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LAN AIRLINES REPORTS NET INCOME OF US$93.6 MILLION FOR 4Q06 AND US$241.3 MILLION FOR FULL YEAR 2006

Santiago, February 14, 2007

LAN Airlines S.A. (NYSE: LFL), one of Latin America’s leading passenger and cargo airlines, announced today its consolidated financial results for the fourth quarter and full year ended December 31, 2006. “LAN” or “the Company” makes reference to the consolidated entity, which includes several passenger and cargo airlines in Latin America. All figures were prepared in accordance with generally accepted accounting principles in Chile and are expressed in U.S Dollars.

HIGHLIGHTS

  • LAN reported net income of US$93.6 million for the fourth quarter of 2006 (4Q06), compared to net income of US$49.9 million in 4Q05. Net income for full year 2006 reached US$241.3 million as compared to US$146.6 million for full year 2005. Excluding extraordinary items, net income for FY2006 reached US$213.0 million.
  • The Company reported operating income of US$138.0 million for the fourth quarter 2006 compared to US$59.2 million for 4Q05, increasing its operating margin by 7.8 percentage points to 16.2%. This was a result of an increase of 20.8% in revenue, which outpaced a 10.6% increase in operating costs. Operating costs were positively impacted this quarter by decreases in the price of jet fuel, which resulted in lower fuel costs of US$26.8 million.
  • Total revenues for 4Q06 reached US$853.5 million compared to US$706.3 million in 4Q05, due to a 26.1% increase in passenger revenues and a 16.5% rise in cargo revenues. Passenger and cargo revenues accounted for 60% and 35% of total revenues, respectively in 4Q06. This growth can be attributed largely to the Company’s long haul operations and to the consolidation of operations of Lan Argentina.
  • During the quarter, LAN continued the expansion of its fleet, incorporating one new Boeing 767-300F freighter and one new Boeing 767-300ER passenger aircraft. This is the seventh of LAN’s long haul passenger aircraft to feature the new Premium Business and Economy classes.
  • LAN Argentina continued the expansion of its international operations with the launch, on December 5, 2006, of a new international destination: Sao Paulo. The airline currently offers 13 weekly frequencies between Buenos Aires and Sao Paulo in addition to service to Miami, Santiago and Punta Cana, Dominican Republic.
  • During 4Q06, LAN implemented pilot programs to test its new business model for short-haul operations in three domestic destinations in Chile. These tests have shown very positive results. LAN’s new business model for short haul operations seeks to increase efficiency in domestic and regional operations, and is expected to be fully implemented during 2007.
  • On January 31, 2007, LAN announced that it has provided US$17.1 million in financing to Brazilian company VRG LINHAS AEREAS S.A. (“New Varig”). This may be converted into shares of New Varig. If LAN were to exercise its option to convert the loans into stock, the Company would then have a minority stake in New Varig.
  • In December 2006, LAN’s Business Class was selected as having the best service to South America by the Readers Choice Awards of Business Traveler magazine. During 2006 LAN was also chosen Best Airline in Central/South America by Global Traveler, one of the leading business publications for international executive travelers.

Management Comments on 4Q06 Results

LAN reported net income of $93.6 million for the fourth quarter of 2006. This result reflects a strong operating performance, with significant margin improvements resulting mainly from higher revenues per ATK in both the passenger and cargo businesses as well as from lower fuel costs, in each case as compared to the fourth quarter of 2005. While total revenues increased 20.8% during the quarter, operating margin improved 7.8 points to 16.2%. This represents a major accomplishment for the Company as revenue growth surpassed the 14.9% expansion in operations, as measured in system ATKs. The Company also benefited from an estimated US$26.8 million in lower fuel costs as a result of decreases in the price of jet fuel, partly offset by lower fuel surcharges and a small hedging loss.

Passenger revenues grew 26.1% due mainly to a 19.8% expansion in capacity as well as a 5.3% improvement in revenues per ASK. The latter resulted from a 1.4% improvement in yield and a 2.9 point increase in load-factors during the quarter. During the fourth quarter, the Company managed capacity to respond to demand growth and market opportunities. As a consequence, capacity increased on the majority of LAN’s routes, especially those to the United States, Europe, and the South Pacific as well as within South America. Capacity decreased on segments to the Caribbean. Capacity also increased in all of the company’s domestic markets, namely Chile, Peru and Argentina. During the quarter, higher yields as a result of nominal fare increases and better revenue management were offset by lower fuel surcharges resulting from lower WTI prices as compared to 4Q05.

