Press Release

LAN AIRLINES REPORTS NET INCOME OF US$100.8 MILLION FOR 4Q07 and US$308.3 MILLION FOR FULL YEAR 2007

Santiago, Chile, January 29, 2008


HIGHLIGHTS

  • LAN reported net income of US$100.8 million for the fourth quarter of 2007, a 7.7% increase compared to net income of US$93.6 million in the fourth quarter of 2006.
  • Net income for full year 2007 reached US$308.3 million, compared to US$241.3 million for full year 2006. Excluding extraordinary items recorded in 2006, net income for full year 2007 increased by 44.8%.
  • The Company reported operating income of US$131.9 million for the fourth quarter of 2007 compared to operating income of US$138.0 million in the fourth quarter of 2006, resulting in a 3.6 point decrease in operating margin from 16.2% to 12.6%. This decrease was mainly the result of higher fuel prices, which resulted in US$81.5 million in higher fuel costs during the quarter. Considering the fuel hedging gain obtained in the fourth quarter 2007 (which is accounted for as non-operating income), operating income would have reached US$152.7 million, an 11.5% increase over fourth quarter 2006, demonstrating LAN's ability to operate successfully in a high fuel price environment.
  • Total revenues for the fourth quarter of 2007 reached US$1,046.1 million compared to revenues of US$853.5 million in the fourth quarter of 2006, due mainly to a 24.9% increase in passenger revenues, while cargo revenues increased 15.5% and other revenues increased 47.9%. Passenger and cargo revenues accounted for 61.4% and 33.4% of total revenues, respectively, during the fourth quarter of 2007.
  • Continuing with the expansion and renewal of its fleet, LAN received two new Boeing 767-300 passenger aircraft during the fourth quarter 2007, both of them featuring the Company's new Premium Business and Economy classes. For its short haul fleet, LAN also received two new Airbus A320s and three new Airbus A318s.
  • In November 2007 LAN celebrated its tenth anniversary of listing its American Depositary Shares on the New York Stock Exchange, having been the first Latin American airline to do so. Members of the board and senior management celebrated by ringing the closing bell at the NYSE on November 6, 2007.
  • During the quarter LAN continued to receive international recognition, being selected as the best airline in South America at the recent World Travel Awards. This prize is based on the votes of approximately 170,000 industry professionals and travel agents worldwide. On this occasion, one world was also elected as the leading airline alliance in the world for the fifth consecutive year. .

Management Comments on Fourth Quarter 2007 Results

LAN reported net and operating income of US$100.8 million and US$131.9 million, respectively, in the fourth quarter of 2007. Total revenues increased 22.6% during the quarter, while LAN's operating margin decreased from 16.2% to 12.6%, mainly as a result of higher fuel costs. Considering the fuel hedging gain obtained in the fourth quarter 2007 (which is accounted for as non operating income), operating income would have amounted to US$152.7 million, an 11.5% increase over fourth quarter 2006, demonstrating LAN's ability to operate successfully in a high fuel price environment.

Passenger revenues grew 24.9% during the quarter, due to a 14.5% expansion in capacity, and a 9.1% increase in revenues per ASK. The latter was driven by an 8.1% increase in yields, together with a 0.7 point increase in load factors from 76.2% to 76.9%. During the quarter, the Company managed its capacity in order to respond to demand growth and market opportunities. As a consequence, capacity increased proportionately on all of LAN's routes, including long haul and regional routes as well as domestic routes within Chile , Peru and Argentina . During the quarter, yields increased mainly as a result of nominal fare increases, better revenue management practices on regional and long-haul routes and the increase in fuel surcharges due to higher fuel costs.

LAN's strategy in the cargo business seeks to rationalize capacity expansion by focusing on the most profitable routes, as well as optimizing its fleet by maintaining the optimal mix of ACMI leases and its own Boeing 767 freighters. The implementation of this strategy during the fourth quarter of 2007 continues to achieve important profitability improvements. During the fourth quarter of 2007, cargo revenues rose 15.5% as capacity rose 9.2% and unit cargo revenues increased 5.8%. Higher revenues per ATK resulted mainly from a 9.2% increase in yields, which offset a decline in load factors from 78.0% to 75.6%. Yields increased during the quarter mainly driven by the implementation of certain revenue management initiatives and by higher fuel surcharges .

