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Latam Airlines (LTMAQ)

Filed: 28 Mar 17, 8:00pm
Table of Contents

-As filed with the Securities and Exchange Commission on March 29, 2017

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:1-14728

 

 

LATAM Airlines Group S.A.

(Exact name of registrant as specified in its charter)

 

 

 

LATAM Airlines Group S.A. Republic of Chile
(Translation of registrant’s name into English) (Jurisdiction of incorporation or organization)

Presidente Riesco 5711, 20th Floor

Las Condes

Santiago, Chile

(Address of principal executive offices)

Gisela Escobar

Tel.:56-2-2565-3944E-mail: InvestorRelations@latam.com

Presidente Riesco 5711, 20th Floor

Las Condes

Santiago, Chile

(Name, telephone,e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered:

American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of Common Stock, without par value New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 606,407,693.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☒    No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☐    No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):

Large Accelerated filer  ☒                 Accelerated filer  ☐                 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  ☒

  Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes ☐    No ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PRESENTATION OF INFORMATION

   2 

FORWARD-LOOKING STATEMENTS

   3 

GLOSSARY OF TERMS

   3 
PART I  

ITEM 1.

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

   5 

ITEM 2.

  

OFFER STATISTICS AND EXPECTED TIMETABLE

   5 

ITEM 3.

  

KEY INFORMATION

   5 

ITEM 4.

  

INFORMATION ON THE COMPANY

   17 

ITEM 4A

  

UNRESOLVED STAFF COMMENTS

   47 

ITEM 5.

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   47 

ITEM 6.

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   68 

ITEM 7.

  

CONTROLLING SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   77 

ITEM 8.

  

FINANCIAL INFORMATION

   83 

ITEM 9.

  

THE OFFER AND LISTING

   86 

ITEM 10.

  

ADDITIONAL INFORMATION

   88 

ITEM 11.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   114 

ITEM 12.

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   118 
PART II  

ITEM 13.

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   119 

ITEM 14.

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

   119 

ITEM 15.

  

CONTROLS AND PROCEDURES

   119 

ITEM 16.

  

RESERVED

   120 
PART III  

ITEM 17.

  

FINANCIAL STATEMENTS

   123 

ITEM 18.

  

FINANCIAL STATEMENTS

   123 

ITEM 19.

  

EXHIBITS

   123 

 

1


Table of Contents

PRESENTATION OF INFORMATION

Throughout this annual report on Form20-F we make numerous references to “LATAM”. Unless the context otherwise requires, references to “LATAM Airlines Group” are to LATAM Airlines Group S.A., the unconsolidated operating entity, and references to “LATAM,” “we,” “us” or the “Company” are to LATAM Airlines Group S.A. and its consolidated affiliates: Transporte Aéreo S.A. (which does business under the name “LATAM Airlines Chile”), LAN Perú S.A. (“LATAM Airlines Peru”), Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. (“LATAM Airlines Ecuador”), LAN Argentina S.A. (“LATAM Airlines Argentina,” previously Aero 2000 S.A.), Aerovías de Integración Regional, Aires S.A. (which does business under the name “LATAM Airlines Colombia”), TAM S.A. (“TAM”), LAN Cargo S.A. (“LATAM Cargo”) and its three regional affiliates: Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Linea Aerea Carguera de Colombia S.A. (“LANCO”) in Colombia and Aerolinhas Brasileiras S.A. (“ABSA”) in Brazil. Other references to “LATAM”, however, are to the LATAM brand which was launched in 2016 and brings together, under one internationally recognized name, all of the affiliate brands such as LATAM Airlines Chile, LATAM Airlines Peru, LATAM Airlines Argentina, LATAM Airlines Colombia, LATAM Airlines Ecuador and LATAM Airlines Brazil.

References to “LATAM” and all references to “LAN” are to LAN Airlines S.A., currently known as LATAM Airlines Group S.A. and its consolidated affiliates, in connection with circumstances and facts occurring prior to the completion date of the combination between LAN Airlines S.A. and TAM S.A. See “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.

