupational Health Management program is to ensure the safety and health of workers at work, by advising, managing and helping the company prevent occupational accidents and diseases through the identification and control of occupational hazards and medical surveillance. The foregoing objectives are satisfied through a dedicated team of professionals (engineers, doctors, risk prevention experts and paramedics), who constantly develop activities aimed at protecting LATAM employees.
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Fuel Supplies
Fuel costs comprise the single largest category of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations. On the other hand, in the year 2014 due to the significant drop in the international price of crude oil, LATAM has seen also a drop in its Jet fuel costs. In 2014 total fuel costs represented 34.9% of our total operating expenses. The into-wing price for 2014, (average fuel price plus taxes and transportation costs, including hedge) was US$3.36 per gallon, representing a decrease of 3.4% from the 2013 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Risk of Fluctuations in Jet Fuel Prices.”
The following table details our consolidated fuel consumption and operating expenses, after related hedging gains and losses (which exclude fuel costs related to charter operations because fuel expenses are covered by the entity that charters the flight) during the last three years.
Fuel consumption (thousands of gallons)
ASKs Equivalent (millions)
Fuel consumption (thousands of gallons) per ASK Equivalent (millions)
Total fuel costs (US$ thousands)
Cost per gallon (US$)
Total fuel costs as a percentage of total operating expenses
Our fuel supply arrangements vary by airport and are distributed among 29 providers, but are mainly concentrated in Brazil (43%), Chile (13%), United States (12%) and Perú (10%). During 2014, we negotiated our fuel supply in major European, North American and South American airports. We also negotiated around 15% of our fuel supply in Santiago and most of the regions of Chile.
In 2014, we also signed a long term contract with Pure Biofuels in Lima and with Puma Aviation in Asunción, Paraguay. In North America our main airports are Miami and New York, where we signed contracts with WFS securing our supply in complex markets.
In Argentina, Brazil, Colombia, Ecuador, Mexico, Paraguay and Uruguay, we continued working with our current suppliers (including Raizen/Shell, YPF, Petrobras, Petro Peru,Repsol, Petroecuador, Terpel, Axion, among others.) regarding our fuel supply arrangements in these countries and many of these supply agreements will be negotiated during 2015.
Ground Facilities and Services
Our main operations are based at the Comodoro Arturo Merino Benítez International Airport in Santiago, Chile, where we operate hangars, aircraft parking and other airport service facilities at the Comodoro Arturo Merino Benítez International Airport pursuant to concessions granted by the DGAC. We also maintain a customs warehouse at the Comodoro Arturo Merino Benítez International Airport, additional customs warehouses in Chile (Iquique, Antofagasta and Punta Arenas) and Argentina (Aeroparque) and operate cargo warehouses at the Miami International Airport to service our cargo customers. Our facilities at Miami International Airport include corporate offices for our cargo and passenger operations and temperature-controlled and freezer space for imports and exports. We also operate from various other airports in Chile and abroad.
We also operate significant ground facilities and services through TAM’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2013, we inaugurated two new facilities for ground handling equipment maintenance and repair at São Paulo’s Guarulhos Airport with 9,000 m² and at Rio de Janeiro’s Galeão Airport with 4,000 m².
Finally, we incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
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Ancillary Airline Activities
In addition to our airline operations, we generate revenues from a variety of other activities, including aircraft leases (including subleases, dry-leases, wet-leases and capacity sales to certain alliance partners) and charter flights, tours, duty-free in-flight sales, other maintenance, storage and customs, handling and activities and revenues of Multiplus. In 2014, LATAM generated other revenues of US$378 million from ancillary activities.
Insurance
We maintain insurance policies as required by law and in accordance with the terms of all aircraft leasing agreements which LATAM and their affiliates and subsidiaries may own or we are responsible for or operate, including TAM and its affiliates and subsidiaries. The scope of these policies includes all risk coverage for aircraft hulls, including war risks and third party legal liability for passengers, cargo, baggage and injuries to third parties on the ground. Our current policies, which are in force through April 1, 2015 and are renewed annually, follow the best practices adopted by the international civil aviation industry.
We have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with IAG Group (British Airways, Iberia and their affiliates and franchises), which allows us to obtain premium reductions and coverage improvements. We also maintain insurance in respect of the assets against the risk of theft, fire, flood, electrical damage and similar events for equipment and buildings we own or for which we are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible.
Information Technology
Passenger Service Systems
As part of the Single Agenda of Transformation of the Customer Experience at LATAM, we have redefined our travel experience model and will continue to redesign our passenger service systems with the aim of providing a unified experience to our customers. Since the association between LAN and TAM was announced in 2012, a series of projects have been implemented to foster company among customers the perception that they are a single company offering equivalent services. Intense efforts have been made to standardize processes such as passenger recognition, attention at contact centers, sales offices and airports, in-flight services, e-commerce, loyalty programs, etc. However, many of these efforts are partial pending full unification of the two companies’ processes and systems, which is still ongoing.
In 2014, we redefined our travel experience model was based on the needs of our target customer, reinforcing six key elements:
All these elements call for the development of new processes with strong technological support. This, in turn, requires a robust and consistent technological model meets the new standard of service we offer to passengers and guarantees the continuity of business processes.
In order to address this challenge, we drew up an aggressive and robust three-year plan of work, with focus on the customer throughout 2015. This plan includes the design of new processes and selection of the definitive platforms that will be part of LATAM Group’s new solution. Under this plan, we will review the current status of each area of work involved in the travel experience, compare it to the desired technological end state, and establish a roadmap that is consistent with both customer perceptions and internal processes. Examples of the many areas of work to be considered include:
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Implementation of many of these processes also calls for consistent work to unify customer service support systems. To this end, work has been undertaken to select the necessary end-game tools that meet the identified challenges and is compatible with our technological standards. In furtherance of this goal, we have either selected the best tools already available at LAN or TAM or have opted to implement new tools, in which case a selection process is launched.
The design and implementation of this plan for the next three years form part of the so-called Single Agenda of Transformation of the Customer Experience at LATAM.
LATAM host and digital world
In the case of passenger management systems, LAN and TAM adopted different solutions in 2012 and 2009, respectively.
TAM’s migration to Amadeus in 2009 included standardization of processes and solid preparation of the technological platform for joining Star Alliance in 2010. TAM implemented a complete end-to-end solution with Amadeus, including inventory, bookings, electronic sale of tickets, mobile solutions, kiosk, check-in and loading solutions.
LAN migrated to Sabre in 2012 and similarly focused on improving processes and a robust solution. The scope of Sabre’s implementation included inventory, bookings, ticket sales, kiosk, check-in and loading. LAN’s approach differed from that of TAM in that all e-commerce and mobile solutions were provided by partners or developed internally.
After the combination, LATAM decided to unify the Passenger Service Platform in a quest for operational and financial synergies. As a result of this, the project of migration of the current LAN and TAM platforms began in 2014.
This project comprises three phases. The first seeks to evaluate the technical and functional capacities of the partners with which Sabre (LAN) and Amadeus (TAM) were operated and to negotiate better commercial conditions for LATAM. Selection of the supplier will be followed in the second phase by a draft establishing all the requirements and the implementation plan and, once this has been completed, announcement of the Go Live date. Finally, the third phase consists in the project’s implementation.
LATAM has announced that, in parallel with the migration of the passenger service platform, it will make an important investment in its digital platform as part of its strategy to improve services and its customers’ travel experience. Through innovation and best practices, the digital platform will be enhanced, focusing on the business priorities for e-commerce and mobile solutions.
In 2010, after a 2.5-year implementation process, LAN started production of the MXI (Maintenix) solution for maintenance of its fleets in accordance with aviation regulation. This solution integrates Maintenance and Procurement and Logistical Management of Components (parts and spares) processes in a single IT tool.
In 2010, TAM evaluated adoption of the same solution but postponed its implementation.
In 2013, TAM began implementation of a 2.5-year Maintenix implementation project that is scheduled for completion by the end of 2015. This project includes standardization of LAN’s and TAM’s maintenance processes, permitting optimization of stocks of components and seeking to take advantage of synergies in the maintenance process, while operational safety remains the key pillar of its implementation. This solution also takes into account the specific nature of financial, accounting and tax processes in Brazil.
ERP LATAM
In January 2015, the SAP platform (ERP ECC 6.0, EHP 3.0) was implemented at TAM, adapted to Brazil’s financial and procurement needs. This project forms part of LATAM’s IT strategy, defined in 2012 and known as PMI (Post Merger Integration), which contains the roadmap for integration of all LATAM’s systems.
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This project implements unification of the company’s information systems and the integration of LATAM Group’s finance and procurement processes standardizes the technological platform for these processes and consolidates the Group’s organizational structure, implying better control mechanisms and a greater analytical capacity to support decision-making.
The project is currently at the stage of stabilization and transfer of control to the SAP team which will be responsible for business continuity and support.
Implementation of another PMI project also began in the last quarter of 2014. This consists in the integration of LATAM Group’s human resources processes and technological platforms. Its aim is to implement in TAM the SAP modules for Payroll, Personnel Administration, Organizational Development, Compensation, Recruitment and Selection. This project is scheduled to be in operation in the second quarter of 2016.
Central IT
At the level of central IT infrastructure, a PMI project is currently being implemented to address solutions (servers, communications, network, etc.) that permit operation of the systems which support unified business processes at the LATAM level.
Data Centers and Central Infrastructure: At present, LATAM has two data centers in Chile and two in Brazil. Design of a configuration of two data centers and a DRP for LATAM is expected to be completed at the end of the second quarter of 2015 and their implementation will subsequently begin.
Communications and Telephony
In the case of communications and telephony, the LATAM solution on which work began in 2013 was implemented in 2014. This solution includes links within the two countries, a high-speed Santiago-São Paulo connection, back-up solutions and fixed-line and mobile telephony. At present, LATAM’s principal suppliers are Telefónica, SITA and OI.
Regulation
Below is a brief reference to the material effects of aeronautical and other regulations in force in each of the relevant jurisdictions in which LAN and its subsidiaries operate.
Aeronautical Regulation
Both the DGAC and the JAC oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile, regulates the assignment of international routes, and the compliance with certain insurance requirements, and the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Chile is a contracting state, as well as a permanent member, of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Chilean authorities have incorporated into Chilean laws and regulations. In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Route Rights
Domestic Routes. Chilean airlines are not required to obtain permits in connection with carrying passengers or cargo on any domestic routes, but only to comply with the technical and insurance requirements established respectively by the DGAC and the JAC. There are no regulatory barriers that would prevent a foreign airline from creating a Chilean subsidiary and entering the Chilean domestic market using that subsidiary. On January 18, 2012 the Secretary of Transportation and the Secretary of Economics of Chile announced a unilateral opening the Chilean domestic skies. This was confirmed on November 2013, and it is in force since that date.
International Routes. As an airline providing services on international routes, LAN is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Chile and various other countries. There can be no assurance that existing bilateral agreements between Chile and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
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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:
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.
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Both the Administración Nacional de Aviación Civil (“ANAC”) and the Secretary of Transport oversee and regulate the Argentinean aviation industry. ANAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management, and reports indirectly to the Ministry of Planning and is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Secretary of Transport also reports to the Ministry of Planning and regulates the assignment of international routes and matters related to tariff regulation policies. We have obtained and maintain the necessary authorizations from the Argentinean government to conduct flight operations, including authorization certificates and technical operative certificates from ANAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Argentina is a contracting state and a permanent member of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Argentinean authorities have incorporated into Argentinean laws and regulations. In the absence of applicable Argentinean regulation concerning safety or maintenance, the ANAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Domestic Routes. In Argentina airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes, and to comply with the technical requirements established by the local authority. There are no regulatory barriers preventing a foreign airline from creating an Argentine subsidiary and entering the Argentine domestic market using that subsidiary. However, ownership of such subsidiary by the foreign airline may not be direct, but through a subsidiary formed in Argentina, which in turn may be directly or indirectly owned by the foreign company. However, such subsidiary should operate Argentine registered aircraft and employ Argentine aeronautical personnel.
International Routes. As an airline providing services on international routes, LAN Argentina is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Argentina and various other countries. There can be no assurance that existing bilateral agreements between Argentina and foreign governments will continue. Furthermore, a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Argentina and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Argentina, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the ANAC may terminate its rights to that route.
Airfare Pricing Policy. Argentine airlines are permitted to establish their own international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. Yet, there are government-fixed maximum and minimum prices for domestic flights.
Registration of Aircraft. Aircraft registration in Argentina is governed by the Argentinean Aeronautical Code (“AAC”). In order to register or continue to be registered in Argentina, an aircraft must be wholly owned by either:
Safety. ANAC requires that all aircraft operated by Argentinean airlines be registered with ANAC. All aircraft must have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to an Argentinean airline until ANAC has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits periodically and approves maintenance operations once the airline initiates its operations and each time an airline changes its maintenance regime. Only ANAC-certified maintenance facilities (in Argentina or in any other country) may maintain and repair the aircraft operated by Argentinean airlines. Aircraft maintenance personnel at such facilities must also be certified by ANAC before assuming any aircraft maintenance positions.
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Security. ANAC establishes and supervises the implementation of security standards and regulations for the Argentinean commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Argentina must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Argentina has submitted its aviation security handbook to ANAC. Argentinean airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy. The ORSNA (Organismo Regulador del Sistema Nacional de Aeropuertos) supervises and manages the airports in Argentina, including the supervision of take-off and landing charges. The ORSNA proposes airport charges, which are approved by ANAC and are the same at all airports. Nevertheless, while domestic flights are charged in local currency, international flights are charged in U.S. dollars. Since the late-90s, a number of Argentinean airports have been privatized, including Aeroparque and Aeropuerto Internacional de Ezeiza Ministro Pistarini in Buenos Aires, the two most important airports in Argentina. At the privatized airports, the airport administration manages the facilities under the supervision of ANAC and ORSNA.
Environmental and Noise Regulation. There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us in Argentina, except for environmental laws and regulations of general applicability and noise restriction regulation currently applicable to aircraft in Argentina. Any aircraft operated by an Argentinean airline should comply with certain noise restrictions, specifically with Stage 3 standards, as set forth in chapter 91.805 of the Argentinean civilian aviation regulations (Regulaciones Argentinas de Aviación Civil) referred to in the market 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.
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.
Domestic Routes. Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the PDGAC. Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.
International Routes. As an airline providing services on international routes, LAN Peru is also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Peru and various other countries. There can be no assurance that existing bilateral agreements between Peru and foreign governments will continue, and a modification, suspension or revocation of one or more bilateral treaties could have a material adverse effect on our operations and financial results.
International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Peru and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Peru, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency the PDGAC awards it through a public auction for a period of four years. The PDGAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of 90 days or more, the PDGAC may terminate its rights to that route, although that has never happened in practice.
Airfare Pricing Policy. Peruvian airlines are permitted to establish their own domestic and international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. For more information, see “—Antitrust Regulation” below. Airlines or other interested parties may file complaints before the Institute for Protection of Fair Competition and Consumer Rights (“Indecopi”) with respect to monopolistic or other pricing practices by other airlines that violate Peru’s antitrust laws.
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Registration of Aircraft. Aircraft registration in Peru is governed by the Peruvian Civil Aviation Law. In order to own and register a Peruvian aircraft, the following conditions shall apply:
Safety. Peruvian law allows the use of aircraft that are registered either with the PDGAC or with an equivalent supervisory body in a country other than Peru. All aircraft must have a valid certificate of airworthiness issued by either the PDGAC or an equivalent non-Peruvian supervisory entity. In addition, the PDGAC will issue maintenance permits to a Peruvian airline as long as the PDGAC has assessed the airline’s maintenance capabilities. The PDGAC has approved our maintenance operations. Only PDGAC-certified maintenance facilities or facilities certified by an equivalent non-Peruvian supervisory body in the country where the aircraft is registered may maintain and repair the aircraft operated by Peruvian airlines. Aircraft maintenance personnel at such facilities must also be certified either by the PDGAC or an equivalent non-Peruvian supervisory body before be appointed to any aircraft maintenance positions.
Security. The PDGAC establishes and supervises the implementation of security standards and regulations for the Peruvian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Peru must submit an aviation security handbook to the PDGAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training. LAN Peru has submitted its aviation security handbook to the PDGAC. Peruvian airlines that operate international routes must also adopt security measures in accordance with the requirements of applicable bilateral international agreements.
Airport Policy. CORPAC supervises and manages airports in Peru, including the supervision of take-off and landing charges. CORPAC sets airport charges for navigation facilities, which may differ from airport to airport. Since the mid-90s, a number of Peruvian airports have been privatized, including the Aeropuerto Internacional Jorge Chávez in Lima. At the privatized airports, the airport administration manages the facilities under the supervision of the Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público, (the Supervising Agency of Investment in Public Transport Infrastructure Facilities or “OSITRAN”), an independent regulatory and supervising entity.
Environmental and Noise Regulation. There are no specific material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise materially affect us in Peru, except for environmental laws and regulations of general applicability. There are noise restriction regulations currently applicable to aircraft in Peru. LAN’s fleet complies with the proposed restrictions so they do not impose a material burden on us.
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:
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The EDGAC also must comply with the standards and recommended methods of the ICAO since Ecuador is a signatory of the 1944 Chicago Convention.
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 the Comunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.
Shared codes are allowed in Ecuador after authorization by the CNAC, but the respective airlines must have the relevant traffic rights.
Airfare Pricing Policy. On October 13, 2011, The Statutory Law of Regulation and Control of the Market Power was passed with a purpose to avoid, prevent, correct, eliminate and sanction the abuse of economic operators with market power, as well as to sanction restrictive, disloyal and agreements involving collusive practices. This Law creates a new public entity as the maximum authority of application and establishes the procedures of investigation and the applicable sanctions, which are severe. Rates are not regulated and are subject only to registration. In general, bilateral treaties regarding air transportation provide for airfares to be regulated by the regulation of the country of origin.
Registration of Aircraft. The legislation allows Ecuadorian companies to provide international air transportation services using aircraft licensed in Ecuador and aircraft with a foreign license, always provided the latter are exploited under dry leases. For domestic operations, aircraft is authorized only pursuant to dry leases and Ecuadorian registration. Aircraft interchange agreements are also allowed for international operations, provided that the aviation authority can confirm that the aircraft is under the operational control of an Ecuadorian operator. Wet leases are permitted, but very restricted.
Safety. In order to ensure aviation safety, the EDGAC requires that the airline hold an Air Operator Certificate and have Operating Specifications that are examined technically and rigorously to ensure compliance with the Civil Aviation Technical Regulations, which are essentially the same as the Federal Aviation Regulations (“FAR”) of the FAA. They cover matters of aircraft airworthiness, certification of maintenance facilities, and oversight by the EDGAC.
Security. The governing rules also apply to security in respect of the EDGAC. There are regulations, manuals and procedures on airport security overseen by the EDGAC.
Airport Policy. The international airports in Quito and Guayaquil are managed under administrative concessions, and the EDGAC merely controls air traffic. Fees for the use of airport facilities, terminal fees, landing fees, parking fees are all overseen and collected by the operator. Over-flight and approach fees are controlled and collected by the EDGAC.
Environmental and Noise Regulation. Aircraft must comply with the standards of category 3 under Ecuadorian applicable noise regulations, as set forth in Executive Decree (Decreto Ejecutivo) 1,405, enacted on October 24,2008, which provides certain technical specific criteria. Beginning in May 2010, aircraft must comply with standards of category 4 under cited regulation. Category 3 provides for compliance with ICAO regulations and technical conditions mandatory in the United States of America.
United States of America
Operations to and from the United States by non-U.S. airlines, such as LAN, are subject to Title 49 of the U.S. Code, under which the Department of Transportation (“DOT”) and the FAA exercise regulatory authority. The DOT has jurisdiction over international aviation in connection with the United States, subject to review by the President of the United States. The DOT also has jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters. The U.S. DOJ also has jurisdiction over airline competition matters under the U.S. federal antitrust laws. Flight operations between Chile and the United States by airlines licensed by either country are governed generally by the open skies air transport agreement that Chile and the United States signed in October 1997. Under the open skies agreement, there are no restrictions on the number of destinations or flights that either a U.S. or a Chilean airline may operate between the two countries or on the number of U.S. and Chilean airlines that may operate.
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Authorizations and Licenses
LAN is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Chile and points in the United States and beyond (via intermediate points in other countries). LAN holds the necessary authorizations from the DOT in the form of a foreign air carrier permit, Exemption Authorizations and Statements of Authorization to conduct current operations to and from the United States. Exemptions and Statements of Authorization are temporary in nature and are subject to renewal and therefore there can be no assurance that any particular exemption or statement of authorization will be renewed. LAN’s foreign air carrier permit has no expiration date, while a renewal of the exemption authorization (which includes the open skies traffic rights) was timely filed and the Authority was automatically extended until such time as the DOT issues the renewal order. LAN intends to request the inclusion of the open skies rights into our foreign air carrier permit, which would eliminate our need to renew the exemption authority in the future.
The FAA is engaged in the regulation with respect to safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation and other matters affecting air safety. The FAA requires each foreign air carrier to obtain certain operations specifications that authorize it to operate to particular airports on approved international routes using specified equipment. LAN currently holds FAA operations specifications under Part 129 of the FAR in compliance in all material respects with all requirements necessary to maintain in good standing of its operations specifications issued by the FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can suspend temporarily or revoke permanently our authority if an airline fails to comply with the regulations, and can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operations specifications could have a material adverse effect on our business.
The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. We have not incurred any material fines related to operations.
Security. On November 19, 2001, the Congress of the United States passed, and the President signed into law, the Aviation and Transportation Security Act, also referred to as the Aviation Security Act. This law federalized substantially all aspects of civil aviation security and created the Transportation Security Administration (“TSA”), which took over security responsibilities previously held by the FAA. The TSA is an agency of the U.S. Department of Homeland Security. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$2.50 per segment passenger security fee, subject to a US$10 per round trip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 (“ANCA”), and related FAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA noise requirements. All of our aircraft that fly to the United States meet the Stage 3 requirements.
Under the direction of the ICAO, governments are considering the creation of a new and more stringent noise standard than that contained in the ANCA. The ICAO adopted new noise standards in 2001 that established more stringent noise requirements for aircraft manufactured after January 1, 2006. In the U.S., legislation known as the “Vision 100—Century of Aviation Reauthorization Act,” which was signed into law in December 2003, required the FAA to issue regulations implementing Stage 4 noise standards consistent with recommendations adopted by the ICAO. FAA regulations require all aircraft designed and certified after January 1, 2006 to comply with Stage 4 noise restrictions.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System, approved airborne wind shear warning system and aging aircraft regulations. Our entire fleet meets these requirements.
The Brazilian aviation industry is regulated and overseen by the ANAC. The ANAC reports directly to the Civil Aviation Secretary, which is subordinated by the Federal Executive Power of this country. Primarily on the basis of Law No. 11.182/2005, ANAC was created to regulate commercial aviation, air navigation, the assignment of domestic and international routes, compliance with certain insurance requirements, flight operations, including personnel, aircraft and security standards, air traffic control, in this case sharing it activities and responsibilities with the Departamento 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 the Empresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially (with the exception of Guarulhos International Airport, Viracopos International Airport and Brasilia International Airport which was privatized in 2012 and are administrated by concession agreement).
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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.
Domestic Routes. Brazilian airlines are not required to obtain permits in connection with domestic passenger or cargo transportation, but only to comply with the technical requirements established by ANAC. Based on the Brazilian Aeronautical Code (“CBA”) established by Law No. 7.565/86, non-Brazilian airlines are not permitted to provide domestic air service between destinations in Brazil. The same law prevents a foreign airline from creating a Brazilian subsidiary and entering the Brazilian domestic market using that subsidiary.
International Routes. Brazilian and non-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, ANAC may terminate its rights to that route. ANAC may also terminate its right if the recipient airline does not operate at least 80% of the frequency given for that specific route.
Airfare Pricing Policy. Brazilian and non-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.
Registration of Aircraft. Aircraft registration in Brazil is managed by ANAC, which maintains the Brazilian Aeronautical Register, as regulated by the CBA. The CBA allows ANAC to permit registration of aircraft belonging to Brazilian and non-Brazilian individuals.
Safety. ANAC requires that all Brazilian aircraft to have a valid certificate of airworthiness issued by ANAC. In addition, ANAC will not issue maintenance permits to a Brazilian airline until it has assessed the airline’s maintenance capabilities. ANAC renews maintenance permits annually, and has approved our maintenance operations. Only ANAC certifies aircraft maintenance services and its personnel.
Security. ANAC establishes and supervises the implementation of security standards and regulations for the Brazilian commercial aviation industry. Such standards and regulations are based on standards developed by international commercial aviation organizations. Each airline and airport in Brazil must submit an aviation security handbook to ANAC describing its security procedures for the day-to-day operations of commercial aviation and procedures for staff security training.
Brazilian Airport Policy. INFRAERO supervises and manages airports in Brazil, including the supervision of take-off and landing charges. INFRAERO proposes airport charges, which are approved by ANAC and are the same at all airports. At privatized airports, the airport administration manages the facilities under the supervision of ANAC.
Environmental and Noise Regulation. ANAC coordinates and supervises noise regulations by regulation 121, which established noise restriction applicable to aircraft in Brazil. There are no material environmental regulations or controls imposed specifically upon airlines companies, applicable to aircraft, other than Brazilian general environmental laws and regulations.
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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.
The AC grants operation permits to domestic and foreign carriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit the company must comply with the RAC and fulfill legal, economic and technical requirements, to later be subject to public hearings where the public convenience and necessity of the service is considered. The same process must be followed to add national or international routes, whose concession is subject to the bilateral instruments entered into by Colombia. Routes cannot be transferred under any circumstance and there is no limit to foreign investment in domestic airlines.
Airfare Pricing Policy. Since July 2007, as stated in resolution 3299 of the Aeronautical Civil entity, bottom level airfares for both international and domestic transportation were eliminated. Under resolution 904 issued in February 2012, the Aeronautical Civil entity decided to liberalize the obligation of charging a fuel surcharge for both domestic and international transportation of passengers and cargo. As of April 1, 2012, air carriers may now freely decide whether or not to charge a fuel surcharge. In the case that it is charged, the fuel surcharge must be part of the fare, but may be informed separately on the tickets, advertising or other methods of marketing used by the company.
In the same line, as of April 1, 2012 there is no longer be any restriction on top level fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil entity the fares and conditions the day after being published.
Administrative fares are not subject to any changes and its charge is an obligation for the transport of passengers under Aeronautical Civil Regulations.
Registration of Aircraft. The AC, through the Office of Aeronautical Registration, is in charge of handling the registration of aircraft that will be operated by Colombian airlines. Registration may be obtained by a registration process fully conducted in Colombia or through the validation in Colombia of a foreign registration. For such registration, the aircraft must be legally imported to the country and inspected by the aeronautical inspectors. This office is also in charge of property registrations, lease contracts and liens of the registered aircraft.
Safety. Aircraft registered in Colombia obtain an airworthiness certificate or a validation of the airworthiness certificate (if they operate under the approval of the foreign registration).
Security. Following the guidelines of the OACI annexes, the AC issued an airport security program that must be strictly complied with by all the aircraft operators in the country as well as by airports.
Environmental and Noise Regulation. In Colombia, only aircraft that comply with category 3 noise limits may operate. There are strict regulations to control noise during takeoffs and landings of the aircraft at the El Dorado Airport in Bogotá due to its location in an urban area.
Antitrust Regulation
The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law. The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.
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Since October 1997, LAN Airlines S.A. and LAN Express follow a self-regulatory plan, which was modified and approved by the Tribunal de la Libre Competencia (the Competition Court) in July 2005, and further in September, 2011. In February 2010, the Fiscalía Nacional Economica (the National Economic Prosecutor’s Office) finalized the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made
As a condition to the business combination between LAN and TAM in June 2012, the antitrust authorities in Chile and in Brazil each imposed certain mitigation measures as part of their approval of the combination. Furthermore, the combination was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The combination was filed with the Argentinean antitrust authorities, which approval is still pending. For more information regarding these mitigation measures please see below:
On September 21, 2011, the TDLC issued the Decision with respect to the consultation procedure initiated on January 28, 2011 in connection with the proposed combination. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:
The Brazilian Council for Economic Defense – CADE approved the LAN/TAM combination by unanimous decision during the hearing session of December 14, 2011, subject to the following conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance 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.
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C. ORGANIZATIONAL STRUCTURE
LATAM Airlines Group is a company primarily involved in the transportation of passengers and cargo. Our operations are carried out principally by LAN, and by a number of different subsidiaries and affiliates, including TAM. As of January 31, 2015, in the passenger business we operated through seven main airlines: LATAM Airlines Group S.A. (which does business under the name “LAN Airlines”), incorporated in Chile, Transporte Aéreo S.A. (which does business under the name “LAN Express”), a Chilean subsidiary, LAN Perú S.A. (“LAN Peru”), a Peruvian subsidiary, Aerolane, an Ecuadorian subsidiary, Líneas Aéreas Nacionales del Ecuador S.A. (“LAN Ecuador”), and Ecuadorian subsidiary, LAN Argentina S.A. (“LAN Argentina,” previously Aero 2000 S.A.), an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (which does business under the name “LAN Colombia”), a Colombian subsidiary, TAM Linhas Aereas S.A. (“TAM Linhas Aereas”) incorporated in Brazil.).
As of January 31, 2015 we held a 99.90% stake in LAN Express through direct and indirect interests, a 69.98% stake in LAN Peru through direct and indirect interests, a 79.66% indirect stake in LAN Ecuador, a 94.99% indirect stake in LAN Argentina, a 98.81% indirect stake in LAN Colombia and a 100.00% of the non-voting shares of TAM, and 19.42% of the voting shares and 100% of the non-voting of Holdco I S.A., who has the 100.00% of the voting shares of TAM. For a description of the recent combination with TAM, including TAM’s operating structure, see “Item 4.History and Development of the Company—Combination of LAN and TAM.”
The cargo operations are carried out by our subsidiaries and affiliates, including TAM Linhas Aereas and LAN Cargo. The cargo operations are complemented by the operations of certain related companies, such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Aerolinhas Brasileiras S.A. (which does business under the name of “ABSA” and “TAM Cargo”) in Brazil and Linea Aérea Carguera de Colombia S.A. (“LANCO”) in Colombia. As of January 31, 2015, we indirectly held 100% of the non-voting shares and 24.99% of the voting shares of MasAir, 100% of the non-voting shares and 20% of the voting shares of ABSA, and an 90.00% stake in LANCO through direct and indirect participations. TAM holds 100% stake in ABSA. In the cargo business, LATAM markets itself primarily under the LAN Cargo brand internationally and the TAM Cargo brand in Brazil.
D. PROPERTY, PLANTS AND EQUIPMENT
LAN Infrastructure Management and TAM Infrastructure Management report to the Director of Purchasing and Infrastructure of LATAM. Both LAN and TAM infrastructure management teams have worked together during 2012 and 2013 regarding strategic planning for infrastructure issues for the LATAM Airlines Group.
LAN’s Property, Plant and Equipment
Headquarters
Our main facilities are located on approximately five acres of land that we own near the Comodoro Arturo Merino Benítez International Airport. The complex includes approximately 150,695 square feet of office space, 32,292 square feet of conference space and training facilities, 9,688 square feet of dining facilities and mock-up cabins used for crew instruction.
During 2003, we moved some of our executive offices into a new building in a more central location in Santiago, Chile, where we occupied a total of four floors owned by LAN. To accommodate our growth, we have, since 2005 expanded our offices. In 2005 LAN bought 3 floors, in 2007, LAN leased two floors in an adjacent building (totaling 18,298 square feet), and in 2009, LAN leased additional floors in this building (totaling 12,917 square feet). In 2010, new offices were leased east of Santiago to allow for Company growth and to implement projects such as “Host,” which involves changing our system of reservations, sales, inventory and passenger check-in. We have leased these additional offices since 2010, under a 4-year lease. These additional offices add a total of 19,913 square feet to LAN’s property.
Furthermore, during 2011 we added to our facilities a new 11,840 square feet floor at the Arrau Building located in Santiago, Chile, which we lease for the new facilities of LAN Cargo. We have leased this floor since 2011, under a 3-year lease.
Maintenance Base
Our 877,258 square feet maintenance base is located on a site that we own inside Comodoro Arturo Merino Benítez International Airport. This facility contains our aircraft hangar, warehouses, workshops and offices, as well as a 559,720 square feet aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a 53,820 square feet office building plus a 10,000 square feet office and workshop space. We also lease from the DGAC 193,750 square feet of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. Our lease has duration of 14 years.
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During 2013, we began to develop a series of infrastructure projects, the most significant of which is the construction of a north platform which allows for an additional 13 new A320 aircraft parking spaces. During 2013, a significant part of this project was completed, including 5 new parking spaces for A320 aircraft. The project is expected to be finished during the third quarter of 2014. Additionally during 2013, parking capacity for vehicles was increased by 135 new spaces.
During 2014 these Facilities were completed and delivered to operation.
Miami Facilities
We occupy a 36.3-acre site at the Miami International Airport that has been leased to us by the airport under a concession agreement. Our facilities include a 48,000 square feet corporate building, a 380,000 square feet cargo warehouse (including a 10,000 square meter cooling area) and a 783,000 square feet aircraft-parking platform, which were constructed and are now leased to us under a long-term contract by a North American developer, and approximately 21,528 square feet of furnished office space. The rent we pay for the use of this space is approximately US$735,000 per month. We are currently negotiating with the local airport authority regarding its construction of a new hangar at the Miami International Airport, which we expect to lease from them when it is constructed.
During 2010, LAN signed a concession agreement with the AMB Property Corporation to add a new cargo warehouse for additional areas for future developments. Our concession has duration of 5 years at a rate of approximately US$215,000 per month.
During 2013, a new project for a Boeing B777 hangar was developed. This project finally received approval from Miami airport authorities in 2014 and should be completed during 2015.
Other Facilities
We own a building and sixteen acres of land on the west side of the Comodoro Arturo Merino Benítez International Airport that houses a flight-training center. As of February 28, 2014, this facility features three full-flight simulators for Boeing 767, Airbus A320 and Boeing 737 aircraft.
Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our subsidiaries that operate import customs warehouses, utilizes an import warehouse and office building at the Comodoro Arturo Merino Benítez International Airport. This 172,000 square feet building was developed in conjunction with two other operators. We have leased these facilities since 2004 and we will continue to operate there until September 2015.
LAN Peru’s Property, Plant and Equipment
LAN Peru has approximately 19,000 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 7,000 m2
Sales Offices: 2,000 m2
Concessions airports: 10,000 m2
We also own a 166,840 square feet of land near the Lima airport, where built training facilities for flight and cabin crews of the Company, with capacity for two flight simulators (Airbus A320s and Boeing 767s), facilities for emergency evacuation practice (including pool to practice ditching) and classrooms. In addition, in 2010 we leased a piece of land and hangar inside the Lima airport for our maintenance facilities that was rented to LAN Peru for an initial period of 5 years, which may be renewed. The new maintenance facilities have approximately 3,500 m² of space, a hangar with a covered area of approximately 6,500 m² (space for three Airbus A320s or one Boeing 767) plus an out platform of approximately 3,500 m².
Finally, we are renting eight floors in a building and three floors in another building for our corporate facilities. We are also renting twenty three commercial offices around the country.
LAN Colombia’s Property, Plant and Equipment
LAN Colombia has approximately 27,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 4,500 m2
Sales Offices: 1,700 m2
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Concessions airports: 21,300 m2
During 2012, new administrative and operational offices were created in the Logistic center (PARQUE DEL SOL) near the El Dorado airport in Bogota, covering 11,500 square feet.
During November 2013, a new VIP lounge covering 690m2 in the El Dorado Airport in Bogotá was complete.
During 2014 there was a complete renovation of the Hangar Aircraft Parking, which now has space for three A320 aircraft.
LAN Ecuador’s Property, Plant and Equipment
LAN Ecuador has approximately 14,500 m2 built. All facilities are leased and are distributed as follows:
Administrative Offices: 1,600 m2
Sales Offices: 1,000 m2
Concessions airports: 11,900 m2
In Ecuador, the New Quito Airport was opened in 2013 and LAN Ecuador spent approximately US$4.5 million for facilities and infrastructure investments at this new airport. During the construction period, LAN Ecuador (and other airlines) were required to make significant investments for airport infrastructure in this new airport.
In 2012, LAN began the construction of new facilities for Andes, a company that performs ground service aircraft handling services for LAN Ecuador and acts as an airport service provider. A new facility for line maintenance and operations was also constructed. Both facilities were built on land concessioner by QUIPORT and were opened during the first quarter of 2013. Further information regarding the size and amount of these investments is detailed in the table below:
Facilities
ANDES
MAINTENANCE
LAN Argentina’s Property, Plant and Equipment
LAN Argentina has approximately 192,670 square feet built. All facilities are leased and are distributed as follows:
Administrative Offices: 71,042 square feet
Sales Offices: 27,986 square feet
Concessions airports: 93,646 square feet
We also have maintenance base in Argentina with a hangar of 26,900 square feet, 9,600 square feet of offices, 1,070 square feet of workshops and an exterior platform of 5,300 square feet. This facility is meant for the parking and maintenance of A320 aircraft and it is capable of providing full maintenance, including C-Checks.
On December of 2012, LAN Argentina launched its new VIP lounge in Terminal B of the Ezeiza Airport. An area of 6,458 square feet was built to house more than 150 passengers, with areas for resting, work, entertainment, bathrooms and shower services.
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TAM’s Property Plant and Equipment
TAM’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, TAM leases office facilities in converted hangars belonging to INFRAERO (the Local Airport Administrator). These facilities comprise 649,933 square feet.
The Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport, is a separate property which TAM owns, exclusively for the areas of Selection, Medical Service, Training, and Mock-ups, comprising 15,342 m².
Base Maintenance
At Hangars II and V in Congonhas Airport, which TAM leases for approximately R$39,510 and R$52,665 per month, TAM has 15,650 m² of offices and hangars with about 1,050 workstations. This site also houses the areas of Aircraft Maintenance, Procurement and Logistics of Aeronautical Materials, and Retrofitting.
In São Paulo, TAM has other facilities such as: Commercial Headquarters, an old Pantanal office, located 7.0 km from Congonhas Airport, with 540 m² leased area and about 94 workstations; Uniform Building, with 890 m2 and about 10 workstations, exclusive use for storage and delivery of uniforms; and a Call Center Building at Rua Augusta with 110 m2 and about 150 workstations distributed in four floors.