Operating expenses rose 27.8% compared to the fourth quarter of 2006, while costs per ATK (including net financial expenses) increased 17.2%. Higher fuel prices generated US$81.5 million in higher fuel costs for the quarter. Excluding fuel, unit costs increased 7.3%, mainly due to the impact of the appreciation of local currencies and of inflation on wages & benefits, as well as due to higher fleet costs.

The Company recorded a US$10.3 million non-operating loss in the fourth quarter of 2007 compared to a US$24.3 million non-operating loss in the fourth quarter of 2006. In the fourth quarter of 2007, interest expenses increased due to higher debt, related to fleet financing, while interest income increased due to higher cash balances resulting from the proceeds of the equity offering completed in June 2007. The Company recorded a US$20.8 million fuel hedging gain in the fourth quarter of 2007, compared to a US$1.0 million fuel hedging loss in the fourth quarter of 2006. LAN has hedged approximately 30% of its fuel requirements for the first quarter of 2008, approximately 40% for the second quarter of 2008 and approximately 48% for the second half of 2008. In addition, in the fourth quarter 2007, LAN recorded a US$25.0 million reserve related to the ongoing investigation by the European Commission for allegations of anti-competitive behavior in the cargo business.

LAN continues to maintain a solid financial position, with ample liquidity and a sound financing structure. At the end of the fourth quarter 2007 LAN had US$540 million in cash, cash equivalents and available credit lines. Additionally, the Company's long-term debt only finances aircraft, has 12 to 18-year repayment profiles and features competitive interest rates.

During the quarter, LAN continued with its retrofit program to reconfigure all of its Boeing 767 passenger aircraft with the new Premium Business Class and upgraded Economy Class. As of December 31, 2007, fifteen of LAN's 22 Boeing 767 passenger aircraft had this new configuration.

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 increase 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.

Recent Events

New Business Model for Domestic/Regional Operations

During the fourth quarter, LAN continued to see the excellent results from the launch of its new business model for short-haul operations on domestic routes within Chile and Peru . Domestic traffic in Chile grew 26.1% during the quarter, while domestic load factors increased from 70.0% to 77.5%, largely driven by fare reductions of up to 35% on the lowest fare classes. At the same time, CASK in the domestic business continues to be reduced via a larger Airbus fleet, increased fleet utilization rates, longer flight legs, and lower distribution costs as a result of the reduction in commissions to agents and higher Internet sales. Internet sales in the Chilean domestic operations increased from 18% in December 2006 to 45% in December 2007.

Fleet Plan

During the quarter, LAN continued the expansion of its fleet. In the fourth quarter 2007, the Company received three Airbus A318 and two Airbus A320 aircraft destined for domestic and regional short haul operations. In addition, LAN took delivery of two Boeing 767-300 passenger aircraft for long-haul routes.

Cargo Investigation

As previously reported, in February 2006 the European Commission, in conjunction with the Department of Justice of the United States, initiated a global investigation including a large number of international cargo airlines - among them LAN Cargo S.A., LAN´s cargo subsidiary - for possible price fixing of cargo fuel surcharges and other fees in the European and United States air cargo markets.

 

On December 26, 2007, the Directorate-General for Competition of the European Commission notified LAN Cargo S.A. and LAN of the initiation of proceedings against 25 cargo airlines, among them LAN Cargo S.A., for allegations of anti-competitive behavior in the air freight business. LAN is currently reviewing the terms of the notification. Given the current stage of the proceedings, it is not possible at this time to anticipate with any precision their outcome, although it is expected to be a lengthy judicial process. Notwithstanding the above, in the fourth quarter of 2007, LAN recorded a US$25.0 million reserve in Other Non-Operating Expenses in relation with this investigation.