In this annual report on Form20-F, unless the context otherwise requires, references to “TAM” are to TAM S.A., and its consolidated affiliates, including TAM Linhas Aereas S.A. (“TLA”), which does business under the name “LATAM Airlines Brazil”, Multiplus S.A. (“Multiplus”), Fidelidade Viagens e Turismo Limited (“TAM Viagens”) and Transportes Aéreos Del Mercosur S.A. (“TAM Mercosur”).

LATAM Airlines Group and the majority of our affiliates maintain their accounting records and prepare their financial statements in U.S. dollars. Some of our other affiliates, however, maintain their accounting records and prepare their financial statements in Chilean pesos, Argentinean pesos, Colombian pesos or Brazilian reais. 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 affiliates translated into U.S. dollars. International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), require assets and liabilities to be translated atperiod-end exchange rates, while revenue and expense accounts are translated at each transaction date, although a monthly rate may also be used if exchange rates do not vary widely.

In this annual report on Form20-F, all references to “Chile” are references to the Republic of Chile. This annual report contains conversions of certain Chilean peso and Brazilian real amounts into U.S. dollars at specified rates solely for the convenience of the reader. These conversions should not be construed as representations that the Chilean peso and the Brazilian real amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless we specify otherwise, all references to “$”, “US$”, “U.S. dollars” or “dollars” are to United States dollars, references to “pesos,” “Chilean pesos” or “Ch$” are to Chilean pesos. References to “reais,” “Brazilian reais” or “R$” are to Brazilian reais, and references to “UF” are toUnidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate. Unless we indicate otherwise, the U.S. dollar equivalent for information in Chilean pesos used in this annual report and in our audited consolidated financial statements is based on the “dólar observado” or “observed” exchange rate published byBanco Central de Chile (which we refer to as the Central Bank of Chile) on December 31, 2016, which was Ch$669.47 = US$1.00. The observed exchange rate on February 28, 2017, was Ch$645.19= US$1.00. Unless we indicate otherwise, the U.S. dollar equivalent for information in Brazilian reais used in this annual report and in our audited consolidated financial statements is based on the average “bid and offer rate”published by Banco Central do Brasil (which we refer to as the Central Bank of Brazil) on December 31, 2016, which was R$3.259 = US$1.00. The observed exchange rate on February 28, 2017 was $R$3.099 = US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos or Brazilian reais.

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.

LATAM’s audited consolidated financial statements for the periods ended December 31, 2012, 2013, 2014, 2015 and 2016 were prepared in accordance with IFRS.

This annual report contains certain terms that may be unfamiliar to some readers. You can find a glossary of these terms on page 4 of this annual report.

 

2


Table of Contents

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements. Such statements may include words such as “anticipate,” “could” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or other similar expressions. Forward-looking statements, including statements about our beliefs and expectations, are not statements of historical facts. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. There is no assurance that the expected events, trends or results will actually occur. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to:

 

 the factors described in “Item 3. Key Information—Risk Factors”;

 

 our ability to service our debt and fund our working capital requirements;

 

 future demand for passenger and cargo air service in Chile, Brazil, other countries in Latin America and the rest of the world;

 

 the maintenance of relationships with customers;

 

 the state of the Chilean, Brazilian, Latin American and world economies and their impact on the airline industry;

 

 the effects of competition;

 

 future terrorist incidents, cyberattacks or related activities affecting the airline industry;

 

 future outbreak of diseases, or the spread of already existing diseases, affecting traveling behavior and/or exports;

 

 natural disasters affecting traveling behavior and/or exports;

 

 the relative value of the Chilean and other Latin American currencies compared to other world currencies;

 

 inflation;

 

 competitive pressures on pricing;

 

 our capital expenditure plans;

 

 changes in labor costs, maintenance costs and insurance premiums;

 

 fluctuation of crude oil prices and its effect on fuel costs;

 

 cyclical and seasonal fluctuations in our operating results;

 

 defects or mechanical problems with our aircraft;

 

 our ability to successfully implement our growth strategy;

 

 increases in interest rates; and

 

 changes in regulations, including regulations related to access to routes in which we operate.