TAM also has the following offices: Multiplus Office, located in Brooklin region, with 800 m2 leased, and approximately 150 workstations; TAM Viagens Office, with 2,800 m2 leased distributed in about 265 workstations; Two Stores of TAM Viagens, at Rua Augusta with 110 m2 leased and about 10 workstations; and at Shopping SP Market with 50 m2 leased and about 5 workstations.
In Guarulhos, TAM has a total area of approximately 12,894 m2 distributed in the Passenger Terminal, Operational Areas such as Check-in, Ticket Sales, Check Out, Operations Areas, VIP Lounges, Aircraft Maintenance, GSE, Cargo Terminal, Distribution Centers, etc. The Cargo Terminal has 164 m2 of office and 15,000 m2 of open area. The Distribution Centre Supplies has 3,030 m2.
TAM has a total of 45 online sites and 10 offline/chartering/high season sites in Brazil. Outside of Brazil, TAM has a total of 30 sites in 6,300 m², including 20 online sites and 10 offline/chartering/high season sites. TAM also has 133 franchised stores of TAM Viagens through Brazil.
New Headquarters
In 2013, TAM finished its project for a new headquarters with an area of 5,066 m², of which two and one-third floors are leased, space for 641 workstations and a total investment of R$12.0 million. The new headquarters is located at the Tower Bridge Building, located in Brooklin region.
We are building a new office with 12,195 m², LATAM will lease 12 floors, to transfer 1100 workstations, in a total investment of R$ 23.9 million. The new office is located at Espaço Empresarial Nações Unidas (EENU), in the Chacára Santo Antonio región. When this Project is finished we will terminate the contract lease of hangar 7 and hangar 8.
Building Improvements
We have approved the “Big Picture” project, which will implement a new plan of occupancy for Hangars in 2 and 5 at Congonhas Airport for approximately 5700 m² and Hangar 3 for approximately 6000 m². These improvements will receive and investment of US$18 million. This project will be completed in the second half of 2015.
New Facilities
TAM concluded several projects for new facilities in 2014, the most significant of which was a new cargo terminal in Manaus that integrates the operations of ABSA and TAM Cargo in the city and has a cargo space of about 4,700 m²; the construction of a new GSE area in Florianópolis with an area of approximately 400 m²; the construction of a new GSE area in Vitória with 255 m² and a new distribution center for supplies in Guarulhos, with an area of approximately 3,035 m². In total, TAM spent approximately R$30 million on these projects in 2014. Additionally we build TPS 3 offices in Guarulhos airport at terminal 3, with 2100 m².
Moreover, TAM has several projects for new facilities in 2014 and 2015, the most significant of which are a new cargo terminal in Guarulhos that integrates the operations of ABSA and TAM Cargo in Guarulhos, with a cargo space of about 15,434 m²; the construction of a new VIP Lounge in Guarulhos Airport with 1,900 m2; investments of R$ 20 million targeted to general
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improvements of GSE facilities in all Brazilian territory and a new hangar in Guarulhos Airport for narrow and wide body aircraft maintenance. This new hangar is under study but is expected to complete projects still in 2014. The new facilities will receive an investment of R$ 50 million in 2014-2015.
Both Projects were completed and they are already in service. The VIP Lounge was delivered in October 2014 and The New Cargo terminal was delivered in January 2015
In addition, to the projects mentioned above, some large airports in Brazil, including, like Guarulhos, Natal and Viracopos have undergone major structural reforms promoted by the government which required investments of R$ 8,3 for modernization of our facilities. These projects are directly related to the world cup football.
None.
Operating Results
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the accompanying notes beginning on page F-1 of this annual report.
The summary consolidated annual financial information as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2012, 2013 and 2014, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report.
Overview
We derive our revenues primarily from transporting passengers on our passenger aircraft, as well as from transporting cargo in the belly of our passenger aircraft and in our dedicated freighter aircraft. In 2014, approximately 83% of our revenues came from passenger revenues, 14% came from our cargo business, and the remaining 3% from other operating revenues. Other operating revenue consists primarily in revenues generated from tour operator services, aircraft leases, on-board sales, third-party maintenance, ground handling, customs and storage brokerage operations.
Our operating environment in 2014 was marked by continued capacity rationalization in both cargo and passenger operations compared with 2013, coupled with a generally weaker macroeconomic environment in Latin America, including slower GDP growth trends, and weaker currencies in most countries. Additionally our operations were negatively affected by reduced passenger and cargo demand during the FIFA World Cup soccer tournament held in Brazil.
In general, our passenger revenues are driven by international and country-specific political and economic conditions, competitive activity and the attractiveness of the destinations that we serve. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. Our capacity is measured in terms of available seat kilometers, or ASKs, which represents the number of seats we make available for sale, multiplied by the kilometers flown. We measure traffic in revenue passenger kilometers, or RPKs, as the number of passengers on our flights multiplied by the number of kilometers flown. Load factors represent RPKs (traffic) as a percentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Finally, we use yield, revenue from passenger operations divided by RPKs, to measure the average amount that one passenger pays to fly one kilometer and unit revenue, or revenue per ASK, to measure the effect of capacity on revenues. See “Item 3. Key Information—Selected Financial Data.”
Passenger demand over the past years has been affected as a result of weaker economic environments in some Latin America’s countries, reflected in slower GDP trends and depreciated currencies, and increases in competition from operators to South America and within the region.
During 2014, domestic operations in the Company’s Spanish speaking countries (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador) continued to show moderate growth in terms of traffic and remained very profitable, in spite of the economic slowdown in some countries. Our SSC business grew at a slower pace than 2013, as we increased capacity by only 3.7% as compared to 2013. Nonetheless, the Company was able to stimulate passenger traffic as measured in RPKs by 6.2%, allowing for an improvement of 1.9 p.p. in load factors, reaching 80.5%. However, yields in the SSC domestic markets continue to be under pressure due to the depreciation of local currencies, mainly the Chilean and Argentinian peso which depreciated an average of 15.2% and 48.2% respectively, as compared to 2013. This resulted in a 5.2% decline in revenue per ASK as compared to 2013.
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Since we achieved the turnaround in the domestic Brazil passenger operations, we have had a successful and profitable operation. However, the weaker economy in Brazil, the depreciation of the Brazilian real and the impact of the FIFA World Cup in the months of June and July of 2014 have negatively impacted our results. In this context, and in line with the current dynamics of domestic industry, TAM reduced capacity by 1.4% as measured in ASK during 2014. However, even with these circumstances, we were able to increase traffic by 1.1% as measured in RPK further improving our load factor by 2.0 p.p., reaching a high 83.0%. As a result, TAM ended the year with an increase of 2.2% in our revenues per ASK in Brazilian reais as compared to 2013.
The FIFA World Cup soccer tournament took place in Brazil in June and July of 2014 and resulted in a highly complex operation due to the large number of passengers who travelled to these cities on specific dates. Despite the increase in the number of passengers, LATAM’s operating margin during the World Cup period was adversely impacted by approximately between US$ 140 million and US$160 million, mainly due to decreases in traffic and yields as a result of reduced corporate travel, as well as a reduction in leisure demand during the winter holidays, which are usually a period of high seasonal demand. Nonetheless LATAM is very satisfied to have successfully provided a customer-focused operation during this globally high profile and visible event.
In our international operations, we have continued to rationalize passenger capacity in response to a challenging competitive environment and continued pressure on yields. In terms of increased competition, we have seen a significant increase in capacity to the region from airlines from different regions, specifically from North America. Additionally, we had a significant increase in intraregional competition during the year; some operators - formerly domestic operators - strengthened their regional flights; and other operators redirected their capacity from Venezuela to other markets within the region situation. Additionally, the depreciation of some local currencies, especially the Argentinean peso, has adversely affected our international demand. Furthermore Brazilian international passenger results were also affected in July by lower corporate travel to and from Brazil during the World Cup soccer tournament. During 2014, the international business unit decreased capacity by 2.4% while traffic as measured in RPK increased 1.2%, boosting load factors by 3.1 p.p., to 85.4%, resulting in a decrease of 3.2% in the revenue per ASK (RASK).
Overall, LATAM has focused on improving our product and connectivity with international passengers. We have implemented initiatives such as the beginning reconfiguration of the cabins of the TAM B777 fleet to include a fully flat business class, the increased use of B787 aircraft on long-haul routes, and advances in the construction of the main hub of the company at Guarulhos airport in Sao Paulo, where LATAM already moved all of its operations to the new Terminal 3, and where the Company was able to substantially improve its connection times to offer a much more attractive product for its passengers. Additionally, during November 2014, LATAM inaugurated a new VIP lounge at the airport, which is currently the largest in South America and which will also be important in helping the best experience of our passengers.
Our cargo operations depend on exports from and imports to South America and are, therefore, affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries, competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are also affected by our capacity, traffic, load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available for the transportation of cargo, multiplied by the kilometers flown. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) multiplied by the number of kilometers flown. Load factors represent RTKs (traffic) as a percentage of ATKs (capacity), or the percentage of our cargo capacity that is actually used to transport cargo for our customers. Finally, we use yield, or revenue from cargo operations divided by RTKs, to measure the average amount that our customers pay to transport one ton of cargo one kilometer. See “Item 3. Key Information—Selected Financial Data.”
We have designed our operations, route network and commercial strategies with the flexibility required to respond to changing conditions. In the cargo business, it is important to differentiate between what has been our business northbound - exports from the region to North America and Europe – and our business southbound - imports to the region.
Since 2012, the environment for the freighter business, and therefore for LATAM’s cargo business unit, has been complicated. The global freight markets have remained weak, and Latin America has not been an exception. In addition, freighter and passenger’s operators, have significantly increased cargo capacity in the region. These have put significant pressure on cargo yields.
During 2014, cargo traffic decreased 3.3%, reflecting a challenging scenario in Latin American cargo markets mainly due to a decline in demand on routes from the U.SA to Latin America, especially Brazil, which was affected by the FIFA World Cup, uncertainty surrounding presidential elections and lower economic growth. Additionally northbound demand was affected by a significant contraction of seed exports from Chile, partially offset by strong asparagus, flowers and fresh fruit export seasons.
As a result, the Company continues with a rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of the Company’s passenger fleet. In this regard, in 2014 the Company sub-leased two of its 767-300Fs to another company operating in a different market for a period of three years. An additional 767-300F was also leased to this same operator starting in January 2015. Overall, capacity decreased by 5.6% in the year, resulting in a load factor of 59.8%, which represents an improvement of 1.4 percentage points as compared to 2013. Nonetheless, the 4.8% decline in the cargo yields led to a contraction of the revenues per ATK of 2.5%.
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Cost Structure
LATAM Airlines Group’s costs are driven by the size of our operations, fuel prices, fleet costs and exchange rates. Our operating expenses are calculated in accordance with IFRS and comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses”, as shown on our consolidated statement of comprehensive income. These operating expenses include wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance, and other operating expenses. The following is a discussion of the drivers of the most important costs.
As an airline, we are subject to fluctuations in costs that are outside our control, particularly fuel prices. At the end of 2013, fuel prices were high principally because of the strong signals of growth in the U.S. At the beginning of 2014, fuel followed the same trend because of the Ukraine/Russia conflict and also because of strong signals of growth in the U.S. and Europe. In the second half of 2014, fuel prices tumbled 42% as OPEC elected not to curb output in response to a supply glut produced by increased production of shale oil in the U.S., and as a result of weak demand as China, Japan and Eurozone showed an economic slowdown and deflation. Although we have implemented a number of strategies to mitigate the impact of the volatility of fuel prices, such as fuel-hedging policies and the use of pass-through mechanisms, it is unlikely that we will be able to fully protect ourselves against the volatility of fuel costs. In addition, during periods in which fuel prices decrease, as during 2014, a fuel hedging program may prevent us from realizing the full benefit of the lower fuel prices. Moreover, another important driver that affects this item cost is the amount of gallons consumed during the year, resulting from the size of our operation, the efficiency of the fleet and efficiency programs.
Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs is denominated in Chilean pesos and in Brazilian reais, appreciation of these currencies against the dollar as well as increases in local inflation rates can result in increased costs in dollar terms and can negatively affect our results. Depreciation of local currencies results in decreases in costs in dollars. Additionally, other important drivers are average headcount and average wages.
Commissions paid to travel and cargo agents are also a significant cost to the company. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents.
Fleet related expenses, namely aircraft rentals and depreciation, are another significant cost, and mainly depend on the number and type of aircraft that are owned and that are under operating leases. These costs are mainly fixed and can be reduced on a per unit basis by achieving higher daily aircraft utilization rates.
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Results of Operation
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2014 compared to year ended December 31, 2013.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2014, and December 31, 2013. For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Consolidated Results of Income by Function
Other operating income
Other operating expenses
Share of profit of investments accounted for using the equity method
Foreign exchange 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 to non-controlling interests
Basic earnings per share (US$)
Diluted earnings per share (US$)
Net Loss
Net loss for the year ended December 31, 2014 equaled US$ 227.2 million, representing a decrease of US$ 36.6 million from a net loss of US$263.8 million in 2013. Net loss attributable to the parents of the company decreased to US$ 260.0 million in 2014 from US$281.1 million in 2013. Results for the 2014 include a US$ 112 million provision recognized during the first quarter of the year mainly related to estimated penalties for anticipated redeliveries of aircraft and other redelivery expenses expected to be incurred as a part of the Company’s fleet restructuring process. In addition, the Company recognized an accounting charge of US$ 150.2 million due to modifications made to the Chilean Tax System, consisting of a gradual increase of the corporate income tax from 20% to 27% in 2018. The Company entirely recognized the effect of the 7p.p. increase in the corporate rate during 2014.For more information see “Business strategy – Fleet restructuring plan” and “Item 10.—Taxation and Note 17 our audited consolidated financial statements.
Results were also impacted by a foreign exchange loss of US$ 130.2 million mainly resulting from the 12.5% depreciation of the Brazilian real between December 31, 2013 and December 31, 2014, as compared to a foreign exchange loss of US$482.2 million in 2013.. On the other hand, in 2013 LATAM incurred US$56.0 million in non-recurring expenses related to the combination and integration costs, whereas no costs related to integration were incurred in 2014.
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Operating Revenues
Our total operating revenues decreased by 6.4% to US$ 12,093.5 million in the year ended December 31, 2014 compared to revenues of US$ 12,924.5 million in 2013. The 2014 decrease in operating revenues was attributable to a 6.2% decrease in passenger revenues, and an 8.0% decrease in cargo revenues. Passenger and cargo revenues accounted for 85.8% and 14.2% of total operating revenues in 2014, respectively.
Our consolidated passenger revenues decreased by 6.2% to US$10,380.1 million in 2014 from US$11,061.6 million in 2013, as a result of a decrease of 1.1% in our capacity (ASK) and a decrease of 5.1% in our unit revenues (RASK). The decreases in capacity was a result of a 2.4% decrease in our international operations and a 1.4% decrease in our domestic Brazil operations, reflecting our rationalization strategy in these markets, partially offset by an increase of 3.7% in capacity in our domestic capacity in our Spanish speaking countriesDecreases in RASK reflect a decrease of 7.9% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, the challenging competitive environment in our international operations, and the impact of the World Cup on corporate demand and leisure traffic which took place in Brazil.
Cargo revenues decreased by 8.0%, to US$1,713.4 million in 2014 from US$1,863.0 million in 2013, as a result of a decrease of 5.6% in capacity (ATK) and a decrease of 2.5% in unit revenues (RATK). Capacity decreased in our cargo operations mainly as a result of the phase out of our fleet of a Boeing 767F aircraft during the first quarter of the year and lower freighter utilization. Decreases in RATK reflect the still challenging cargo scenario in South America and mainly the weakness of the imports into the region, which have affected our cargo yields, which decreased by 4.8% in 2014 as compared to 2013.
Cost of Sales
Cost of sales decreased by 4.3% to US$9,624.5 million in the year ended December 31, 2014 from US$10,054.2 million in 2013, mainly due to lower fuel expenses in the year. As a percentage of total operating revenues, cost of sales increased from 77.8% in 2013 to 79.6% in 2014.
The table below presents cost of sales information for the fiscal year ended December 31, 2014 and 2013.
(in US$ millions, except
as otherwise stated)
As a percentage of total
operating revenues
Revenues
Aircraft Fuel
Wages and Benefits
Other Rental and Landing Fees
Depreciation and Amortization
Aircraft Rentals
Aircraft Maintenance
Passenger Services
Other Costs of Sales
The decrease in cost of sales was driven by lower aircraft fuel expenses, which decreased by 5.6% to US$4,167.0 million in 2014 as a result of a 3.7% decrease in fuel consumption related to the Company’s capacity adjustments and more fuel efficient fleet and a 4.9% decrease in the full year average fuel price (excluding hedge losses). In addition, LATAM recognized a net loss of US$108.8 million in fuel hedging in 2014, compared to the fuel hedge gain of US$22.1 million in 2013. The Company also recognized a US$3.8 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.
Depreciation and amortization decreased by US$50.4 million amounting to US$991.3 million, which represents a decrease of 4.8% despite the increase in modern owned aircraft mainly as a result of the phase out of leased aircraft with the consequent decrease in maintenance depreciation and the positive impact of the depreciation of the Brazilian real in the year as compared to 2013.
Other rental and landing fees decreased by 3.3% to US$1,327.2 million in 2014 from U$1,373.1 million in 2013, mainly resulting from lower aeronautical rates related to the depreciation of local currencies..
Aircraft maintenance expenses decreased by 5.1%, from US$477.1 million in 2013 to US$452.7 million in 2014, mainly as a result of fleet renewal initiatives and reduced operations, which was partially offset with higher costs related to aircraft redeliveries as part of our fleet restructuring program.
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Aircraft rentals increased by 18.2% to US$521.4 million in 2014 from US$441.1 million in 2013 despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s), whereas returned aircraft have mainly been older and smaller models (i.e. Airbus A319, Boeing 737, Dash8 Q400 aircraft).
Passenger service expenses decreased by 9.4%, to US$300.3 million in 2014 compared to US$331.4 million in 2013, despite the increase of 1.7% in passengers transported, mainly due to a decrease in certain variable costs per passenger resulting from better negotiations and/or certain new suppliers, a decrease in passenger compensations and the positive effect of the depreciation of the Brazilian real in suppliers.
As a result of the above, gross margin decreased by 14.0% from US$2,870.4 million in 2013 to US$2,469.0 million in 2014.
Other Consolidated Results
Other operating income increased in 2014 by 10.5%, from US$341.6 million in 2013 to US$377.6 million, mainly due to an increase of US$93.7 million in revenue from Multiplus’ breakage and non-air redemptions during the year.
Distribution costs decreased by 6.6% from US$1,025.9 million in 2013 to US$957.1 million in 2014, mainly as a result of lower commissions to agents which decreased by 10.6% from US$408.7 million to US$365.5 million, driven by reduced passenger commissions at LAN and TAM related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies..
Administrative expenses decreased by 13.7% from US$1,136.1 million in 2013 to US$980.7 million in 2014, mainly due to a decrease of 5.7% in wages and benefits mainly resulting from the positive impact of the depreciation of the Brazilian real, Chilean peso and Argentinian peso in wages denominated in those currencies.
Other operating expenses decreased by 1.9% from US$408.7 million in 2013 to US$401.0 million in 2014, mainly due to a change in the classification of certain taxes in Brazil.
Financial income increased to US$90.5 million in the year ended December 31, 2014 from US$72.8 million in 2013, mainly due to an increase in our cash held in currencies different from the US dollar which have higher interest rates during the period.
Financial costs (from non-financial activities) decreased by 7.0% to US$430.0 million in 2014 from US$462.5 million in 2013 mainly due to lower debt levels, which was partially offset by a higher average interest rate resulting in part from the securitized bond issued in November 2013. In addition, during the first quarter of the year, we recognized US$23 million in breakage costs related to the sale and leaseback of 4 of our Boeing 777 aircraft.
Exchange rate differences decreased from a loss of US$482.2 million in 2013 to a loss of US$130.2 million in 2014, mainly resulting from the reductions on TAM’s balance sheet exposure between assets denominated in Brazilian reais and liabilities denominated in US dollars, which decreased from US$2.0 billion as of December 2013 to less than US$1.0 billion as of December 2014. Under other gains (losses), the Company recorded a net gain of US$33.5 million in 2014 as compared to a net loss of US$55.4 million in 2013 as a result of mainly due to the prescription and other reversals of tax contingencies at TAM which were recognized at the time of the business combination.
Income tax expense for 2014 amounted to US$292.4 million as compared to an income tax credit of US$20.1 million in 2013. This variation includes the recognition of an accounting charge of US$150.2 million in 2014 due to modifications made to the Chilean Tax System, consisting in a gradual increase of the corporate income tax from 20% to 27% in 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
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LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2013 compared to year ended December 31, 2012
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2013, and for LATAM Airlines Group, for the year ended December 31, 2012 (including TAM’s results from June 23, 2012). For certain operating data during these periods, see “Item 3. Key Information—Selected Financial Data.”
Financial costs (from non-financial activities)
Earning on investments (equity method)
Income (loss) tax expense / benefit
Net (loss) income for the year
Net loss for the year ended December 31, 2013 equaled US$ 263.8 million, representing an increase of US$ 258.2 million from a net loss of US$5.6 million in 2012. Net loss attributable to the parents of the company rose to US$ 281.1 million in 2013 from US$19.1 million in 2012. Results for the 2013 year were negatively impacted by a foreign exchange loss of US$ 482.2 million mainly resulting from the depreciation of the Brazilian real in the year. On the other hand, in 2012 and 2013, LATAM incurred US$47.0 and US$7.3 million, respectively, of non-recurring expenses related to the combination and integration costs, and an accounting charge of US$70 million related to the increase in the Chilean corporate tax rate from 17% to 20% during 2012.
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Operating revenues increased by 33.1% to US$12,924.5 million for the year ended December 31, 2013 from US$9,710.4 million in 2012. Our consolidated passenger revenues increased by 38.8% to US$11,061.6 million in 2013 from US$7,966.8 million in 2012, primarily as a result of the consolidation of TAM’s revenue for 2012 since June 23.
Cargo revenues increased by 6.9%, to US$1,863.0 million in 2013 from US$1,743.5 million in 2012, also as a result of the consolidation of TAM’s cargo revenues for full year 2013. The slight increase in cargo revenues in spite of TAM’s cargo integration is a result of a weak global cargo scenario which has impacted both cargo traffic and yields.
Cost of sales increased by 31.7% to US$10,054.2 million in the year ended December 31, 2013 from US$7,634.5 million in 2012, mainly as a result of increased operations due to the complete consolidation of TAM’s costs for year 2013. As a percentage of total operating revenues, cost of sales decreased from 78.6% in 2012 to 77.8% in 2013.
The table below presents cost of sales information for the fiscal year ended December 31, 2013 and 2012.
The increase in cost of sales was driven by higher aircraft fuel expenses, which increased by 28.5% to US$4,414.2 million in 2013 as a result of higher fuel consumption related to the incorporation of TAM’s operations from June 23, 2012, which was partially offset by lower average fuel prices and efficiency initiatives. In addition, LATAM recognized a net gain of US$22.1 million in fuel hedging in 2013, compared to the fuel hedge gain of US$2.8 million in 2012.
Depreciation and amortization increased by US$270.6 million amounting to US$1,041.7 million, which represents an increase of 35.1% mainly due to the incorporation of all of TAM’s fleet (including new TAM fleet deliveries in 2012) starting June 23, 2012.
Other rental and landing fees increased by 30.4% to US$1,373.1 million in 2013 from U$1,052.6 million in 2012, resulting from higher fees related to a larger operation with the consolidation of TAM’s fees for full year 2013.
Aircraft maintenance expenses increased by 60.3%, from US$297.6 million in 2012 to US$477.1 million in 2013, as a result of higher costs related to a larger fleet and higher maintenance costs related to redeliveries of aircraft.
Aircraft rentals increased by 42.8% to US$441.1 million in 2013 from US$308.8 million in 2012, primarily due to the complete consolidation of TAM’s fleet for full year 2013 and the net increase of aircraft under operating leases during the year.
Passenger service expenses increased by 38.2%, to US$331.4 million in 2013 compared to US$239.8 million in 2012, mainly resulting from the increase in passengers transported after the combination of LAN and TAM.
As a result of the above, gross margin increased by 38.2% from US$2,075.9 million in 2012 to US$2,870.4 million in 2013.
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Other operating income increased in 2013 by US$121.4 million, from US$220.2 million to US$341.6 million, due to the incorporation of TAM’s other revenues since June 22, 2012; including a US$28.7 million revenue from Multiplus’ breakage and non-air redemptions, and an income for recognizing US$11.9 million and US$ 8.2 million generated as a result of the sale and lease-back of ten Airbus A330 aircraft, and two Airbus A318 aircraft and an engine, respectively, during the second quarter of the year.
Distribution costs increased by 27.7% from US$803.6 million in 2012 to US$1,025.9 million in 2013, as a result of the consolidation of TAM’s results only starting in June 23, 2012.
Administrative expenses increased by 27.8% from US$888.7 million in 2012 to US$1,136.1 million in 2013, mainly due to an increase of 30.6% in wages and benefits resulting from the higher number of employees following the combination of LAN and TAM in 2012.
Other operating expenses increased by 31.1% from US$311.8 million in 2012 to US$408.7 million in 2013, as a result of higher sales costs, advertising and marketing expenses and costs related to tours and travel services, related to the integration of TAM’s operations from June 23, 2012.
Financial income decreased to US$72.8 million in the year ended December 31, 2013 from US$77.5 million in 2012, due to a lower average cash balance and interest rates during the period.
Financial costs (from non-financial activities) increased by 57.0% to US$462.5 million in 2013 from US$292.6 million in 2012 due to higher average long-term debt related to fleet financing mainly related to the consolidation of TAM’s fleet.
Exchange rate differences decreased from a gain of US$66.7 million in 2012 to a loss of US$482.2 million in 2013, mainly resulting from the depreciation of the Brazilian real in the period.
Under other gains (losses), the Company recorded a net loss of US$55.4 million in 2013 as compared to a net loss of US$45.8 million in 2012.
Income tax credit for 2013 amounted to US$ 20.1 million as compared to an income tax expense of US$102.4 million in 2012. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.
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Accounting impact of the business combination
The combination between LAN and TAM has been accounted for using the purchase method of accounting, with LAN treated as the acquirer of TAM.
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of the LAN shares provided and the Squeeze-Out of the remaining TAM shareholders. Following this criteria, the total consideration paid as of June 22, 2012 was US$ 3,782.2 million.
As a result of the consolidation, certain TAM assets and liabilities which were accounted for at historical values were incorporated into the consolidated balance sheet at their fair value, as required by applicable accounting principles. Applicable accountings standards permit a one year measurement period, requiring fair value adjustments completed during that period to be adjusted against previously reported goodwill. As of June 30, 2013, the purchase price allocation has been completed. Previously reported goodwill has been adjusted to reflect fair value changes in this one year period. Goodwill as of June 30, 2013 amounts to US$ 3,890.2 million.
The main adjustments to the balance sheet accounts of TAM as a result of the consolidation with LATAM Airlines Group were related to the fair values of the following: (i) airport slots (Congonhas, JFK and Heathrow airports); (ii) the Multiplus loyalty program; (iii) fleet; and (iv) other provisions, including legal proceedings with a probability of loss below 50%, which are not accounted for under the normal course of business but must be accounted for under a business combination, according to applicable accounting standards (IFRS 3).
U.S. Dollar Presentation and Price-Level Adjustments
Foreign currency transactions
The items included in the financial statements of LATAM are valued using the currency of the main economic environment in which the entity operates (the “functional currency”). The functional currency of LATAM is the U.S. dollar, which is also the currency of presentation of the audited consolidated financial statements of LATAM and its subsidiaries.
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.
The results and financial position of all the LATAM entities (none of which utilizes the currency of a hyper-inflationary economy) that have a functional currency other than the currency of presentation are translated to the currency of presentation as follows:
For consolidation purposes, exchange differences arising from the translation of a net investment in foreign entities (or in local entities with a functional currency different to that of the parent), and of loans and other foreign currency instruments designated as hedges for such investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the period-end exchange rate.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. Most of our revenues (58% expected for 2015) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (65% expected for 2015) is denominated in dollars or pegged to the U.S. dollar, particularly fuel costs, landing and over flight fees, aircraft rentals, insurance and aircraft components and supplies.
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A substantial majority of our liabilities are denominated in U.S. dollars (74% as of December 31, 2014), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2014, 54 % of our assets were denominated in U.S. dollars, principally aircraft, cash and cash equivalents, accounts receivable and other fixed assets. Substantially all of our commitments, including operating lease and purchase commitments for aircraft, are denominated in U.S. dollars.
On the other hand, balance sheet imbalance denominated in currencies other than the functional currency of the specific entity creates a foreign exchange rate exposure that impacts the foreign exchange losses and gains due to exchange rate fluctuations. We recorded net foreign exchange losses of US$482.2 million in 2013 and US$130.2 million in 2014, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses)”. For more information, see Notes 2.3 and 28 to our audited consolidated financial statements.
IFRS/Non-IFRS Reconciliation
We use “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” in analyzing operating expenses on a per unit basis. “ASKs” (available seat kilometers) measures the number of seats of capacity available for the transportation of passengers multiplied by the kilometers flown. “ASK-equivalent” includes capacity for both passenger and cargo equivalent tons multiplied by the kilometers flown. The figure is obtained by adding passenger ASKs and the quotient of cargo ATKs (available ton kilometers) divided by 0.095. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our “total costs” by our total ASK-equivalents. “Total costs” are calculated by starting with operating expenses as defined under IFRS and making certain adjustments for interest costs and other revenues. The cost component is further adjusted to obtain “costs per ASK-equivalents excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” do not have a standardized meaning, and as such may not be comparable to similarly titled measures provided by other companies. These metrics should not be considered in isolation or as a substitute for operating expenses or as indicators of performance or cash flows or as a measure of liquidity.
The table below reconciles our operating expenses (as defined by IFRS) for 2014, 2013 and 2012 to costs used in the calculation of “Cost per ASK-equivalent” and “Cost per ASK-equivalent excluding fuel price variations” for such periods. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated costs from June 23, 2012 and TAM’s third and fourth quarter operating statistics.
Cost per ASK-equivalent
Operating expenses (US$ thousands)
+ Interest expense (US$ thousands)
– Interest income (US$ thousands)
– Other operating income (US$ thousands)
ASK-equivalent operating expenses
Divided by system’s ASK-equivalents (thousands)
= Cost per ASK equivalent (US$ cents)
Cost per ASK-equivalent excluding fuel price variations
ASK-equivalent operating expenses (thousands)
– Actual fuel expenses (US$ thousands)
+ (Gallons consumed) times (previous year’s fuel price)
ASK-equivalent operating expenses excluding fuel price variations
= Cost per ASK-equivalent excluding fuel price variations (US$ cents)
In addition, LATAM continues to use revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis, which is consistent with how LAN analyzed its revenues before the combination. To obtain unit revenues, we divide our passenger revenues by our total ASKs and our cargo revenues by our total ATKs. We use our revenues as defined under IFRS for purposes of the calculation of this metric. Revenues per ASK or ATK, as the case may be, do not have a standardized meaning, and as such may not
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be comparable to similarly titled measures provided by other companies. This metric is not an IFRS based measure of performance or liquidity. It should not be considered in isolation or as a substitute for revenues or as indicators of performance or cash flows as a measure of liquidity.
The table below shows the calculation of our revenues per ASK or ATK, as applicable, in each of the periods indicated. Figures for 2012 correspond to LATAM’s consolidated audited financial statements prepared in accordance with IFRS for the year ended December 31, 2012, including TAM’s consolidated revenues from June 23, 2012.
Passenger Revenues (US$ million)
ASK (million)
Passenger Revenues/ASK (US$ cents)
Cargo Revenues (US$ million)
ATK (million)
Cargo Revenues/ATK (US$ cents)
Seasonality
Our operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. Our passenger revenues are generally higher in the first and fourth quarters of each year, during the southern hemisphere’s spring and summer. In the Brazilian passenger air transportation market, there is always a higher demand for air transportation services in the second half of the year, leaving the second quarter as the weakest one for the Company. However, the seasonality is partially mitigated by the fact of LATAM having higher than market average concentration of business travel (which is less sensitive to seasonality). Additionally, the expansion of the Company in other countries with different seasonal patterns has also moderated the overall seasonality of the passenger business.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with IFRS requires our management to adopt accounting policies and make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes. We strive to maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements. We believe that the consistent application of these policies enables us and our subsidiaries to provide readers of the financial statements with more useful and reliable information about our operating results and financial condition.
Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions. For a discussion on these and other accounting policies, see Note 2 to our consolidated financial statements. The following are the accounting policies that we believe are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments.
Accounting estimates and judgments
The Company has used estimates to value and book some of the assets, liabilities, revenues, expenses and commitments; these basically refer to:
These estimates are made on the basis of the best information available on the matters analyzed.
In any case, it is possible that events will require them to be modified in the future, in which case the effects would be accounted for prospectively.
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The management has applied judgment in determining that LATAM Airlines Group S.A. has control over TAM S.A. and Subsidiaries for accounting purposes and therefore has consolidated their financial statements. This judgment is made on the basis that LATAM issued their ordinary shares in exchange for all of the outstanding common and preferred shares of TAM, except those shareholders of TAM who did not accept exchange and which were subject of the squeeze-out entitling LATAM to substantially all of the economic benefits that will be generated by the LATAM Group and also, consequently, exposing it to substantially all the risks incidental to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the TAM controlling shareholders, ensuring that the shareholders and directors of TAM will have no incentive to exercise their rights in a manner that is beneficial to TAM but detrimental to LATAM. Further, all significant actions required for the operation of the airlines require the affirmative vote of both LATAM and the TAM controlling shareholders.
Since the integration of LAN and TAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the LATAM board. Further, the LATAM CEO evaluates the performance of the LATAM Group executives and, together with the LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the economic substance of these arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of TAM’s operations is appropriate.
Revenue Recognition
Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. Revenues are shown net of refunds, rebates and discounts.
(a) Rendering of services
We recognize passenger and cargo revenues either when the transportation service is provided or when we determine that the tickets will not be used or refunded, which, in the case of passenger revenues, reduces the air traffic liability. We estimate revenue breakage based on historical breakage experience that takes into account the aging of tickets that will not be used or refunded. Commissions payable related to such unearned earnings are shown net of the air traffic liability. Other revenues, including aircraft leases, courier, logistic and ground services, duty free sales, and storage and customs brokering, are recognized when services are provided.
The amount of passenger ticket sales not yet recognized as revenue is reflected as an air traffic liability. Air traffic liability includes estimates of the amount of future refunds and exchanges, net of forfeitures for all unused tickets once the flight date has passed. We perform periodic evaluations of this estimated liability based on actual results. Any adjustments, which can be significant, are included in the results of operations for the periods in which the evaluations are completed. These adjustments relate primarily to the differences between our estimation of certain revenue transactions and the related sales price, as well as refunds, exchanges and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Actual events and circumstances may differ from historical fare sale activity and customer travel patterns and can result in refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate our estimates periodically. If actual refunds, exchanges or forfeitures fall outside of our estimated ranges, we review our estimates and assumptions and adjust air traffic liability and passenger revenues as necessary. As with any estimates, actual results may vary from estimated amounts.
a.2 Frequent flyer program
The Company has a frequent flyer program for LATAM passengers called LANPASS and a frequent flyer program for TAM passengers called TAM Fidelidade. Customers can also earn points through Multiplus, a subsidiary of TAM, which permits the accrual of points for many products and services (not just airline flights) and has more than 200 partner establishments, including the TAM Fidelidade program, as of December 31, 2014.
Both frequent flyer programs’ objective is customer loyalty through the delivery of LANPASS kilometers or Multiplus points every time that members of the program fly with the Company or its alliance partners, use the services of entities registered with the program or make purchases with an associated credit card. The kilometers/points earned can be exchanged for flight tickets or other services of associated entities.
The consolidated financial statements include LANPASS liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers accumulated pending use at that date, in accordance with IFRIC 13: “Customer loyalty programs.” Points earned from TAM Fidelidade members are bought from Multiplus and seats redeemed are sold to Multiplus. Multiplus manages the points liabilities. Revenue from both programs are recognized once the purchased tickets are flown.
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LANPASS Kilometers expire if they are not utilized over a period of three years. This period is renewable if the passenger takes a flight or meets specific requirements regarding the accumulation of kilometers through one of the partners of the program. Multiplus Points expire if they are not utilized over a period of two years, this period is not renewable.
Property, Plant and Equipment
LATAM’s land is recognized at cost less any accumulated impairment loss. The rest of the property, plant and equipment are shown, initially and subsequently, at their historic cost less the corresponding depreciation and any impairment loss.
The amount of advance payments to aircraft manufacturers are capitalized by the Company under “Construction in progress” until receipt of aircraft.
Subsequent costs (replacement of components, improvements and extensions) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written-off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the result of the year in which they are incurred.
Depreciation of property, plant and equipment is calculated using the straight-line method over their estimated useful lives; except in the case of certain technical components, which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets is revised, and adjusted if necessary, once a year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount. For more information, see Note 2.8 to our audited consolidated financial statements.
Losses and gains on the sale of property, plant and equipment are calculated by comparing the proceeds obtained with the book value and are included in the consolidated statement of income.
The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in terms of cycles and flight hours.
In case of on balance sheet aircraft, these maintenance costs are capitalized as Property, plant and equipment, while in the case of off balance sheet aircraft maintenance costs are periodically provided for and recognized through profit and loss as “Cost of sales”.
Additionally, under some of our aircraft operating leases, prepayment deposits are required in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, a process that requires judgment, and recognizes an expense if any such amounts are less than probable of being returned.
The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.
Derivative Financial Instruments and Hedging Activities
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:
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.
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The total fair value of the hedging derivatives is booked as an Other non-current financial asset or liability if the remaining maturity of the hedging instrument is over 12 months, and as an Other current financial asset or liability if the remaining term of the hedging instrument is less than 12 months. Derivatives not booked as hedges are classified as other financial assets or liabilities, current in the case that their remaining maturity is less than 12 months and non-current in the case that it is more than 12 months.
(a) Fair value hedges
Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.
(b) Cash flow hedges
The effective portion of changes in the fair value of designated derivatives that qualify as cash flow hedges is shown in net equity. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under “Other gains (losses).” Amounts deferred in equity are reclassified to profit and loss when the related hedged item impacts profit and loss.
In the case of variable interest-rate hedges, this means that the amounts recognized in equity are reclassified to results within financial cost at the same time the associated debts accrue interest.