 

Dividend Information

On December 21, 2007, LAN's Board of Directors approved the payment of a second interim dividend corresponding to net income for fiscal year 2007, in the amount of US$0.35389 per share. This dividend was paid on January 17, 2008 to all shareholders of record as of January 11, 2008.

Outlook

 The actions mentioned under "Recent Events" above are part of a broad set of initiatives aimed at strengthening LAN´s future performance. The Company´s strong full-year 2007 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 the Company to consolidate its position as Latin America ´s leading international carrier.

LAN has embarked on a very significant fleet expansion program, which included the delivery of a total of 11 passenger aircraft in 2007 and of 22 passenger aircraft in 2008, partially to replace the Boeing 737-200 aircraft which will be phased out during the first half of 2008. In addition to more aircraft, ASK growth will be enhanced as a result of increased aircraft utilization and, to a lesser extent, the densification of the current fleet. Overall, LAN expects passenger ASK growth to be between 20-22% in 2008. LAN expects growth in the cargo business in 2008 to be largely driven by capacity in the belly space of passenger aircraft, as well as from possible additional ACMI leases in 2008. As a result, the Company estimates cargo ATK growth of 8-10% in 2008.

Consolidated Fourth Quarter Results

Net income for the fourth quarter of 2007 amounted to US$100.8 million compared to net income of US$93.6 million in the same period of 2006, an increase of 7.7%. Net margin for the quarter decreased from 11.0% in 2006 to 9.6% in 2007.

Operating income amounted to US$131.9 million in the fourth quarter of 2007 as compared to operating income of US$138.0 million in the fourth quarter of 2006. Operating margin for the quarter decreased from 16.2% to 12.6%, mainly as a result of higher fuel costs.

Total operating revenues grew 22.6% compared to the fourth quarter of 2006, reaching US$1,046.1 million. This reflected a:

•  24.9% increase in passenger revenues to US$642.4 million,

•  15.5% increase in cargo revenues to US$349.4 million, and a

•  47.9% increase in other revenues to US$54.3 million.

Passenger and cargo revenues accounted for 61% and 33% of total revenues for the quarter, respectively.

Passenger revenues were higher driven by a 15.5% increase in traffic, coupled with an 8.1% increase in yields. Load factors increased from 76.2% to 76.9%, as traffic outpaced the 14.5% increase in capacity. Overall, revenues per ASK increased 9.1%. Traffic grew as a result of a 26.1% increase in Chilean domestic traffic, and a 13.8% increase in international traffic (including domestic operations in Peru and Argentina ). International traffic accounted for 85% of total passenger traffic during the quarter. Yields increased 8.1% mainly as a result of nominal fare increases, better revenue management practices on regional and long-haul routes, and the increase in fuel surcharges due to higher fuel costs.

Cargo revenues increased 15.5% driven by a 5.8% increase in traffic and a 9.2% increase in yields. Yields increased primarily due to the implementation during the quarter of certain revenue management initiatives and to higher fuel surcharges. Capacity during the quarter increased 9.2%. As a consequence, load factors decreased from 78.0% to 75.6%, due to the effect of stronger currencies and higher fuel prices on some northbound export markets. Revenues per ATK increased by 5.8% compared to the fourth quarter of 2006.

Other revenues increased 47.9%, mainly driven by increased revenues from on board sales and aircraft rentals, maintenance and storage and custom brokerage services to third parties. In addition, the Company received US$11.3 million from Airbus related to a change in the delivery schedule for certain Airbus A318 aircraft. These effects were partly offset by the sale of the subsidiaries of LAN Logistics Corp, including the Miami-based companies LAN Box Inc. and courier company SkyNet SA, during the second quarter of 2007, which were not part of the Company's core airline business.

Total operating expenses increased 27.8% during the quarter, while unit (ATK) costs increased 17.2% as compared to the fourth quarter 2006. Higher jet fuel prices during the quarter led to approximately US$81.5 million in higher fuel costs. Excluding fuel, unit costs increased 7.3%. Changes in operating expenses were driven by:

•  Wages and benefits increased 13.9%, driven mainly by the impact of stronger local currencies and of inflation on local currency-denominated wages, as well as by increased headcount in line with the expansion of the Company's operations,

•  Fuel costs increased 53.9%, driven by an 11.3% increase in consumption and a 38.3% increase in prices.