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.

 

Capacity Measurements:

  
“available seat kilometers” or “ASKs”  The sum, across our network, of the number of seats made available for sale on each flight multiplied by the kilometers flown by the respective flight.
“available ton kilometers” or “ATKs”  The sum, across our network, of the number of tons available for the transportation of revenue load (cargo) on each flight multiplied by the kilometers flown by the respective flight.
“available seat kilometers equivalent” or “ASK equivalent”  The sum, across our network, of the number of seats made available for sale on each flight plus the quotient of cargo ATKs divided by 0.095, all multiplied by the kilometers flown by the respective flight.

 

3


Table of Contents
Traffic Measurements:  
“revenue passenger kilometers” or “RPKs”  The sum, across our network, of the number of passengers on each flight multiplied by the number of kilometers flown by the respective flight.
“revenue ton kilometers” or “RTKs”  The sum, across our network, of the load (cargo) in tons on each flight multiplied by the kilometers flown by the respective flight.
“traffic revenue”  Revenue from passenger and cargo operations.
Yield Measurements:  
“cargo yield”  Revenue from cargo operations divided by RTKs.
“passenger yield”  Revenue from passenger operations divided by RPKs.
Load Factors:  
“cargo load factor”  RTKs expressed as a percentage of ATKs.
“passenger load factor”  RPKs expressed as a percentage of ASKs.
Other:  
“Airbus A320-Family Aircraft”  The Airbus A318, Airbus A319, Airbus A320 and Airbus A321 models of aircraft.
“m²”  Square meters.
“ton”  A metric ton, equivalent to 2,204.6 pounds.
“utilization rates”  The actual number of flight hours per aircraft per operating day.
“operating expenses”  Operating expenses, which are calculated in accordance with IFRS, comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses,” as shown on our consolidated statement of comprehensive income. These operating expenses include: wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance and other operating expenses.

“MiSchDynamicDT”

  Market Intelligence Schedule Dynamic Table.
“Diio Mi”  Data In Intelligence Out Market Intelligence.
“CO2”  Carbon Dioxide Gas

 

4


Table of Contents

PART I

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.KEY INFORMATION

A. Selected Financial Data

LATAM’s Historical Financial Information

The summary consolidated annual financial information of LATAM as of December 31, 2016, 2015, 2014, 2013 and 2012 has been prepared in accordance with IFRS(*). On June 22, 2012, LATAM Airlines Group was formed through the business 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 LATAM Airlines Group. Financial statements for LATAM fully consolidate TAM’s results since June 23, 2012.

LATAM’s Annual Financial Information

 

   Year ended December 31, 
   2016  2015  2014  2013  2012 
   (in US$ millions, except per share and capital stock data) 

The Company(1)(2)

      

Statement of Income Data:

     

Operating revenues

      

Passenger

   7,877.7   8,410.6   10,380.1   11,061.5   7,966.8 

Cargo

   1,110.6   1,329.4   1,713.4   1,863.0   1,743.6 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating revenues

   8,988.3   9,740.0   12,093.5   12,924.5   9,710.4 

Cost of sales

   (6,967.0  (7,636.7  (9,624.5  (10,054.2  (7,634.5
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross margin

   2,021.3   2,103.3   2,469.0   2,870.3   2,075.9 

Other operating income(3)

   538.7   385.8   377.6   341.6   220.2 

Distribution costs

   (747.4  (783.3  (957.1  (1,025.9  (803.6

Administrative expenses

   (873.0  (878.0  (980.7  (1,136.1  (888.7

Other expenses

   (373.7  (324.0  (401.0  (408.7  (311.8

Other gains/(losses)