For fuel price hedges, the amounts shown in equity are reclassified to results as Cost of sales to the extent that the fuel subject to the hedge is used.
For Multiplus’ foreign currency hedges, the amounts shown in equity are reclassified to results to the extent that the deferred revenue resulting from the use of points, are recognized as income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in net equity until that moment remains in equity and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in net equity is taken immediately to the consolidated statement of income as “Other gains (losses).”
(c) Derivatives not booked as a hedge
The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income, in “Other gains (losses).”
Deferred taxes
Deferred taxes are calculated on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction other than a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws), that have been enacted or substantially enacted at the end of the reporting period, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is discharged.
Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences. Estimating the level of tax earnings for this purpose requires considerable judgment.
The Company does not record deferred tax on temporary differences arising on investments in subsidiaries, provided that the opportunity to reverse the temporary differences is controlled by the Company and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax on temporary differences arising on investments in associates is immaterial.
Recently Issued Accounting Pronouncements
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The Company’s management believes that the early adoption of the standards, amendments and interpretations described above but not yet effective would not have had a significant impact on the Company’s consolidated financial statements in the year of their first application. The Company only has early adopted the amendment to IAS 36.
B. Liquidity and Capital Resources
LATAM cash and cash equivalents totaled US$989.4 million as of December 31, 2014, US$1,984.9 million as of December 31, 2013 and US$650.3 million as of December 31, 2012. Additionally, the Company had short term marketable securities totaling US$544.4 million as of December 31, 2014, US$576.7 million as of December 31, 2013 and US$470.1 million as of December 31, 2012. In the aggregate, LATAM’s cash and marketable securities totaled US$1,533.8 million as of December 31, 2014, US$2,561.6 million as of December 31, 2013 and US$1,120.3 million as of December 31, 2012.
The US$1,027.8 million decrease in our cash and marketable securities from 2013 to 2014 was mainly due to the execution of the deleveraging plan, the negative impact of the FIFA World Cup, and the weaker global economic scenario in Latin America. Changes in our net cash generated from operating, investing and financing activities are described below.
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Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2014, 2013 and 2012 and our total cash position as of December 31, 2014, 2013 and 2012.
Net cash flows from operating activities
Net cash flow from (used in) investing activities
Net cash flows from (used in) financing activities
Effects of variation in the exchange rate on cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
In addition to the cash and marketable securities LATAM has access to short term credit lines. As of December 31, 2014, LATAM had working capital uncommitted credit facilities for a total amount of US$ 1,827 million, of which US$953million was drawn as of December 31, 2014, and committed credit lines with a total available amount of US$145 million, of which $0 was drawn as of December 31, 2014.
Cash from operations is derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to the recurring expenses of airline operations, including fuel consumption.
Net cash inflows from operating activities in 2014 decreased US$77.3 million, or 5.5%, from US$1,408.7 million, mainly due to the negative impact of the FIFA World Cup on LATAM’s operating margin, as well as a generally weaker macroeconomic scenario in Latin America, including slower GDP growth trends and weaker currencies in most countries. In addition the net cash from operations was negatively affected by fuel hedge, hedging margin guarantees and other guarantees in US$ 251.7 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements). Nevertheless, the negative effect was compensated by the cash received from the renewal of the Santander and LANPASS exclusive co-branding agreement.
Net cash inflows from operating activities in 2013 increased $204.9 million, or 17.0%, from US$1,203.8 million in 2012, primarily due to an improvement in the operational margin and the turnaround of the Brazilian domestic market, mainly reflected in a stronger fourth quarter operational result.
Net cash used in investing activities in 2014 decreased US$379.7 million from US$1,278.8 million in 2013 to US$899.1 million in 2014, due to an increase in aircraft sales of US$265.8 and a decrease in Aircraft CAPEX of US$497.8 million, driven by a decrease in aircraft purchases from 20 narrow body aircraft to 9 and 4 wide body aircraft to 3. This reduction was partially offset by an increase in purchases of property, plant and equipment non related to purchase of new aircrafts of US$556.4. It is important to note that during 2014 the sale and leaseback of 4 B777 was reflected in an asset sale of US$510.5 million and a reduction of debt of US$516.6 million.
Net cash used in investing activities in 2013 decreased US$647.6 million from US$1,926.4 million in 2012 to US$1,278.8 million in 2013, primarily due to the decrease in capital expenditure and the return of PDP payments relating to the aircraft deliveries. Aircraft purchases in 2013 included 20 narrow body aircraft and 4 wide body aircraft for a total of US$1,219 million.
Net cash used in financing activities was (US$1,205.8 million), a decrease of US$2,526.0 million from the US$1,205.8 million in cash generated by financing activities in 2013. The variation resulted primarily from a liability restructuring, including an important reduction of outstanding debt and an increase in debt repayment, mainly the US dollar denominated debt of TAM S.A. of US$1,327.6 million (for more information see to Note 18-Other Financial Liabilities of our audited consolidated financial statements). The decrease in the net cash generated was also affected by the net effect of the capital increase, where US$888.6 million was accounted for in 2013 and US$156.3 million during the first quarter of 2014.
Net cash generated from financing activities increased by US$200.6 million from US$1,005.2 million to US$1,205.8 million in 2013, primarily due to LATAM’s capital increase, the increase of long term debt related to new aircraft purchases, but partially offset by the voluntary prepayment of BRL 400 million of local Brazilian bonds.
Sources of financing
Long term
We typically finance our fleet with long-term loans covering between 80% and 100% of the net purchase price. We also finance our aircraft under sale and leaseback arrangements in order to add flexibility to our fleet. For more information regarding to the fleet financing, please refer to “—F. Tabular Disclosure of Contractual Obligations.”
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From time to time in the past, we have considered, and may consider in the future, other forms of financing including securitization of ticket receivables or the securitization of fleet and engines or the issuance of additional debt or equity securities.
Short term
We have generally been able to arrange for short-term loans with local Chilean and international banks when we have needed to finance working capital expenditures or increase our liquidity. As of December 31, 2014, we maintained US$537 million in short-term credit lines with both local and foreign banks, including US$210 million of committed credit lines.
We have diversified our sources of short term financing to include the following: PAE (“Prestamos a Exportadores”), which are foreign currency short term loans granted to exporting parties in Chile mainly to finance working capital; Credit card advancements, a financial alternative where the bank advances to the Company the cash inflows related to the credit card sales on installments with a discount factor; and advance purchases by Multiplus of kilometers for TAM flights, in an amount at any time up to a maximum of R$500 million.
Capital expenditures
Our capital expenditures are related to the acquisition of aircraft, aircraft-related equipment, IT equipment, support infrastructure and the funding of pre-delivery deposits. LATAM’s capital expenditures totaled US$1,440.4 million in 2014, US$1,381.8 million in 2013 and US$2,389.4 million in 2012. See “—Sources of financing” above.
The following chart sets forth our estimate, as of December 31, 2014, of our future capital expenditures for, 2015, 2016, 2017, 2018 and 2019 calendar years:
Fleet Commitments
PDPs (1)
Purchase Obligations
Other expenditures(2)
The expenditures set out in the table above reflect payments for purchases and other fleet-related items, as well as for information technology and other items. See “Item 4. Information on the Company—Business Overview—Fleet.” We have projected our capital expenditures based on our anticipated deliveries of aircraft fleet. See “—F. Tabular Disclosure of Contractual Obligations” below for a description of our purchase obligations, borrowings and other contractual commitments as of December 31, 2014.
C. Research and Development, Patents and Licenses, etc.
LATAM has registered the trademarks “LAN,” “LAN Chile,” “LAN Peru,” “LAN Argentina” and “LAN Ecuador” with the trademark office in Chile, Peru, Argentina and Ecuador, respectively. We license certain brands, logos and trade dress under the alliance agreement with oneworld®related to LAN’s alliance. As long as LAN is a member of oneworld®, it will have the right to continue to use current logos on its aircraft.
TAM holds or has filed registration applications for 135 trademarks before the Instituto Nacional da Propriedade Industrial, or INPI, the body with jurisdiction for registering trademarks and patents in Brazil, and 105 trademarks before the bodies with jurisdiction for registering trademarks in other countries in which TAM operates. Currently, TAM is not aware of any third-party challenges to these applications.
D. Trend Information
For 2015, LATAM expects total passenger ASK growth to be between 2% and 4%. International passenger ASK growth for full year 2015 is expected to grow between 4% and 6%. TAM’s domestic passenger ASKs in the Brazilian market are expected to be flat during 2015. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.
In the passenger business, we expect to continue to face increased competition, a weaker macroeconomic environment in South America, and depreciated local currencies, putting pressure on yields throughout the region for all players in the industry. Nevertheless, the Company will continue to develop initiatives to improve our operations, with special focus in customer experience and network. Moreover, LATAM’s unique leadership position in a region with growth potential will allow us to continue building our business model in the future.
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Regarding cargo operations, LATAM expects cargo ATKs to increase between 1% and 3% for full year 2015, driven by increased availability in the bellies of passenger aircraft.
In the cargo business, we continue to be adversely affected by the challenging macroeconomic environment, which is directly correlated with the number of tons being transported and by the fact that weaker cargo markets globally might further drive additional competition to South America, especially Brazil. However we expect partially offset this negative impact with solid export volumes from Latin America to the United States and Europe. Also, we plan to continue to optimize the utilization of the bellies of our passenger aircraft to maximize synergies associated with the Company’s integrated passenger/cargo business model.
We continue to maintain significant flexibility to adjust the physical size of our fleet. Between 2015 and 2016, we will have 43 operating lease expirations in our passenger fleet and 2 operating lease expirations in our passenger and cargo fleet, which leases can thereafter be terminated without additional costs.
As a result, the Company has more flexibility, as well as a proven track record of acting quickly to adapt our business to economic challenges. In this context, LATAM has developed a robust strategic plan for the next four years (2015-2018), based on three critical success factors: Customer Experience, Network, and Efficiency and Cost Reduction. This plan will improve the way we work, allowing us to become one of the best airline groups in the world, renewing our commitment to sustained profitability and superior shareholder returns.
Cost savings include reductions in fuel and fees, procurement, operations, overhead, and distribution costs, among others. The company has already started work on cost initiatives in all these areas.
Regarding fuel, we expect jet fuel prices will continue to be volatile in 2015, and we will continue to use fuel hedging programs and fuel surcharge mechanisms in both the passenger and cargo businesses to help minimize the impact of short-term movements in crude oil prices.
LATAM has hedged approximately 30% of its estimated fuel consumption for the first quarter of 2015, 25% of its average estimated fuel consumption for the second quarter of 2015, 39% of its average estimated fuel consumption for third quarter 2015, and 39% of its average estimated fuel consumption for fourth quarter 2015. The Company’s fuel hedging strategy consists of a combination of collars, swaps and call options for Brent and Jet Fuel.
E. Off-Balance Sheet Arrangements
As of December 31, 2014 the Company had 107 aircraft (of which 70 are obligations of TAM and 37 are obligations of LAN) and 23 aircraft engines under operating leases. These operating leases provide us with flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value to our strategy and financial performance. The total future lease payments related to our operating leases as of December 31, 2014 were US$ 2,155 million, for all remaining periods through maturity (the latest of which expires in 2026). See “—F. Tabular Disclosure of Contractual Obligations.”
Under the aforementioned operating leases, LATAM is responsible for all maintenance, insurance and other costs associated with operating these aircraft. The Company has not made any residual value or similar guarantees to our lessors. There are certain guarantees and indemnities to other unrelated parties that are not reflected on the Company’s balance sheet, but we believe that these will not have a significant impact on our results of operations or financial condition.
LATAM operates 17 aircraft under tax leasing structures. These methods involve the creation of special purpose entities that acquire aircraft with bank and third party financing. Under IFRS, eight of these aircraft are shown in the consolidated statement of financial position as part of “Property, plant and equipment” and the corresponding debt is shown as a liability and nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2014.
As of December 31, 2014, we are not aware of any event, lawsuit, commitment, trend or uncertainty that may result in, or is reasonably likely to result in, the termination of the operating leases. See Note 33 to our audited consolidated financial statements for a more detailed discussion of these commitments.
F. Tabular Disclosure of Contractual Obligations
We have contractual obligations and commitments primarily related to the payment of aircraft debt and lease arrangements, principal and interest on our non-aircraft long-term debt (which consists of senior notes, a securitized bond and bank loans), and short-term export-import credits for the future incorporation of aircraft to our fleet.
The Company’s debt that is secured by aircraft (including Export-Import Bank of the United States (“EX-IM Bank”) Bank guaranteed bonds, Export Credit Agency (“ECA”) guaranteed loans, commercial loans, Japanese Leases with a call option (“JOLCO”)
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structures and capital leases) as of December 31, 2014, was US$6,221 million. In general, LATAM’s aircraft debt has 12 year repayment profiles. However, some financing structures feature a balloon payment or a purchase option at the end of the lease. By refinancing this balloon payment, the maturity dates of a number of our aircraft financings have been extended for another 3 to 8 years. Our 2014 aircraft acquisitions are described in further detail below under “—2014 Fleet Acquisitions.”
Regarding non-aircraft debt, LATAM issued a securitized bond for an amount of US$ 450 million in November 2013 with seven years tenor and two years interest only. This bond is backed by future flows of credit card sales of LATAM Airlines in the United States and Canada. The coupon is 6.0% fixed with quarterly payments.
In addition, TAM has three series of senior notes, totaling US$1,100 million. TAM’s senior notes comprise:
The average interest rate of all of our long term debt (which is our aircraft debt plus the senior notes issued by TAM, the LATAM securitization and bank loans) was 3.68% as of December 31, 2014. Out of the total long-term debt, 68.8%accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.
As of December 2014, LATAM had US$1,308.3 million in current debt liabilities. Of this amount, US$552.5 million was short-term debt, which represents 42% of our total current debt liabilities. The remaining US$755.7 million is composed mainly of amounts payable within the next 12 months related to aircraft financing.
Various EX-IM Bank loans signed by LATAM for the financing of Boeing 767, 777, 777 freighter and 787 aircraft contain financial covenants and other restrictions, including restrictions in terms of its shareholder composition and disposal of assets. As of December 31, 2014, we also had purchase obligations totaling US$ 11.7 billion, with deliveries between 2015 and 2021, as set forth below:
The following table sets forth our material expected obligations and commitments as of December 31, 2014:
(US$ in millions)
Long-term debt obligations(1)
Capital (finance) lease obligations
Operating lease obligations
Fleet Commitments(2)
TOTAL
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2014 Fleet Acquisitions
During 2014, LATAM completed the acquisition of the following wide body aircraft:
These EX-IM Bank financial obligations have a repayment profile of 12 years, with a guarantee covering 85% of the net purchase price of the aircraft. The EX-IM Bank guarantee is secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of EX-IM Bank. We have financed the remaining 15% of the net purchase price with our own funds.
Finally, the 2 Boeing 787-8 aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments
During 2014, LATAM completed the acquisition of the following narrow body aircraft:
The commercial financing for these 9 Airbus 321-231 aircraft consists of a senior tranche financing 81.7% of the net purchase price of the aircraft. A first priority mortgage on the aircraft exists in favor of a security trustee on behalf of the senior lender. The documentation for each loan follows standard market forms for the type of financing, including standard events of default
Finally, narrow body aircraft financed through sale and leaseback transactions have lease terms of 8 years. These leases are denominated in U.S. dollars and have monthly payments.
The majority of our wide body and narrow body aircraft financings through EX-IM Bank bonds, ECA guaranteed loans or commercial loans are denominated in U.S. dollars and have quarterly amortizations with a combination of fixed and floating rates linked to USD LIBOR. A small portion of our aircraft debt has monthly or semiannual payments; nevertheless it is also denominated in US dollars and linked to U.S. dollar Libor. Through the use of interest rate swaps and fixed coupon Bond issuances in the case of Boeing aircraft, we have effectively converted a significant portion of our floating rate debt under these loans into fixed rate debt.
A. Directors and Senior Management
The LATAM Airlines Group board of directors consists of nine directors who are elected every two years for two-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may be re-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month and extraordinary board of directors’ meetings are called when summoned by the chairman of the board of directors and two other directors, or when requested by a majority of the directors.
The current board of directors was elected at the ordinary shareholders’ meeting held on April 29, 2014. Its term expires in April 2016. On September 2nd, 2014 Mrs. Maria Claudia Amaro (1) resigned as a member of the board of directors, which elected Mr. Henri Philippe Reichstul in her place. Mr. Reichstul’s appointment will be in effect until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full. The entire board will be reelected in April 2015.
The following are LATAM Airlines Group’s directors:
Directors
Position
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Senior Management
Biographical Information
Set forth below are brief biographical descriptions of LATAM Airlines Group’s directors and senior management. All of LATAM’s directors were elected or reelected, as the case may be, in September 2012 for a two-year term, which expires in September 2014.
Mr. Mauricio Rolim Amaro, has served as member of LATAM Airlines Group’s board of directors since June 2012. He was reelected to the board of directors of LATAM in April 2014 and has served as Chairman since September 2012. Mr. Amaro’s current term as chairman ends in April 2015. Mr. Amaro has previously held various positions in the TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Amaro has been a member of the Board of TAM S.A. since 2004, and vice-chairman of the Board since April 2007. He is also an executive officer at TAM Empreendimentos e Participações S.A. and chairman of the boards of Multiplus S.A. (subsidiary of TAM S.A.) and of TAM AviaçãoExecutiva e Taxi Aéreo S.A. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Amaro shared in the beneficial ownership of 65,554,075 common shares of LATAM Airlines Group (12.02% of LATAM Airlines Group’s outstanding shares), held by TEP Chile S.A. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014. Mr. Reichstul’s term as a director ends in April 2015. Mr. Reichstul has served as President of Petrobras and the IPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to Administrative Board member of TAM and LATAM group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline - Hertford College - Oxford University.
Mr. Juan José Cueto Plaza, has served on LAN’s board of directors since 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Cueto’s term as a director ends in April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Minera Michilla S.A., Inversiones del Buen Retiro S.A., Inmobiliaria e Inversiones Asturias S.A., Inversiones Mineras del Cantábrico S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A. and Valle Escondido S.A. Mr. Cueto is the brother of Messrs. Enrique
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and Ignacio Cueto Plaza, LATAM Airlines Group Executive Vice-President and LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. Mr. Cueto is also a member of the board of directors of Holdco II. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Ramón Eblen Kadis, 70 years old, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM in April 2014. Mr. Eblen’s term as a director ends in April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., Inversiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of LATAM Airlines Group). As of January 31, 2015, The Eblen Group had the beneficial ownership of 27,945,199 common shares of LATAM Airlines Group (5.12% of LATAM Airlines Group’s outstanding shares) plus a 40% ownership of Costaverde Aeronautica SpA, which owns 20.000.000 common shares of LATAM Airlines Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Georges de Bourguignon, has served on LATAM Airlines Group’s board of directors since September 2012. Mr. de Bourguignon’s term as a director ends in April 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1994. He is currently member of the board of directors of Asset Chile S.A. and several of its affiliates, is also an independent board member of Sal Lobos S.A., Chilean subsidiary of the German group K+S, and Salmones Austral Spa, a Chilean salmon farming company. In the past he has served in several other boards of public and private companies, as well as of boards of non profit organizations. Before co-founding Asset Chile, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. As of January 31st, 2015, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0006%) of LATAM Airlines Group outstanding shares).
Mr. Ricardo J. Caballero, joined LATAM’s board of directors in April 2014. Mr. Caballero is the Ford International Professor of Economics and Director of the World Economic Laboratory at the Massachusetts Institute of Technology, an NBER Research Associate, and an advisor of QFR Capital Management LP. Mr. Caballero was the Chairman of MIT’s Economics Department (2008-2011) and has been a visiting scholar and consultant at many major central banks and international financial institutions. His teaching and research fields are macroeconomics, international economics, and finance. His current research looks at global capital markets, speculative episodes and financial bubbles, systemic crises prevention mechanisms, and dynamic restructuring. His policy work focuses on aggregate risk management and insurance arrangements for emerging markets and developed economies. He has also written about aggregate consumption and investment, exchange rates, externalities, growth, price rigidity, dynamic aggregation, networks and complexity. Mr. Caballero has served on the editorial board of several academic journals and has a very extensive list of publications in all major academic journals. Among his major awards, he was the winner of the 2002 Frisch Medal of the Econometric Society for “Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach”, Econometrica, 67(4), July 1999 (joint work with Eduardo Engel); and both the Smith Breeden Prize by the American Finance Association and the Emerald Management Review Citation of Excellence Award for “Collective Risk Management in a Flight to Quality Episode”, Journal of Finance, 63(5), October 2008 (joint work with Arvind Krishnamurthy). In April 1998 Caballero was elected a Fellow of the Econometric Society and subsequently of the American Academy of Arts and Sciences in April 2010.
Carlos Heller Solari, joined the board of LAN in May 2010 and was re-elected to the Board of Directors of LATAM in April 2014. The mandate of Mr. Heller as a director ends in April 2015. The Mr. Heller has vast experience in retail (retail) through SACI Falabella in transport and logistics, agriculture, wine, Horse Riding and communications category. Mr. Heller is president of Bethia SA (“Bethia”) (parent company of Axxion SA and Betlan Two SA), Chairman of Axxion SA, Betlan Two SA, Equestrian Club of Santiago, Sotraser SA and Agricultural Ancali Ltda . also serves on the boards of SACI Falabella Falabella Retail SA, Sodimac SA, Titanium SA, Betfam SA Viña Indómita SA, Viña Santa Alicia SA, Viña Two Andes SA Blue Express SA and Aero Andina SA In addition he is the principal shareholder and president of “Azul Azul” through Inversiones Limitada Alpes (first division team manager football at the University of Chile). At January 31, 2015, Mr. Heller indirectly held 33,367,357 ordinary shares of LATAM Airlines Group through Axxion SA and Inversiones HS Spa (6.12% of the shares of LATAM Airlines Group) and 1.017.449.607 shares Naviera SA Group Companies Axxion through S.A.
Mr. Gerardo Jofré Miranda, joined LATAM’s Board of directors on May 2010 and was reelected to the board of directors of LATAM in April 2014. Mr. Jofré’s term as a director ends in April 2015. Mr. Jofré is member of the board of directors of Codelco. Mr. Jofré is member of the Real Estate Investment Council of Santander Real Estate Funds. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobiliaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. As of January 31st, 2015, Mr. Jofre held49,923 common shares of LATAM Airlines Group (0.0092% of LATAM Airlines Group’s outstanding shares).
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Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2014. Mr. Luzón’s term as a director ends in April 2015. He has served as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (CEIBS) in Shanghai (2012-2013). He is currently a member of the board of La Haya Real Estate (September 2014) and an Independent Director at Willis Group (June 2013). Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin America of Banco Santander. In this period, he was also Worldwide Vice President of Universia SA. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988 Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Inditex-Zara from 1997 until 2012. As of January 31, 2015, Mr. Luzon held 12,200 common shares of LATAM Airlines Group (0.0022% of LATAM Airlines Group’s outstanding shares).
Senior Management 1
Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”). From 1994 to 2012, Mr. Cueto was the CEO of LAN. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. Mr. Cueto also served on the LAN board of directors from 1993 to 1994. Mr. Cueto has in-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 24 years in the airline industry. Mr. Cueto is an active member of theoneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Federation of Chilean Industry (SOFOFA) and of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile. Mr. Cueto is the brother of Mers. Juan José and Ignacio Cueto Plaza, member of the board and LAN CEO, respectively. Mr. Cueto is also a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2015, Mr. Cueto jointly shared in the beneficial ownership of 139,089,520 common shares of LATAM Airlines Group (25.49% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Ignacio Cueto Plaza, is LAN’s CEO. Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business from 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 2012. Mr. Cueto has previously served on the board of directors of LAN (from 1995 to 1997) and Ladeco (from 1994 to 1997). In addition, Mr. Cueto served as Chief Executive Officer of Fast Air from 1993 to 1995. Between 1985 and 1993, Mr. Cueto held several positions at Fast Air, including Service Manager for the Miami sales office, Director of Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the brother of Messrs. Juan José and Enrique Cueto Plaza, Director and LATAM’s CEO, respectively. Mr. Cueto is also a member of the Cueto Group (which is a controlling shareholder of LATAM). As of January 31, 2015, Mr. Cueto shared in the beneficial ownership of 139,089,520 common shares of LATAM (25.49% of LATAM’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”
Mr. Marco Bologna, is TAM’s CEO since May, 2010. He is also board member of Suzano Papel e Celulose S/A. He joined TAM in March 2001, when he was appointed Vice President for Finance and Management, and Market Relations Director. From 2004 to 2007 he served as President of TAM Linhas Aéreas, and in March 2009 he took over as President of TAM Aviação Executiva and Táxi Aéreo S.A. Since April 30, 2010 he has chaired the holding company TAM S.A., which brings together TAM Linhas Aéreas, TAM Airlines (formerly TAM Mercosur), Multiplus Fidelidade, and the maintenance unit TAM MRO. In February 2012, he was also appointed President of TAM Linhas Aéreas. Mr. Bologna has extensive experience in the aviation industry, and has worked in the financial markets for over 20 years. Mr. Bologna will cease to be CEO of TAM on April 1ST, 2015.
Mr. Armando Valdivieso Montes, is President of LAN. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business of LAN and from 2006 until 2012 he served as the General Manager-Passenger. After the combination with TAM in 2012, Mr. Valdivieso served as LATAM’s Spanish Speaking Countries Executive Vice-President, before being named to his current position. From 1994 to 1997, Mr. Valdivieso was President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. As of January 31, 2015, according to shareholder registration data in Chile, Mr. Valdivieso owned 67,359 common shares of LATAM Airlines Group (0.012% of LATAM Airlines Group’s outstanding shares).
Mrs. Claudia Sender Ramirez, has served as TAM Airlines’ President since May 2013. Mrs. Sender joined the company in December 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion of TAM-LAN combination and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Sender dedicated most of her career in consumer goods industry, focused in Marketing and Strategic Planning. Prior to joining TAM, she was Marketing Vice-President at Whirlpool Latin America for
Mr. Damian Scokin held the position of LATAM’s International Unit Business Executive Vice President until September 30, 2014, date in which Mr. Scokin left the company
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seven years. She also worked as a consultant at Bain&Company, developing projects for large companies in various industries, including TAM Airlines and other players of the global aviation sector. She has a bachelor degree in Chemical Engineering from the Polytechnic School at the University of São Paulo (USP) and a MBA from Harvard Business School.
Mr. Roberto Alvo Milosawlewitsch, is LATAM’s Senior VP Planning and Network. Mr. Alvo has served in various roles within LAN since 2001, including as CFO of LAN Argentina from 2005 until 2008, as Vice-president of Development of LATAM Airlines Group from 2003 until 2005 and Vice-President of Treasury of LATAM Airlines Group from 2001 until 2003. He assumed the position of Senior Vice-President Strategic Planning and Development in 2008. Before 2001 Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading non-metallic Chilean mining company. Mr. Alvo is a civil engineer and obtained an MBA from IMD in Lausanne, Switzerland.
Mr. Jerome Cadier, is Chief Marketing Officer, a position he assumed in March 1st, 2013. Mr. Cadier has a Masters degree from the Kellogg Graduate School of Business, USA and an Industrial Engineer degree from Escola Politecnica da Universidade de Sao Paulo, Brasil. Between 1994 and 2002, Mr. Cadier worked as a management consultant for McKinsey and Co. in Sao Paulo, Brasil. In 2003 he joined Whirlpool Home Appliances where he held several positions among which are head of sales and marketing for Brazil and CEO for Whirlpool Oceania.
Mr. Juan Carlos Mencio is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since June 1, 2014. Mr. Mencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for its worldwide Cargo Operations, both since 1998. Prior to joining LAN, he was in private practice in New York and Florida representing various international airlines. Mr. Mencio obtained his Bachelor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University.
Mr. Andrés Osorio, is LATAM’s Chief Financial Officer (“CFO”), and has held this position since August, 2013. He holds a Business degree from the Catholic University of Chile and has over 20 years of experience leading financial areas in companies such as Cencosud, where he was CFO for 7 years, and Metrogas, among others. He has also been CEO of Empresas Indumotora, a Chilean automobile conglomerate, and was a partner at PricewaterhouseCoopers in Chile. As of January 31, 2015, Mr. Osorio owned 20,000 common shares of LATAM (0.0036% of LATAM Airlines Group’s outstanding shares).
Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral. Between 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, including Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Manager for Latin America.
Mr. Cristian Ureta Larrain, is LATAM’s Cargo Executive Vice-President. From 1998 and 2002, Mr. Ureta was LAN Cargo’s Planning and Development Vice-President and in 2002 he was promoted to Production Vice President. In 2005, Mr. Ureta assumed the position of General Manager-Cargo. Mr. Ureta has an Engineering degree from Pontificia Universidad Católica and a Special Executive Program from Stanford University. Prior to that, Mr. Ureta served as General Director and Commercial Director at Mas Air, and as Service Manager for Fast Air.
B. Compensation
In 2014, the Company paid its principal executives (considering the levels of Vice- Presidents, General Managers, Senior Director and Directors as defined above) a total of US$ 44,133,566. No incentives for performance during 2014 were paid. As a result, the Company paid its principal executives total gross remunerations of US$ 44,133,566.
Under Chilean law, LATAM Airlines Group must disclose in its annual report details of all compensation paid to its directors during the relevant fiscal year, including any amounts that they received from LATAM Airlines Group for functions or employment other than serving as a member of the board of directors, including amounts received as per diem stipends, bonuses and, generally, all other payments. Additionally, pursuant to regulations of the Superintendencia de Valores y Seguros de Chile (“SVS”), the Chilean securities regulator, the annual report must also include the total compensation and severance payments received by managers and principal executives, and the terms of and the manner in which board members and executive officers participate in any stock option plans.
LATAM Airlines Group’s directors are paid 50 UF per meeting (100 UF for the chairman of the board) and 40 UF for assistance to the subcommittee of Directors meetings. LATAM Airlines Group also provides certain benefits to its directors and executive officers, such as free and discounted airline tickets and health insurance. We do not have contracts with any of our directors to provide benefits upon termination of employment.
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As set forth in further detail in the following table, in 2014 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$372,913.
Board Members
Mauricio Rolim Amaro
Maria Claudia Amaro
Henri Philippe Reichstul
Ricardo J. Caballero
Juan José Cueto Plaza
Ramon Eblen Kadis
Georges de Bourguignon
José María Eyzaguirre Baeza
Carlos Heller Solari
Juan Gerardo Jofre Miranda
Francisco Luzón López(
All of the above-mentioned directors were elected to the LATAM board of directors in April 2014.
As required by Chilean law, LATAM Airlines Group makes obligatory contributions to the privatized pension fund system on behalf of its senior managers and executives, but it does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.
C. Board Practices
Our board of directors is currently comprised of nine members. The terms of each of our current directors will expire in April 2015. See “—Directors and Senior Management” above.
Committees
Board of Directors’ Committee and Audit Committee
Pursuant to Chilean Corporation Law, LATAM Airlines Group must have a board of directors’ committee composed of no less than three board members. LATAM Airlines Group has established a three-person committee of its board of directors, which, among other duties, is responsible for:
Under Chilean Corporation Law we are required, to the extent possible, to appoint a majority of independent directors to the Board of Directors Committee. A director is considered independent when he or she can be elected regardless of the voting of the controlling shareholders. See “Item 16. G. Corporate Governance.”
Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in Rule 10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Board of Directors’ Committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule 10A-3 under the Exchange Act.
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As of March 31, 2015, all of the members of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule 10A-3 of the Exchange Act. As of March 31, 2015, the committee members were Mr. Gerardo Jofré Miranda, Mr. Ramón Eblen Kadis and Mr. Georges de Bourguignon Arndt. We pay each member of the committee 67 UFs per monthly assistance to meetings.
Other LATAM Board Committees
LATAM’s board of directors also has established four other committees to review, discuss and make recommendations to our board of directors. These include a Strategy Committee, a Leadership Committee, a Finance Committee and a Brand, Product and Frequent Flyer Program Committee. The Strategy Committee focuses on the corporate strategy, current strategic issues and the three-year plans and budgets for the main business units and functional areas and high-level competitive strategy reviews. The Leadership Committee focuses on, among other things, group culture, high-level organizational structure, appointment of the LATAM CEO and his or her other reports, corporate compensation philosophy, compensation structures and levels for the LATAM CEO and other key executives, succession or contingency planning for the LATAM CEO and performance assessment of the LATAM CEO. The Finance Committee is responsible for financial policies and strategy, capital structure, monitoring policy compliance, tax optimization strategy and the quality and reliability of financial information. Finally, the Brand and Frequent Flyer Program Committee is responsible for brand strategies and brand building initiatives for the corporate and main business unit brands, the main characteristics of products and services for each of the main business units, frequent flyer program strategy and key program features and regular audit of brand performance.
On June, 2014 LATAM’s board of directors established a Risk Committee to oversee the creation, implementation and management of a risk matrix for the Company
Corporate Governance Practices
On March 31, 2014 LATAM Airlines Group filed the Company’s Corporate Practices Report prepared according to General Rule N° 341 of the Securities and Insurance Commission issued November 29, 2012. The reporting obligation stipulated in this rule is for practices in place as of December 31st of each year and the report must be presented no later than March 31st of the following year.
The report provided each year to the Commission must cover the following subjects:
D. Employees
The following table sets forth the number of employees in various positions at the Company.
Employees ending the period
Administrative
Sales
Operations
Cabin crew
Cockpit crew
We have a performance-related pay structure for our administrative, management and flight personnel (such as cabin crew members, airport and sales agents, call-center employees, and some back office employees) including performance-based bonuses and pay scales that reward foreign language proficiency among counter, technical and administrative personnel. During 2013, 93% of our employees were eligible to receive performance related bonus payments that are linked to personal, team and corporate performance. TAM executives participate in the same program described below. For other employees there is a profit sharing program, which is a variable pay program based on the Company’s financial performance.
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We provide our employees with medical insurance complementary to the coverage of the private health system, and also grant other benefits, such as free and discounted airline tickets, to our permanent employees.
A stock option compensation plan is offered to key senior executives. For a detailed description of the stock option compensation plan, please see Note 38 to our audited consolidated financial statements for the fiscal year ended December 31, 2013.
As required by Chilean law, we make obligatory contributions to the privatized pension fund system on behalf of our employees, but we do not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees. However, the pilots’ collective bargaining agreement includes a clause that permits resignation with severance payment, in case a pilot reaches a certain age and is still providing services to the company. In Brazil, TAM offers a private pension plan to its executives and pilots.
Long Term Incentive Compensation Program
On December 21, 2011, the extraordinary shareholders meeting approved a capital increase of 142,355,882 shares to a total of 488,355,791 shares. The same meeting designated 4,800,000 shares for purposes of a proposed employee stock option compensation plan. Those 4,800,000 shares represented a 0.98% of the total share capital after such capital increase. The shareholders’ meeting authorized our board of directors to elaborate the compensation plan. The 2011 Compensation Plan is aimed at promoting our interests by encouraging senior management employees to contribute substantially to our success, by motivating them with stock options.
The selection of employees for participation in the stock option plan was based on, among other criteria that the Board determined at the time of employment with the Company, the position they hold, their importance in earning profits, the responsibility of their position, the amount of equity managed, the ability to work as a team, performance, potential for development and importance within the Company given their education and experience.
As of March, 2015, Stock Option Contracts were issued by the Company to 46 employees of the Company and its subsidiaries for a total of 4,202,000 stock options. This stock option plan excludes members of the Cueto group, the LATAM Controlling Shareholder, that serve as senior management of the Company.
The Company’s shareholders approved the issuance of 1,500,000 shares at the Special Shareholders Meeting held June 11, 2013, among other matters. Those shares will be allocated to compensation plans for the employees of the Company and its subsidiaries (the “2013 Compensation Plan”).
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The general features of the 2013 Compensation Plan are:
No options have been granted under the 2013 Compensation Plan.
Training
There has been no significant change in the number of company employees between 2012 and 2014. There was also no significant variation between the positions held by such employees.
As of December 31, 2014, the Company had 776 temporary employees. Approximately 48% of these temporary employees worked in Chile, 50% in other Latin American countries and 2% in the rest of the world.
As of December 31, 2014, 97% of all company employees with permanent contracts are covered by collective agreements.
Labor Relations
We believe we generally maintain good relations with our employees and the unions, and expect to continue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect, or that we will not be subject to labor-related disruptions due to strikes, stoppages or walk-outs.
We usually negotiate longer-term labor contracts with the labor unions in anticipation of their scheduled expirations. Under Chilean law longer-term labor contracts are limited to a period of four years. In general, the expiration of our labor agreements with the several unions that represent our pilots and other personnel are staggered in a way that we avoid being in the position of having to renegotiate contract terms with substantially all of our pilots or other personnel at the same time.
In 2014, we renegotiated our collective bargaining agreement with LAN Express’ flight attendants union, which will be effective until 2018.
Additionally, in 2011 a union previously exclusive to cabin crew became general. These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union
In November 2014 the Company’s negotiation of a voluntary agreement with the association of pilots was suspended because the directive did not agree with the offer from the Company.
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These groups maintain relations with the Company, but do not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of each union.
In Argentina, the majority of LAN employees are members of sectorial unions. In December 2014, we entered into five salary agreements with unions representing LAN Argentina employees. Negotiations with the Mechanics’ Union are still ongoing. These negotiations take place annually due to need to make adjustments for inflation
LAN Peru is negotiating with the union of flight dispatchers, and is expected to conclude negotiations with a collective agreement during the first quarter of 2015. In Peru we have five other unions whose collective agreements are in force until 2016 (pilots), 2017 (cabin crew, aircraft technicians) and 2018 (airport workers).
Under Brazilian law, the validity of collective bargaining agreements is limited to two years. TAM’s collective bargaining agreements are valid for one year (for the economic clauses) and for two years (for social clauses). TAM has historically negotiated collective bargaining agreements with nine unions in Brazil— one crew flight union, which represents the functions of flying workers (pilots, copilots and flight attendants), and nine ground staff unions, which are TAM employees who exercise their duties on the ground to support TAM’s operations. In December 2013, TAM renegotiated collective bargaining agreements with nine unions, which included a wage increase of 7% for ground workers (ground handling) earning minimum wage, and an increase of 5.6% for other salaried ground workers and flying workers, and the inflation rate for the period was 5.6%. For the ground staff workers with salaries up to ten thousand dollars, the increase was 5.6% and for employees earning over R$ 10,000 the adjustment was R$ 560.0. During the negotiations there was no stoppage of employees or even strike action.