•  Commissions to agents increased 11.1% due to a 21.4% increase in traffic revenues (passenger and cargo), which was offset by a 1.1 point reduction in average commissions. This reduction was mainly related to lower commissions in the passenger business in Chile .

•  Depreciation and amortization increased 29.6%, mainly due to the incorporation of three new Boeing 767 aircraft, two Airbus A320 and five Airbus A318 aircraft during 2007.

•  Other rental and landing fees increased 11.7%, mainly due to the impact of increased operations on airport landing fees and handling expenses, which were offset in part by lower variable aircraft rentals as a result of the termination of certain cargo allotment agreements.

•  Passenger service expenses increased 27.0%, driven by the 19.5% increase in the number of passengers transported during the quarter, as well as by higher costs associated with passenger compensations.

•  Aircraft rentals increased 9.3% mainly due to the incorporation of one leased Airbus A340 into LAN's fleet during the third quarter of 2007.

•  Maintenance expenses increased 52.0% mainly as a result of the expansion in operations, a larger fleet and the increased fleet utilization, as well as higher maintenance rates per hour due to escalation in maintenance contracts.

•  Other operating expenses increased 27.1% due to increased operations, driven mainly by higher sales and distribution costs and marketing expenses.

 

Non-operating results for the fourth quarter of 2007 amounted to a US$10.3 million loss compared to a US$24.3 million loss in the fourth quarter of 2006.

•  Interest income increased 110.4% due to higher average cash balances resulting from the proceeds of the equity offering completed in June 2007.

•  Interest expense increased 8.0% due to increased average long-term debt related to fleet financing.

•  In the other income-net item, the Company recorded a US$4.3 million gain compared to an US$8.2 million loss in 2006. In the fourth quarter 2007, LAN recorded a US$25.0 million reserve related to the ongoing investigation by the European Commission for allegations of anti-competitive behavior in the cargo business. In addition, the Company recorded a fuel hedging gain of US$20.8 million in the fourth quarter of 2007 (compared to a US$1.0 million loss in the fourth quarter of 2006), as well as a US$9.4 million foreign-exchange gain (compared to a US$6.1 million gain in the fourth quarter of 2006).

 

Consolidated Full Year 2007 Results

Net income for the full-year 2007 amounted to US$308.3 million compared to net income of US$241.3 million in the same period of 2006, an increase of 27.8%. Excluding extraordinary items that amounted to US$28.3 million during the first half of 2006, net income rose 44.8% and net margin increased from 7.0% in 2006 to 8.7% in 2007.

Operating income amounted to US$413.4 million in 2007 compared to US$302.6 million in 2006. Operating margin for the year increased from 10.0% to 11.7%.

Total operating revenues grew 16.2% compared to 2006, reaching US$3.5 billion. This reflected a:

•  21.2% increase in passenger revenues to US$2,197.2 million,

•  7.6% increase in cargo revenues to US$1,154.3 million, and a

•  17.3% increase in other revenues which amounted to US$173.4 million.

Passenger and cargo revenues accounted for 62% and 33% of total revenues for the period, respectively.

Passenger revenues grew 21.2% driven by a 23.1% increase in traffic, partly offset by a 1.6% decrease in yields. Load factors increased from 73.9% to 76.1%, as traffic outpaced the 19.5% increase in capacity. Overall, revenues per ASK increased 1.4%. Traffic grew as a result of a 23.5% increase in Chilean domestic traffic and a 23.1% increase in international traffic (including domestic operations in Peru and Argentina ). International traffic accounted for 87% of total passenger traffic during the period. Yields decreased 1.6% due to fare decreases on regional and domestic routes related to the new business model for short-haul operations, partly offset by nominal fare increases, improved revenue management and higher fuel surcharges in the fourth quarter of 2007 .