Cargo revenues rose 16.5% as capacity rose 7.4% and unit cargo revenues increased 8.5%. Higher revenues per ATK resulted mainly from an 8.9% improvement in yields, partly offset by a 0.3 point decrease in load factors. The cargo business continues to experience an imbalance caused by weak exports and strong imports into Latin America. In response to these conditions, LAN has adjusted its aircraft rotations in order to support northbound flights with stop-overs in various export markets. Additionally, the Company is reducing its ACMI leases of dedicated freighters and increasing the usage of its own fleet of Boeing 767 freighters, leveraging the aircraft’s low operating costs and their ability to adequately serve key destinations. Yields rose due to careful route selection and fare increases, mainly on southbound routes.

Operating expenses rose 10.6% compared to fourth quarter of 2005 as capacity increased 14.9%. This led to a 2.0% decrease in total cost per ATK (which include net financial expenses). Excluding the impact of lower fuel prices, which generated US$26.8 million in lower fuel costs for the quarter, unit costs rose 3.7%. Ex-fuel, unit costs rose due to increases in wages and benefits, higher commercial costs related to the higher yields obtained in the quarter, higher airport fees, and higher fleet related expenses as a result of a larger fleet. These factors were partially offset by lower maintenance costs attributable to a more modern fleet.

The Company recorded a US$24.3 million non-operating loss in the fourth quarter of 2006 compared to a US$1.0 million loss in 4Q05. This was mainly the result of higher interest expenses due to higher debt related to fleet financing, as well as a decrease in fuel hedging gains (US$4.3 million gain in 4Q05 as compared to a US$1.0 million loss in 4Q06) and an US$8.1 million provision related to the phase-out of the Boeing 737-200 fleet to occur during 2007. LAN has hedged approximately 36%, 27%, 28% and 29% of its fuel requirements for 1Q07, 2Q07, 3Q07 and 4Q07, respectively.

LAN continues to maintain a solid financial position, with ample liquidity and a sound financing structure. At the end of the quarter LAN had US$281 million in cash, cash equivalents and committed credit lines. Additionally, the Company’s long-term debt only finances aircraft, has 12 to 18-year repayment profiles and features competitive interest rates.

In October 2006, LAN received one new Boeing 767-300F freighter to be incorporated into its dedicated cargo fleet. For its passenger operations, LAN incorporated one new Boeing 767-300ER into its long-haul fleet in November 2006, the fourth such delivery in 2006. This aircraft features LAN’s recently-launched Premium Business Class and upgraded Economy Class.

Consistent positive results and a solid balance sheet have enabled LAN to continue advancing on a number of long-term initiatives. These plans, which encompass all levels and business units, are aimed at improving LAN’s long-term strategic position by enabling the Company to address opportunities, strengthen its market position and raise competitiveness.

EBITDAR Calculation (1)

The following is a calculation of LAN’s EBITDA (earnings before interest, taxes, depreciation and amortization) and EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rentals), which the Company considers useful indicators of operating performance.

EBITDAR (in US$ millons)
  4Q06 4Q05 %Chg FY06 FY05 %Chg
Revenues 853.5 706.3 20.8% 3,034.0 2,506.4 21.1%
Operating Expenses 715.5 647.1 10.6% 2731.3 2364.7 15.5%
Operating Income 138.0 59.2 132.9% 302.6 141.6 113.7%
Depreciation and Amortization 32.6 21.5 52.0% 122.8 80.5 52.6%
             
EBITDA 170.6 80.7 111.4% 425.4 222.1 91.6%
EBITDA Margin 20.0% 11.4% 8.6pp 14.0% 8.9% 5.1pp
             
Aircraft Rentals 39.1 37.9 3.0% 157.7 148.2 6.4%
EBITDAR 209.7 118.7 76.8% 583.1 370.3 57.5%
EBITDAR Margin 24.6% 16.8% 7.8pp 19.2% 14.8% 4.4pp

(1) EBITDA and EBITDAR are non-GAAP measures and should not be considered in isolation nor as a substitute for net income prepared in accordance with generally accepted accounting principles in Chile as a measure of operating performance. Furthermore, these calculations may not be comparable to similarly titled measures used by other companies.