E. Share Ownership
As of January 31, 2015, the members of our Board of Directors and our executive officers as a group own 48.77% of our shares. See “Item 7. Controlling Shareholders and Related Party Transactions.”
For a description of stock options granted to our executive officers, see “—Employees—Long Term Incentive Compensation Program.”
A. Major Shareholders
The Cueto Group is LATAM’s controlling shareholder and it is comprised by Mr. Juan José Cueto Plaza (one of our directors), Mr. Ignacio Cueto Plaza (the CEO LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other family members. As of January 31, 2015, the Cueto Group owned 25.49% of LATAM Airlines Group’s common shares. The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a position to direct the management of the Company. The Cueto Group, which we also refer to as the “LATAM controlling shareholders,” have entered into a shareholder’s agreement with LATAM, TEP Chile and the TAM controlling shareholders. See “—Shareholders’ Agreements.”
Following our combination with TAM, the Amaro Group is also a major shareholder of LATAM Airlines Group. The Amaro Group, which we also refer to as the “TAM controlling shareholders,” are controlling shareholders of TAM, through their 100% ownership of TEP Chile and majority ownership of Holdco I voting shares, which owns 100% of the common shares of TAM. The Amaro Group’s members include our chairman Mauricio Rolim Amaro and our former director Maria Claudia Amaro. As of January 31, 2015, the Amaro Group owned 12.02% of LATAM Airlines Group’s common shares. The Amaro Group has entered into a shareholder’s agreement with LATAM and the LATAM controlling shareholders. The terms of this shareholders’ agreement require the LATAM controlling shareholders to vote to elect individuals nominated by TEP Chile as members of our board of directors. See “—Shareholders’ Agreements.”
In addition to these shareholders, there are two other major shareholder groups. As of January 31, 2015, the Bethia Group, which includes our director Carlos Heller Solari, owned 6.14% of our common shares and the Eblen Group, which includes our director Ramón Eblen Cádiz, owned 5.12% of our common shares.
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The table below sets forth the beneficial owners, as of January 31, 2015, of our common shares, including our controlling shareholders, other major shareholders and minority shareholders.
Shareholder
Cueto Group
Costa Verde Aeronautica S.A.
Inversiones Nueva Costa Verde Aeronautica Ltda.
Costa Verde Aeronautica SpA
Others
Amaro Group
TEP Chile S.A.
Bethia Group.
Axxion S.A.
Inversiones HS SpA.
Eblen Group.
Inversiones Andes S.A.
Inversiones PIA SpA.
All other minority shareholders
As of January 31, 2015, 7.66% of our capital stock was held in the form of ADSs, and 0.52% in the form of BDSs. Chilean pension funds held 17.63% of our capital stock and other minority investors held 25.44% in the form of common shares. It is not practicable for us to determine the number of ADSs or common shares beneficially owned in the United States. As of January 31, 2015, we had 1,638 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or the number of record holders in Chile. All of our shareholders have identical voting rights.
Shareholders’ Agreements
As described above under “Item 4. Information on the Company—History and Development of the Company—Combination of LAN and TAM,” following the combination of LAN and TAM in June 2012, TAM S.A. continues to exist as a subsidiary of Holdco I and a subsidiary of LATAM, and LAN Airlines S.A. has been redesignated as “LATAM Airlines Group S.A.”
Prior to the consummation of the business combination, LATAM Airlines Group and the LATAM controlling shareholders entered into several shareholders’ agreements with TAM, the TAM controlling shareholders (acting through TEP Chile) and Holdco I that establish agreements and restrictions relating to corporate governance in an attempt to balance LATAM Airlines Group’s interests, as the owner of substantially all of the economic rights in TAM, and the TAM controlling shareholders, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certain specified material corporate actions and decisions without prior supermajority approval of the shareholders and/or the board of directors of Holdco I or TAM. These shareholders’ agreements also set forth the parties’ agreement regarding the governance and management of the LATAM Airlines Group following the consummation of the business combination of LAN and TAM.
Governance and Management of LATAM Group
We refer to the shareholders’ agreement among the LATAM controlling shareholders and TEP Chile, which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Group, and voting and transfer of their respective LATAM Airlines Group common shares and TEP Chile’s voting shares of Holdco I, as the “control group shareholders’ agreement.” We refer to the shareholders’ agreement between us and TEP Chile, which sets forth our agreement concerning the governance, management and operation of the LATAM Group as the “LATAM Airlines Group-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Group following the effective time.
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This section describes the key provisions of the control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement. The description of these control group shareholders’ agreement and the LATAM Airlines Group-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the LATAM Airlines Group Board
Mr. Maurício Rolim Amaro was reelected to the LATAM Airlines Group board of directors in April 2014. If Mr. Amaro vacates this position for any reason within that two-year period, TEP Chile has the right to select a replacement to complete his term. Thereafter, LATAM Airlines Group’s board of directors will appoint any of its members as the chairman of LATAM Airlines Group’s board of directors, from time to time, in accordance with LATAM Airlines Group’s by-laws. Mrs. Maria Cláudia Oliveira Amaro was elected to the LATAM Airlines Group board of directors in June 2012, and resigned this position in September 2014. Also in September 2014, accordingly with Chilean law, Mr. Henri Philippe Reichstul was appointed by the board to fill her seat until the next general shareholders meeting. Mr. Reichstul will serve in this position until the next ordinary meeting of shareholders, in which the board of directors will have to be renewed and reelected in full.
Management of the LATAM Group
Mr. Enrique Cueto Plaza has served as CEO of LATAM (“CEO LATAM”) since June 2012. The CEO LATAM is the highest ranked officer of the LATAM Airlines Group and reports directly to the LATAM board of directors. The CEO LATAM is charged with the general supervision, direction and control of the business of the LATAM Airlines Group and certain other responsibilities set forth in the LATAM Airlines Group-TEP shareholders’ agreement. After any departure of the current CEO LATAM, our board of directors will select his or her successor after receiving the recommendation of the Leadership Committee.
Mr. Ignacio Cueto Plaza has served as CEO of LAN (“CEO LAN”) since June 2012. The CEO LAN reports directly to the CEO LATAM and has general supervision, direction and control of the passenger and cargo operations of the LATAM Group, excluding those conducted by Holdco I, TAM and its subsidiaries, and the international passenger business of the LATAM Group. The CEO LAN, together with Mr. Marco Antonia Bologna, the current the CEO of TAM (“CEO TAM”), are responsible for recommending a candidate to the CEO LATAM to serve as the head of the international passenger business of the LATAM Group (including both long haul and regional operations), who shall report jointly to the CEO LAN and the CEO TAM. The key executives of the LATAM Group (other than the CEO LATAM and those in the TAM Group) will be appointed by, and will report, directly or indirectly, to the CEO LATAM.
The head office of the LATAM Airlines Group continues to be located in Santiago, Chile.
Governance and Management of Holdco I and TAM
We refer to the shareholders’ agreement between us, Holdco I and TEP Chile, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, as the “Holdco I shareholders’ agreement” and to the shareholders’ agreement between us, Holdco I, TAM and TEP Chile, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time as the “TAM shareholders’ agreement.” The Holdco I shareholders’ agreement and the TAM shareholders’ agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the business combination of LAN and TAM.
This section describes the key provisions of the Holdco I shareholders’ agreement and the TAM shareholders’ agreement. The description of these Holdco I shareholders’ agreement and the TAM shareholders’ agreement summarized below and elsewhere in this annual report on Form 20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form 20-F.
Composition of the Holdco I and TAM Boards
The Holdco I shareholders’ agreement and TAM shareholders’ agreement generally provide for identical boards of directors and the same chief executive officer at Holdco I and TAM, with LATAM appointing two directors and TEP Chile appointing four directors (including the chairman of the board of directors). On April 30, 2014 Mr. Marco Antonio Bologna was named President of the Board of Directors of TAM S.A. replacing Mrs. Maria Cláudia Oliveira Amaro and on September 8th, 2014 Mrs. Maria Cláudia Oliveira Amaro resigned to her position as director of Holdco I. In her place, the board of directors appointed Mr. Henri Philippe Reichstul as a member of the board until the next general ordinary meeting of shareholders. A full renovation of the Board of Directors will take place no later than April 2015.
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The control group shareholders’ agreement provides that the persons elected by or on behalf of the LATAM controlling shareholders or the TAM controlling shareholders to our board of directors must also serve on the boards of directors of both Holdco I and TAM.
Management of Holdco I and TAM
The day-to-day business and affairs of Holdco I will be managed by the TAM Group CEO under the oversight of the board of directors of Holdco I. The day-to-day business and affairs of TAM will be managed by 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. Marco Bologna, currently the CEO of TAM, will be the initial CEO of Holdco I and TAM, or the “TAM Group CEO” and any successor CEO will be selected by LATAM from three candidates proposed by TEP Chile. The TAM Group CEO will have general supervision, direction and control of the business and operations of the TAM Group (other than the international passenger business of the LATAM Group) and will carry out all orders and resolutions of the board of directors of TAM. The initial chief financial officer of TAM, or the “TAM CFO,” has been jointly selected by LATAM and TEP Chile and any successor CFO will be selected by TEP Chile from three candidates proposed by LATAM The chief operating officer of TAM, or the “TAM COO,” and chief commercial officer of TAM, or the “TAM CCO,” will be jointly selected and recommended to the TAM board of directors by the TAM Group CEO and TAM CFO and approved by the TAM board of directors. These shareholders’ agreements also regulate the composition of the boards of directors of subsidiaries of TAM.
Following the combination, TAM continues to be headquartered in São Paulo, Brazil.
Supermajority Actions
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:
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Actions requiring supermajority shareholder approval include:
Voting Agreements, Transfers and Other Arrangements
Voting Agreements
The LATAM controlling shareholders and TEP Chile have agreed in the control group shareholders agreement to vote their respective LATAM Airlines Group common shares as follows:
The number of “exempted shares” of TEP Chile means that number of LATAM Airlines Group common shares which TEP Chile owns immediately after the effective time in excess of 12.5% of the outstanding LATAM Airlines Group common shares at such time as determined on a fully diluted basis.
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The parties to the Holdco I shareholders agreement and TAM shareholders agreement have agreed to vote their voting shares of Holdco I and shares of TAM so as to give effect to the agreements with respect to representation on the TAM board of directors discussed above.
Transfer Restrictions
Pursuant to the control group shareholders’ agreement, the LATAM Airlines Group controlling shareholders and TEP Chile are subject to certain restrictions on sales, transfers and pledges of the LATAM Airlines Group common shares and (in the case of TEP Chile only) the voting shares of Holdco I beneficially owned by them. Except for a limited amount of LATAM Airlines Group common shares, neither the LATAM Airlines Group controlling shareholders nor TEP Chile may sell any of its LATAM Airlines Group common shares, and TEP Chile may not sell its voting shares of Holdco I, until June 2015. Thereafter, sales of LATAM Airlines Group common shares by either party are permitted, subject to (i) certain limitations on the volume and frequency of such sales and (ii) in the case of TEP Chile only, TEP Chile satisfying certain minimum ownership requirements. After June 2022, TEP Chile may sell all of its LATAM Airlines Group common shares and voting shares of Holdco I as a block, subject to (x) approval of the transferee by the LATAM board of directors, (y) the condition that the sale not have an adverse effect and (z) a right of first offer in favor of the LATAM Airlines Group controlling shareholders, which we refer to collectively as “block sale provisions.” An “adverse effect” is defined in the control group shareholders agreement to mean a material adverse effect on our and Holdco I’s ability to own or receive the full benefits of ownership of TAM and its subsidiaries or the ability of TAM and its subsidiaries to operate their airline businesses worldwide. The LATAM Airlines Group controlling shareholders have agreed to transfer any voting shares of Holdco I acquired pursuant to such right of first offer to LATAM for the same consideration paid for such shares.
In addition, TEP Chile may sell all LATAM Airlines Group common shares and voting shares of Holdco I beneficially owned by it as a block, subject to satisfaction of the block sale provisions, after June 2015 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any 24-month period at two meetings (consecutive or not) of the shareholders of LATAM Airlines Group held at least 12 months apart and LATAM Airlines Group has not yet fully exercised its conversion option described below. A “release event” will occur if (i) a capital increase of LATAM Airlines Group occurs, (ii) TEP Chile does not fully exercise the preemptive rights granted to it under applicable law in Chile with respect to such capital increase in respect of all of its restricted LATAM Airlines Group common shares, and (iii) after such capital increase is completed, the individual designated by TEP Chile for election to the board of directors of LATAM Airlines Group with the assistance of the LATAM Airlines Group controlling shareholders is not elected to the board of directors of LATAM Airlines Group.
In addition, after June 2022 and after the occurrence of the full ownership trigger date (as described below under the “—Conversion Option” section), TEP Chile may sell all or any portion of its LATAM Airlines Group common shares, subject to (x) a right of first offer in favor of the LATAM Airlines Group controlling shareholders and (y) the restrictions on sales of LATAM Airlines Group common shares more than once in a 12-month period.
The control group shareholders agreement provides certain exceptions to these restrictions on transfer for certain pledges of LATAM Airlines Group common shares made by the parties and for transfers to affiliates, in each case under certain limited circumstances.
In addition, TEP Chile agreed in the Holdco I shareholders agreement not to vote its voting shares of Holdco I, or to take any other action, in support of any transfer by Holdco I of any equity securities or convertible securities issued by it or by any of TAM or its subsidiaries without our prior written consent.
Restriction on transfer of TAM shares
LATAM agreed in the Holdco I shareholders’ agreement not to sell or transfer any shares of TAM stock to any person (other than our affiliates) at any time when TEP Chile owns any voting shares of Holdco I. However, LATAM will have the right to effect such a sale or transfer if, at the same time as such sale or transfer, LATAM (or its assignee) acquires all the voting shares of Holdco I beneficially owned by TEP Chile for an amount equal to TEP Chile’s then current tax basis in such shares and any costs TEP Chile is required to incur to effect such sale or transfer. TEP Chile has irrevocably granted us the assignable right to purchase all of the voting shares of Holdco I beneficially owned by TEP Chile in connection with any such sale.
Conversion Option
Pursuant to the control group shareholders’ agreement and the Holdco I shareholders’ agreement, we have the unilateral right to convert our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I to the maximum extent allowed under law and to increase our representation on the TAM and Holdco I boards of directors if and when permitted in accordance with foreign ownership control laws in Brazil and other applicable laws if the conversion would not have an adverse effect (as defined above under the “—Transfer Restrictions” section).
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On or after June 2022, and after we have fully converted all of our shares of non-voting stock of Holdco I into shares of voting stock of Holdco I as permitted by Brazilian law and other applicable laws, we will have the right to purchase all of the voting shares of Holdco I held by the controlling shareholders of TAM for an amount equal to their then current tax basis in such shares and any costs incurred by them to effect such sale, which amount we refer to as the “sale consideration.” If we do not timely exercise our right to purchase these shares or if, after June 2022, we have the right under applicable law in Brazil and other applicable law to fully convert all the shares of non-voting stock of Holdco I beneficially owned by us into shares of voting stock of Holdco I and such conversion would not have an adverse effect but we have not fully exercised such right within a specified period, then the controlling shareholders of TAM will have the right to put their shares of voting stock of Holdco I to us for an amount equal to the sale consideration.
Acquisitions of TAM Stock
The parties have agreed that all acquisitions of TAM common shares by LATAM Airlines Group, Holdco I, TAM or any of their respective subsidiaries from and after the effective time of the business combination will be made by Holdco I.
B. Related Party Transactions
We have engaged in a variety of transactions with our affiliates, including entities owned or controlled by certain of our controlling shareholders. In the ordinary course of our business we render to and receive from related companies services of various types, including aircraft leases, aircraft interchanges, freight transportation and reservation services.
It is our policy not to engage in any transaction with or for the benefit of any shareholder or member of the board of directors, or any entity controlled by such a person or in which such a person has a substantial economic interest, unless the transaction is related to our business and the price and other terms are at least as favorable to us as those that could be obtained on an arm’s-length basis from a third party. Such transactions, none of which is individually material, are summarized in Note 35 to our audited consolidated financial statements for the fiscal year ended December 31, 2014.
A. Consolidated Financial Statements and Other Financial Information
See “Item 3. Key Information—Selected Financial Data,” “Item 18. Financial Statements” and pages F-1 through F-194.
Legal and Arbitration Proceedings
We are involved in routine litigation and other proceedings relating to the ordinary course of our business.
In February 2006 the 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 €800 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$10.9 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.
On September 3, 2013, CADE published its decision to impose a fine of US$51.020 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$1.020 million and US$510,000.00 respectively. On December 5, 2013 ABSA filed its application for Administrative Reconsideration before CADE. On December 19, 2014, CADE issued a new decision which reduced the fine against ABSA to US$ 12,580,835 (based on an exchange rate of US$ 1 = R$ 2.6). CADE also reduced the fines against ABSA’s Director and employees to US$ 251,616 and US$ 125,800, respectively. ABSA is evaluating its option of a formal judicial appeal proceeding. Because ABSA continues to evaluate this judicial process, we cannot predict the ultimate outcome of this matter at this time.
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. As previously announced, LAN Cargo and ABSA reached a settlement agreement with the class action plaintiffs / non-class action claimants in the United States and in Canada.
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Civil actions have also been initiated against many airlines, including LAN Cargo and LATAM Airlines Group, in various European countries (Great Britain, Norway, Holland and Germany). The activity and progress of said civil actions is limited, in that they are directly contingent upon the pending appeal before the General Court in Luxembourg. Given the pending decision of the General Court and a potential subsequent appeal to the Court of Justice of the European Union, we cannot predict the ultimate outcome of these cases at this time.
Authorities in Chile and the United States continue to investigate payments by LATAM Airlines Group S.A. (formerly LAN Airlines S.A.) in 2006-2007, to a consultant who assisted in the resolution of labor issues in Argentina. In connection with the above, the Company has hired lawyers in Chile and the United States, and in June 2011 voluntarily reported this situation to the Securities and Exchange Commission and the Justice Department of the United States. The Company continues to cooperate with the Chilean and U.S. investigations, including the review by the U.S. authorities of any potential violations of applicable U.S. laws and regulations. Presently the Company cannot predict the results in the matter, nor estimate or range the potential losses or risks that may eventually result from the way in which these investigations are finally resolved.
Legal proceedings involving TAM
TAM Linhas Aéreas is party to one action filed by relatives of victims of an accident that occurred in October 1996 involving one of its Fokker 100 aircraft which crashed during departure, in addition to 22 actions filed by residents of the region of where the accident occurred, who are claiming pain and suffering, and a class action related to this crash. Any damages resulting from the aforementioned legal claims are covered by the civil liability guarantee provided for in TAM’s insurance policy with ItaúUnibancoSeguros S.A. We believe that the cap of US $400 million in that insurance policy is sufficient to cover any potential penalties and judicial or extrajudicial agreements arising as a result of this matter.
Insurance coverage has been sufficient to cover the liabilities arising from an accident that occurred in July 2007 involving an Airbus A320 aircraft from TAM Linhas Aereas. Settlements have been made directly between the insurance company and the victims’ families. As of December 31, 2013, approximately 196 settlements have occurred and others are under negotiation between the insurance company and victims’ families. Management believes that the insurance coverage is adequate and that TAM will not incur any expenses that were not contemplated by the scope of the insurance policy that would result in TAM’s obligation to pay damages.
TAM Linhas Aereas filed an ordinary action with a request for injunctive relief for non-payment of the Airline Workers Fund, a tax charged monthly at the rate of 2.5% of an airline’s total payroll. Payment of the tax credit is suspended by virtue of the injunctive relief granted in TAM’s favor. Currently, judgment is pending on an appeal that TAM lodged challenging the initial decision (which was ruled in favor of the INSS). In 2004 and 2011, the INSS issued an assessment notice tolling the Statute of Limitations of the social security credit as a result of TAM Linhas Aereas’ non-payment of the Airline Workers Fund. The administrative proceedings have been suspended until completion of the judicial process. The approximate adjusted value of this proceeding as of December 31, 2012 was R$ 271 million. In the opinion of our legal advisors, the chance of losing in this proceeding is possible. Assuming payment of this tax is required by law, we have established a provision in the amount of R$271 million pending the final outcome of the matter.
TAM Linhas Aereas is a plaintiff in an action filed against the Brazilian government in 1993 seeking damages for the break-up of an air transport concession agreement that resulted in the freezing of TAM’s prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period. The process is currently being heard before the Federal Regional Court and judgment is pending an appeal by TAM requesting clarification of the initial decision. The estimated value of the action is R$245 million, based on a calculation made by an expert witness of the court. This sum is subject to delinquent interest since September 1993 and inflation adjustment since November 1994. Based on the opinion of TAM’s legal advisors, and recent rulings handed down by the Brazilian Supreme Court 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. We have not recognized these credits in our financial statements and will only do so if and when the aforementioned decision is final.
TAM Linhas Aereas filed an ordinary claim, with a request for early judgment, in relation to a dispute concerning the legality of charging 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. The total amount involved, adjusted for inflation, as of December 31, 2012 totaled R$1,146 million.
In addition, one administrative proceeding had been filed against TAM Linhas Aéreas concerning the alleged failure to pay an Industrialized Products Tax (“IPI”) and Import Tax (“II”) due on imported aircraft. In response, we filed the appropriate challenges on the basis that no federal tax should be payable on the imported aircraft because it is leased aircraft. The total amount involved in this administrative proceeding is R$770 million. In April 2013, the Conselho Administrativo de Recursos Fiscais (“CARF”) ruled the case in our favor and definitively released TAM from paying the initial debt.
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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 of Oficio Circular No. 856 issued on October 17, 2014 by the Chilean Superintendency of Securities and Insurance. If there is no net income in a given year, 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’s by-laws, the annual cash dividend is approved by the shareholders at the annual ordinary shareholders’ meeting held between February 1 and April 30 of the year following the year with respect to which the dividend is proposed. All outstanding common shares are entitled to share equally in all dividends declared by LATAM, unless the shares have not been fully paid by the shareholder after being subscribed.
Holders of ADSs will be entitled to receive dividends on the underlying common shares to the same extent as holders of common shares. Holders of ADRs on the applicable record dates will be entitled to receive dividends paid on the common shares represented by the ADSs evidenced by such ADRs. Dividends payable to holders of ADSs will be paid by us to the depositary in Chilean pesos and remitted by the depositary to such holders net of foreign currency conversion fees and expenses of the depositary and will be subject to Chilean withholding tax currently imposed at a rate of 35% (subject to credits in certain cases as described under “Item 10. Additional Information—Taxation—Cash Dividends and Other Distributions”). Owners of the ADSs will not be charged any dividend remittance fee by the depositary with respect to cash dividends.
Chilean law requires that holders of shares of Chilean companies that are not residents of Chile register as foreign investors under one of the foreign investment regimes established by Chilean law in order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market (Mercado Cambiario Formal). Under our Foreign Investment Contract, the depositary, on behalf of ADS holders, will be granted access to the Formal Exchange Market to convert cash dividends from pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile.
B. Significant Changes
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A. Offer and Listing Details
The principal trading market for our common shares is the SSE. The common shares have been listed on the SSE under the symbol “LAN” since 1989, and the ADSs have been listed on the NYSE under the symbol “LFL” since November 7, 1997. The common shares also trade on the Bolsa de Valores de Valparaíso and the Bolsa Electrónica de Chile. On June 22nd, 2012 the common shares additionally started to be traded on the Brazilian Stock Exchange (“Bovespa”) under the symbol LATM11. The outstanding ADSs are identified by the CUSIP number 501723100. The following table sets forth, for the periods indicated, the high and low closing sale prices on the 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
2012(*)
Quarters:
First
Second
Third
Fourth
Annual:
Annual 2013
Months:
Annual 2014
March
Source: Santiago Stock Exchange, the New York Stock Exchange and the Bovespa
As of January 31, 2015, a total of 545,558,101 million common shares were outstanding, including common shares represented by ADSs.
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B. Plan of Distribution
C. Markets
Trading
The Chilean stock market, which is regulated by the SVS under Law 18,045 of October 22, 1981, as amended, which we refer to as the Securities Market Law, is one of the most developed among emerging markets, reflecting the particular economic history and development of Chile. The Chilean government’s policy of privatizing state-owned companies, implemented during the 1980s, led to an expansion of private ownership of shares, resulting in an increase in the importance of stock markets. Privatization extended to the social security system, which was converted into a privately managed pension fund system. These pension funds have been allowed, subject to certain limitations, to invest in stocks and are currently major investors in the stock market. Some market participants, including pension fund administrators, are highly regulated with respect to investment and remuneration criteria, but the general market is less regulated than the U.S. market with respect to disclosure requirements and information usage.
The SSE is Chile’s principal exchange and accounts for approximately 86.87% of securities traded in Chile. Approximately 12.91% of equity trading is conducted on the Chilean Electronic Stock Exchange, an electronic trading market created by banks and non-member brokerage houses. The remaining equity trading is conducted on the Valparaíso Stock Exchange.
Equities, closed-end funds, fixed-income securities, short-term and money market securities, gold and U.S. dollars are traded on the SSE. In 1991, the SSE initiated a futures market with two instruments: U.S. dollar futures and Selective Shares Price Index, or IPSA, futures. Securities are traded primarily through an open voice auction system; a firm offers system or daily auctions. Trading through the open voice system occurs on each business day between 9:30 a.m. to 4:30 p.m. The SSE has an electronic system of trade, called Telepregón HT, which operates continuously for stocks trading in high volumes from 9:30 a.m. to 4:00 p.m. (or 5:00 p.m., depending on the period of the year). The Chilean Electronic Stock Exchange operates continuously from 9:30 a.m. to 4:30 p.m. (or 5:30 p.m., depending on the period of the year) on each business day. In February 2000, the SSE Off-Shore Market began operations. In the Off-Shore Market, publicly offered foreign securities are traded and quoted in U.S. dollars.
Bovespa is a Brazilian publicly-held company, created in 2008, through the integration between the São Paulo Stock Exchange (Bolsa de Valores de São Paulo) and the Brazilian Mercantile & Futures Exchange (Bolsa de Mercadorias e Futuros).
Bovespa is the most important Brazilian institution to intermediate equity market transactions and the only securities, commodities and futures exchange in Brazil. Trading on such exchanges is limited to member brokerage firms and to limited number of authorized non-members. LATAM’s common shares are listed on the Bovespa.
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is smaller and less liquid than major U.S. and European securities markets. Any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, but in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, governmental entities or one principal shareholder.
The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and Brazilian corporation law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the National Monetary Council; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
Trading through Bovespa occurs on each business day between 10:00 a.m. to 4:20 pm (Brazilian local time).
D. Selling Shareholders
E. Dilution
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This Item reflects recent legal amendments effected by Chilean Law No. 20,382 on Corporate Governance, which was enacted on October 20, 2009, and came into effect on January 1, 2010, and Chilean Law No. 20,552, which modernize and encourage competition in the financial system, enacted on November 6, 2011 and into effect on December 17, 2011.
A. Share Capital
B. Memorandum and Articles of Association
Set forth below is information concerning our share capital and a brief summary of certain significant provisions of our by-laws and Chilean law. This description contains all material information concerning the common shares but does not purport to be complete and is qualified in its entirety by reference to our by-laws, the Chilean Corporation Law and the Securities Market Law, each referred to below. For additional information regarding the common shares, reference is made to our by-laws, a copy of which is included as Exhibit 1.1 to this annual report on Form 20-F.
Organization and Register
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. 31.759 on December 31, 1983, and registered on page 20,341, No. 11,248 of the Chilean Real Estate and Commercial Registrar (Registro de Comercio del Conservador de Bienes Raices y Comercio de Santiago) for the year 1983. Our corporate purpose, as stated in our by-laws, is to provide a broad range of transportation and related services, as more fully set forth in Article Four thereof.
Shareholders’ rights in a Chilean company are generally governed by the company’s by-laws and the Chilean Corporation Law. Article 22 of the Chilean Corporation Law states that the purchaser of shares of a company implicitly accepts its by-laws and any prior agreements adopted at shareholders’ meetings. Additionally, the Chilean Corporation Law regulates the government and operation of corporations (“sociedades anónimas,” or S.A.) and provides for certain shareholder rights. Article 137 of the Chilean Corporation Law provides that the provisions of the Chilean Corporation Law take precedence over any contrary provision in a corporation’s by-laws. The Chilean Corporation Law and our by-laws also provide that all disputes arising among shareholders in their capacity as such or between us or our administrators and the shareholders may either be submitted to arbitration in Chile or to the courts of Chile at the election of the plaintiff initiating the action. Despite the foregoing, a recent legal amendment has forbidden certain individuals (directors, senior managers, administrators and main executives of the corporation, and any shareholder that directly or indirectly holds shares whose book or market value exceed 5,000 UF at the moment of filing of the action) from submitting such action before the ordinary courts, thus obligating them to proceed with arbitration in all situations. Finally, Decree-Law No. 3,500 on Pension Fund Administrators, which allows pension funds to invest in the stock of qualified corporations, indirectly affects corporate governance and prescribes certain rights of shareholders. The Chilean Corporation Law sets forth the rules and requirements under which a corporation is deemed to be “publicly held.” Article 2 of the Chilean Corporation Law defines publicly held corporations as corporations that register their shares with the Registro de Valores (Securities Registry) of the SVS, either voluntarily or pursuant to a legal obligation. In addition, Article 5 of the Chilean Securities Market Law indicates which corporation’s shares must be registered with the Securities Registry:
The framework of the Chilean securities market is regulated by the SVS under the Securities Market Law and the Chilean Corporation Law, which imposes certain disclosure requirements, restricts insider trading, prohibits price manipulation and protects minority investors. In particular, the Securities Market Law establishes requirements for public offerings, stock exchanges and brokers and outlines disclosure requirements for corporations that issue publicly offered securities.
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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 SVS and the Chilean stock exchanges on which the shares are listed. Since the ADRs are deemed to represent the shares underlying the ADSs, transactions in ADRs will be subject to those reporting requirements. Among other matters, the beneficial owners of ADSs that directly or indirectly hold 10% or more of the subscribed capital of LATAM Airlines Group, or that reach or exceed such percentage through an acquisition, are required to report to the SVS and the Chilean stock exchanges, the day following the event:
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 SVS regulations, persons or entities that intend to acquire control, whether directly or indirectly, of a publicly traded company, must follow certain notice requirements, regardless of the acquisition vehicle or procedure or whether the acquisition will be made through direct subscriptions or private transactions. In the first place, the potential acquirer must send a written communication to the target corporation, any companies controlling or controlled by the target corporation, the SVS and the Chilean stock exchanges on which the target’s securities are listed, stating, among other things, the person or entity purchasing or selling and the price and conditions of any negotiations. Subsequently, the potential acquirer 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 acquirer’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 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 SVS regulations provide that the following transactions shall be carried out through a tender offer:
Article 200 of the Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of twelve months from the date of the transaction that granted it control of the publicly traded company, a number of shares equal to or higher than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on the floor of a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
Title XV of the Securities Market Law sets forth the basis for determining what constitutes a controlling power, a direct holding and a related party.
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Capitalization
Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in the company’s share capital. When an investor subscribes issued shares, the shares are registered in that investor’s name even without payment, and the investor is treated as a shareholder for all purposes except with regard to receipt of dividends and return of capital, provided that the shareholders may, by amending the by-laws, also grant the right to receive dividends of distribution of capital despite not having paid for the subscribed shares. The investor becomes eligible to receive dividends once it has paid for the shares, or, if it has paid for only a portion of such shares, it is entitled to receive a corresponding pro rata portion of the dividends declared with respect to such shares, unless the company’s by-laws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on the appropriate stock exchange, and it has a cause of action against the investor to recover the difference between the subscription price and the price received for the sale of those shares at auction. However, until such shares are sold at auction, the investor continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital, as noted above). Regarding shares issued but not paid for within the period determined by the extraordinary shareholders’ meeting for their payment (which period cannot exceed three years from the date of such shareholders’ meeting), until January 1, 2010 they were canceled and no longer available for issuance by us. As of January 1, 2010, the board of directors of 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, 2015, our share capital consisted of 545,558,101 common shares, all of which were subscribed and fully paid. Chilean law recognizes the right of corporations to issue common and preferred shares. To date, we have issued and are authorized by our shareholders to issue only common shares. Each share of stock is entitled to one vote. Pursuant to two employee compensation plans: (i) 2011: approved by extraordinary shareholders’ meetings held on December 21, 2011 and September 4, 2012, 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 December 21, 2016; and (ii) 2013: approved by extraordinary shareholders’ meeting held on June 11, 2013, the issuance of the shares for this compensation plan has been authorized but has not been made effective, as such issuance is subject to the exercising of rights granted to certain employees that expire on November 15, 2017.
Preemptive Rights and Increases in Share Capital
The Chilean Corporation Law requires Chilean companies to offer existing shareholders the right to purchase a sufficient number of shares to maintain their existing percentage of ownership in a company whenever that company issues new shares for cash, except for up to 10% of the capital increase which may be designated to employee compensation pursuant to article 24 of the Corporation Law. Under this requirement, any preemptive rights will be offered by us to the depositary as the registered owner of the common shares underlying the ADSs, but holders of ADSs and shareholders located in the United States will not be allowed to exercise preemptive rights with respect to new issuances of shares by us unless a registration statement under the Securities Act is effective with respect to those common shares or an exemption from the registration requirements thereunder is available.
We intend to evaluate at the time of any preemptive rights offering the costs and potential liabilities associated with the preparation and filing of a registration statement with the SEC, as well as the indirect benefits of enabling the exercise by the holders of ADSs and shareholders located in the United States of preemptive rights and any other factors we consider appropriate at the time. No assurances can be given that any registration statement would be filed. If preemptive rights are not made available to ADS holders, the depositary may sell those holders’ preemptive rights and distribute the proceeds thereof if a secondary market for such rights exists and a premium can be recognized over the cost of such sale. In the event that the depositary does not sell such rights at a premium over the cost of any such sale, all or certain holders of ADRs may receive no value for the preemptive rights. The inability of holders of ADSs to exercise preemptive rights in respect of common shares underlying their ADSs could result in a change in their percentage ownership of common shares following a preemptive rights offering.
Under Chilean law, preemptive rights are freely exercisable, transferable or waived by shareholders during a thirty-day period commencing upon publication of the official notice announcing the start of the preemptive rights period in the newspaper designated by the shareholders’ meeting. The preemptive right of the shareholders is the pro rata amount of the shares registered in their name in the shareholders’ registry of 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 such thirty-day period (except for shares as to which preemptive rights have been waived), Chilean companies are not permitted to offer any newly issued common shares for sale to third parties. For that thirty-day period and an additional thirty-day period, Chilean publicly held corporations are not permitted to offer any unsubscribed common shares for sale to third parties on terms that are more favorable to the purchaser than those offered to shareholders. At the end of such additional thirty-day period, Chilean publicly held corporations are authorized to sell non-subscribed shares to third-parties on any terms, provided they are sold on a Chilean stock exchange.
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Our by-laws provide for a board of nine directors. Compensation to be paid to directors must be approved by vote at the annual shareholders’ meeting. We hold elections for all positions on the board of directors every two years. Under our by-laws, directors are elected by cumulative voting. Each shareholder has one vote per share and may cast all of his or her votes in favor of one nominee or may apportion his or her votes among any number of nominees. These voting provisions currently ensure that a shareholder owning more than 10% of our outstanding shares is able to elect at least one representative to our board of directors.
Under the Chilean Corporation Law, transactions of a publicly-traded company with a “related” party must be conducted on an arm’s-length basis and must satisfy certain approval and disclosure requirements which are different from the ones that apply to a privately-held company. The conditions apply to the publicly-traded company and to all of its subsidiaries.
These transactions include any negotiation, act, contract or operation in which the publicly-traded company intervenes together with either (i) parties which are legally deemed related pursuant to article 100 of the Chilean Securities Market Law, (ii) a director, senior manager, administrator, main executive or liquidator of the company, either on their own behalf or on behalf of a third party, including those individuals’ spouses or close relatives, (iii) companies in which the foregoing individuals own at least 10% (directly or indirectly), or in which they serve as directors, senior managers, administrators or main executives (iv) parties indicated as such in the publicly-traded company’s by-laws, or identified by the directors’ committee, or (v) those who have served as directors, senior managers, administrators, main executives or liquidators of the counterparty in the last eighteen months and are now serving in one of those positions at the publicly-traded company.
Corporations may enter into transactions with related parties if (i) the transaction is in the interest of the corporation, (ii) the transaction is made on an arm’s-length basis at market conditions, (iii) the individuals involved in the transactions report them immediately to the board, (iv) the transaction is approved after a reasoned explanation by the majority of the board, excluding those directors or liquidators that are involved in the transaction (who shall, nonetheless, render an opinion on the matter if required by the board), (v) the decisions of the board is disclosed at the next shareholders’ meeting, and (vi) in case the majority of the board is disqualified to vote, the majority of the non-involved directors have approved the transaction, or two thirds of the voting shares have approved the transaction).
If as noted in clause (vi) of the preceding paragraph, the transaction is to be approved by the shareholder’s meeting, the following additional rules apply: (i) the board shall appoint an independent appraiser that shall report to the shareholders on the transaction; (ii) the director’s committee or the non-involved directors may appoint a second independent appraiser; (iii) the appraiser’s reports shall be made available for fifteen days; (iv) the receipt and availability of the reports shall be disclosed as a material fact; (iv) directors shall render an opinion on the transaction within five business days after receiving the reports.
Transactions which do not meet the foregoing requirements are valid and enforceable, but neither the corporation nor its shareholders shall have a cause of action to sue the infringing party for reimbursement on behalf of the corporation, for a total of the benefits reported to the interested party, in addition to indemnification for the damages caused. In such proceedings, the defendant shall prove that the transaction met the legal requirements.
The Chilean Corporation Law sets forth a number of exceptions to the foregoing rules. In the following situations, transactions with related parties may be carried out without complying with the foregoing rules: (i) if a transaction does not involve a substantial amount (if it does not exceed 1.0% of the net worth of the company and does not exceed the equivalent of 2,000 UF or approximately US$96,554 as of the date of this annual report on Form 20F) unless such a transaction exceeds 20,000 UF (for this calculation all similar transactions carried out within a consecutive 12-month period between the same parties or for the same subject matter, shall be deemed as a single transaction), (ii) transactions which according to the policies determined by the board of directors, are deemed to be within the ordinary course of business (the determination of such policies shall be disclosed as a material fact and made available to shareholders), and (iii) if the counterparty is an entity in which the publicly-traded company has, directly or indirectly, at least a 95.0% ownership. As per the exemption indicated in (ii) above, on December 29, 2009, the Board of Directors of 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’s by-laws further provide that the ordinary annual meeting of shareholders must take place between February 1 and April 30. The shareholders at the ordinary annual meeting approve the annual financial statements, including the report of our auditors, the annual report, the dividend policy and the final dividend on the prior year’s profits, elect the board of directors (in our case, every two years or earlier if a vacancy occurs) and approve any other matter that does not require an extraordinary shareholders’ meeting. The most recent extraordinary meeting of our shareholders was held on June 11, 2013, and the most recent ordinary annual meeting of our shareholders was held on April 29, 2013.