Cargo revenues increased 7.6% mainly due to a 4.8% increase in traffic, coupled with a 2.7% increase in yields. Yields increased due to strong demand on southbound routes and to the implementation of certain revenue management initiatives as well as higher fuel surcharges. Traffic growth was exceeded by a 6.9% capacity increase. As a consequence, load factors decreased from 75.9% to 74.4%. Revenues per ATK marginally increased 0.7% compared to full-year 2006.

Other revenues increased 17.3% driven by increased revenues from on-board sales and aircraft rentals, maintenance and storage, custom brokerage and handling services to third parties, partially offset by the sale in the second quarter of 2007 of the subsidiaries of Lan Logistics Corp, which were not part of the Company's core airline business . In addition, the Company received US$18.6 million from Airbus related to a change in the delivery schedule of certain Airbus A318 aircraft.

Total operating expenses increased 13.9% during the period, while unit (ATK) costs increased 2.8%. Higher jet fuel prices during the period led to approximately US$78.5 million in higher fuel costs. Excluding fuel, unit costs were stable during the year, decreasing 0.2%. Changes in operating expenses were driven by:

•  Wages and benefits increased 10.5%, mainly driven by increased headcount in line with the expansion in the Company's operations, together with the impact of stronger local currencies and inflation on local currency-denominated wages.

•  Fuel costs increased 21.8%, due to an 11.5% increase in consumption and a 9.2% increase in prices.

•  Commissions to agents were flat during the year, despite significant revenue growth, due to a 16.1% increase in traffic revenues (passenger and cargo), which was offset by a 2.0 point reduction in average commissions. This reduction was mainly related to a change in the commission structure in the cargo business, as well as lower commissions in the passenger business in Chile .

•  Depreciation and amortization increased 25.3%, mainly to the incorporation into LAN's fleet of three new Boeing 767 aircraft, two Airbus A320 and five Airbus A318 aircraft during 2007.

•  Other rental and landing fees increased 8.8%, mainly due to the impact of increased operations on landing fees and handling expenses, partially offset by lower variable aircraft rentals as a result of lower ACMI leases in the cargo business, as well as the termination of certain cargo allotment agreements.

•  Passenger service expenses increased 28.1%, driven mainly by the 24.9% increase in the number of passengers transported during the period, in addition to higher costs associated with passenger compensations.

•  Aircraft rentals marginally increased 0.8%, as a decrease in the average number of leased aircraft was offset by higher average lease rates and by the incorporation of an additional Airbus A340 into LAN's fleet.

•  Maintenance expenses increased 35.7% mainly as a result of the expansion in operations, a larger fleet and increased utilization of the fleet, as well as higher maintenance rates per hour due to an escalation in maintenance contracts.

•  Other operating expenses increased 14.9% due to increased operations, which resulted in increased sales and distribution costs, higher advertising and marketing expenses, and costs related to the Company's on board sales. This was partially offset by the de-consolidation of the costs related to the subsidiaries of Lan Logistic Corp, which were sold during the second quarter of 2007.

 

Non-operating results for 2007 amounted to a US$45.6 million loss compared to a US$15.7 million loss in 2006.

•  Interest income increased 128.5% due to higher average cash balances resulting from the proceeds of the equity offering completed in June 2007.

•  Interest expense increased 25.5% due to increased average long-term debt related to fleet financing.

•  In the other income-net item, the Company recorded a US$12.6 million gain compared to a US$37.1 million gain in 2006. In 2007, this item included a US$25.0 million reserve related to the ongoing investigation by the European Commission for allegations of anti-competitive behavior in the cargo business. In 2006, this item included a US$40.3 million pre-tax, one-time gain related to a change in the Company's aircraft maintenance accounting policy, a US$6.4 million pre-tax one-time charge related to severance payment charges and an US$8.1 million provision related to the phase-out of the Boeing 737-200 fleet. The Company recorded a fuel hedging gain of US$28.2 million in the full-year 2007 (compared to a US$12.9 million gain in 2006), as well as a US$15.7 million foreign-exchange gain (compared to a US$5.5 million gain in 2006).

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