Recent Events

New Business Model for Domestic/Regional Operations
The Company has recently embarked on an important project to redesign its domestic and regional business model. This project seeks to increase efficiency and improve the margins of LAN’s short haul operations, including domestic operations in Chile and its affiliate operations in Argentina and Peru, as well as regional narrow-body aircraft operations. During the 4Q06 LAN carried out pilot programs to test this new business model in three domestic destinations in Chile: Puerto Montt, Punta Arenas and La Serena. The Company saw very positive results in all of these markets in terms of demand stimulation as well as significant increases in first-time passengers.

LAN plans to implement the new model nationwide throughout Chile in April 2007. LAN Peru has implemented the new business model on most of its domestic routes, and plans to complete its implementation during the first quarter of 2007. In Argentina, implementation by LAN Argentina of the new model will be gradual, and will focus mainly on certain operational changes. Both Lan Peru and Lan Argentina are currently operating all Airbus 320 family fleets.

Capital Increase
On January 26, 2007, LAN’s Extraordinary Shareholders Meeting approved a share issuance of 7,500,000 common shares, amounting to 2.4% of the Company’s current capital on a fully diluted basis. A portion of this issuance will be designated to the implementation of a stock option plan for Company employees, under conditions to be defined by the Company’s Board of Directors.

Financing to VRG Linhas Aereas S.A.
On January 31, 2007, LAN announced that it has provided a total of approximately US$ 17.1 million in financing to Brazilian company VRG LINHAS AEREAS S.A. (“New Varig”). These loans may be converted into shares of New Varig and if LAN were to exercise its option to convert the loans into stock, the Company would then have a minority stake in New Varig. LAN in currently involved in ongoing negotiations with New Varig’s shareholders in order to potentially exercise its option to participate in such company through the capitalization of its loans.

Outlook

The actions mentioned above are part of a broad set of initiatives aimed at reinforcing LAN’s future performance. The Company’s strong fourth quarter operating performance provides a solid base for long-term growth and profitability. As a consequence, LAN is in a position to plan for capacity expansion in response to growth opportunities, while leveraging opportunities to improve its cost performance. Combined, LAN believes that these elements will enable LAN to consolidate its position as Latin America’s leading international carrier.

LAN is embarked on a very significant fleet expansion program, which included the delivery of a total of 13 passenger and cargo aircraft in 2006. In addition to additional aircraft, ASK growth will be enhanced as a result of increased aircraft utilization and, to a lesser extent, the densification of its current fleet. Overall, LAN expects passenger ASK growth to be between 19-21% in 2007 and between 18-20% in 2008. LAN expects growth in the cargo business over the next two years will largely be driven by capacity in the belly space of passenger aircraft, as well as from the delivery of one new freighter in 4Q06 and a possible additional freighter in 2008. As a result, we estimate cargo ATK growth of 4-6% in 2007 and 4-6% in 2008.

Consolidated Fourth Quarter Results

Net income for the fourth quarter of 2006 amounted to US$93.6 million compared to US$49.9 million for the same period of 2005, increasing 87.7%. Net margin for the quarter increased 3.9 points from 7.1% in 2005 to 11.0% in 2006.

Operating income amounted to US$138.0 million in 4Q06 as compared to US$59.2 million in 4Q05. Operating margin for the quarter increased 7.8 points to 16.2%.

Total operating revenues grew 20.8% compared to the fourth quarter of 2005, reaching US$853.5 million. This reflected a:

  • 26.1% increase in passenger revenues to US$514.2 million,
  • 16.5% increase in cargo revenues to US$302.6 million, and a
  • 5.5% decrease in other revenues to US$36.7 million.

Passenger and cargo revenues accounted for 60% and 35% of total revenues for the quarter, respectively.