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Extraordinary shareholders’ meetings may be called by the board of directors, if deemed appropriate, and ordinary or extraordinary shareholders’ meetings must be called by the board of directors when requested by shareholders representing at least 10.0% of the issued voting shares or by the SVS. In addition, as from January 1, 2010 there are two new rules in this regard: (i) the SVS may directly call for an extraordinary shareholders’ meeting in case of a publicly-traded companies, and (ii) any kind of shareholders’ meeting may be self-convened and take place if all voting shares attend, regardless of the fulfillment of the notice and other type of procedural requirements.
Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago, Chile) designated by the shareholders at their annual meeting and, if the shareholders fail to make such designation, the notice must be published in the Chilean Official Gazette pursuant to legal requirements. The first notice must be published not less than fifteen days and not more than twenty days in advance of the scheduled meeting. Notice also must be mailed not less than fifteen days in advance of the meeting to each shareholder and to the SVS and the Chilean stock exchanges. Currently, we publish our official notices in the newspaper La Tercera (available online at www.latercera.com).
The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing a majority of our issued common shares. If that quorum is not reached, the meeting can be reconvened within forty-five days, and at the second meeting the shareholders present are deemed to constitute a quorum regardless of the percentage of the common shares that they represent.
Only shareholders registered with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his or her proxy to attend and vote on his or her behalf. Proxies addressed to us that do not designate a person to exercise the proxy are taken into account in order to determine if there is a sufficient quorum to hold the meeting, but the shares represented thereby are not entitled to vote at the meeting. The proxies must fulfill the requirements set forth by the Chilean Corporation Law and its regulatory norms. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed.
The following matters can only be considered at an extraordinary shareholders’ meeting:
The matters referred to in the first seven items listed above may only be approved at a meeting held before a notary public, who shall certify that the minutes are a true record of the events and resolutions of the meeting.
The by-laws establish that resolutions are passed at shareholders’ meetings by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. However, under the Chilean Corporation Law, the vote of a two-thirds majority of the outstanding voting shares is required to approve any of the following actions:
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Amendments to the by-laws that have the effect of establishing, modifying or eliminating any special rights pertaining to any series of shares require the consenting vote of holders of two-thirds of the shares of the affected series. As noted above, 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 the fifteen-day period before a scheduled meeting. No later than the first notice summoning an ordinary 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 provide a copy of the annual report and the financial statements of the company. However, the SVS may authorize companies that have a large number of shareholders to limit the sending of such documents only to those shareholders who have a number of shares exceeding a certain number, and, in any case, to any shareholder who has requested a written notice. Shareholders who do not fall into this category but who request it must be sent a copy of our annual report. In addition to these requirements, we regularly have provided, and currently intend to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend for shareholder approval. See “—Dividend and Liquidation Rights” below.
The Chilean Corporation Law provides that, whenever shareholders representing 10% or more of the issued voting shares so request, a Chilean company’s annual report must include such shareholders’ comments and proposal in relation to the company’s affairs, together with the comments and proposals set forth by the directors’ committee. Similarly, the Chilean Corporation Law provides that whenever the board of directors of a publicly held corporation convenes an ordinary meeting of the shareholders and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be included, together with the comments and proposals set forth by the directors’ committee.
Dividend and Liquidation Rights
In accordance with the Chilean Corporation Law, 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.
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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 be required to receive a dividend in cash. See “—Preemptive Rights and Increases in Share Capital” above.
Dividends that are declared but not paid within the appropriate time period set forth in the Chilean Corporation Law (as to minimum dividends, thirty days after declaration; as to additional dividends, the date set for payment at the time of declaration) are adjusted to reflect the change in the value of the UF. The UF is a daily indexed, Chilean peso-denominated accounting unit designed to discount the effect of Chilean inflation and it is based on the previous month’s inflation rate as officially determined. Such dividends also accrue interest at the then-prevailing rate for UF-denominated deposits during such period. The right to receive a dividend lapses if it is not claimed within five years from the date such dividend is payable. After that period, the amount not claimed is given to a non-profit organization, the Junta Nacional de Cuerpos 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 sixty days from the date of that meeting. If the shareholders reject the new financial statements, the entire board of directors is deemed removed from office and a new board is to be elected at the same meeting. Directors who approved such financial statements are disqualified for re-election for the ensuing period.
Right of Dissenting Shareholders to Tender Their Shares
The Chilean Corporation Law provides that, upon the adoption at an extraordinary meeting of shareholders of any of the resolutions or if it takes place any of the situations enumerated below, dissenting or affected shareholders acquire the right to withdraw and to compel the company to repurchase their shares, subject to the fulfillment of certain terms and conditions. However, such right shall be suspended if we are declared bankrupt or are subject to a creditor’s agreement pursuant to Title XII of Book IV of the Commerce Code. In the case of holders of ADRs, however, in order to exercise such rights, holders of ADRs would be required to first withdraw the common shares represented by the ADRs pursuant to the terms of the deposit agreement. Such holders of ADRs would need to perfect the withdrawal of the common shares on or before the fifth business day prior to the date of the meeting.
“Dissenting shareholders” are defined as those who attend a shareholders’ meeting and vote against a resolution which results in the withdrawal right, or, if absent at such a meeting, those who state in writing to the company their opposition to such resolution within the following thirty days. Dissenting shareholders must perfect their withdrawal rights by tendering their stock to the company within thirty days after adoption of the resolution.
The price paid to a dissenting shareholder of a publicly held corporation is the weighted average of the sales prices for the shares as reported on the Chilean stock exchanges on which the shares are quoted for the two-month period preceding the event giving rise to the withdrawal right. If, because of the volume, frequency, number and diversity of the buyers and sellers, the SVS determines that the shares are not shares actively traded on a stock exchange (acciones de transacción bursátil), the price paid to the dissenting shareholder is the book value. Book value for this purpose equals paid capital plus reserves and profits, less losses, divided by the total number of subscribed shares (whether entirely or partially paid). For the purpose of making this calculation, the last annual balance sheet is used and adjusted to reflect inflation up to the date of the shareholders’ meeting that gave rise to the withdrawal right.
The resolutions and situations that result in a shareholder’s right to withdraw are the following:
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In addition, shareholders of publicly held corporations have the right to withdraw if a person acquires two-thirds or more of the outstanding shares of such corporation with the right to vote (except as a result of other shareholders not having subscribed and paid a capital increase) and does not make a tender offer for the remaining shares within thirty days after acquisition.
Under Article 69(bis) of the Chilean Corporation Law, the right to withdraw also is granted to shareholders (other than pension funds that administer private pension plans under the national pension law), under certain terms and conditions, if a company were to become controlled by the Chilean government, directly or through any of its agencies, and if two independent rating agencies downgrade the rating of its stock from first class because of certain actions specified in Article 69(bis) undertaken by the company or the Chilean government that affect negatively and substantially the earnings of the company. Shareholders must perfect their withdrawal rights by tendering their shares to the company within thirty days of the date of the publication of the new rating by two independent rating agencies. If the withdrawal right is exercised by a shareholder invoking Article 69(bis), the price paid to the dissenting shareholder shall be the weighted average of the sales price for the shares as reported on the stock exchanges on which the company’s shares are quoted for the six-month period preceding the publication of the new rating by two independent rating agencies. If, as previously described, the SVS determines that the shares are not actively traded on a stock exchange, the price shall be the book value calculated as described above.
There is no legal precedent as to whether a shareholder that has voted both for and against a proposal (such as the depositary) may exercise withdrawal rights with respect to the shares voted against the proposal. As such, there is doubt as to whether holders of ADRs who have not surrendered their ADRs and withdrawn common shares on or before the fifth business day prior to the shareholder meeting will be able to exercise withdrawal rights either directly or through the depositary with respect to the shares represented by ADRs. Under the provisions of the deposit agreement the depositary will not exercise these withdrawal rights.
The circumstance indicated above regarding ownership in excess of 95% by the controlling shareholder creates not only a withdrawal right for the remaining minority shareholders, but as of January 1, 2010, it also creates a “squeeze out” right by the controlling shareholder with respect to those same shareholders (granting a call option by means of which the controlling shareholder may buy-out the existing ownership participations pursuant to the provisions of article 71 bis of the Corporation Law).
Registration and Transfers
TheDepósito Central de Valores, (“DCV”), acts as LATAM Airlines Group’s registration agent. In the case of jointly owned common shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.
C. Material Contracts
Boeing
Boeing 767-300 Fleet
On May 9, 1997, we entered into the Aircraft General Terms Agreement with The Boeing Company (“AGTA”), applicable to all Boeing aircraft contracted for purchase from The Boeing Company.
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On January 30, 1998, we entered into Purchase Agreement No. 2126 with The Boeing Company (“Purchase Agreement No. 2126”) to acquire two Boeing 767-300 passenger aircraft.
On November 11, 2004, we entered into supplemental agreement No. 16 to the Purchase Agreement No. 2126 to acquire one additional Boeing 767-300 freighter aircraft and three Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$140,000,000.
On April 28, 2005, we entered into supplemental agreement No. 20 to the Purchase Agreement No. 2126 to acquire two additional Boeing 767-300 freighter aircraft and one Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$300,000,000.
On July 20, 2005, we entered into supplemental agreement No. 21 to the Purchase Agreement No. 2126 to acquire three Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$410,000,000.
On March 31, 2006, we entered into supplemental agreement No. 22 to the Purchase Agreement No. 2126 to acquire three Boeing 767-300 aircraft. Furthermore, we converted two Boeing 767-300 freighter aircraft to two Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$430,000,000.
On December 14, 2006, we entered into supplemental agreement No. 23 to the Purchase Agreement No. 2126 to acquire three additional Boeing 767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$460,000,000.
On November 10, 2008, we entered into supplemental agreement No. 24 to the Purchase Agreement No. 2126 to acquire four additional Boeing 767-300 passenger aircraft and two purchase rights for Boeing 767-300 aircraft. Two of these aircraft were delivered in 2011, while the other two aircraft have a scheduled delivery date in 2012. The estimated gross value (at list prices) of these aircraft was US$636 million.
On March 22, 2010, we entered into supplemental agreement No. 28 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of ten 787-8 aircraft, substitute four aircraft from 787-916 to 787-816 and substitute three 767-316ER to 767-316F freighter aircraft. Moreover, on November 10, 2010, we entered into supplemental agreement No. 29 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of three Aircraft and substitute those three aircraft from 767-316F to 767-316ER.
On February 15, 2011, we entered into supplemental agreement No.30 to the Purchase Agreement No.2126 to acquire three additional Boeing 767-300 passenger aircraft. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$510 million.
On May 10, 2011, we entered into supplemental agreement No.31 to the Purchase Agreement No.2126 to acquire five additional Boeing 767-300 passenger aircraft and four purchase rights for Boeing 767-300 passenger aircraft. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$870 million.
On December 22, 2011 we entered into supplemental agreement No.32 to the Purchase Agreement No.2126 to exercise two purchase options for two additional Boeing 767-300 passenger aircraft, while the remaining purchase options were deleted. Delivery is scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$340 million.
Boeing 787-8/9 Fleet
On October 29, 2007, we entered into Purchase Agreement No. 3256 with the Boeing Company (“Purchase Agreement No. 3256”) to acquire 18 Boeing 787-8 aircraft and eight Boeing 787-9 aircraft to be delivered between 2012 and 2016. This purchase agreement provides us with the option of purchasing fifteen additional aircraft to be delivered in 2017 and 2018. The estimated gross value (at list prices) of the Boeing aircraft for which we had firm commitments to take delivery under this contract is US$3.2 billion.
On March 22, 2010, we entered into supplemental agreement No. 1 to the Purchase Agreement No. 3256 to advance the schedule delivery date of ten Boeing 787-8 aircraft and substitute four Boeing 787-9 aircraft into four Boeing 787-8 aircraft.
On July 8, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3256 to advance the schedule delivery date of two Boeing 787-8 aircraft.
On August 24, 2012, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3256 to replace two Boeing 787-8 aircraft with two Boeing 787-8 aircraft with a later delivery.
On September 16, 2013, we entered into a delay settlement agreement with respect to Purchase Agreement No. 3256, whereby we agreed to update delivery dates, settle consequences of the currently known delays and convert several future deliveries of B787-8 aircraft to B787-9 aircraft.
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Boeing 777 Freighter Fleet
On July 3, 2007, we entered into Purchase Agreement No. 3194 with the Boeing Company (“Purchase Agreement No. 3194”) to acquire two Boeing 777 freighter aircraft with schedule deliveries dates in 2011 and 2012. The estimated gross value (at list prices) of the Boeing aircraft for which we had firm commitments to take delivery under this contract was US$545 million.
On March 22, 2010, we entered into letter agreement 6-1162-KSW-6454R2 to the Purchase Agreement No. 3194 to transfer two purchase rights from Purchase Agreement No. 2126 to Purchase Agreement No. 3194.
On November 2, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3194, to exercise one of the two options for a Boeing 777 freighter aircraft with schedule delivery date in 2012. The estimated gross value (at list prices) of this aircraft was US$280 million.
On September 22, 2011, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3194 to advance the schedule delivery date of one firm Boeing 777 freighter aircraft during 2012.
On August 9, 2012, we entered into supplemental agreement No. 4 to the Purchase Agreement No. 3194 to reflect the configuration of the aircraft covered under such Purchase Agreement.
Airbus A320 Family Fleet
On March 20, 1998, we entered into the Second A320-Family Purchase Agreement with Airbus S.A.S. (“Second A320-Family Purchase Agreement”) to acquire five Airbus 320 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 twenty five additional Airbus 320 family aircraft and fifteen 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 fifteen purchase rights for fifteen Airbus A320-Family aircraft.
On December 23, 2009, we entered into amendment No. 5 to the Second A320-Family Purchase Agreement to acquire thirty additional Airbus A320-Family aircraft. The estimated gross value (at list prices) of these aircraft was US$2.0 billion.
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 reschedule the scheduled delivery date of thirteen aircraft.
On May 19, 2010, we entered into amendment No. 7 to the Second A320-Family Purchase Agreement to reschedule 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 reschedule 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 fifty 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 reschedule the schedule delivery date of four aircraft.
On November 19, 2012, we entered into amendment No. 12 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft, identify certain Aircraft as Sharklet Installed Aircraft and others as Sharklet Capable Aircraft, as those are defined in such Purchase Agreement, and notify the scheduled delivery month for certain aircraft.
On August 19, 2013, we entered into amendment No. 13 to the Second A320-Family Purchase Agreement to convert several A320 aircraft to A321 aircraft and to reschedule the scheduled delivery dates of several aircraft.
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On 31 March, 2014, we entered into amendment No. 14 to the Second A320-Family Purchase Agreement covering the rescheduling of the scheduled delivery date of one Aircraft.
On May 16, 2014, we entered into amendment No. 15 to the Second A320 Family Purchase Agreement covering the rescheduling of the scheduled delivery month of certain Aircraft.
On July 15, 2014, we entered into amendment No. 16 to the Second A320 Family Purchase Agreement July 15th 2014 covering substitution of certain Aircraft.
On October 30, 2014, we entered into a novation agreement covering the novation of the original TAM A320/A330 Family Purchase Agreement from TAM to LATAM.
On December 11, 2014, we entered into amendment No. 17 to the Second A320 Family Purchase Agreement covering the substitution of certain Aircraft.
Between April and August 2011, we entered into Buyback Agreements No. 3001, 3030, 3062, 3214 and 3216 with Airbus Financial Services for the sale of five A318 aircraft.
Between August 2012 and January 2013, we entered into Buyback Agreements No. 3371, 3390, 3438, 3469 and 3509 with Airbus Financial Services for the sale of five A318 aircraft.
Airbus A320NEO Family Fleet
On June 22, 2011, we entered into A320 NEO Purchase Agreement (“A320 NEO Purchase Agreement”) to acquire twenty Airbus 320 NEO family aircraft with schedule delivery dates in 2017 and 2018. The estimated gross value (at list prices) of these aircraft is US$1.7 billion.
On February 27, 2014, we entered into amendment No. 1 to the A320 NEO Purchase Agreement covering the advancement of the date by which the LATAM selects the propulsion systems.
On July 15, 2014, we entered into amendment No. 2 to the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft.
On December 11, 2014, we entered into amendment No. 3 the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft and A321 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 A330-200 aircraft already in fleet and several new aircraft to be received from the manufacturer including A350-00, B787-8 and B787-9 aircraft. The estimated gross value (at list prices) of these aircraft is US$3.0 billion.
Aircastle Holding Corporation Limited
On February 21, 2014, we entered into a framework deed with Aircastle Holding Corporation Limited for the lease of four B777-300ER already in fleet. The four aircrafts were manufactured in 2012 and the estimated market value (at list prices) of these aircraft is US$580 million. The average term of the leases is 60 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 of CF6-80C2B6F engines (which powers our B767 fleet) during 200 shop visits or 10 years, whichever occur first.
CFM International
On December 17, 2010, we entered into General Terms Agreement No. CFM-1-2377460475 (the “GTA”) and Letter Agreement No. 1 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM of CFM56-5B engines to power 70 A320
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family aircraft and up to 14 CFM56-5B 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 abovementioned 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 of CFM56-5B engines to power 20 A320 family aircraft and 1 spare engine.
PW1100G-JM Engine Maintenance Agreement
In February 2014, we entered into an engine support and maintenance agreement with United Technologies Internation Corporation, Pratt & Whitney Division (“PW”) for the sale, support and maintenance by PW of PW1100G-JM engines to power 42 A320NEO family aircraft and 9 spare engines. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for LATAM.
Sabre Contract
In November 2009, we entered into a master agreement with Sabre Inc., pursuant to which LATAM was granted with access and use of certain reservation systems and other Sabre software solutions. This agreement will remain in force for five years or until the expiration of all Work Orders to the agreement. In addition, LATAM has distribution agreements in place with Sabre as well as with other distribution providers.
TAM Material Contracts
A320/A330 Family Purchase Agreements
In November 2006, TAM entered into a purchase agreement with Airbus S.A.S. for the purchase of 31 A320-Family Aircraft and 6 A330-200 aircraft, with deliveries between 2007 and 2010.
In January 2008, TAM entered into a new purchase agreement for 20 A320-Family Aircraft and 4 A330-200 aircraft, with deliveries between 2007 and 2014.
In July 2010, TAM entered a purchase agreement for 20 A320-Family Aircraft with deliveries between 2014 and 2015.
In October 2011, TAM entered into a new purchase agreement for 10 A320-Family Aircraft with deliveries between 2016 and 2017, plus 22 A320 NEO Family Aircraft with deliveries between 2016 and 2018.
In January 2012, TAM entered into Amendment No. 12 to the 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.
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.
In July 2010, TAM entered into amendment No. 1 to the A350 purchase agreement to purchase five additional A350 XWB.
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In July 2014, TAM entered into amendment No. 2 to the A350 purchase agreement to reschedule the delivery of certain A350-900XWB and to amend certain provisions to reflect the latest aircraft specification.
In July 2014, TAM, LATAM and Airbus entered into a novation agreement novating the A350 purchase agreement from TAM to LATAM.
In October 2014, we entered into amendment No. 3 to the A350 purchase agreement to reschedule the schedule delivery month of a certain A350-900XWB aircraft.
Boeing 777 Purchase Agreement
In February 2007, TAM entered into a purchase agreement with Boeing for the purchase of four Boeing 777-32WER.
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 2 incremental 777 aircraft.
In July 2010, TAM entered into supplemental agreement No. 5 to the 777 Purchase Agreement to reschedule the delivery of certain aircraft.
In February 2011, TAM entered into supplemental agreement No. 6 to the 777 Purchase Agreement for the purchase of 2 incremental 777 aircraft.
In May 2014, TAM entered into supplemental agreement No. 7 to the 777 purchase agreement to substitute two 777-300ER Aircraft originally scheduled for delivery in 2014 for two 777-F aircraft for scheduled delivery in 2017.
CFM56-5B Engine 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 of CFM56-5B engines to power 25 A320 family aircraft and 4 spare engines.
In March 2007 TAM entered into the Amendment 1 to the abovementioned services agreement with GE Celma, extending the maintenance services to the engines powering additional 16 A320 family aircraft and 2 spare engines.
V2500-A5 Engine Maintenance Agreement
In 2000, TAM entered into an engine maintenance contract with MTU Motoren-und Turbinen-Union München GmbH, or MTU, pursuant to which MTU agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105 TAY650-15 aircraft engines. This contract is complemented by a novation and amendment agreement between us and Rolls-Royce Brazil Ltda. pursuant to which Rolls-Royce Brazil Ltda., replaced MTU as contract counterparty. This agreement terminates on June 30, 2015.
PW4168 Engine Maintenance Agreement
In June 2007, TAM Linhas Aéreas S.A. entered into an purchase and support agreement engine sale, support and maintenance services agreement with Pratt & Whitney covering 20 engines contained in TAM’s A330-200 fleet 6 aircraft plus 2 spares. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for TAM. Amendment 3 July 2010 10 aircraft y 4 spares.
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.
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Amadeus Contract
In July 2009, TAM entered into a general services agreement with Amadeus IT Group S.A., pursuant to which TAM was granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup. This agreement will remain in force for ten years, unless cancelled early by either party. In addition, TAM has distribution agreements in place with Amadeus as well as with other distribution providers.
D. Exchange Controls
Foreign Investment and Exchange Controls in Chile
The Central Bank of Chile is responsible, among other things, for monetary policies and exchange controls in Chile. Equity investments, including investments in shares of stock by persons who are non-Chilean residents, have been generally subject in the past to various exchange control regulations restricting the repatriation of their investments and the earnings thereon.
Article 47 of the Central Bank Act and former Chapter XXVI of the Central Bank Foreign Exchange Regulations regulated the foreign exchange aspects of the issuance of ADSs by a Chilean company until April 2001. According to former Chapter XXVI, the Central Bank of Chile and the depositary had to enter into an agreement in order to gain access to the formal exchange market. The issuers of the shares underlying the ADSs and the custodian could also be parties to these agreements.
On April 16, 2001, the Central Bank of Chile agreed that, effective April 19, 2001:
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:
Under the new regulations, only the following limitations apply to these operations:
The Central Bank of Chile also eliminated Chapter XXVI of the Compendium of Foreign Exchange Regulations, which regulated the establishment of an ADR facility by a Chilean company. Pursuant to the new rules, it is no longer necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADR facility nor to enter into a foreign investment contract with the Central Bank of Chile. The establishment of an ADR facility is now regarded as an ordinary foreign investment, and simply requires that the Central Bank of Chile be informed of the transaction pursuant to Chapter XIV of the amended Compendium of Foreign Exchange Regulations and that the foreign currency transactions related thereby be conducted through the Formal Exchange Market.
However, all contracts executed under the provisions of former Chapter XXVI (including the foreign investment contract among 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.
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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.
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:
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
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to vote the shares or other deposited securities underlying their ADSs as they direct by a specified date. For instructions to be valid, the depositary must receive them on or before the date specified as “Vote Cut-Off Date.” The depositary will try, as far as practical, subject to Chilean law and the provisions of our by-laws, to vote or to have its agents vote the shares or other deposited securities as holders instruct. Otherwise, holders will not be able to exercise their right to vote unless they withdraw the shares. However, holders may not know about the meeting far enough in advance to withdraw the shares. We will use our best efforts to request that the depositary notify holders of upcoming votes and ask for their instructions.
If the depositary does not receive voting instructions from a holder by the specified date, it will consider such holder to have authorized and directed it to give a discretionary proxy to a person designated by our board of directors to vote the number of deposited securities represented by such holder’s ADSs. The depositary will give a discretionary proxy in those circumstances to vote on all questions to be voted upon unless we notify the depositary that:
The depositary will only vote or attempt to vote as such holder instructs or as described above.
We cannot assure holders that they receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. This means that holders may not be able to exercise their right to vote and there may be nothing they can do if their shares are not voted as they requested.
Exchange Rates
Prior to 1989, Chilean law permitted the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank of Chile. The Central Bank Act liberalized the rules that govern the ability to buy and sell foreign currency. The Central Bank Act empowers the Central Bank of Chile to determine that certain purchases and sales of foreign currency specified by law must be carried out exclusively in the Formal Exchange Market, which is made up of the banks and other entities authorized by the Central Bank of Chile. All payments and distributions with respect to the ADSs must be conducted exclusively in the Formal Exchange Market.
For purposes of the operation of the Formal Exchange Market, the Central Bank of Chile sets a reference exchange rate (dólar acuerdo). The Central Bank of Chile resets the reference exchange rate monthly, taking internal and external inflation into account, and adjusts the reference exchange rate daily to reflect variations in parities between the Chilean peso, the U.S. dollar, the Japanese yen and the European euro.
The observed exchange rate (dólar observado) is the average exchange rate at which transactions were actually carried out in the Formal Exchange Market on a particular day, as certified by the Central Bank of Chile on the next banking day.
Prior to September 3, 1999, the Central Bank of Chile was authorized to buy or sell dollars in the Formal Exchange Market to maintain the observed exchange rate within a specified range above or below the reference exchange rate. On September 3, 1999, the Central Bank of Chile eliminated the exchange band. As a result, the Central Bank of Chile may buy and sell foreign exchange in the Formal Exchange Market in order to maintain the observed exchange rate at a level the Central Bank of Chile determines.
Purchases and sales of foreign exchange may be effected outside the Formal Exchange Market through the Informal Exchange Market (Mercado Cambiario Informal) established by the Central Bank in 1990. There are no limits on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the observed exchange rate.
Although our results of operations have not been significantly affected by fluctuations in the exchange rates between the peso and the U.S. dollar because our functional currency is the U.S. dollar, we are exposed to foreign exchange losses and gains due to exchange rate fluctuations. Even though the majority of our revenues are denominated in or pegged to the U.S. dollar, the Chilean government’s economic policies affecting foreign exchange and future fluctuations in the value of the peso against the U.S. dollar could adversely affect our results of operations and an investor’s return on an investment in ADSs.
E. Taxation
Chilean Tax
The following discussion relates to Chilean income tax laws presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue Service (“Chilean IRS”) and other applicable regulations and rulings, all of which are subject to change. The discussion summarizes the principal Chilean income tax consequences of an investment in the ADSs or common shares by a person who is neither domiciled in, nor a resident of, Chile or by a legal entity that is not organized under the laws of Chile and does not have a branch or a permanent establishment located in Chile (such an individual or entity is referred to herein as a Foreign
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Holder). For purposes of Chilean tax law, an individual holder is a resident of Chile if such person has resided in Chile for more than six consecutive months in one calendar year or for a total of six months, whether consecutive or not, in two consecutive tax years. In addition, an individual is considered domiciled in Chile in case he or she resides in Chile with the actual or presumptive intent of staying in the country. The discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor’s particular tax situation.
Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign investors, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may only be amended by another statute. In addition, the Chilean tax authorities enact rulings and regulations of either general or specific application and interpret the provisions of Chilean tax law. Chilean tax may not be assessed retroactively against taxpayers who act in good faith relying on such rulings, regulations and interpretations, but Chilean tax authorities may change these rulings, regulations and interpretations prospectively. On February 4, 2010, representatives of the governments of the United States and Chile signed an income tax treaty. The new treaty will have to be approved by the U.S. Senate.
On September 29, 2014, Chile enacted Law No. 20,780 (the “Tax Reform Act”). The Tax Reform Act introduced changes to the corporate tax rate, mandating a gradual increase of the rate from 20% to 25% or 27% in certain cases, the rules regarding minimum capitalization, and the taxation of Chilean investments abroad (the controlled-foreign-corporation rules), among others. The new rules are set to come into effect gradually, with the implementation process having commenced on October 1, 2014 and set to be completed by January 1, 2018.
Cash Dividends and Other Distributions
Cash dividends we pay with respect to the ADSs or common shares held by a Foreign Holder will be subject to a 35% Chilean withholding tax, which we withhold and pay over to the Chilean tax authorities and which we refer to as the Withholding Tax. A credit against the Withholding Tax is available based on the level of corporate income tax we actually paid on the income to be distributed (referred to herein as the First Category Tax); however, this credit does not reduce the Withholding Tax on a one-for-one basis because it also increases the base on which the Withholding Tax is imposed. If we register net income but taxable losses, no credit against the Withholding Tax will be available. In addition, if we distribute less than all of our distributable income, the credit for First Category Tax we pay is proportionately reduced. In the year 2014, Law 20.780 modified the provisional rate of the first category tax from 20% to 21%.
In general, the example below illustrates the effective Withholding Tax burden on a cash dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%, a First Category Tax rate of 21%, and a distribution of 30% of the consolidated net income of the Company after payment of the First Category Tax:
The Company’s taxable income
First Category Tax (21% of Ch$100)
Net distributable income
Dividend distributed (30% of net distributable income)
First category increase
Withholding Tax (35% of the sum of Ch$23.70 dividend plus Ch$6.30 First Category Tax paid)
Credit for 21% of First Category Tax
Net tax withheld
Net dividend received
Effective dividend withholding rate
In general, the effective dividend Withholding Tax rate, after giving effect to the credit for the First Category Tax, can be calculated using the following formula:
(Withholding Tax rate) – (First Category Tax effective rate)1 – (First Category Tax effective rate)
Under Chilean income tax law, dividends generally are assumed to have been paid out of our oldest retained profits for purposes of determining the level of First Category Tax that we paid. The effective rate of Withholding Tax to be imposed on dividends we pay will vary depending upon the amount of First Category Tax we paid (if any) on the earnings to which the dividends are attributed, according to the Company’s Taxable Profit Fund. The Effective Withholding Tax rate for dividends attributed to earnings from 1991 until 2001, for which the First Category Tax rate was 15%, which results in an effective rate of 23.5%. For 2002, the First Category Tax rate was 16.0%, which results in an effective rate of 22.62%. In 2003, the First Category Tax rate was 16.5%, which results in an effective rate of 22.16%, from 2004 until 2010, the First Category Tax rate was 17%, which results in an effective rate of Withholding
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Tax of 21.69%, In 2011 the First category Tax rate was 20%, which results in an effective rate of Withholding Tax of 18.75%. In 2012 the First category Tax rate was 20%, which results in an effective rate of Withholding Tax of 18.75%. In 2013 the First category Tax rate was 20%, which results in an effective rate of Withholding Tax of 18.75%. In 2014 the First category Tax rate was 21%, which results in an effective rate of Withholding Tax of 17.72%.
For dividends attributable to our profits during years when the First Category Tax was 10% (before 1991), the effective rate will be 27.8%. However, whether the First Category Tax is 10%, 15%, 16%, 16.5%, 17% or 20% the effective overall combined tax rate imposed on our distributed profits will be 35%. In the event that profits from previous years are not sufficient to cover a particular dividend, and the dividend is attributable to the current year, we will generally withhold tax from the dividend at the full 35% rate. If as of December 31 of the year in which the dividend is paid, the withholding is determined to be excessive taking into account First Category Tax, holders may file for a refund.
Dividend distributions made in property would be subject to the same Chilean tax rules as cash dividends based on the fair market value of such property. Stock dividends and the distribution of preemptive rights are not subject to Chilean taxation.
Capital Gains
Gain from the sale or other disposition by a Foreign Holder of ADRs evidencing ADSs outside Chile will not be subject to Chilean taxation. The deposit and withdrawal of common shares in exchange for ADRs will not be subject to any Chilean taxes.
Gain recognized on a sale or disposition of common shares (as distinguished from sales or exchanges of ADRs evidencing ADSs representing such common shares) may be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter) if:
In all other cases, gain on the disposition of common shares will be subject only to a flat capital gains tax which is assessed at the same rate as the First Category Tax as sole income tax 21% in 2014, ) and no withholding tax will apply. The sale of shares of common stock by a Foreign Holder to an individual or entity resident or domiciled in Chile is subject to a provisional withholding. Such a provisional withholding will be equal to (i) the difference between Withholding Tax rate and First Category Tax rate of the total (sale price) amount, without any deduction, paid to, credited to, account for, put at the disposal of, or corresponding to, the Foreign Holder if the transaction is subject to the First Category Tax too. Unless the gain subject to taxation can be determined, case in which the withholding is equal to 35%. The Foreign Holder would be entitled to request a tax refund for any amounts withheld in excess of the taxes actually due, in April of the following year upon filing its corresponding tax return. Gain recognized in the transfer of common shares that have a high presence in the stock exchange, however, is not subject to capital gains tax in Chile, provided that the common shares are transferred in a local stock exchange, in other authorized stock exchanges or within the process of a public tender of common shares governed by the Securities Market Law.
Chile’s Internal Revenue Service Ruling Nº224 (issued on January 30, 2008) confirmed that capital gains stemming from the sale of shares with high stock-market presence acquired through the exchange of American Depositary Receipts (ADRs) for shares is not subject to capital gains tax in Chile. Such exemption is applicable provided that the purchase of such ADR certificates has been made at stock exchanges duly authorized by SVS (which includes the New York Stock Exchange).
The common shares must also have been acquired either in a stock exchange, within the process of a public tender of common shares governed by the Securities Market Law, in an initial public offer of common shares resulting from the formation of a corporation or a capital increase of the same, or in an exchange of convertible bonds. Shares are considered to have a high presence in the stock exchange when they:
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$40,588 as of December 31, 2014) within the previous 180 business days of the stock market. That number must then be divided by 180, multiplied by 100, and expressed in a percentage value. This tax regime does not apply if the transaction involves an amount of shares that would allow the acquirer to take control of the publicly traded corporation, in which case the ordinary tax regime referred to in the previous paragraph will apply, unless the transfer is part of a tender offer governed by the Securities Market Law or the transfer is done on a Chilean stock exchange, without substantially exceeding the market price.
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Capital gains obtained in the sale of shares that are publicly traded and have a high presence in a stock exchange are also exempt from capital gains tax in Chile when the sale is made by “foreign institutional investors” such as mutual funds and pension funds, provided that the sale is made in a stock exchange or in accordance with the provisions of the Securities Market Law, or in any other form authorized by the SVS. To qualify as a foreign institutional investor, an entity must be formed outside of Chile, not have a domicile in Chile, and must be at least one of the following:
The foreign institutional investor must not directly or indirectly participate in the control of the corporations issuing the shares it invests in, nor possess or participate in 10% or more of the capital or the profits of such corporations.
Another requirement for the exemption is that the foreign institutional investor must execute a written contract with a bank or a stock broker incorporated in Chile. In this contract, the bank or stock broker must undertake to execute purchase and sale orders, verify the applicability of the tax exemption or tax withholding and inform the Chilean IRS of the investors it works with and the transactions it performs. Finally, the foreign institutional investor must register with the Chilean IRS by means of a sworn statement issued by such bank or stock broker.
The tax basis of common shares received in exchange for ADRs will be the acquisition value of the common shares on the date of exchange duly adjusted for local inflation. The valuation procedure set forth in the deposit agreement, which values common shares which are being exchanged at the highest price at which they trade on the SSE on the date of the exchange, will determine the acquisition value for this purpose. Consequently, the surrender of ADRs for common shares and the immediate sale of the common shares for the value established under the Deposit Agreement will not generate a capital gain subject to taxation in Chile, provided that the sale of the common shares is made on the same date on which the exchange of ADRs for common shares is recorded, or if the price of the common shares at the exchange date, as determined above, is higher than the price at which the common shares are sold.
The exercise of preemptive rights relating to the common shares will not be subject to Chilean taxation. Any gain on the sale of preemptive rights relating to the common shares will be subject to both the First Category Tax and the Withholding Tax (the former being creditable against the latter).
Other Chilean Taxes
There are no Chilean inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by gift of the common shares by a Foreign Holder. There are no Chilean stamp, issue, registration or similar taxes or duties payable by Foreign Holders of ADSs or common shares.
Withholding Tax Certificates
Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of the Withholding Tax (net of the applicable First Category Tax).
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United States Federal Income Tax Considerations
This section describes the material United States 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 apply to you if you are a member of a special class of holders subject to special rules, including:
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. There is currently no comprehensive income tax treaty in effect between the United States and the Republic of Chile. In addition, this section is based in part upon the representations of the 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 States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the common shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of an investment in the common shares or ADSs.
You are a U.S. holder if you are a beneficial owner of common shares or ADSs and you are:
You should consult your own tax advisor regarding the United States federal, state and local and the Chilean and other tax consequences of owning and disposing of common shares and ADSs in your particular circumstances.
ADSs
In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the common shares represented by those ADRs. Exchanges of common shares for ADRs, and ADRs for common shares, generally will not be subject to United States federal income tax.
Taxation of Dividends
Under the United States 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 States federal income tax purposes) is subject to United States federal income taxation.
If you are a noncorporate U.S. holder, dividends paid on the ADSs 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 for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends paid on the ADSs will be treated as qualified dividend income if:
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The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Accordingly, we expect that dividends we pay with respect to the ADSs will be qualified dividend income. Because our common shares are not expected to be listed on any United States securities market, it is unclear whether dividends we pay with respect to the common shares will also be qualified dividend income. If dividends we pay with respect to our common shares are not qualified dividend income, then the U.S. dollar amount of such dividends received by a U.S holder (including dividends received by a noncorporate U.S. holder) will be subject to taxation at ordinary income tax rates.
You must include any Chilean tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of common shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Chilean pesos payments made, determined at the spot Chilean pesos/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the common shares or ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with United States federal income tax principles. Accordingly, you should expect to generally treat distributions we make as dividends.
Subject to generally applicable limitations and conditions under the Internal Revenue Code, Chilean Withholding Tax withheld and paid over to the Chilean tax authorities (after taking into account the credit for the First Category Tax, when it is available) will be creditable or deductible against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available to you under Chilean law, as is the case if the amount of Chilean Withholding Tax initially withheld from a dividend is determined to be excessive 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, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to you.
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 States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your common shares or ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. 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 unless such credit can be applied against tax due on other income treated as derived from foreign sources in the appropriate limitation category.
PFIC Rules
We believe that commons 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, unless you elect to be taxed annually on a mark-to-market basis with respect to your common shares or ADSs, gain realized on the sale or other disposition of your commons shares or ADSs would in general not be treated as capital gain. Instead, if you are a U.S. holder, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the commons shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your commons shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your commons shares or ADSs. Dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.