   (72.6  (55.3  33.5   (55.4  (45.8

Financial income

   74.9   75.1   90.5   72.8   77.5 

Financial costs

   (416.3  (413.4  (430.0  (462.5  (294.6

Equity accounted earnings

   0.0   0.0   (6.5  2.0   1.0 

Exchange rate differences

   121.7   (467.9  (130.2  (482.2  66.6 

Result of indexation units

   0.3   0.6   0.1   0.3   0.0 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   273.9   (357.1  65.2   (283.8  96.7 

Income (loss) tax expense/benefit

   (163.2  178.4   (292.4  20.0   (102.3
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income for the period

   110.7   (178.7  (227.2  (263.8  (5.6

Income (loss) attributable to the parent company’s equity holders

   69.2   (219.3  (260.0  (281.1  (19.1

Income (loss) attributable tonon-controlling interests

   41.5   40.5   32.8   17.3   13.5 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) for the year

   110.7   (178.7  (227.2  (263.8  (5.6

Earnings per share

      

Average number of Shares

   549,559,559   545,547,819   545,547,819   487,930,977   412,267,624 

 

5


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   Year ended December 31, 
   2016   2015  2014  2013  2012 
   (in US$ millions, except per share and capital stock data) 

Basic earnings (loss) per share (US$)

   0.12665    (0.40193  (0.47656  (0.57613  (0.0463

Diluted earnings (loss) per share (US$)

   0.12665    (0.40193  (0.47656  (0.57613  (0.0463
   At December 31, 
   2016   2015  2014  2013  2012 
   (in US$ millions, except per share and capital stock data) 

Balance Sheet Data:

  

Cash, and cash equivalents

   949.3    753.5   989.4   1,984.9   650.3 

Other current assets in operation

   2,340.3    2,067.4   2,644.1   2,992.2   2,626.2 

Non-current assets and disposal groups held for sale

   337.2    2.0   1.1   2.4   47.7 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

   3,626.8    2,822.9   3,634.6   4,979.5   3,324.2 

Property and equipment

   10,498.1    10,938.7   10,773.1   10,982.8   11,807.1 

Othernon-current assets

   5,073.3    4,339.8   6,076.7   6,668.8   7,195.0 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-current assets

   15,571.4    15,278.5   16,849.8   17,651.6   19,002.1 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

   19,198.2    18,101.4   20,484.4   22,631.1   22,326.3 

Total current liabilities

   6,222.2    5,641.0   5,829.7   6,509.1   6,297.5 

Totalnon-current liabilities

   8,790.7    9,522.9   10,151.0   10,795.6   10,808.1 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

   15,012.9    15,163.9   15,980.7   17,304.7   17,105.6 

Issued capital

   3,149.6    2,545.7   2,545.7   2,389.4   1,501.0 

Net equity attributable to the parent company’s equity holders

   4,096.7    2,856.5   4,401.9   5,238.8   5,112.1 

Non-controlling interest

   88.6    81.0   101.8   87.7   108.6 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total net equity

   4,185.3    2,937.5   4,503.7   5,326.5   5,220.7 

Shares Outstanding

   606,407,693    545,547,819   545,547,819   535,243,229   479,107,860 

 

(1)For more information on the affiliates included in this consolidated information, see Note 1 to our audited consolidated financial statements.
(2)The addition of the items may differ from the total amount due to rounding.
(3)Other operating income included in this Statement of Income Data is equivalent to the sum of income derived from Colation and Loyalty Program, Tours, Duty free, aircraft leasing, Maintenance, customs and warehousing operations, and other miscellaneous income. For more information, see Note 28 to our audited consolidated financial statements.

(*)Law No. 20,780 issued on September 29, 2014, introduced modifications to the income tax system in Chile and other tax matters. On October 17, 2014 the Chilean Superintendence of Securities and Insurance (the “SVS”) issued Circular No. 856, which established that the effects of the change in the income tax rates on deferred tax assets and liabilities must be recognized directly on the Balance Sheet within “Retained earnings” instead of on the Income Statement as required by IAS 12. In order to comply with IAS 12, the financial statements in this document for the period ended December 31, 2014 are different from those presented to the SVS as the modifications introduced by Law No. 20,780 have been recognized within the income statement. For more information on the reconciliation of such differencessee Note 2.1 and Note 18 to our audited consolidated financial statements.