Passenger revenues grew driven by a 24.4% increase in traffic and an 1.4% increase in yields. Load factor increased 2.9 points to 76.2% as traffic outgrew a 19.8% increase in capacity. Overall, revenues per ASK increased 5.3%. Traffic grew as a result of an 11.7% increase in Chilean domestic and a 26.7% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 86% of total passenger traffic during the quarter. Yields increased 1.4% as nominal fare increases and better revenue management were offset by lower fuel surcharges resulting from lower WTI prices as compared to 4Q05.

Cargo revenues grew due to a 7.0% increase in traffic and a 8.9% improvement in yield. Yields increased primarily due to higher fares, especially on southbound routes. Traffic growth was slightly exceeded by a 7.4% capacity increase. As a consequence, load factors decreased 0.3 points to 69.0%. Nevertheless, revenues per ATK increased 8.5% as compared to 4Q05.

Other revenues decreased 5.5% as increased on-board sales, handling and courier revenues were offset by lower revenues from logistics and aircraft rental activities.

Total operating expenses increased 10.6% during the quarter as capacity, measured in system ATKs, increased 14.9%. As a consequence, unit (ATK) costs decreased 2.0%. Lower jet fuel prices during the quarter led to approximately US$26.8 million in lower fuel costs. Ex-fuel, unit costs increased 3.7%. Changes in operating expenses were driven by:

  • Wages and benefits increased 19.5% due to higher provisions for employee incentive programs as compared to 4Q05, in line with the Company’s improved results.
  • Fuel costs decreased 1.8% as a 12.0% increase in consumption was offset by a 12.3% decrease in prices as well as by fuel efficiencies resulting from a newer fleet.
  • Commissions to agents rose 14.8% as a 22.4% increase in traffic (passenger and cargo) revenues was offset by a 0.8 point reduction in average commissions. This reduction was mainly related to lower passenger commissions.
  • Depreciation and amortization increased 52.0%, mainly due to the incorporation during 2006 of four new Boeing 767-300ER passenger aircraft, one new Boeing 767-300F freighter aircraft and eight new Airbus A319 aircraft, as well as to the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.
  • Other rental and landing fees increased 22.5%, mainly as a result of the impact of increased operations on landing and ground-handling fees.
  • Passenger service expenses increased 18.2%, in line with the 22.3% increase in the number of passenger transported during the quarter.
  • Aircraft rentals increased 3.0% mainly due to an increase in the average number of leased aircraft as a result of certain leases that were incorporated to the fleet during 4Q05.
  • Maintenance expenses decreased 15.7% as increased costs due to capacity growth were compensated by efficiency gains related to fleet renewal programs, the renegotiation of maintenance contracts with third parties and the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.
  • Other operating expenses increased 14.8% due to increased operations, which resulted in increased sales costs and costs related to the Company’s frequent flyer program LanPass,.


Non-operating results
for the fourth quarter of 2006 amounted to a US$24.3 million loss compared to a US$1.0 million loss in the fourth quarter of 2005. Interest income increased 22.1% due to higher average cash balances. Interest expenses increased 67.8% due to increased average long-term debt related with fleet financing. In the miscellaneous-net item, the Company recorded a US$8.2 million loss compared to a US$7.9 million gain in 2005. In 4Q06, this included a US$1.0 million fuel hedging loss (compared to a US$4.3 million gain in 4Q05) as well as a US$6.1 million foreign-exchange gain (compared to a US$3.3 million gain in 2005). This item also included in 4Q06 an US$8.1 million provision related with the phase-out of the Boeing 737-200 fleet planned for 2007.

Consolidated Full Year 2006 Results

Net income for the full-year 2006 amounted to US$241.3 million compared to US$146.6 million for 2005. Net margin increased 2.1 points from 5.8% in 2005 to 8.0% in 2006. Excluding extraordinary items, net income for 2006 reached US$213.0 million.

Operating income for 2006 was US$302.6 million compared to US$141.6 million in 2005. Operating margin for 2006 increased 4.3 points to 10.0%.