F. Dividends and Paying Agents
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G. Statement by Experts
H. Documents on Display
We are subject to the information requirements of the Exchange Act, as amended. In accordance with these requirements, we file reports, including annual reports on Form 20-F and other information with the SEC. These materials, including this annual report and the exhibits hereto, may be inspected and copied at the SEC’s public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. In addition, some of our SEC filings, including those filed on and after February 19, 2002, are also available to the public through the SEC’s website 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 Form 20-F within the time period required by the SEC, which is currently six months from December 31, the end of our fiscal year.
I. Subsidiary Information
Given the nature of its business, LATAM is exposed mainly to three types of market risk:
Management assesses the level of our exposure to these risks periodically to determine the extent to which we should hedge against them and the most effective mechanisms to implement the hedge. 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.
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 and geopolitical factors.
Individually, LAN and TAM fuel consumption for 2014 of 597.2 million and 632.1 million gallons, respectively. Since the combination of their business operations, LATAM has been managing the fuel hedging program for both LAN and TAM, based on an approved policy. LATAM forecasted fuel consumption for 2015 was 1.252 million gallons. This policy aims to hedge approximately 20-60% of our aggregate fuel consumption, using commodity derivatives for the expected fuel consumption from 12-24 months.
Jet Fuel isn’t the only underlying asset that LATAM may use for hedging purposes. It may also consider derivative instruments in other underlying commodity assets such as crude oil (Brent) or heating oil.
To keep the Company competitive, a portion of the fuel consumption is not hedged, as a drop in fuel prices positively affects the Company through a reduction in costs.
We may be exposed to fuel hedging transaction losses if our counterparties default (when LATAM has a positive Mark To Market). To manage this credit risk, we select counterparties based on their credit ratings and monitor our relative market position on a daily basis. For more information see “Item 3. Key Information—Risk Factors—Risks Related to Our Operations and the Airline Industry—Our operations are subject to fluctuations in the supply and cost of jet fuel, which could negatively impact our business” .
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During 2014, 2013 and 2012 we entered into a mix of swaps and option contracts on BRENT and JET FUEL 54 USGC with investment grade banks and other financial entities for notional fuel purchases (non delivery forward). Details of the fuel hedging program are shown below:
Gallons Purchased
% Total Annual Fuel Consumption
Combined Result of Hedges (in US$)
As of December 31, 2014, the fair value of our outstanding fuel related derivative contracts was estimated to be US$157.2 million (negative).
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 a non-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 December 31, 2015, 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 2014, 2013 and 2012.
BRENT or JET benchmark price
+5
–5
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, 2014, which reflects only a partial hedge of our expected fuel consumption, a vertical fall by US$5 in the BRENT and JET benchmark price (the monthly daily average) for each month would have meant savings of approximately US$ 90.2 million in the cost of the Company’s total fuel consumption. A vertical increase by US$5 in the JET and BRENT benchmark price (the monthly daily average) for each month would have meant an additional cost of approximately US$ 88.1 million of the Company’s total fuel consumption.
Risk of Fluctuations in Interest Rates
As of December 31, 2014, LATAM had US$ 8,793 million in outstanding interest bearing loans. LATAM uses interest rate derivatives to reduce the impact of an increase of interest rates. 68% of LATAM outstanding debt as of December 31,2014 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$2,799 million from which 83.3% is assigned to aircraft financing and 16.7% to non-aircraft financing. The fixed interest rate debt amounts are US$ 5,994 million from which 64.9% is assigned to aircraft financing and 35.1% to non-aircraft financing. The interest rate hedged debt amounts to US$ 486 million from which 97.1% is assigned to interest rate swaps and 2.9% to interest rate caps.
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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, 2014, the fair value of all the interest rate swaps was estimated to be US$60.7 million (negative).
The interest rate cap contracts qualify as cash flow hedges with no ineffectiveness associated to them due to the fact that all critical terms of the debt and the caps are matched. As of December 31, 2014, the fair value of these contracts was estimated to be close to zero.
The premiums paid on the cap contracts were allocated to individual caplets and recognized in the income statement throughout the term of each contract. Under IFRS these derivatives qualify as cash flow hedges even though some ineffectiveness exists as the notional amount over which some caps are calculated is different from the one used to determine the interest and lease payments on the aircraft. For IFRS purposes, there was no amount of ineffectiveness recorded in earnings because the change in fair value of the perfect hypothetical option was greater than the change in the fair value of the Company’s option.
The use of the aforementioned hedging instruments, combined with fixed interest rate financing for our aircraft financing has enabled the Company to have a predictable interest rate costs, reducing the cash volatility.
As of December 31 2014, the average interest rate of our entire outstanding interest-bearing long-term debt rate was 3.8%.
The following table summarizes our principal payment obligations on all of our interest-bearing debt as of December 31, 2014 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, 2014 for each loan.
Interest-bearing liabilities
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.
Increase (decrease) in LIBOR
+100 basis points
–100 basis points
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.
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Increase (decrease) in three month LIBOR
Future rates
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.
Risk of Variation in Foreign Currency Exchange Rates
LATAM sells most of its services in U.S. dollars (or at prices based on an amount of U.S. dollars). A large part of its expenses are denominated or based on U.S. dollars, particularly fuel costs, aeronautic charges, aircraft leases, insurance and aircraft components and accessories. Of LATAM’s total expenses, the main item denominated in local currencies is employee remuneration.
Because we conduct business in local currencies in several countries, we face the risk of variations in multiple foreign currency exchange rates. Depreciation on these currencies against the U.S. Dollar could have an adverse effect on the cash flow projections because part of our revenues and receivables are denominated in those currencies. The Company may enter into FX derivative contracts to protect its foreign exchange risk exposure.
Balance sheet exposure of LATAM to the Brazilian Real is related to the functional currency of TAM and its balance sheet currency mismatch, as more of TAM’s debt is denominated in U.S. Dollars as compared to its assets denominated in U.S. Dollars. When the balance sheet denominated in U.S. Dollars is translated to Brazilian Real, the financial results of TAM may fluctuate and therefore could impact LATAM’s financial results.
The exposure to the Brazilian real on TAM’s balance sheet has constantly been reduced from over US$4.0 billion since the combination in June 2012 to less than US$ 1.0 billion of December 31, 2014. The Company continues working to mitigate this exposure through the execution of the fleet transfer from TAM to LATAM and payment of TAM’s short term debt denominated in USD.
The following table shows the sensitivity of LATAM’s financial results to changes in the R$/US$ exchange rate:
Appreciation (depreciation) of R$/US$
–10%
+10%
Additionally, one of LATAM’s financing sources is the receipt of future flows related dividends and capital distributions that subsidiaries will distribute. These future cash flows vary depending on the evolution of the foreign currency exchange rate compared to the U.S. dollar. The greatest exposure to future cash flows is mainly presented by the subsidiary TAM S.A. and the R$/US$ volatility. In the case of TAM S.A., the earnings are expressed in large proportion in R$, which a large portion of its costs are in US$.
To hedge the investment in subsidiaries and reduce the cash flow volatility, the Company may enter into derivative contracts to mitigate currency appreciation or depreciation against the LATAM functional currency.
In order to reduce the operational monthly cash flow exposures for 2015, caused by Brazilian real depreciation and ensure economic margin, LATAM hedges the foreign exchange risk using FX derivatives.
As of December 31, 2014, the Company has FX derivative for US$100 million (notional) with a market value of US$ 0.1 million (negative).
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If the Brazilian Real depreciates against the U.S. dollar, it could adversely affect the Company’s results by increasing costs to LATAM denominated in U.S dollars. However, a depreciation of the Brazilian Real would positively affect the value of these derivative positions.
Because changes in the values of existing positions do not represent changes in cash flow, 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 exchange rate has an impact on the equity of the Company).
The following table shows the sensitivity of financial instruments according to reasonable changes in the exchange rates and its effect on equity. The term projection is defined until the end of the last hedging contract in force:
LATAM foreign exchange sensitivity
Position as of December 31
-10%
Our foreign currency exchange exposure as of December 31, 2014 was as follows:
Current assets
Other assets
Current liabilities
Long-term liabilities
Total liabilities and shareholders’ equity
For more information on Market Risk, see Note 3 “Financial Risk Management” to our audited consolidated financial statements.
A. Debt Securities
B. Warrants and Rights
C. Other Securities
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”).
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Fees and Charges for ADR Holders
The Bank of New York Mellon, and since October 2011 JP Morgan, as depositary, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees. The depositary may also collect its annual fee for depositary services by deductions from cash distributions, by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
• Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
• Any cash distribution to ADS registered holders
• Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders
• Depositary services
• Transfer and registration of shares on the depositary’s share register to or from the name of the depositary or its agent when investors deposit or withdraw shares
• Cable, telex and facsimile transmissions
• Conversion of foreign currencies into U.S. dollars
• As necessary
Fees and Direct and Indirect Payments Made by the Depositary to the Foreign Issuer
Past Fees and Payments
During 2013, the Company received from the depositary US972,327for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), payments related to applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
Future Fees and Payments
JP Morgan, as the depositary bank, has agreed to reimburse the Company for certain of our reasonable expenses related to our ADS program and incur by us in connection with the program. The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form 20-F and ongoing SEC compliance and listing requirements, listing fees, investor relations expenses, advertising and public relations expenses and fees payable to service providers for the distribution of hard copy materials to beneficial ADR holders in the Depositary Trust Company, such as information related to shareholders’ meetings and related voting instruction cards); and indirect payments (third-party expenses paid directly and fees waived).
PART II
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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, 2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon 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, 2014, were effective in providing reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
Management’s annual report on internal control over financial reporting
The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate. 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, 2014 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, 2014, the Company’s internal control over financial reporting is effective. The company’s internal control over financial reporting effectiveness as of December 31, 2014 has been audited by PricewaterhouseCoopers Consultores, Auditores y Companía Limitada, an independent registered public accounting firm, as stated in their report included herein.
(c) Attestation report of the registered public accounting firm. See page F-156 of our audited consolidated financial statements.
(d) Changes in internal control over financial reporting. There has been no significant change in our internal control over financial reporting during 2014. None of the changes has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has designated Georges de Bourguignon Arndt, as an “audit committee financial expert” within the meaning of this Item 16. A. Mr. de Bourguignon is independent within the meaning of Rule 10A-3 under the Exchange Act. See “Item 6. Directors, Senior Management and Employees—Directors and Senior Management.”
B. CODE OF ETHICS
We have adopted a code of ethics and conduct, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of ethics applies to our senior management, including our chief executive officer, our chief financial officer and our chief accounting officer, as
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well as to other employees. Our code is freely available online at our website, www.lan.com, under the heading “Corporate Governance” in the Investor Relations page. In addition, upon written request, by regular mail, to the following address: LAN Airlines S.A., Investor Relations Department, attention: Investor Relations, Av. Presidente Riesco 5711, Piso 20, Comuna Las Condes, Santiago, Chile, or by e-mail atinvestor.relations@lan.com we will provide any person with a copy of it without charge. If we amend the provisions of our code of ethics that apply to our senior management or to other persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
The following table sets forth the fees paid to our independent registered public accounting firm, PricewaterhouseCoopers, during the fiscal years ended December 31, 2014 and 2013:
Audit fees
Audit-related fees
Tax fees
All Other fees
Total fees
Audit-related fees in the above table are the aggregate fees billed by PricewaterhouseCoopers for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, including due diligence and other audit related services. Fees in 2014 include attestation services related with revenues in Argentina. Fees in 2013 include payments to PricewaterhouseCoopers Brazil since the business combination with TAM.
Other fees in the above table are fees billed by PricewaterhouseCoopers as of December 31, 2014 primarily for survey salary and salary special studies in Peru, review of the reporting process for the business intelligence program in Chile and entity management risk consulting. Other fees in 2013 include training services in IFRS and the review of pro forma financial statements that were included in the 2013 annual report.
Board of Directors’ Committee Pre-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 Board of Directors’ Committee (which serves as our Audit Committee) has decided to automatically authorize any such accepted services for an amount of up to 10% of the fees charged by the auditing firm, and for an amount of up to 50% when adding all such services provided by the auditing firm in the aggregate. If the amount of any services is larger than these thresholds, approval by the Board of Directors’ Committee will be required.
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
G. CORPORATE GOVERNANCE
New York Stock Exchange Corporate Governance Comparison
Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Chilean corporation with shares listed on the SSE, the Chilean Electronic Exchange and the Valparaiso Stock Exchange, our ADSs listed on the NYSE and our BDRs listed on Bovespa. Our corporate governance practices are governed by our bylaws, the Chilean Corporation Law and the Securities Market Law.
126
The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
127
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
H. Mine Safety Disclosure
128
PART III
See “Item 18. Financial Statements.”
See our consolidated Financial Statements beginning on page F-1. The following is an index of the financial statements.
Consolidated Financial Statements for LATAM Airlines Group and its Subsidiaries
Audited Consolidated Financial Statements
Consolidated Statements of Financial Position at December 31, 2014 and 2013
Consolidated Statement of Income by Function for the years ended December 31, 2014, 2013 and 2012
Consolidated Statement of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Statement of Changes in Equity for the year ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows – Direct Method for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements at December 31, 2014
Report of Independent Registered Public Accounting Firm
Documents filed as exhibits to this annual report:
ExhibitNo.
Description
129
130
131
132
133
134
LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
CONTENTS
Consolidated Statement of Financial Position
Consolidated Statement of Income by Function
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows - Direct Method
Notes to the Consolidated Financial Statements
F-1
Contents of the notes to the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.
1 - General information
2 - Summary of significant accounting policies
2.1. Basis of Preparation
2.2. Basis of Consolidation
2.3. Foreign currency transactions
2.4. Property, plant and equipment
2.5. Intangible assets other than goodwill
2.6. Goodwill
2.7. Borrowing costs
2.8. Losses for impairment of non-financial assets
2.9. Financial assets
2.10. Derivative financial instruments and hedging activities
2.11. Inventories
2.12. Trade and other accounts receivable
2.13. Cash and cash equivalents
2.14. Capital
2.15. Trade and other accounts payables
2.16. Interest-bearing loans
2.17. Current and deferred taxes
2.18. Employee benefits
2.19. Provisions
2.20. Revenue recognition
2.21. Leases
2.22. Non-current assets (or disposal groups) classified as held for sale
2.23. Maintenance
2.24. Environmental costs
3 - Financial risk management
3.1. Financial risk factors
3.2. Capital risk management
3.3. Estimates of fair value
4 - Accounting estimates and judgments
5 - Segmental information
6 - Cash and cash equivalents
7 - Financial instruments
7.1. Financial instruments by category
7.2. Financial instruments by currency
8 - Trade, other accounts receivable and non-current accounts receivable
9 - Accounts receivable from/payable to related entities
10 - Inventories
11 - Other financial assets
12 - Other non-financial assets
13 - Investments in subsidiaries
14 - Intangible assets other than goodwill
F-2
15 - Goodwill and Business combination
15.1. Goodwill
15.2. Business combination
16 - Property, plant and equipment
17 - Current and deferred tax
18 - Other financial liabilities
19 - Trade and other accounts payables
20 - Other provisions
21 - Other non-financial liabilities
22 - Employee benefits
23 - Accounts payable, non-current
24 - Equity
25 - Revenue
26 - Costs and expenses by nature
27 - Other income, by function
28 - Foreign currency and exchange rate differences
29 - Earnings per share
30 - Contingencies
31 - Commitments
32 - Transactions with related parties
33 - Share based payments
34 - The environment
35 - Events subsequent to the date of the financial statements
36 - Consolidation Schedule
F-3
LATAM AIRLINES GROUP S.A AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
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 or as held for distribution to owners
Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners
Non-current assets
Accounts receivable
Equity accounted investments
Intangible assets other than goodwill
Goodwill
Property, plant and equipment
Deferred tax assets
The accompanying Notes 1 to 36 form an integral part of these consolidated financial statements.
F-4
Other financial liabilities
Trade and other accounts payables
Accounts payable to related entities
Other provisions
Tax liabilities
Other non-financial liabilities
Non-current liabilities
Accounts payable
Deferred tax liabilities
Employee benefits
EQUITY
Share capital
Retained earnings
Treasury Shares
Other reserves
Parent’s ownership interest
Total equity
Total liabilities and equity
F-5
CONSOLIDATED STATEMENT OF INCOME BY FUNCTION
Revenue
Other income
Gains (losses) from operating activities
Income (loss) before taxes
NET INCOME (LOSS) FOR THE PERIOD
Income (loss) attributable to owners of the parent
Income (loss) attributable to non-controlling interest
EARNINGS PER SHARE
Basic earnings (losses) per share (US$)
Diluted earnings (losses) per share (US$)
(*) The balances at December 31, 2012, include TAM S.A. and Subsidiaries from June 22, 2012, date of the business combination materialized. See Note 15.2
F-6
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NET INCOME (LOSS)
Components of other comprehensive income that will be reclassified to income before taxes
Currency translation differences
Gains (losses) on currency translation, before tax
Other comprehensive income, before taxes, currency translation differences
Cash flow hedges
Gains (losses) on cash flow hedges before taxes
Other comprehensive income (losses), before taxes, cash flow hedges
Other components of other comprehensive income (loss), before taxes
Income tax relating to other comprehensive income that will be reclassified to income
Income tax related to cash flow hedges in other comprehensive income
Income taxes related to components of other comprehensive income that will be reclassified to income
Other comprehensive income (loss)
Total comprehensive income (loss)
Comprehensive income (loss) attributable to owners of the parent
Comprehensive income (loss) attributable to non-controlling interests
TOTAL COMPREHENSIVE INCOME (LOSS)
F-7
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Equity as of January 1, 2014
Total increase (decrease) in equity
Comprehensive income
Gain (losses)
Other comprehensive income
Total comprehensive income
Transactions with shareholders
Equity issuance
Increase (decrease) through transfers and other changes, equity
Total transactions with shareholders
Closing balance as of December 31, 2014
F-8
Equity as of January 1, 2013
Dividends
Closing balance as of December 31, 2013
F-9
Equity as of January 1, 2012
Increase (decrease) through transactions with treasury shares
Closing balance as of December 31, 2012
F-10
CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD
For the periods ended
December 31,
Cash flows from operating activities
Cash collection from operating activities
Proceeds from sales of goods and services
Other cash receipts from operating activities
Payments for operating activities
Payments to suppliers for goods and services
Payments to and on behalf of employees
Other payments for operating activities
Interest received
Income taxes refunded (paid)
Other cash inflows (outflows)
Cash flows used in investing activities
Cash flows used to obtain control of subsidiaries or other businesses
Cash flows used in the purchase of non- controlling interest
Other cash receipts from sales of equity or debt instruments of other entities
Other payments to acquire equity or debt instruments of other entities
Amounts raised from sale of property, plant and equipment
Purchases of property, plant and equipment
Sales of intangible assets
Purchases of intangible assets
Payment from other long-term assets
Dividends received
Cash flows from (used in) financing activities
Amounts raised from issuance of shares
Payments to acquire or redeem the shares of the entity
Amounts raised from long-term loans
Amounts raised from short-term loans
Loans repayments
Payments of finance lease liabilities
Dividends paid
Interest paid
Net increase (decrease) in cash and cash equivalents before effect of exchanges rate change
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-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2014
NOTE 1 - GENERAL INFORMATION
LATAM Airlines Group S.A. (the “Company”) is a public company registered with the Chilean Superintendency of Securities and Insurance (SVS), under No.306, whose shares are quoted in Chile on the Stock Brokers—Stock Exchange (Valparaíso), the Chilean Electronic Stock Exchange and the Santiago Stock Exchange; it is also quoted in the United States of America on the New York Stock Exchange (“NYSE”) in New York in the form of American Depositary Receipts (“ADRs”) and in Brazil BM & FBOVESPA S.A. – Stock Exchange, Mercadorias e Futuros, in the form of Brazilian Depositary Receipts (“BDRs”).
Its principal business is passenger and cargo air transportation, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil and in a developed series of regional and international routes in America, Europe and Oceania. These businesses are performed directly or through its subsidiaries in different countries. In addition, the Company has subsidiaries operating in the freight business in Mexico, Brazil and Colombia.
The Company is located in Santiago, Chile, at Avenida Américo Vespucio Sur No. 901, commune of Renca.
Corporate Governance practices of the Company are set in accordance with Securities Market Law the Corporations Law and its regulations, and the regulations of the SVS and the laws and regulations of the United States of America and the U.S. Securities and Exchange Commission (“SEC”) of that country, with respect to the issuance of ADRs, and the Federal Republic of Brazil and the Comissão de Valores Mobiliarios (“CVM”) of that country, as it pertains to the issuance of BDRs.
The Board of the Company is composed of nine members who are elected every two years by the ordinary shareholders’ meeting. The Board meets in regular monthly sessions and in extraordinary sessions as the corporate needs demand. Of the nine board members, three form part of its Directors’ Committee which fulfills both the role foreseen in the Corporations Law and the functions of the Audit Committee required by the Sarbanes Oxley Law of the United States of America and the respective regulations of the SEC.
The majority shareholder of the Company is the Cueto Group, which through Costa Verde Aeronáutica S.A., Costa Verde Aeronáutica SpA, Inversiones Nueva Costa Verde Aeronáutica Limitada, Inversiones Priesca Dos y Cía. Ltda., Inversiones Caravia Dos y Cía. Ltda., Inversiones El Fano Dos y Cía. Ltda., Inversiones La Espasa Dos S.A., Inversiones Puerto Claro Dos Limitada, Inversiones La Espasa Dos y Cía. Ltda., Inversiones Puerto Claro Dos y Cía. Limitada and Inversiones Mineras del Cantábrico S.A. owns 25.49% of the shares issued by the Company, and therefore is the controlling shareholder of the Company in accordance with the provisions of the letter b) of Article 97 and Article 99 of the Securities Market Law, given that there is a decisive influence on its administration.
F-12
As of December 31, 2014, the Company had a total of 1,622 registered shareholders. At that date approximately 7.69 % of the Company’s share capital was in the form of ADRs and approximately 0.53% in the form of BDRs.
For the period ended December 31, 2014, the Company had an average of 53,300 employees, ending this period with a total of 53,072 employees, spread over 10,077 Administrative employees, 6,986 in Maintenance, 17,517 in Operations, 9,237 in Cabin Crew, 4,009 in Controls Crew, and 5,246 in Sales.
F-13
The main subsidiaries included in these consolidated financial statements are as follows:
Tax No.
Company
96.518.860-6
Lantours Division Servicios Terrestres
S.A. and Subsidiaries
96.763.900-1
96.969.680-0
Foreign
Islands
93.383.000-4
96.951.280-7
96.634.020-7
96.631.520-2
96.631.410-9
96.969.690-8
96.575.810-0
During 2014 LATAM Airlines Group S.A. made a capital increase in TAM S.A. for the total amount of ThUS$ 250,000.
F-14
During 2013 LATAM Airlines Group S.A. made a capital increase in TAM S.A. for the total amount of ThUS$ 1,650,000.
F-15
c) As of December 31, 2012
LATAM Airlines Group S.A. owns 226 voting shares of Holdco I S.A., equivalent to 19.42% of total voting shares of that company.
F-16
Additionally, has proceeded to consolidate special purpose entities, denominated: JOL, destined to the aircraft financing and Chercán Leasing Limited, destined to the aircraft advance financing and Guanay Finance Limited, destined to the issuance of securitized bond, as the Company has major risks and benefits associated to them according to standards issued by the International Financial Reporting Standards: Consolidated Financial Statement (IFRS 10) and private investment funds in which the parent company and subsidiaries are contributors.
All the entities controlled have been included in the consolidation.
Changes in the scope of consolidation between January 1, 2013 and December 31, 2014, are detailed below:
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements.
The consolidated financial statements of LATAM Airlines Group S.A. are for the period ended December 31, 2014, and have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) incorporated therein and with the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRIC).
As explained in notes 2.17 and 17, on September 29, 2014 Law No. 20,780 was issued, which introduces modifications to the income tax system in Chile and other tax matters. On October 17, 2014 the Chilean Superintendence of Securities and Insurance (the “SVS”) issued Circular No. 856, which established that the effects of the change in the income tax rates on deferred tax assets and liabilities must be recognized directly within “Retained earnings” instead of the income statement as required by IAS 12.
F-17
In order to comply with IAS 12, these financial statements are different to those presented to the SVS as the aforementioned effect has been recognized within the income statement. A reconciliation of such differences in presented as follows:
As of December 31, 2014
Total Equity
Parent’s ownership
Net Income (Loss) for the period
Retained earnings for the last period
Total Retained earnings
Non-controlling
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 described above requires the use of certain critical accounting estimates. It also requires management to use its judgment in applying the Company’s accounting policies. Note 4 shows the areas that imply a greater degree of judgment or complexity or the areas where the assumptions and estimates are significant to the consolidated financial statements.
In order to facilitate comparison, there have been some minor reclassifications to the consolidated financial statements corresponding to the previous year.
(i) Standards and amendments
Amendment to IAS 32: Financial instruments: Presentation
F-18
Annual periods
beginning on or after
Amendments to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of interests in other entities and IAS 27: Separate financial statements.
Amendment to IAS 36: Impairment of assets
01/01/2014
The Company adopted in advance this amendment at December 31, 2013.
Amendment to IAS 39: Financial instruments: Recognition and measurement
Amendment to IAS 19: Employee Benefits
(ii) Interpretations
IFRIC 21: Levies
(iii) Improvements
Improvements to the International Financial Reporting Standards (2012): IFRS 2: Share-based Payment; IFRS 3: Business Combinations Therefore, IFRS 9, IAS 37, and IAS 39 are also modified; IFRS 8: Operating Segments, IFRS 13: Fair Value Measurement, IFRS 9 and IAS 39 were consequently changed; IAS 16: Property, Plant and Equipment, and IAS 38: Intangible Assets; and IAS 24: Related Party Disclosures.
Improvements to the International Financial Reporting Standards (2013): IFRS 1: First-time Adoption of International Financial Reporting Standards; IFRS 3: Business Combinations; IFRS 13: Fair Value Measurement; and IAS 40: Investment Property.
F-19
(b) Accounting pronouncements effective implementation starting on January 1, 2015 and following:
Mandatory
Application:
IFRS 9: Financial instruments
IFRS 15: Revenue from contracts with customers
Amendment to IFRS 9: Financial instruments.
Amendment to IFRS 11: Joint arrangements.
Amendment to IAS 16: Property, plant and equipment, and IAS 38: Intangible assets.
Amendment to IAS 27: Separate financial statements.
Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures.
Amendment IAS 1: Presentation of Financial Statements
Amendment to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of Interests in other entities and IAS 28: Investments in associates and joint ventures.
(ii) Improvements
Improvements to International Financial Reporting Standards (2012-2014 cycle): IFRS 5 Non-current assets held for sale and discontinued operations; IFRS 7 Financial instruments: Disclosures; IAS 19 Employee benefits and IAS 34 Interim financial reporting.
F-20
Subsidiaries are all the entities (including special-purpose entities) over which the Company has the power to control the financial and operating policies, which are generally accompanied by a holding of more than half of the voting rights. In evaluating whether the Company controls another entity, the existence and effect of potential voting rights that are currently exercisable or convertible at the date of the consolidated financial statements are considered. The subsidiaries are consolidated from the date on which control is passed to the Company and they are excluded from the consolidation on the date they cease to be so controlled. The results and flows are incorporated from the date of acquisition.
The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets.
Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re-measured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognized in profit or loss.
Inter-company transactions, balances and unrealized gains on transactions between the Company’s entities are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment loss of the asset transferred. When necessary in order to ensure uniformity with the policies adopted by the Company, the accounting policies of the subsidiaries are modified.
To account for and identify the financial information to be revealed when carrying out a business combination, such as the acquisition of an entity by the Company, shall apply the acquisition method provided for in IFRS 3: Business combination.
The Company applies the policy of considering transactions with non-controlling interests, when not related to loss of control, as equity transactions without an effect on income.
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).
F-21
If LATAM Airlines Group S.A. and Subsidiaries retain an ownership of participation in the sold subsidiary, and does not represent control, this is recognized at fair value on the date that control is lost, the amounts previously recognized in Other comprehensive income are accounted as if the Company had disposed directly from the assets and related liabilities, which can cause these amounts are reclassified to profit or loss. The percentage retained valued at fair value are subsequently accounted using the equity method.
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.
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency other than the presentation currency are translated to the presentation currency as follows:
(i) Assets and liabilities of each consolidated statement of financial position presented are translated at the closing exchange rate on the consolidated statement of financial position date;
(ii) The revenues and expenses of each income statement account are translated at the exchange rates prevailing on the transaction dates, and
(iii) All the resultant exchange differences by conversion are shown as a separate component in Other comprehensive income.
F-22
The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar.
In the consolidation, exchange differences arising from the translation of a net investment in foreign entities (or local with a functional currency different to that of the parent), and of loans and other foreign currency instruments designated as hedges for these investments, are recorded within net equity. When the investment is sold, these exchange differences are shown in the consolidated statement of income as part of the loss or gain on the sale.
Adjustments to the 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 informed.
The land of LATAM Airlines Group S.A. and Subsidiaries is recognized at cost less any accumulated impairment loss. The rest of the Property, plant and equipment are registered, initially and subsequently, at historic cost less the corresponding depreciation and any impairment loss.
The amounts of advance payments to aircraft manufacturers are capitalized by the Company under Construction in progress until receipt of the aircraft.
Subsequent costs (replacement of components, improvements, extensions, etc.) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the results of the year in which they are incurred.
Depreciation of Property, plant and equipment is calculated using the straight-line method over their estimated technical useful lives; except in the case of certain technical components which are depreciated on the basis of cycles and hours flown.
The residual value and useful life of assets are reviewed, and adjusted if necessary, once per year.
When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount (Note 2.8).
Losses and gains on the sale of Property, plant and equipment are calculated by comparing the compensation with the book value and are included in the consolidated statement of income.
F-23
(a) Brands, Airport slots and Loyalty program
Brands, Airport slots and Coalition and loyalty program are intangible assets of indefinite useful life and are subject to impairment tests annually as an integral part of each CGU, in accordance with the premises that are applicable, included as follows:
Airport slots – Air transport CGU
Loyalty program – Coalition and loyalty program Multiplus CGU
Brand – Air transport CGU
(See Note 15)
The airport slots correspond to an administrative authorization to carry out operations of arrival and departure of aircraft at a specific airport, within a specified period.
The Loyalty program corresponds to the system of accumulation and redemption of points that has developed Multiplus S.A., subsidiary of TAM S.A.
The Brands, airport Slots and Loyalty program were recognized in fair values determined in accordance with IFRS 3, as a consequence of the business combination with TAM and Subsidiaries.
(b) Computer software
Licenses for computer software acquired are capitalized on the basis of the costs incurred in acquiring them and preparing them for using the specific software. These costs are amortized over their estimated useful lives, for which the Company has been defined useful lives between 3 and 7 years.
Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. The personnel costs and others costs directly related to the production of unique and identifiable computer software controlled by the Company, are shown as intangible Assets others than Goodwill when they have met all the criteria for capitalization.
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. Gains and losses on the sale of an entity include the book amount of the goodwill related to the entity sold.
Interest costs incurred for the construction of any qualified asset are capitalized over the time necessary for completing and preparing the asset for its intended use. Other interest costs are recognized in the consolidated income statement when they are accrued.
F-24
Intangible assets that have an indefinite useful life, and developing IT projects, are not subject to amortization and are subject to annual testing for impairment. Assets subject to amortization are subjected to impairment tests whenever any event or change in circumstances indicates that the book value of the assets may not be recoverable. An impairment loss is recorded when the book value is greater than the recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. In evaluating the impairment, the assets are grouped at the lowest level for which cash flows are separately identifiable (CGUs). Non-financial assets other than goodwill that have suffered an impairment loss are reviewed if there are indicators of reverse losses at each reporting date.
The Company classifies its financial instruments in the following categories: financial assets at fair value through profit and loss and loans and receivables. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at the time of initial recognition, which occurs on the date of transaction.
(a) Financial assets at fair value through profit and loss
Financial assets at fair value through profit and loss are financial instruments held for trading and those which have been designated at fair value through profit or loss in their initial classification. A financial asset is classified in this category if acquired mainly for the purpose of being sold in the near future or when these assets are managed and measured using fair value. Derivatives are also classified as held for trading unless they are designated as hedges. The financial assets in this category and have been designated initial recognition through profit or loss, are classified as Cash and cash equivalents and Other current financial assets and those designated as instruments held for trading are classified as Other current and non-current financial assets.
(b) Loans and receivables
Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded on an active market. These items are classified in current assets except for those with maturity over 12 months from the date of the consolidated statement of financial position, which are classified as non-current assets. Loans and receivables are included in trade and other accounts receivable in the consolidated statement of financial position (Note 2.12).
The regular purchases and sales of financial assets are recognized on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or losses are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
The financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method.
F-25
At the date of each consolidated statement of financial position, the Company assesses if there is objective evidence that a financial asset or group of financial assets may have suffered an impairment loss.
Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and if so, the nature of the item hedged. The Company designates certain derivatives as:
(a) Hedge of the fair value of recognized assets (fair value hedge);
(b) Hedge of an identified risk associated with a recognized liability or an expected highly-Probable transaction (cash-flow hedge), or
(c) Derivatives that do not qualify for hedge accounting.
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.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is shown in the statement of other comprehensive income. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under Other gains (losses). Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.
In case of variable interest-rate hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to results within financial costs at the same time the associated debts accrue interest.
F-26
For fuel price hedges, the amounts shown in the statement of Other comprehensive income are reclassified to results under the line item Cost of sales to the extent that the fuel subject to the hedge is used.
For foreign currency hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to income as deferred revenue resulting from the use of points, are recognized as Income.
When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in the statement of Other comprehensive income until that moment remains in the statement of other comprehensive income and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in the statement of other comprehensive income is taken immediately to the consolidated statement of income as “Other gains (losses)”.
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.
Trade accounts receivable are shown initially at their fair value and later at their amortized cost in accordance with the effective interest rate method, less the allowance for impairment losses. An allowance for impairment loss of trade accounts receivable is made when there is objective evidence that the Company will not be able to recover all the amounts due according to the original terms of the accounts receivable.
The existence of significant financial difficulties on the part of the debtor, the probability that the debtor is entering bankruptcy or financial reorganization and the default or delay in making payments are considered indicators that the receivable has been impaired. The amount of the provision is the difference between the book value of the assets and the present value of the estimated future cash flows, discounted at the original effective interest rate. The book value of the asset is reduced by the amount of the allowance and the loss is shown in the consolidated statement of income in Cost of sales. When an account receivable is written off, it is charged to the allowance account for accounts receivable.
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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 and are valued according to the method of the effective interest rate.
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 expense by current tax is comprised of income and deferred taxes.
The charge for current tax is calculated based on tax laws in force on the date of statement of financial position, in the countries in which the subsidiaries and associates operate and generate taxable income.
Deferred taxes are calculated using the liability method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction different from a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws) that have been enacted or substantially enacted at the consolidated financial statements close, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability discharged.
Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences.
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The tax (current and deferred) is recognized in income by function, unless it relates to an item recognized in Other comprehensive income, directly in equity or from business combination. In that case the tax is also recognized in Other comprehensive income, directly in income by function or goodwill, respectively.
(a) Personnel vacations
The Company recognizes the expense for personnel vacations on an accrual basis.
(b) Share-based compensation
The compensation plans implemented by the granting of options for the subscription and payment of shares are shown in the consolidated financial statements in accordance with IFRS 2: Share based payments, showing the effect of the fair value of the options granted as a charge to remuneration on a straight-line basis between the date of granting such options and the date on which these become vested.
(c) Post-employment and other long-term benefits
Provisions are made for these obligations by applying the method of the actuarial value of the accrued cost, and taking into account estimates of future permanence, mortality rates and future wage increases determined on the basis of actuarial calculations. The discount rates are determined by reference to market interest-rate curves. Actuarial gains or losses are shown in other comprehensive income.
(d) Incentives
The Company has an annual incentives plan for its personnel for compliance with objectives and individual contribution to the results. The incentives eventually granted consist of a given number or portion of monthly remuneration and the provision is made on the basis of the amount estimated for distribution.
Provisions are recognized when:
(i) The Company has a present legal or implicit obligation as a result of past events;
(ii) It is probable that payment is going to be necessary to settle an obligation; and
(iii) The amount has been reliably estimated.
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(i) Passenger and cargo transport
The Company shows revenue from the transportation of passengers and cargo once the service has been provided.
Consistent with the foregoing, the Company presents the deferred revenues, generated by anticipated sale of flight tickets and freight services, in heading Other financial liabilities in the Statement of Financial Position.
(ii) Frequent flyer program
The Company currently has a frequent flyer programs, whose objective is customer loyalty through the delivery of kilometers or points fly whenever the programs holders make certain flights, use the services of entities registered with the program or make purchases with an associated credit card. The kilometers or points earned can be exchanged for flight tickets or other services of associated entities.
The consolidated financial statements include liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers or points accumulated pending use at that date, in accordance with IFRIC 13: Customer loyalty programs.
(iii) Other revenues
The Company records revenues for other services when these have been provided.
(b) Interest income
Interest income is booked using the effective interest rate method.
(c) Dividend income
Dividend income is booked when the right to receive the payment is established.
(a) When the Company is the lessee – financial lease
The Company leases certain Property, plant and equipment in which it has substantially all the risk and benefits deriving from the ownership; they are therefore classified as financial leases. Financial leases are initially recorded at the lower of the fair value of the asset leased and the present value of the minimum lease payments.
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Every lease payment is separated between the liability component and the financial expenses so as to obtain a constant interest rate over the outstanding amount of the debt. The corresponding leasing obligations, net of financial charges, are included in Other financial liabilities. The element of interest in the financial cost is charged to the consolidated statement of income over the lease period so that it produces a constant periodic rate of interest on the remaining balance of the liability for each year. The asset acquired under a financial lease is depreciated over its useful life and is included in Property, plant and equipment.
(b) When the Company is the lessee – operating lease
Leases, in which the lessor retains an important part of the risks and benefits deriving from ownership, are classified as operating leases. Payments with respect to operating leases (net of any incentive received from the lessor) are charged in the consolidated statement of income on a straight-line basis over the term of the lease.
2.22. Non-current assets or disposal groups classified as held for sale
Non-current assets (or disposal groups) classified as assets held for sale are shown at the lesser of their book value and the fair value less costs to sell.
In case of own aircraft or under financial leases, these maintenance cost are capitalized as Property, plant and equipment, while in the case of aircraft under operating leases, a liability is accrued based on the use of the main components is recognized, since exists a contractual obligation with the lessor to return the aircraft on agreed terms of maintenance levels. These are recognized as Cost of sales.
Additionally, some leases establish the obligation of the lessee to make deposits to the lessor as a guarantee of compliance with the maintenance and return conditions. These deposits, often called maintenance reserves, accumulate until a major maintenance is performed, once made, is request the recovery to the lessor. At the end of the contract period, the balance between paid reservations and conditions agreed with levels of maintain in delivering, be offset the parties if applicable.
Disbursements related to environmental protection are charged to results when incurred.
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NOTE 3 - FINANCIAL RISK MANAGEMENT
The Company’s activities are exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on the net margin. The Company uses derivative instruments to hedge part of these risks.
(a) Market risk
Due to the nature of its operations, the Company is exposed to market risks such as:
(i) fuel-price risk, (ii) interest-rate risk, and (iii) local exchange-rate risk. In order to fully or partially hedge all of these risks, the Company operates with derivative instruments to fix or limit the possible impact that could generate the above mentioned risks.
(i) Fuel-price risk:
Fluctuations in fuel prices largely depend on the global supply and demand for oil, decisions taken by Organization of Petroleum Exporting Countries (“OPEC”), global refining capacity, stock levels maintained, and weather and geopolitical factors.
The Company purchases an aircraft fuel called Jet Fuel grade 54. There is a benchmark price in the international market for this underlying asset, which is US Gulf Coast Jet 54. However, the futures market for this asset has a low liquidity index and as a result the Company hedges its exposure using West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and are highly liquid assets and therefore have advantages in comparison to the use of the U.S. Gulf Coast Jet 54 index.
During the period ended December 31, 2014, the Company recognized losses of US$ 108.7 million on fuel derivative. During the period 2013, the Company recognized gains of US$ 19.0 million and during the same period 2012 the Company recognized losses of US$ 1.80 million for the same reason.
At December 31, 2014, the market value of its fuel positions amounted to US$ 157.2 million (negative). At December 31, 2013, this market value was US$ 15.9 million (positive).
The following tables show the level of hedge for different periods:
Positions as of December 31, 2014 (*)
Percentage of the hedge of expected consumption value
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Positions as of December 31, 2013 (*)
Sensitivity analysis
A drop in fuel price positively affects the Company through a reduction in costs. However, this drop also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price.
Due to the fact that current positions do not represent changes in cash flows, but a variation in the exposure to the market value, the current hedge positions have no impact on income (they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity through the consolidated statement of comprehensive income).
The following table shows the sensitivity analysis of the financial instruments according to reasonable changes in the fuel price and their effect on equity. The term of the projection was defined until the end of the last current fuel hedge contract, being the last business day of the third quarter of 2015.
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, 2014 and the end of December, 2013.
Benchmark price
(US$ per barrel)
-5
The Company seeks to reduce the risk of fuel price rises to ensure it is not left at a disadvantage compared to its competitors in the event of a sharp price fall. The Company therefore uses hedge instruments like swaps, call options and collars to partially hedge the fuel volumes by consume.
Given the fuel hedge structure during the year of 2014, which considers a hedge-free portion, a vertical fall by 5 dollars in the BRENT and JET benchmark price (the monthly daily average), would have meant an impact of approximately US$ 90.2 million in the cost of total fuel consumption for the same period. For the period of 2014, a vertical rise by 5 dollars in the BRENT and JET benchmark price (the monthly daily average) would have meant an impact of approximately US$ 88.07 million of increased fuel costs.
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(ii) Cash flow interest-rate risk:
The fluctuation in interest rates depends heavily on the state of the global economy. An improvement in long-term economic prospects moves long-term rates upward while a drop causes a decline through market effects. However, if we consider government intervention in periods of economic recession, it is usual to reduce interest rates to stimulate aggregate demand by making credit more accessible and increasing production (in the same way interest rates are raised in periods of economic expansion).
The present uncertainty about how the market and governments will react, and thus how interest rates will change, creates a risk related to the Company’s debt at floating interest rates and its investments.
Cash flow interest rate risk equates to the risk of future cash flows of the financial instruments due to the fluctuation in interest rates on the market. The Company’s exposure to risks of changes in market interest rates is mainly related to long-term obligations with variable interest rates.
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 69% (70% at December 31, 2013) of the debt is fixed to fluctuations in interest rate. Therefore the Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) of 30 days, 90 days, 180 days and 360 days. Other interest rates of less relevance are Brazilian Interbank Deposit Certificate (“ILC”), and the Interest Rate Term of Brazil (“TJLP”).
The following table shows the sensitivity of changes in financial obligations that are not hedged against interest-rate variations. These changes are considered reasonably possible based on current market conditions.
Increase (decrease)
futures curve
in libor 3 months
-100 basis points
Changes in market conditions produce a change in the valuation of current financial instruments hedging interest rates, causing an effect on the Company’s equity (because they are booked as cash-flow hedges). These changes are considered reasonably possible based on current market conditions. The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve.
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There are limitations in the method used for the sensitivity analysis and relate to those provided by the market because the levels indicated by the futures curves are not necessarily met and will change in each period.
In accordance with the requirements of IAS 39, during the periods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement.
(iii) Foreign exchange rate risk:
The functional currency used by the Company is the US dollar in terms of setting prices for its services, the composition of its statement of financial position and effects on its operating income.
The main risk arises when items listed on the balance sheet are exposed to exchange rate variations, due to their being listed in a currency other than the functional currency.
In the case of the subsidiary TAM S.A, which operates with the Brazilian Real as its functional currency, a large proportion of the company’s liabilities are expressed in United States Dollars. Therefore, this subsidiary’s profit and loss varies when its financial assets and liabilities, and its accounts receivable listed in dollars are converted to Brazilian Reals. This impact on profit and loss is consolidated in the Company.
In order to reduce the volatility on the financial statements of the Company caused by rises and falls in the R$/US$ exchange rate, the Company has conducted transactions for to reduce the net US$ liabilities held by TAM S.A.
The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:
Appreciation (depreciation)
of R$/US$
The Company sells most of its services in US dollars, prices equivalent to the US dollar and Brazilian real. A large part of its expenses are denominated in US dollars or equivalents to the US dollar, particularly fuel costs, aeronautic charges, aircraft leases, insurance and aircraft components and accessories. Remuneration expenses are denominated in local currencies.
The Company maintains its cargo and passenger international business tariffs in US dollars. There is a mix in the domestic markets as sales in Peru are in local currency but the prices are indexed to the US dollar. In domestic markets of Brazil, Chile, Argentina and Colombia the tariffs are in local currency without any kind of indexation. In the case of the domestic business in Ecuador, both tariffs and sales are in US dollar. The Company is therefore exposed to fluctuations in the different currencies, among which are: Brazilian real, Chilean peso, Argentine peso, Paraguayan guaraní, Mexican peso, Euro, Pound sterling, Peruvian sol, Colombian peso, Australian dollar and New Zealand dollar. Of these currencies, the largest exposure is presented by Brazilian real and Chilean peso.
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On the other hand, one of the sources of financing of the Company is the receipt of future flows relating to dividends and distributions of capital that the subsidiaries project distribute. These futures flows vary depending on the evolution of currency in compared to the US$. Most exposure to future flows is presented in subsidiary TAM S.A. and the volatility in the exchange rate R$/US$. In the case of the subsidiary TAM S.A. the incomes are expressed a large proportion in R$ and a large proportion of their costs are expressed in US$.
For cover the inversion in the subsidiaries and reduce the volatility in the cash flow , the Company may acquire derivatives contracts to hedge variations in other currencies against the Company’s functional currency, hedging exchange rate risk through currency forward.
With the object of reduce the exposition to the futures monthly operating flows of all 2014, caused by eventual depreciation of the BRL and assure an economic margins, LATAM done the hedge by derivatives FX Forward.
During the year ended at December 31, 2014 the Company recognized losses of US$ 3.8 million on hedging FX. During the period of 2013 and 2012 the Company had no current positions for this item, so no compensation is recognized.
At December 31, 2014, the market value of its FX positions amounted to US$0.1 million (negative). At end of December 2013 the market value was of US$ 32.1 million (positive).
At end of December 2014, the Company has contracted derivatives of FX for US$ 100 million (US$ 500 million at December 31, 2013)
Sensitivity exchange rate LATAM
A depreciation of exchange rate R$/ US$ affects negatively the Company for a rise of its costs in US$, however, it also affects positively the value of contracted derivate positions.
Because the changes in the value of current positions not represented changes in cash flows, but a variation in the exposure of market value, the current hedge positions have not impact on result (are registered as cash flow hedges according to IAS 39, therefore, a variation in the exposure has an impact on the Company’s net equity).
The following table presents the sensitivity of derivative FX Forward instruments agrees with reasonable changes to exchange rate and its effect on equity. The projection term was defined until the end of the last current contract hedge, being the last business day of the first month of 2015:
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Effects of exchange rate derivatives in the Financial Statements
The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 18).
Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in Other comprehensive income.
The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$:
(b) Credit risk
Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in market value of a financial instrument (only financial assets, not liabilities).
The Company is exposed to credit risk due to its operative and financial activities, including deposits with banks and financial institutions, investments in other kinds of instruments, exchange-rate transactions and the contracting of derivative instruments or options.
To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents).
As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the company has established maximum limits for investments which are monitored regularly.
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(i) Financial activities
Cash surpluses that remain after the financing of assets necessary for the operation are invested according to credit limits approved by the Company’s Board, mainly in time deposits with different financial institutions, private investment funds, short-term mutual funds, and easily-liquidated corporate and sovereign bonds with short remaining maturities. These investments are booked as Cash and cash equivalents and Other current financial assets.
In order to reduce counterparty risk and to ensure that the risk assumed is known and managed by the Company, investments are diversified among different banking institutions (both local and international). The Company evaluates the credit standing of each counterparty and the levels of investment, based on (i) their credit rating, (ii) the equity size of the counterparty, and (iii) investment limits according to the Company’s level of liquidity. According to these three parameters, the Company chooses the most restrictive parameter of the previous three and based on this, establishes limits for operations with each counterparty.
The Company has no guarantees to mitigate this exposure.
(ii) Operational activities
The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by 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). The bad-debt rate in the principal countries where the Company has a presence is insignificant.
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(c) Liquidity risk
Liquidity risk represents the risk that the Company has no funds to meet its obligations.
Because of the cyclical nature of the business, the operation, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, plus the financing needs related to market-risk hedges, the Company requires liquid funds to meet its payment obligations.
The Company therefore manages its cash and cash equivalents and its financial assets, matching the term of investments with those of its obligations. The Company’s policy is that the average term of its investments may not exceed the average term of its obligations. This cash and cash equivalents position is invested in highly-liquid short-term instruments through first-class financial entities.
The Company has future obligations related to financial leases, operating leases, maturities of other bank borrowings, derivative contracts and aircraft purchase contracts.
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Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2014
Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.
Loans to exporters
97.032.000-8
97.036.000-K
97.006.000-6
97.030.000-7
76.645.030-K
97.951.000-4
Bank loans
97.023.000-9
0-E
Guaranteed obligations
Other guaranteed obligations
Financial leases
Other loans
Hedging derivatives
—
Non—hedging derivatives
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Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.
NEDERLANDSCHE
CREDIETVERZEKERING MAATSCHAPPIJ
Holland
US$
184
493
1,315
1,369
4,676
3,796
Monthly
6.01
Obligation with the public
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Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.
Accounts payable to related parties currents
65.216.000-1
78.591.370-1
INVERSORA AERONÁUTICA ARGENTINA
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Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2013
76.100.458-1
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COMPANHIA BRASILEIRA DE MEIOS DE PAGAMENTO
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Nominal
rate
Accounts payable, non-current
96.847.880-K
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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 2013, the Company provided US$ 94.3 million in derivative margin guarantees, for cash and stand-by letters of credit. At December 31, 2014, the Company had provided US$ 91.8 million in guarantees for Cash and cash equivalent and stand-by letters of credit. The fall was due at i) maturity of hedge contracts, ii) acquire of new fuel purchase contracts, and iii) changes in fuel prices, exchange rate R$/US$ and interest rates.
The Company’s objectives, with respect to the management of capital, are (i) to safeguard it in order to continue as an on-going business, (ii) to seek a return for its shareholders, and (iii) to maintain an optimum capital structure and reduce its costs.
In order to maintain or adjust the capital structure, the Company may adjust the amount of the dividends payable to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Company monitors the adjusted leverage ratio, in line with industry practice. This ratio is calculated as net adjusted debt divided by the sum of adjusted equity and net adjusted debt. Net adjusted debt is total financial debt plus 8 times the operating lease payments of the last 12 months, less total cash (measured as the sum of cash and cash equivalents plus marketable securities). Adjusted capital is the amount of net equity without the impact of the market value of derivatives.
The Company’s strategy, which has not changed since 2007, has consisted of maintaining an adjusted leverage ratio of between 70% and 80% and an international credit rating of higher than BBB- (the minimum required for being considered investment grade). As a result of consolidation with TAM S.A. and Subsidiaries, the rating agency Fitch has issued on May 2, 2014 a new long-term rating for the Company of BB with negative perspective (which is not an investment grade rating). Additionally, on June 10, 2013, S&P issued a long term rating of BB, with a positive outlook.
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Adjusted leverage ratios:
Total financial loans
Last twelve months Operating lease payment x 8
Less:
Cash and marketable securities
Total net adjusted debt
Net Equity
Cash flow hedging reserve
Adjusted equity
Total adjusted debt and equity
Adjusted leverage
See information related to financial covenants in Note 31 (a).
3.3. Estimates of fair value.
At December 31, 2014, the Company maintained financial instruments that should be recorded at fair value. These are grouped into two categories:
1. Hedge Instruments:
This category includes the following instruments:
2. Financial Investments:
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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.
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The following table shows the classification of financial instruments at fair value, depending on the level of information used in the assessment:
Assets
Short-term mutual funds
Other financial assets, current
Fair value of interest rate derivatives
Fair value of fuel derivatives
Fair value of foreign currency derivatives
Interest accrued since the last payment date of Cross Currency Swap
Private investment funds
Certificate of deposit CDB
Domestic and foreign bonds
Time deposit
Other investments
Liabilities
Other financial liabilities, current
Interest accrued since the last payment date of Currency Swap
Interest rate derivatives not recognized as a hedge
Other financial liabilities, non current
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Additionally, at December 31, 2014, the Company has financial instruments which are not recorded at fair value. In order to meet the disclosure requirements of fair values, the Company has valued these instruments as shown in the table below:
Cash on hand
Bank balance
Overnight
Time deposits
Trade and other accounts receivable current
Other financial assets, non current
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 Other financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments. In the case of Other financial assets, the valuation was performed according to market prices at period end.
NOTE 4 - ACCOUNTING ESTIMATES AND JUDGMENTS
The Company has used estimates to value and book some of the assets, liabilities, revenues, expenses and commitments; these relate principally to:
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In any case, it is possible that events will require modification of the estimates in the future, in which case the effects would be accounted for prospectively.
Since the integration of LAN and TAM operations, most critical airline activities in Brazil have been managed under the TAM CEO and global activities have been managed by the LATAM CEO, who is in charge of the overall operation of the LATAM Group and who reports to the LATAM board. Further, the LATAM CEO evaluates performance of the LATAM Group executives and, together with the LATAM board, determines compensation. Although there are restrictions on voting interests that currently may be held by foreign investors under Brazilian law, LATAM believes that the economic substance of these arrangements satisfies the requirements established by the applicable accounting standards and that consolidation by LATAM of TAM’s operations is appropriate.
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NOTE 5 - SEGMENTAL INFORMATION
The Company has determined that it has two operating segments: the air transportation business and the coalition and loyalty program Multiplus.
The Air transport segment corresponds to the route network for air transport and it is based on the way that the business is run and managed, according to the centralized nature of its operations, the ability to open and close routes and reallocate resources (aircraft, crew, staff, etc.) within the network, which is a functional relationship between all of them, making them inseparable. This segment definition is the most common level used by the global airline industry.
The segment of loyalty coalition called Multiplus, unlike LanPass and TAM Fidelidade, is a frequent flyer programs which operate as a unilateral system of loyalty that offers a flexible coalition system, interrelated among its members, with 13.8 million of members, along with being a government entity with a separately business and not directly related to air transport.
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(a) For the periods ended
Air
transportation
At December 31,
Coalition and
loyalty program
Eliminations
Consolidated
Income from ordinary activities from external customers (*)
LAN passenger
TAM passenger
Freight
Income from ordinary activities from transactions with other operating segments
Interest income
Interest expense
Total net interest expense
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Depreciation and amortization
Material non-cash items other than depreciation and amortization
Disposal of fixed assets and inventory losses
Doubtful accounts
Exchange differences
Income (loss) atributable to owners of the parents
Participation of the entity in the income of associates
Expenses for income tax
Segment profit / (loss)
Assets of segment
Investments in associates
Amount of non-current asset additions
Intangibles other than goodwill
Segment liabilities
Purchase of non-monetary assets of segment
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The Company’s revenues by geographic area are as follows:
Income from ordinary activities
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
Bank balances
Total Cash
Cash equivalents
Mutual funds
Total cash equivalents
Total cash and cash equivalents
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Cash and cash equivalents are denominated in the following currencies:
Currency
Argentine peso
Brazilian real
Chilean peso (*)
Colombian peso
Euro
US Dollar
Strong bolivar (**)
Other currencies
During 2014, in accordance with the acceptance of the Company about the proposal Bolivarian Republic of Venezuela regarding the repatriation of foreign exchange through the so-called “request of acquisition of foreign exchange”, the Company has modified the exchange rate used in determining equivalence of United States Dollar in cash and cash equivalents held in Strong Bolivar, from 6.3 VEF/US$ to 12.0 VEF/US$, which represented a loss by foreign exchange, amounting to the sum of ThUS$ 61,021.
The Company has done significant non-cash transactions mainly with financial leases, which are detailed in Note 16 letter (d), additional information in numeral (iv) Financial leases.
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Other inflows (outflows) of cash:
Currency hedge
Fuel hedge
Hedging margin guarantees
Guarantees
Fuel derivatives premiums
Bank commissions, taxes paid and other
Total Other inflows (outflows) Operation flow
opening balance Cash and cash equivalents acquired companies
Amount paid by Squeeze Out TAM S.A. (*)
Certificate of bank deposits
Total Other inflows (outflows) Investment flow
Aircraft Financing advances
Credit card loan manager
Settlement of derivative contracts
Breakage
Other
Total Other inflows (outflows) Financing flow
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NOTE 7 - FINANCIAL INSTRUMENTS
Other financial assets, current (*)
Trade and others accounts receivable, current
Accounts receivable from related entities, current
Other financial assets, non current (*)
Accounts receivable, non current
Other liabilities, current
Trade and others accounts payable, current
Accounts payable to related entities, current
Other financial liabilities, non-current
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At December 31, 2013
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a) Assets
Chilean peso
Strong bolivar
Other financial as sets (current and non-current)
Trade and other accounts receivable, current
Other currencies (*)
Accounts receivable, non-current
b) Liabilities
Liabilities information is detailed in the table within Note 3 Financial risk management.
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NOTE 8 - TRADE AND OTHER ACCOUNTS RECEIVABLE CURRENT, AND NON-CURRENT ACCOUNTS RECEIVABLE
Trade accounts receivable
Other accounts receivable
Total trade and other accounts receivable
Less: Allowance for impairment loss
Total net trade and accounts receivable
Less: non-current portion – accounts receivable
The fair value of trade and other accounts receivable does not differ significantly from the book value.
The maturity of these accounts at the end of each period is as follows:
Day
Matured accounts receivable, but not impaired
Expired from 1 to 90 days
Expired from 91 to 180 days
More than 180 days overdue (*)
Total matured accounts receivable, but not impaired
Matured accounts receivable and impaired Judicial, pre-judicial collection and protested documents
Debtor under pre-judicial collection process and portfolio sensitization
Total matured accounts receivable and impaired
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Currency balances that make up the Trade and other accounts receivable and non-current accounts receivable:
Argentine Peso
Brazilian Real
Chilean Peso
Other currency (*)
(*) Other currencies
Australian Dollar
Chinese Yuan
Danish Krone
Pound Sterling
Indian Rupee
Japanese Yen
Norwegian Kroner
Swiss Franc
Korean Won
New Taiwanese Dollar
The Company records allowances when there is evidence of impairment of trade receivables. The criteria used to determine that there is objective evidence of impairment losses are the maturity of the portfolio, specific acts of damage (default) and specific market signals.
Maturity
Judicial and pre-judicial collection assets
Over 1 year
Between 6 and 12 months
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Movement in the allowance for impairment loss of Trade and other accounts receivables:
Periods
From January 1 to December 31, 2012
From January 1 to December 31, 2013
From January 1 to December 31, 2014
Once pre-judicial and judicial collection efforts are exhausted, the assets are written off against the allowance. The Company only uses the allowance method rather than direct write-off, to ensure control.
Historic and current re-negotiations are not relevant and the policy is to analyze case by case in order to classify them according to the existence of risk, determining whether it is appropriate to reclassify accounts to pre-judicial recovery. If such re-classification is justified, an allowance is made for the account, whether overdue or falling due.
The maximum credit-risk exposure at the date of presentation of the information is the fair value of each one of the categories of accounts receivable indicated above.
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.
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NOTE 9 - ACCOUNTS RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES
(a) Accounts Receivable
Related party
Relationship
79.773.440-1
87.752.000-5
(b) Accounts payable
65.216.000-K
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.
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NOTE 10 - INVENTORIES
Technical stock
Non-technical stock
Total production suppliers
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 that as of December 31, 2014 amounts to ThUS$ 2,982 (ThUS$ 1,757 as of December 31, 2013). The resulting amounts do not exceed the respective net realizable values.
As of December 31, 2014, the Company recorded ThUS$ 189,864 (ThUS$ 160,068 as of December 31, 2013 and ThUS$ 127,989 as of December 31, 2012) within the income statement, mainly due to in-flight consumption and maintenance, which forms part of Cost of sales.
During 2014 no reversals of write-downs resulting from an increase in net realizable value.
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NOTE 11 - OTHER FINANCIAL ASSETS
The composition of Other financial assets is as follows:
(a) Other financial assets
Deposits in guarantee (aircraft)
Certificate of deposit (CBD)
Guarantees for margins of derivatives
Deposits in guarantee (loan)
Other guarantees given
Subtotal of other financial assets
(b) Hedging assets
Interest accrued since the last payment date of Cross currency swap
Fair value of foreign currency derivatives (1)
Fair value of fuel price derivatives
Subtotal of hedging assets
Total Other Financial Assets
The types of derivative hedging contracts maintained by the Company at the end of each period are presented in Note 18.
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NOTE 12 - OTHER NON-FINANCIAL ASSETS
The composition of Other non-financial assets is as follows:
(a) Advance payments
Aircraft leases
Aircraft insurance and other
Subtotal advance payments
(b) Other assets
Aircraft maintenance reserve (*)
Sales tax
Other taxes
Contributions to Société Internationale de Télécommunications Aéronautiques (“SITA”)
Judicial deposits
Subtotal other assets
Total Other Non - Financial Assets
These amounts are calculated based on performance measures, such as flight hours or cycles, are payable periodically (usually monthly) and are contractually required to be repaid to the lessee upon the completion of the required maintenance of the leased aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment.
In some cases (5 lease agreements), if the maintenance cost incurred by LATAM is less than the corresponding maintenance reserves, the lessor is entitled to retain those excess amounts at the time the heavy maintenance is performed. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, and recognizes an expense if any such amounts are less than probable of being returned. Since the acquisition of TAM in June 2012, the cost of aircraft maintenance has been higher than the related maintenance reserves for all aircraft.
As of December 31, 2014, LATAM had ThUS$ 154,696 in maintenance reserves (ThUS$ 231,809 at December 31, 2013), corresponding to 12 aircraft out of a total fleet of 327 (21 aircraft out of a total fleet of 339 at December 31, 2013). All of the Company’s aircraft leases containing provisions for maintenance reserves will expire fully by 2017.
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).
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NOTE 13 - INVESTMENTS IN SUBSIDIARIES
(a) Investments in subsidiaries
The Company has investments in companies recognized as investments in subsidiaries. All the companies defined as subsidiaries have been consolidated within the financial statements of LATAM Airlines Group S.A. and Subsidiaries. The consolidation also includes special-purpose entities and private investment funds.
Detail of significant subsidiaries and summarized financial information:
Name of significant subsidiary
Lan Perú S.A.
Lan Cargo S.A.
Lan Argentina S.A.
Transporte Aéreo S.A.
Aerolane Líneas Aéreas Nacionales del Ecuador S.A.
Aerovías de Integración Regional, AIRES S.A.
TAM S.A.
The consolidated subsidiaries do not have significant restrictions for transferring funds to controller.
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Summary financial information of significant subsidiaries
TAM S.A. (*)
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(b) Non-controlling interest
Lan Perú S.A
Lan Cargo S.A. and Subsidiaries
Inversiones Lan S.A. and Subsidiaries
Promotora Aérea Latinoamericana S.A. and Subsidiaries
Aerolane, Lineas Aéreas Nacionales del Ecuador S.A.
Inversora Cordillera S.A. and Subsidiaries
Americonsult de Guatemala S.A.
Americonsult Costa Rica S.A.
Linea Aérea Carguera de Colombiana S.A.
Aerolíneas Regionales de Integración Aires S.A.
Transportes Aereos del Mercosur S.A.
Multiplus S.A.
Promotora Aerea Latinoamericana S.A. and Subsidiaries
Aerolinheas Brasileiras S.A. and Subsidiaries
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NOTE 14 - INTANGIBLE ASSETS OTHER THAN GOODWILL
The details of intangible assets are as follows:
Computer software
Developing software
Airport slots
Loyalty program
Trademarks
Movement in Intangible assets other than goodwill:
Opening balance as of January 1, 2012
Additions
Withdrawals
Transfer software
Acquisitions through business combination
Foreing exchange
Amortization
Opening balance as of January 1, 2013
Opening balance as of January 1, 2014
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The amortization of the period is shown in the consolidated statement of income in administrative expenses. The accumulated amortization of computer programs as of December 31, 2014 amounts to ThUS$ 183,049 (ThUS$ 135,597 as of December 31, 2013, ThUS$ 79,342 as of December 31, 2012). The accumulated amortization of other identifiable intangible assets as of December 31, 2014 amounts to ThUS$ 808 (ThUS$ 727 as of December 31, 2013, ThUS$ 566 as of December 31, 2012).
(*) See Note 2.5
NOTE 15 - GOODWILL AND BUSINESS COMBINATION
15.1 Goodwill
The Goodwill amount at December 31, 2014 is ThUS$ 3,313,401 (ThUS$ 3,727,605 at December 31, 2013 and ThUS$ 4,213,160 as revised at December 2012).
The Company has two cash- generating units (CGUs), confirming the existence of two cash- generating units: “Air transportation” and, “Coalition and loyalty program Multiplus”; consistent with this, at December 31, 2014 was performed impairment tests based on value in use and no impairment was identified. These tests are done at least once per year.
At December 31, 2014, the recoverable amounts of cash generating units have been determined from estimated cash flows by the Administration. The main assumptions used are disclosed as follows:
Air transportationCGU
Coalition and loyaltyprogram Multiplus CGU (2)
Annual growth rate (Terminal)
Exchange rate (1)
Discount rate based on the weighted average cost of capital (WACC)
Discount rate based on cost of equity (CoE)
Fuel Price from futures price curves commodities markets
Given the expectation of growth and the long investment cycles characteristic of the industry, are used projections of ten years.
The result of the impairment test, which includes a sensitivity analysis of the main variables, showed that the estimated recoverable amount is higher than carrying value of the book value of net assets allocated to the cash generating unit, and therefore impairment was not detected.
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The sensitivity analysis included individual impact of variations in the key assumptions with impact on the determination of the recoverable amounts, namely:
Air transportation CGU
Coalition and loyalty program Multiplus CGU
In none of the previous cases was presented impairment in the cash- generating unit.
Movement of Goodwill, separated by CGU:
Additions by business combination
Amendment initial recongnition
Increase (decrease) due to exchange rate differences
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The following information summarizes the business combination process with TAM S.A. and subsidiaries:
(a) Description of the business combination process with TAM S.A. and Subsidiaries
(b) Business combination in accordance with IFRS 3
(c) Other information
(a) Description of the Business Combination process with TAM S.A and Subsidiaries
Dated June 22, 2012 the merger was successfully completed between LAN Airlines S.A. (today LATAM Airlines Group S.A.), with Sister Holdco S.A. and Holdco II S.A., two companies specially constituted for the purpose of the association between the Company and TAM S.A. which was reflected in the deed of execution of merger issued by such companies at the same time, and it was rectified by deed dated July 10, 2012. These scriptures recorded the share exchange of Sister Holdco S.A. and Holdco II S.A. for LAN’s shares in one related of 0.9 of LAN’s shares for each Sister Holdco S.A. and Holdco II S.A.. That exchange occurred with the delivery of the respective LAN shares to shareholders of Sister Holdco S.A. and the respective BDRs (“Brazilian Depositary Receipts”) and ADRs (“American Depositary Receipts”) from LAN to the shareholders of Holdco II S.A. abroad on June 27, 2012, that is, TAM shareholders who accepted the exchange offer.
The share exchange offer materialized with the exchange previously referenced was 99.9% of the TAM shares that accepted that TAM would stop being a public company in Brazil, which fulfilled the condition for the cancellation of registration, requirement for the success of the exchange offer.
The capital increase in LATAM Airline S.A originated in the merger is determined by the social capital amount of Sister Holdco S.A. and Holdco II S.A., equivalent to ThUS$ 951,409. The difference between this value and the purchase price (Note 15.2.b), amounting to ThUS$ 2,665,692 was included in “Other reserves” during 2012.
On July 27, 2012, TAM made use of the Squeeze-Out granted by the Brazilian legislation, under which a compulsory could rescue all TAM shares that were not exchanged in the exchange offer or contributed by controlling shareholders of TAM. Since TAM shares received in the exchange offer, plus the shares committed by the controlling shareholders of TAM, represented 95.9% of the total outstanding shares of TAM, the aforementioned condition was met on the remaining 4.1% through the disbursement by TAM of ThUS$ 165,143.
As a consequence of the end of that process: (i) concluded the process of Business Combination of LAN and TAM, and (ii) the renaming of LAN Airlines S.A. to LATAM Airlines Group S.A. became effective.
The costs incurred by LATAM Airline Group S.A. to make the Business Combination amounts to ThUS$ 50,647 for the year ended December 31, 2012, and were recorded in the Income statement when they were incurred.
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The ownership structure of TAM, after the business combination, is as follows:
Class of shares
ON (voting rights)
PN (non-votings rights)
Serie A (voting rights)
Serie B (economic right)
TAM is a leading airline in Brazil, with more than 35 years in operation, and as of the date of the business combination it boasted: over 30,000 employees, a fleet of more than 160 aircraft, annual sales surpassing US$7.3 billion, and a 2011 Brazilian market share of 41.2% domestically, and 88.1% of international flights operated by Brazilian-flagged airlines. It is appropriate to point out that Multiplus S.A., a company controlled by TAM S.A., is engaged in the development and administration of client loyalty programs. Multiplus S.A. has been registered in the “Novo Mercado” section on the BMF&Bovespa exchange since February 3, 2010.
Under IFRS 3 this operation has been registered as a business combination consigning to the Company as purchaser of TAM. Besides the fact that LATAM is the one who issuing the shares in the combination, this is based on the economic rights and relative vote relating of the former shareholders of LAN and TAM over the combined entity.
(b) Business combination in accordance with IFRS 3 (*)
IFRS 3 establishes principles and requirements for how the acquirer:
IFRS 3 provides the acquirer with a reasonable time (measurement period) to obtain the information necessary to identify and measure the three points mentioned above as of the acquisition date. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period shall not exceed one year from the acquisition date (June 22, 2012). Therefore, some amounts reported in previous financial statements as provisional amounts because the accounting was incomplete have been retrospectively adjusted.
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(i) Consideration paid
The following summarizes the consideration paid for TAM S.A. and subsidiaries:
Number of
shares LANExchange
(a)
Value of the share at June 22, 2012 CLP$ 13,489
Exchange rate as of June 22, 2012 503.89 CLP$/US$
Consideration paid was calculated, in accordance with IFRS 3, as the sum of the fair value of the LAN shares provided and the Squeeze-Out cash payment explained in Note 15.2.(a).
(*) See note 2.2
(ii) Fair value of identifiable assets acquired and liabilities assumed.
The following table summarizes the fair value of recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date.
Assets held for sale
Airport Slots
Other intangible assets
Other property, plant and equipment
Deferred tax
Net assets at fair value
The airport slots (landing and take-offs) have been measured at fair value at the date of the combination, using the net present value of projected Earing Before Interest and Taxes
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(EBIT) of those routes going through those airports where slots were acquired as part of the business combination (Congonhas, JFK and Heathrow); and its useful lives are classified as indefinite, which shall be subject to impairment test annually.
(iii) Goodwill acquired
The financial statements of LATAM Airlines Group S.A. include goodwill recorded to the value of ThUS$ 4,015,987 calculated and assigned to corresponding segments. The following table summarizes the consideration paid, the fair value of assets acquired, liabilities assumed, non-controlling interest and goodwill acquired at the acquisition date.
Purchase price
Historic net assets
Fair value adjustment:
Fleet (included maintenance)
Error correction
Total adjustment
Total net assets at fair value
Goodwill restated at June 22, 2012
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The following table summarizes Goodwill acquired by segments.
Goodwill asignned Air transportation CGU
Goodwill asignned Coalition and loyalty program Multiplus CGU
Total Goodwill
Non-controlling interest have been measured and recognized at fair value.
The income contribution of TAM S.A. and Subsidiaries during the period of 2012 was ThUS$ 3,633,592, the net result considered in the consolidated financial statements of the group at December 31, 2012, was a loss of ThUS$ 75,195.
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NOTE 16 - PROPERTY, PLANT AND EQUIPMENT
The composition by category of Property, plant and equipment is as follows:
Construction in progress
Land
Buildings
Plant and equipment
Own aircraft
Machinery
Information technology equipment
Fixed installations and accessories
Motor vehicles
Leasehold improvements
Other property, plants and equipment
Financial leasing aircraft
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(a) The movement in the different categories of Property, plant and equipment from January 1, 2013 to December 31, 2014 is shown below:
Acquisitions througth Bussines Combination
Disposals
Transfer (to) from non-current assets (or disposal groups)
Retirements
Depreciation expenses
Other increases (decreases)
Changes, total
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Aircraft
Boeing 767
Airbus A319
Airbus A320
Airbus A321
Airbus A340
Boeing 737
Bombardier
Motor vehicle
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.
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In the period ended December 31, 2014, were added direct guarantees by nine Airbus A321-200 aircraft and three Boeing 787-800 aircraft. Additionally, as a result of fleet transfer plan from TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company added direct guarantees associated with three Airbus A319-100 aircraft, twenty one Airbus A320-200 aircraft and seven Airbus A321-200 aircraft.
Moreover, the Company sold its interest in the permanent establishments Flamenco Leasing LLC, Cisne Leasing LLC, Becacina Leasing LLC, Tricahue Leasing LLC and Loica Leasing Limited. Products of the above direct guarantees associated with seven Boeing 767-300, two Airbus A319-100 and two Airbus A320-200 aircraft were removed.
Additionally, as a result of sale, direct guarantees associated with four Boeing 777-300 aircraft were removed.
Description of Property, plant and equipment pledged as guarantee:
Creditor of
guarantee
Wilmington
Trust Company
Banco Santander S.A.
BNP Paribas
Credit Agricole
JP Morgan
Wells Fargo
Bank of Utah
DVB Bank SE
Natixis
Citibank N. A.
HSBC
KfW IPEX-Bank
PK AirFinance US, Inc.
Total direct guarantee
The amounts of existing debt are presented at nominal value. Book value corresponds to the carrying value of the goods provided as guarantees.
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Additionally, there are indirect guarantees related to assets recorded in Property, plant and equipment whose total debt at December 31, 2014 amounted to ThUS$ 1,626,257 (ThUS$ 2,167,470 at December 31, 2013). The book value of assets with indirect guarantees as of December 31, 2014 amounts to ThUS$ 2,335,135 (ThUS$ 2,767,593 as of December 31, 2013).
Fully depreciated assets and commitments for future purchases are as follows:
Gross book value of fully depreciated property, plant and equipment still in use
Commitments for the acquisition of aircraft (*)
Purchase commitment of aircraft
Airbus S.A.S.
A320-NEO
A321
A321-NEO
A350
The Boeing Company
B777
B787-8
B787-9
In July 2014 the cancellation of 4 Airbus A320 was signed and changing 12 Airbus A320 aircraft for 12 Airbus A320 NEO aircraft. In December 2014 a contract was signed changing 4 Airbus A320 aircraft for 4 Airbus A320 NEO aircraft and changing 4 Airbus A321 aircraft for 4 Airbus A321 NEO aircraft.
At December 31, 2014, as a result of the different aircraft purchase agreements signed with Airbus S.A.S., remain to receive 97 aircraft Airbus A320 family, with deliveries between 2015 and 2021, and 27 Airbus aircraft A350 family with delivery dates starting from 2015.
The approximate amount is ThUS$ 17,600,000, according to the manufacturer’s price list. Additionally, the Company has valid purchase options for 5 Airbus A350 aircraft.
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As of December 31, 2014, and as a result of different aircraft purchase contracts signed with The Boeing Company, remain to receive a total of sixteen 787 Dreamliner aircraft, with delivery dates between 2015 and 2018, and two 777 with delivery expected for 2017.
The approximate amount, according to the manufacturer's price list, is ThUS$ 3,900,000. Additionally, the Company has valid purchase options for 2 Boeing 777 aircraft.
Average rate of capitalization of capitalized interest costs
Costs of capitalized interest
The detail of the main financial leases is as follows:
Lessor
Agonandra Statutory Trust
Air Canada
AWMS I (AWAS)
Becacina Leasing LLC
Caiquen Leasing LLC
Cernicalo Leasing LLC
Chirihue Leasing Trust
Cisne Leasing LLC
Codorniz Leasing Limited
Conure Leasing Limited
Flamenco Leasing LLC
FLYAFI 1 S.R.L.
FLYAFI 2 S.R.L.
FLYAFI 3 S.R.L.