Total operating revenues
amounted to US$3.0 billion in 2006, a 21.1% increase compared with 2005. This reflected a:

  • 24.2% increase in passenger revenues to US$1.8 billion,
  • 17.8% increase in cargo revenues to US$1.1 billion, and a
  • 9.3% increase in other revenues to US$147.6 million.

Passenger and cargo revenues accounted for 60% and 35% of total revenues for 2006, respectively.

Passenger revenues grew driven by an 11.5% increase in traffic and an 11.4% increase in yields. Load factors remained flat at 73.8% as traffic growth equaled a 11.5% capacity increase. Overall, revenues per ASK rose 11.4%. Traffic grew by 3.1% in the Chilean domestic market and by 12.8% on international routes (including domestic operations in Peru and Argentina). International traffic accounted for 87% of total passenger traffic during 2006. Yields grew mainly due to the implementation of fuel cost pass-through initiatives as well as nominal fare increases and improved segmentation.

Cargo revenues grew due to a 7.8% increase in traffic and a 9.3% improvement in yield, measured in RTKs. Yields rose primarily due to increases in southbound rates and cost driven rate increases. Growth in cargo traffic outpaced a 7.0% increase in capacity, resulting in a 0.5-point increase in cargo load factors to 66.8%. As a consequence, revenues per ATK rose 10.1%.

Other revenues grew 9.3%, mainly driven by higher revenues from on-board sales and courier operations, as well as higher revenues from aircraft leasing and handling activities to third parties, partially offset by lower maintenance to third parties.

Total operating expenses increased 15.5% in 2006 compared to 2005, as capacity, measured in system ATKs, increased 9.3%. As a consequence, unit (ATK) costs increased 6.9%. Excluding the impact of higher fuel prices, which led to US$70.9 million in additional expenses, unit costs increased 6.2%. Changes in operating expenses were driven by:

  • Wages and benefits increased 19.2% mainly due to the appreciation of the Chilean peso in relation to the US dollar and increased headcount (mainly related to the start up of operations in Lan Argentina in mid-2005), as well as higher provisions for employee incentive programs during 2006.
  • Fuel costs increased 18.9% due to a 10.2% increase in prices and a 7.8% increase in consumption, offset by a more fuel efficient fleet.
  • Commissions to agents rose 16.9% driven primarily from a 21.7% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions fell 0.6 points to 14.0% This reduction was mainly related to lower passenger commissions.
  • Depreciation and amortization increased 52.6%, mainly due to the incorporation of four new Boeing 767-300 passenger aircraft, one new Boeing 767 freighter aircraft, and eight new Airbus A319 aircraft, and to the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.
  • Other rental and landing fees increased 11.7% mainly due the impact of increased operations on both landing fees and ground-handling expenses.
  • Passenger service expenses increased 5.5%, as an 11.5% increase in the number of passengers transported was offset by changes in the on-board service process on certain domestic operations.
  • Aircraft rentals increased 6.4% mainly due to an increase in the average number of leased aircraft as compared to 2005.
  • Maintenance expenses decreased 11.3% as increased costs due to capacity growth were compensated by efficiency gains related to fleet renewal programs, the renegotiation of maintenance contracts with third parties, and the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.
  • Other operating expenses grew 14.0% due to increased operations, which resulted in increased sales costs and costs related to the Company’s frequent flyer program LanPass


Non-operating results
for 2006 amounted to a US$15.7 million loss compared to a US$31.5 million gain in 2005. Interest income decreased 36.4% due to lower average cash balances and lower interest rates. Interest expenses increased 55.0% due to an increase in average debt, mainly related to fleet financing. In the miscellaneous-net item, the Company recorded a US$37.1 million gain compared to a US$58.2 million gain in 2005. In 2006, this included (i) a US$40.3 million one-time gain due to a change in the Company’s maintenance accounting policy recorded in 1Q06 (ii) a US$6.4 million pre-tax one-time charge due to severance payments recorded in 2Q06 and (iii) an US$8.1 million provision related to the phase-out of the Boeing 737-200 fleet planned for 2007 recorded in 4Q06. In addition, this item included a US$12.9 million fuel hedging gain (compared to a US$51.5 million gain in 2005) as well as a US$5.5 million foreign-exchange gain (compared to a US$6.0 million gain in 2005).