Forderum Holding B.V. (GECAS)
Garza Leasing LLC
General Electric Capital Corporation
Intraelo BETA Corpotation (KFW)
Juliana Leasing Limited
Linnet Leasing Limited
Loica Leasing Limited
Mirlo Leasing LLC
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NBB Rio de Janeiro Lease CO and Brasilia Lease LLC (BBAM)
NBB São Paulo Lease CO. Limited (BBAM)
Osprey Leasing Limited
Petrel Leasing LLC
Pochard Leasing LLC
Quetro Leasing LLC
SG Infraestructure Italia S.R.L.
SL Alcyone LTD (Showa)
TMF Interlease Aviation B.V.
TMF Interlease Aviation II B.V.
TMF Interlease Aviation III B.V.
Tricahue Leasing LLC
Wacapou Leasing S.A
Wells Fargo Bank North National Association (ILFC)
Financial leasing contracts where the Company acts as the lessee of aircrafts establish duration between 12 and 18 year terms and semi-annual, quarterly and monthly payments of obligations.
Additionally, the lessee will have the obligation to contract and maintain active the insurance coverage for the aircraft, perform maintenance on the aircraft and update the airworthiness certificates at their own cost.
Fixed assets acquired under financial leases are classified as Other property, plant and equipment. As of December 31, 2014 the Company had seventy one aircraft (ninety nine aircraft as of December 31, 2013).
During the period ended December 2014, due to the sale of its participation in the permanent establishments Flamenco Leasing LLC, Cisne Leasing LLC, Becacina Leasing LLC, Tricahue Leasing LLC and Loica Leasing Limited, the Company increased its number of aircraft on lease by seven Boeing 767-300, two Airbus A319-100 and two Airbus A320-200 aircraft. Therefore, these aircraft were reclassified from the Plant and equipment category to the category Other property plant and equipment.
During the third quarter of 2014 the option was exercised to purchase one A330-200 and during the fourth quarter of 2014 the option were exercised to purchase two A320-200 aircraft. Therefore, this aircraft was reclassified from the Other property plant and equipment category to the category Plant and equipment.
For other hand, as a result of fleet transfer plan from TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company decreases its number of aircraft on lease by three Airbus A319-100 aircraft, twenty one Airbus A320-200 and seven Airbus A321-200 aircraft as a result of modifications in its financial contracts. Therefore, these aircraft were reclassified from the Other property plant and equipment category to the category Plant and equipment.
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Additionally, as a result of the leasing contracts had ended; the Company decreases its number of aircraft on lease by three Boeing 767-300 aircraft and two Airbus A340-500 aircraft. These aircraft were on operative leasing agreement, but according to the stated policy were classified as financial leasing.
The book value of assets under financial leases as of December 31, 2014 amounts to ThUS$ 2,379,789 (ThUS$ 2,840,147 as of December 31, 2013).
The minimum payments under financial leases are as follows:
No later than one year
Between one and five years
Over five years
NOTE 17 - CURRENT AND DEFERRED TAXES
In the period ended December 31, 2014, the income tax provision was calculated at the rate of 21% for the business year 2014, in accordance with the recently enacted Law No. 20,780 published in the Official Journal of the Republic of Chile on September 29, 2014.
Among the main changes is the progressive increase of the First Category Tax which will reach 27% in 2018 if the “Partially Integrated Taxation System”(*) is chosen. Alternatively, if the Company chooses the “Attributed Income Taxation System”(*) the top rate would reach 25% in 2017.
As LATAM Airlines Group S.A. is a public company, by default it must choose the “Partially Integrated Taxation System”, unless a future Extraordinary Meeting of Shareholders of the Company agrees, by a minimum of 2/3 of the votes, to choose the “Attributed Income Taxation System”. This decision must be taken at the latest in the last quarter of 2016.
The effects of the updating of deferred tax assets and liabilities according to rates changes introduced by Law No. 20,780 depending on their period back have been recorded on income for the period. The total effect on income was ThUS $ 150,210, which is explained by an increase in deferred tax assets of ThUS$ 87 and an increase in deferred tax liabilities of ThUS$ 145,253 and an increase in equity by deferred tax of ThUS$ 5,044. The net effect on the assets and liabilities by deferred tax is an increase on liabilities for ThUS$ 145,166.
Deferred tax assets and liabilities are offset if there is a legal right to offset assets and liabilities for income taxes relating to the same entity and tax authority.
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Provisional monthly payments (advances)
Other recoverable credits
Total current tax assets
Income tax provision
Additional tax provision
Total current tax liabilities
The balances of deferred tax are the following:
Depreciation
Leased assets
Provisions
Revaluation of financial instruments
Tax losses
Revaluation property, plant and equipment
Intangibles
The balance of deferred tax assets and liabilities are composed principally of temporary differences to reverse in the long term.
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Movements of Deferred tax assets and liabilities:
(a) From January 1 to December 31, 2012
Revaluation propety, plant and equipment
(b) From January 1 to December 31, 2013
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(c) From January 1 to December 31, 2014
Tax losses (*)
Therefore, the company TAM Linhas Aéreas S.A. decreased its liability associated with the REFIS program using its deferred tax assets related to its tax loss of ThUS $ 126,205 at December 31, 2014, generating no effect on the outcome of tax.
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Deferred tax assets not recognized:
Total Deferred tax assets not recognized
Deferred tax assets on tax loss carry-forwards, are recognized to the extent that it is likely to provide relevant tax benefit through future taxable profits. The Company has not recognized deferred tax assets of ThUS$ 2,781 (ThUS$ 6,538 at December 31, 2013) compared to a loss of ThUS$ 11,620 (ThUS$ 28,855 at December 31, 2013) to offset against future years tax benefits.
Deferred tax expense and current income taxes:
Current tax expense
Adjustment to previous period’s current tax
Other current tax expense
Total current tax expense, net
Deferred tax expense
Deferred expense for taxes related to the creation and reversal of temporary differences
Reduction (increase) in value of deferred tax assets during the evaluation of its usefulness
Total deferred tax expense, net
Income tax expense
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Composition of income tax expense (income):
Current tax expense, net, foreign
Current tax expense, net, Chile
Deferred tax expense, net, foreign
Deferred tax expense, net, Chile
Deferred tax expense, net, total
Profit before tax by the legal tax rate in Chile (21%)
Tax expense using the legal rate
Tax effect by change in tax rate
Tax effect of rates in other jurisdictions
Tax effect of non-taxable operating revenues
Tax effect of disallowable expenses
Other increases (decreases) in legal tax charge
Total adjustments to tax expense using the legal rate
Tax expense using the effective rate
Thereby, at December 31, 2012 the Company had tax expense considering the increased rate of 17% to 20%, which meant a higher recorded tax expense by ThUS$ 70,441.
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Deferred taxes related to items charged to net equity:
For the period ended
Aggregate deferred taxation of components of other comprehensive income
Tax effect by change legal tax rate in other comprehensive income (*)
Aggregate deferred taxation related to items charged to net equity
Tax effect by change legal tax rate in net equity (*)
Total deferred taxes related to items charged to net equity
NOTE 18 - OTHER FINANCIAL LIABILITIES
The composition of Other financial liabilities is as follows:
Current
(a) Interest bearing loans
(b) Derivatives not recognized as a hedge
(c) Hedge derivatives
Total current
Non-current
Total non-current
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Obligations with credit institutions and debt instruments:
Subtotal bank loans
Total obligations with financial institutions
All interest-bearing liabilities are recorded using the effective interest rate method. Under IFRS, the effective interest rate for loans with a fixed interest rate does not vary throughout the loan, while in the case of loans with variable interest rates, the effective rate changes on each date of reprising of the loan.
Currency balances that make the interest bearing loans:
Chilean peso (U.F.)
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Interest-bearing loans due in installments to December 31, 2014
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Interest-bearing loans due in installments to December 31, 2013
Morethan
90 days
one to
three
More
than
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three to
Quarterly/
Semiannual
Monthly/
Quarterly
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Interest rate derivative not recognized as a hedge
Total derivatives not recognized as a hedge
Accrued interest from the last date of interest rate swap
Total hedge derivatives
The foreign currency derivatives exchanges are FX forward and cross currency swap.
Hedging operation
The fair values of assets/ (liabilities), by type of derivative, of the contracts held as hedging instruments are presented below:
Cross currency swaps (CCS) (1)
Interest rate options (2)
Interest rate swaps (3)
Fuel collars (4)
Fuel swap (5)
Currency forward R$/US$ (6)
Currency forward CLP/US$ (7)
Currency collars (8)
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During the periods presented, the Company only maintains cash flow hedges and fair value (in the case of CCS). In the case of fuel hedges, the cash flows subject to such hedges will impact results in the next 12 months from the consolidated statement of financial position date, meanwhile in the case of interest rate hedging, the hedges will impact results over the life of the related loans, which are valid for 12 years. The hedges on investments will impact results continuously throughout the life of the investment, while the cash flows occur at the maturity of the investment. In the case of currency hedges through a CCS, are generated two types of hedge accounting, a cash flow component by UF, and other fair value by US$ floating rate component.
During the periods presented, there have not occurred hedging operations of future highly probable transaction that have not been realized.
Since none of the coverage resulted in the recognition of a non-financial asset, no portion of the result of the derivatives recognized in equity was transferred to the initial value of such assets.
The amounts recognized in comprehensive income during the period and transferred from net equity to income are as follows:
Debit (credit) recognized in comprehensive income during the period
Debit (credit) transferred from net equity to income during the period
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NOTE 19 - TRADE AND OTHER ACCOUNTS PAYABLES
The composition of Trade and other accounts payables is as follows:
(a) Trade and other accounts payables
(b) Accrued liabilities at the reporting date
Total trade and other accounts payables
Trade creditors
Leasing obligation
Other accounts payable (*)
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The details of Trade and other accounts payables are as follows:
Boarding Fee
Other personnel expenses
Airport charges and overflight
Professional services and advisory
Suppliers’ technical purchases
Handling and ground handling
Marketing
Land services
Aircraft and engines leasing
Leases, maintenance and IT services
Services on board
Crew
Achievement of goals
Communications
Aviation insurance
Distribution sistem
Airlines
Tax recovery program (*)
U.S.A. Department of Justice (**)
Accrued personnel expenses
Aircraft and engine maintenance
Accounts payable to personnel (*)
Others accrued liabilities
Total accrued liabilities
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NOTE 20 - OTHER PROVISIONS
The detail of Other provisions as of December 31, 2014 and December 31, 2013 is as follows:
Provision for contingencies (1)
Tax contingencies
Civil contingencies
Labor contingencies
Provision for European
Commision investigation (2)
Total other provisions (3)
The tax contingencies correspond to litigation and tax criteria related to the tax treatment applicable to direct and indirect taxes, which are found in both administrative and judicial stage.
The civil contingencies correspond to different demands of civil order filed against the company.
The labor contingencies correspond to different demands of labor order filed against the company.
The Provisions are recognized in the consolidated income statement in administrative expenses or tax expenses, as appropriate.
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Movement of provisions:
Increase in provisions
Provision used
Additions deu to business combination
Difference by subsidiaries conversion
Reversal of provision
Exchange difference
Accumulated balance includes the judicial deposit in guarantee, related to the “Fundo Aeroviário” (FA), in the amount of US$ 90 million, was done in order to suspend the enforceability of the tax credit. The company is discussing over the Tribunal the constitutionality of the requirement made by FA in a legal suit. Initially it was covered by the effects of a provisional remedy, meaning that, the company was not obligated to collect the tax while there was not a judicial decision in this regard. However, the decision taken by a judge in the first instance was publicized in an unfavorable way, revoking the provisional remedy relief. As the legal suit is still in progress (TAM appealed from this first decision), the company needed to do the deposit judicial in guarantee to suspend the enforceability of such tax credit; deposit classified in this category deducting the existing provision. Finally, if the final decision is favorable to the company, the deposit already made is going to come back to TAM. On the other hand, if the tribunal confirms the first decision, such deposit will be converted in a definitive payment in favor of the Brazilian Government. The procedural stage at December 31, 2014 is disclosed in Note 30, at case No. 2001.51.01.012530-3.
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NOTE 21 - OTHER NON-FINANCIAL LIABILITIES
Deferred revenues (*)
Retentions
Others taxes
Other sundry liabilities
Total other non-financial liabilities
The balance comprises, mainly, deferred income by services not yet rendered and programs such as: LANPASS, TAM Fidelidade y Multiplus:
LANPASS is the frequent flyer program created by LAN to reward the preference and loyalty its customers with many benefits and privileges, by the accumulation of kilometers that can be exchanged for free flying tickets or a wide range of products and services. Customers accumulate LANPASS kilometers every time they fly with LAN, TAM, in companies oneworld® members and other airlines associated with the program, as well as buy on the stores or use the services of a vast network of companies that have an agreement with the program around the world.
For its part, TAM, thinking on frequent flyer who travel constantly, created the program TAM Fidelidade, in order to improve the passenger attention and give recognition to those who choose the company. By using this program, customers accumulate points in a variety of programs loyalty in a single account and can redeem them at all TAM destinations and related airline companies, and even more, participate in the Red Multiplus Fidelidade.
Multiplus is a coalition of loyalty program, with the aim of operate accumulation activities and redemption of points. This program has an integrated network by associates including hotels, financial institutions, retail companies, supermarkets, vehicle rentals and magazines, among many other partners from different segments.
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NOTE 22 - EMPLOYEE BENEFITS
Retirements payments
Resignation payments
Other obligations
Total liability for employee benefits
(a) The movement in retirements and resignation payments and other obligations:
(b) The liability for short-term:
Profit-sharing and bonuses (*)
The participation in profits and bonuses correspond to an annual incentives plan for achievement of objectives.
(c) Employment expenses are detailed below:
Salaries and wages
Short-term employee benefits
Termination benefits
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NOTE 23 - ACCOUNTS PAYABLE, NON-CURRENT
Fleet financing (JOL)
Provision for vacations and bonuses
Other accounts payable
Total accounts payable, non-current
NOTE 24 - EQUITY
(a) Capital
The Company’s objective is to maintain an appropriate level of capitalization that enables it to ensure access to the financial markets for carrying out its medium and long-term objectives, optimizing the return for its shareholders and maintaining a solid financial position.
The Capital of the Company is managed and composed in the following form:
The capital of the Company at December 31, 2014 amounts to ThUS$ 2,545,705 divided into 545,547,819 common stock of a same series (ThUS$ 2,389,384, divided into 535,243,229 shares as of December 31, 2013), no par value. There are no special series of shares and no privileges. The form of its stock certificates and their issuance, exchange, disablement, loss, replacement and other similar circumstances, as well as the transfer of the shares, is governed by the provisions of Corporations Law and its regulations.
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(b) Subscribed and paid shares
The following table shows the movement of the authorized and fully paid shares described above between January 1, 2013 and December 31, 2014.
Nro. Of
shares
Autorized shares as of January 1, 2013
Increase capital approved at Extraordinary Shareholders meeting dated June 11, 2013
Full right decrease of treasury stock
Authorized shares as of December 31, 2013
Autorized shares as of January 1, 2014
No movement of autorized shares at December 31, 2014
Authorized shares as of December 31, 2014
Movement fully paid shares
Paid shares as of January 1, 2013
Placement of the remaining preferential shares issued for merger Companies Sister Holdco S.A. y Holdco II S.A.
Preferential placement capital increase approved at Extraordinary Shareholders meeting dated June 11, 2013
Capitalization of reserves
Paid shares as of December 31, 2013
Paid shares as of January 1, 2014
Paid shares as of December 31, 2014
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(c) Treasury stock
At December 31, 2014, the Company held no treasury stock, the remaining of ThUS$ (178) corresponds to the difference between the amount paid for the shares and their book value, at the time of the full right decrease of the shares.
At December 31, 2013, as per minutes of the Extraordinary Shareholder’s Meeting held on June 11, 2013, the company relinquished all right to 7,972 stocks of its portfolio, this date the Company does not maintain treasury stock.
(d) Reserve of share-based payments
Movement of Reserves of share-based payments:
The effect on deferred tax calculated on the reserves of share- based payments by modifying the tax rate mentioned above, was a charge to equity of ThUS$ 2,708.
These reserves are related to the “Share-based payments” explained in Note 33.
(e) Other sundry reserves
Movement of Other sundry reserves:
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Balance of Other sundry reserves comprises the following:
Higher value for TAM S.A. share exchange (1)
Reserve for the adjustment to the value of fixed assets (2)
Transactions with non-controlling interest (3)
Cost of issuance and placement of shares
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(f) Reserves with effect in other comprehensive income.
Movement of Reserves with effect in other comprehensive income:
Derivatives valuation gains (losses)
Tax effect on deferred tax by change legal tax rate (Tax reform)(*)
(f.1) Currency translation reserve
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.
(f.2) Cash flow hedging reserve
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.
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(g) Retained earnings
Movement of Retained earnings:
(h) Dividends per share
As of December 31, 2013
Description of dividend
Date of dividend
Amount of the dividend (ThUS$)
Number of shares among which the dividend is distributed
Dividend per share (US$)
As of December 31, 2012
The Company’s dividend policy is that dividends distributed will be equal to the minimum required by law, i.e. 30% of the net income according to current regulations. This policy does not preclude the Company from distributing dividends in excess of this obligatory minimum, based on the events and circumstances that may occur during the course of the year.
At December 31, 2014, have not been provisioned minimum mandatory dividends.
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NOTE 25 - REVENUE
The detail of revenues is as follows:
Passengers LAN
Passengers TAM
NOTE 26 - COSTS AND EXPENSES BY NATURE
(a) Costs and operating expenses
The main operating costs and administrative expenses are detailed below:
Aircraft fuel
Other rentals and landing fees
Aircraft rentals
Aircraft maintenance
Comissions
Passenger services
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(b) Depreciation and amortization
Depreciation and amortization are detailed below:
Depreciation (*)
(c) Personnel expenses
The costs for personnel expenses are disclosed in Note 22 liability for employee benefits.
(d) Financial costs
The detail of financial costs is as follows:
Bank loan interest
Other financial instruments
Costs and expenses by nature presented in this note plus the Employee expenses disclosed in Note 22, are equivalent to the sum of cost of sales, distribution costs, administrative expenses, other expenses and financing costs presented in the consolidated statement of income by function.
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(e) Restructuring Costs
As part of the ongoing process of review its fleet plan, the company decided to implement a broad restructuring plan in order to reduce the variety of aircraft currently in operation and gradually withdrawing the less efficient. According with this plan, during the first quarter of 2014 were formalized contracts and commitments having as a result a negative impact on the results of such period of US$ 112 million before tax that are associated with exit costs of seven A330, six A340, five B737, three Q400, five A319 and three B767-33A aircraft. These exit costs are associated with penalties related to early repayment and maintenance costs for returning.
NOTE 27 - OTHER INCOME, BY FUNCTION
Other income by function is as follows:
Tours
Aircraft leasing
Customs and warehousing
Duty free
Other miscellaneous income
NOTE 28 - FOREIGN CURRENCY AND EXCHANGE RATE DIFFERENCES
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 Chilean peso, Argentine peso, Colombian peso and Brazilian real.
The functional currency is defined primarily 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 note correspond to the sum of foreign currency of each of the entities that make LATAM Airlines Group S.A. and Subsidiaries.
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(a) Foreign currency
The foreign currency detail of balances of monetary items in current and non-current assets is as follows:
U.S. dollar
Other currency
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Other non-financial assets, current
Tax current assets
U.S. Dollar
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Other financial assets, non-current
Other non - financial assets, non-current
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The foreign currency detail of balances of monetary items in current liabilities and non-current is as follows:
Trade and other accounts payables, current
Tax liabilities, current
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Other non-financial liabilities, current
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Other provisions, non-current
Brazillian real
Provisions for employees benefits, non-current
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General summary of foreign currency:
Net position
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(b) Exchange differences
Exchange differences recognized in the income statement, except for financial instruments measured at fair value through profit or loss, for the period ended December 31, 2014 and 2013, generated a debit of ThUS$ 130,201 and ThUS$ 482,174, respectively. For the period ended December 31, 2012 generated a credit of ThUS$ 66,685.
Exchange differences recognized in equity as reserves for currency translation differences for the period ended December 31, 2014 and 2013, represented a debit of ThUS$ 650,439 and ThUS$ 629,858, respectively. For the period ended December 31, 2012 generated a credit of ThUS$ 19,170.
The following shows the current exchange rates for the U.S. dollar, on the dates indicated:
Australian dollar
Boliviano
Mexican peso
New Zealand dollar
Peruvian Sol
Uruguayan peso
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NOTE 29 - EARNINGS / (LOSS) PER SHARE
Earnings / (loss) attributable to owners of the parent (ThUS$)
Weighted average number of shares, basic
Basic earnings / (loss) per share (US$)
Weighted average number of shares, diluted
Diluted earnings / (loss) per share (US$)
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NOTE 30 - CONTINGENCIES
Lawsuits
AmountsCommitted
ThUS$
17,100
Plus interests and costs
Plus interest costs and compensation for damage.
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On June 19th, 2014, the Second Division of the Federal Administrative Chamber confirmed the extension of the injunction granted by the Court of 1st Instance in March. On September 18th, 2014 the Court of 1st Instance decided to extend the validity of the injunction until a sentence is reached in the main trial. On December 30th, 2014 the Supreme Court of Justice of the Nation decided to reject the appeal of complaint presented by ORSNA against the granting of the injunction.
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(ii) Lawsuits received by LATAM Airlines Group S.A. and Subsidiaries
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Amounts
Committed
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The July 30th , 2012 LAN COLOMBIA AIRLINES initiated a legal process in Colombia against Regional One INC and Volvo Aero Services LLC, to declare that these companies are civilly liable for moral and material damages caused to LAN COLOMBIA AIRLINES arising from breach of contractual obligations of the aircraft HK- 4107.
The June 20th , 2013 AIRES SA And / Or LAN AIRLINES COLOMBIA was notified of the lawsuit filed in U.S. for Regional One INC and Dash 224 LLC for damages caused by the aircraft HK-4107 arguing failure of LAN COLOMBIA AIRLINES customs duty to obtain import declaration when the aircraft in April 2010 entered Colombia for maintenance required by Regional One.
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NOTE 31 - COMMITMENTS
(a) Loan covenants
With respect to various loans signed by the Company for the financing of Boeing 767, 777 and 787 aircraft, which carry the guarantee of the United States Export–Import Bank, limits have been set on some of the Company’s financial indicators on a consolidated basis. Moreover, and related to these same contracts, restrictions are also in place on the Company’s management in terms of its ownership and disposal of assets.
Additionally, with respect to various loans signed by its subsidiary Lan Cargo S.A. for the financing of Boeing 767F and 777F aircraft, which carry the guarantee of the United States Export–Import Bank, restrictions have been established to the Company’s management and its subsidiary Lan Cargo S.A. in terms of shareholder composition and disposal of assets.
In connection with the financing of spare engines for its Boeing 767, 767F, 777, 777F, which are guaranteed by the Export—Import Bank of the United States, restrictions have been placed on the ownership structure of their guarantors and their legal successor in case of merger.
The Company and its subsidiaries do not maintain financial credit contracts with banks in Chile that indicate some limits on financial indicators of the Company or its subsidiaries.
At December 31, 2014, the Company is in compliance with all indicators detailed above.
(b) Commitments under operating leases as lessee
Details of the main operating leases are as follows:
ACS Aircraft Finance Bermuda Ltd. - Aircastle
Airbus Financial Services
Aircraft 76B-26329 Inc.
Aircraft 76B-27613 Inc.
Aircraft 76B-27615 Inc.
Aircraft 76B-28206 Inc.
Aviacion Centaurus, A.I.E
Aviación Centaurus, A.I.E.
Aviación Real A.I.E.
Aviación Tritón A.I.E.
Avolon Aerospace AOE 19 Limited
Avolon Aerospace AOE 20 Limited
Avolon Aerospace AOE 6 Limited
Avolon Aerospace AOE 62 Limited
Avolon Aerospace AOE 63 Limited
F-135
AWAS 4839 Trust
AWAS 5125 Trust
AWAS 5178 Limited
AWAS 5234 Trust
Baker & Spice Aviation Limited
BOC Aviation Pte. Ltd.
CIT Aerospace International
Continuity Air Finance IV B.V
Delaware Trust Company, National Association
Eden Irish Aircr Leasing MSN 1459
GECAS Sverige Aircraft Leasing Worldwide AB
GFL Aircraft Leasing Netherlands B.V.
International Lease Finance Corporation
KN Operating Limited (NAC)
Magix Airlease limited
MASL Sweden (1) AB
MASL Sweden (2) AB
MASL Sweden (7) AB
MASL Sweden (8) AB
MCAP Europe Limited - Mitsubishi
Orix Aviation Systems Limited
Pembroke B737-7006 Leasing Limited
RBS Aerospace Limited
SASOF II (J) Aviation Ireland Limited
SKY HIGH V LEASING COMPANY LIMITED
Sky High XXIV Leasing Company Limited
Sky High XXV Leasing Company Limited
SMBC Aviation Capital Limited
Sunflower Aircraft Leasing Limited
TC-CIT Aviation Ireland Limited
Volito Aviation August 2007 AB
Volito Aviation November 2006 AB
Volito Brasilien AB
Volito November 2006 AB
Wells Fargo Bank North National Association
Wells Fargo Bank Northwest National Association
Wilmington Trust Company
Yamasa Singapore Pte. Ltd.
Zipdell Limited
The rentals are shown in results for the period for which they are incurred.
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The minimum future lease payments not yet payable are the following:
The minimum lease payments charged to income are the following:
Minimum operating lease payments
In the first quarter of 2013, returned an Airbus A320-200, while during the second quarter of 2013 two Airbus A319-100, one Airbus A320-200 and one Bombardier Dhc8-200 were returned as their leasing contracts had ended. During June 2013 the contracts system applied to ten Airbus A330-200 aircraft were changed from financial leasing to operative leasing, with each aircraft being leased for a period of forty months. During the third quarter of 2013, two Airbus A320-200 aircraft were leased for a period of 8 years each, one Boeing 787-800 aircraft was leased for a period of 12 years and two Boeing 777-300ER aircraft were leased for a period of 5 years each. Moreover, one Airbus A320-200, two Boeing 767-300ER aircraft and one Bombardier Dhc8-400 aircraft were returned. Additionally, during July of 2013 two Bombardier Dhc8-200 aircraft were acquired on leasing. In the fourth quarter of 2013, three Airbus A320-200 aircraft were leased for a period of eight years each, one Boeing 787-800 aircraft was leased for a period of twelve years. Moreover, two Airbus A320-200, one Airbus A319-100, one Airbus A340-300 and one Boeing 737-700 aircraft were returned.
During the first quarter of 2014, two Airbus A320-200 aircraft were acquired and two Airbus A321-200 aircraft were leased for a period of 8 years each. Moreover, two Boeing 737-700 aircraft, one Boeing B767-300F aircraft, one Boeing 767-300F aircraft, one Airbus A340-300 aircraft and one Bombardier Dhc8-400 aircraft were returned. Additionally, as a result of its sale and subsequent lease, during March 2014 four Boeing 777-300ER aircraft were added as operative leasing, with each aircraft being leased for periods between four and six years each.
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During the second quarter of 2014, were added one Airbus A320-200 aircraft and one Boeing 787-800 aircraft by leasing them for a period of 8 and 12 years, respectively. For other hand, one Bombardier Dhc8-400 aircraft, four Airbus A320-200 aircraft, seven Airbus A330-200 aircraft and three Boeing 737-700 aircraft were returned.
In the third quarter of 2014, were added one Airbus A320-200 aircraft and one Boeing 787-800 aircraft by leasing them for a period of 8 and 12 years, respectively. For other hand, one Bombardier Dhc8-400 aircraft, two Airbus A319-100 aircraft and one Boeing 767-300ER aircraft were returned.
In the fourth quarter of 2014, two Airbus A320-200 aircraft and one Boeing 767-300ER aircraft were returned. For other hand, three A340-300 aircraft and one A319-100 aircraft were bought. Additionally it was reported that the purchase option will be exercised by 2 Bombardier Dhc8-200 aircraft. Therefore, these aircraft were reclassified to the category Property, plant and equipment.
The operating lease agreements signed by the Company and its subsidiaries state that maintenance of the aircraft should be done according to the manufacturer’s technical instructions and within the margins agreed in the leasing agreements, a cost that must be assumed by the lessee. The lessee should also contract insurance for each aircraft to cover associated risks and the amounts of these assets. Regarding rental payments, these are unrestricted and may not be netted against other accounts receivable or payable between the lessor and lessee.
At December 31, 2014 the Company has existing letters of credit related to operating leasing as follows:
Creditor Guarantee
AFS Investments 48 LLC.
GE Capital Aviation Services Limited
International Lease Finance Corp
ORIX Aviation System Limited
TAF Mercury
TAF Venus
Wells Fargo Bank Northwest, National Association
Cit Aerospace International
MACQUARIE
Royal Bank Of scotland Aerospace
SMBC Aviation Capital Ltd.
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(c) Other commitments
At December 31, 2014 the Company has existing letters of credit, certificates of deposits and warranty insurance policies as follows:
Aena Aeropuertos S.A.
American Alternative Insurance Corporation
BBVA
Citibank N.A.
Comisión Europea
Deutsche Bank A.G.
Dirección General de Aeronáutica Civil
Dirección Nacional de Aduanas
Empresa Pública de Hidrocarburos del Ecuador EP Petroecuador
Metropolitan Dade County
The Royal Bank of Scotland plc
Washington International Insurance
Wells Fargo Bank
Westpac Banking Corporation
6ª Vara de Execuções Fiscais Federal de Campo Grande/MS
8 Vara da Fazenda Pública da Comarca de São Paulo
Fundação de Proteção e Defesa do Consumidor Procon
Vara da Fazenda Pública da Comarca de São Paulo
Vara De Execuções Fiscais Estaduais de São Paulo
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NOTE 32 - TRANSACTIONS WITH RELATED PARTIES
(a) Details of transactions with related parties as follows:
Nature of
relationship with
Transaction amount with
related parties
As of December 31,
96.810.370-9
79.773.440-3
96.812.280-0
Services received
CLP
(11
)
(13
On December 28, 2012, Inmobiliaria Aeronáutica S.A. as seller and Sotraser S.A. (Subsidiary of Bethia S.A.) as purchaser, entered into an agreement to purchase the land called “Lot No. 12 of parcellation project Lo Echevers”. The value of the sale amounts to ThUS$ 14,217. On December 31, 2013, this balance is paid.
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The balances of Accounts receivable and accounts payable to related parties are disclosed in Note 9.
Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties.
(b) Compensation of key management
The Company has defined for these purposes that key management personnel are the executives who define the Company’s policies and major guidelines and who directly affect the results of the business, considering the levels of Vice-Presidents, Chief Executives and Directors.
Remuneration
Management fees
Non-monetary benefits
Short-term benefits
Share-based payments
NOTE 33 - SHARE-BASED PAYMENTS
(a) Compensation plan for increase of capital in LATAM Airlines Group S.A.
Compensation plans implemented by providing options for the subscription and payment of shares that have been granted by LATAM Airlines Group S.A. to employees of the Company and its subsidiaries, are recognized in the financial statements in accordance with the provisions of IFRS 2 “Share-based Payment”, showing the effect of the fair value of the options granted under compensation in linear between the date of grant of such options and the date on which these irrevocable.
(a.1) Compensation plan 2011
At a Special Shareholders Meeting held on December 21, 2011, the Company’s shareholders approved, among other matters, an increase of capital of which 4,800,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, pursuant to Article 24 of the Companies Law. In this compensation plan no member of the controlling group would be benefited. The granting of options for the subscription and payment of shares has been formalized through conclusion of contracts of options to subscribe for shares, according to the proportions
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shown in the following schedule of accrual and is related to the permanence condition of the executive as employee of the Company at these dates for the exercise of the options:
Percentage
30%
40%
Share options in agreements of share- based payments, as of January 1, 2013
Share options granted
Share options in agreements of share- based payments, as of December 31, 2013
Share options in agreements of share- based payments, as of January 1, 2014
Share options cancelled
Share options in agreements of share- based payments, as of December 31, 2014
These options have been valued and recorded at fair value at the grant date, determined by the “Black-Scholes-Merton”. The effect on income to September 2014 corresponds to ThUS$ 15,895 (ThUS$ 17,200 at December 31, 2013).
The input data of option pricing model used for share options granted are as follows:
(a.2) Compensation plan 2013
At the Extraordinary Shareholders’ Meeting held on June 11, 2013, the Company’s shareholders approved motions including increasing corporate equity, of which 1,500,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, in conformity with the stipulations established in Article 24 of the Corporations Law. Regard to this compensation plan, not exist yet a defined date for implementation. The granting of options for the subscription and payment of shares has been formalized through conclusion of contracts of options to subscribe for shares, according to the proportions shown in the following schedule of accrual and is related to the permanence condition of the executive at these dates for the exercise of the options:
100%
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(b) Subsidiaries compensation plans
TAM Linhas Aereas S.A. and Multiplus S.A., both subsidiaries of TAM S.A., have outstanding stock options at December 31, 2014, which amounted to 96,675 shares and 637,400 shares, respectively.
TAM Linhas Aéreas S.A.
Date
Outstanding option number
The Options of TAM Linhas Aéreas S.A., under the plan's terms, are divided into three equal parts and employees can run a third of its options after three, four and five years respectively, as long as they remain employees of the company. The agreed term of the options is seven years.
For Multiplus S.A., the plan’s terms provide that the options granted to the usual prizes are divided into three equal parts and employees may exercise one-third of their two, three and four, options respectively, as long as they keep being employees of the company. The agreed term of the options is seven years after the grant of the option. The first extraordinary granting was divided into two equal parts, and only half of the options may be exercised after three years and half after four years. The second extraordinary granting was also divided into two equal parts, which may be exercised after one and two years respectively.
Both companies have an option that contains a “service condition” in which the exercise of options depends exclusively on the delivery services by employees during a predetermined period. Terminated employees will be required to meet certain preconditions in order to maintain their right to the options.
The acquisition of the share’s rights, in both companies is as follows:
In accordance with IFRS 2—Share-based payments, the fair value of the option must be recalculated and recorded as a liability of the Company once payment is made in cash (cash-settled). The fair value of these options was calculated using the Black-Scholes method, where the cases were updated with information LATAM Airlines Group S.A. Not exist value recorded in liabilities at December 31, 2014 and in income ThUS$ 191 (at December 31, 2013 the amount recognized in liabilities was ThUS$ 1,493 and ThUS$ 509 in incomes).
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NOTE 34 - THE ENVIRONMENT
LATAM Airlines Group S.A. manages environmental issues at the corporate, centralized in Environmental Management. To monitor the company and minimize their impact on the environment is a commitment to the highest level, where continuous improvement and contribute to the solution of the problem of global climate change, generating added value to the company and the region, are the pillars of his administration.
One function of Environmental Management, in conjunction with the various areas of the Company, is to ensure environmental compliance, implementing a management system and environmental programs that meet the increasingly demanding requirements globally; well as continuous improvement programs in their internal processes that generate environmental and economic benefits and to join the currently completed.
The Environment Strategy LATAM Airlines Group S.A. is based on the following objectives:
For 2014, we have established four priority areas of work to develop:
Thus, during the first half of the year, we have worked in the following initiatives:
As achievement this year, LATAM Airlines Group was selected in the Dow Jones Sustainability index, in global category, emerging as a leader in the global aviation industry its strategy on Climate Change and its efficient operation (Eco-Efficiency).
At December 31, 2014 the Environment Management has spent US$370,159 (US$ 478,445 at December 31, 2013 and US$ 526,074 at December 31, 2012).
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NOTE 35 - EVENTS SUBSEQUENT TO THE DATE OF THE FINANCIAL STATEMENTS
Subsequent to the closing date of the annual financial statements, at December 31, 2014, has occurred an important variation in the exchange rate R$/US$, from R$ 2.66 per US$ to R$ 3.27 per US$ at March 17, 2015, which represents a 23% depreciation of the Brazilian currency.
At the date of issuance of these financial statements, given the complexity of this matter, the administration has not yet concluded the analysis and determination of the financial effects of this situation.
LATAM Airlines Group S.A. and Subsidiaries’ consolidated financial statements as at December 31, 2014, have been approved by the Board of Director’s in an extraordinary meeting held on March 17, 2015.
NOTE 36 - CONSOLIDATION SCHEDULE
In accordance with SEC rule SX 3-10 the Company is presenting consolidation schedules as Senior Notes issued by TAM Capital (issuer), a 100% subsidiary of TAM S.A., in 2007 are fully and unconditionally guaranteed by TAM S.A (guarantor) and by TAM Linhas Aéreas (guarantor) which is also a 100% subsidiary of TAM S.A. The consolidation schedules separately present the financial information for LATAM Airlines Group S.A. (parent company), TAM S.A. (guarantor), TAM Linhas Aéreas S.A. (guarantor) and other consolidated subsidiaries of LATAM Airlines Group S.A. (non-guarantors).
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As of
Total current assets other than non-current assets (or disposal groups) classified as held for sale
Accounts receivable from related parties
Current tax assets, long term portion
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Liabilities and shareholder’s equity
Trade and other accounts payable
Accounts payable to related parties
Provision for losses on investments
Equity
Share premium
Treasury shares
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1Assets
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December 31,2013
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December 31,2014
Revenue and losses from associated companies
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
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NET INCOME/ (LOSS) FOR THE YEAR
Comprehensive income / (loss) attributable to owners of the parent
Comprehensive income / (loss) attributable to non-controlling interest
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NET INCOME FOR THE YEAR
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Receipts from sales of goods and services
Other receipts from operating activities
Payments to suppliers for the supply of goods and services
Other inflows (outflows) of cash
Cash flows from (used in) investing activities
Cash flows from losing control of subsidiaries or other businesses
Cash flows used in the purchase of non-controlling
Loans to related parties
Proceeds from sale of property, plant and equipment
Amounts raised from sale of intangible assets
Proceeds from other long-term assets
Other cash receipts from related parties
Net cash flows from investing 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
Repayment of loans to related parties
Dividends Paid
Net increase (decrease) in , cash and cash equivalents before effect of exchange rate
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Proceeds from term loans
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December 31,2012
Cash receipts from futures contracts, forward, options and swap
Proceeds from related parties
Proceeds from issuance of other equity instruments
Payments for other equity interests
Proceeds from government grants
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Latam Airlines Group S.A.
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of income, comprehensive income, changes in equity and of cash flows present fairly, in all material respects, the financial position of Latam Airlines Goup S.A. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15 of this annual report. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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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.
/s/ PricewaterhouseCoopers
April 1, 2015
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SIGNATURES
The registrant hereby certifies that it meets all 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.
/s/ Andres Osorio Hermansen
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