The table below presents LATAM’s unaudited operating data as of and for the year ended December 31, 2012 (which includes TAM’s data since June 23, 2012), and as of and for the years ended December 31, 2013, December 31, 2014, December 31, 2015 and December 31, 2016. LATAM believes this operating data is useful in reporting the operating performance of its business and may be used by certain investors in evaluating companies operating in the global air transportation sector. However, these measures may differ from similarly titled measures reported by other companies, and should not be considered in isolation or as a substitute for measures of performance in accordance with IFRS. This unaudited operating data is not included in or derived from LATAM’s financial statements.

 

6


Table of Contents
   For the year ended and as of December 31, 
   2016   2015   2014   2013   2012 

Operating Data:

          

ASKs (million)

   134,967.7    134,167.1    130,200.9    131,690.9    132,186.0 

RPKs (million)

   113,626.9    111,509.9    108,534.0    106,466.5    103,886.1 

ATKs (million)

   6,704.1    7,082.8    7,219.7    7,651.9    7,645.9 

RTKs (million)

   3,465.9    3,797.0    4,317.2    4,466.7    4,488.3 

ASK Equivalent (million)

   205,537.5    208,722.5    206,197.9    212,237.0    212,669.6 

Dividend Policy

In accordance with theLey sobre Sociedades Anónimas No. 18,046 (“Chilean Corporation Act”) andReglamento 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 net income for the prior year, subject to limited exceptions. LATAM Airlines Group’s board of directors has the authority to declare interim dividends.Year-end dividends, if any, are declared by our shareholders at our annual meeting. For a description of our dividend policy, see “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Dividend Policy” and “Item 10. Additional Information—Dividend and Liquidation Rights”. LATAM did not pay dividends in 2014, 2015 or 2016. Dividend reserves of US$20,766,199 have been set aside in 2016, to be paid in 2017.

We declare cash dividends in U.S. dollars, but make dividend payments in Chilean pesos, converted from U.S. dollars at the observed exchange rate two business days prior to the day we first make payment to shareholders. Payments of cash dividends to holders of ADSs, if any, are made in Chilean pesos to the custodian, which converts those Chilean pesos into U.S. dollars and delivers U.S. dollars to the depositary for distribution to holders. The amount of U.S. dollars distributed to holders of ADSs may be adversely affected by a devaluation of the Chilean currency that may occur before such dividends are converted and remitted.

Chilean Peso Exchange Rates

The following table sets forth, for the periods indicated, the high, low, average andperiod-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 February 28, 2017 the observed exchange rate was Ch$645.19 = US$1.00.

 

   Daily Observed Exchange Rate 

Year Ended December 31,

  High   Low   Average(1)   Period-End 
   Ch$ per US$ 

2012

   519.69    469.65    486.75    478.60 

2013

   533.95    466.50    495.00    523.76 

2014

   621.41    524.61    570.01    607.38 

2015

   715.66    597.10    654.25    707.34 

2016

   730.31    645.22    676.83    669.47 

2016

        

October

   670.88    651.65    663.92    651.65 

November

   679.24    650.72    666.12    675.48 

December

   677.11    649.40    667.17    669.47 

2017

        

 

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   Daily Observed Exchange Rate 

Year Ended December 31,

  High   Low   Average(1)   Period-End 
   Ch$ per US$ 

January

   673.36    648.31    661.19    648.87 

February

   646.97    638.35    643.21    645.19 

 

Source: Central Bank of Chile

(1)For each year, the average daily exchange rates for the relevant year. For each month, the average daily exchange rate for the relevant month.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

The following important factors, and those important factors described in other reports we submit to or file with the Securities and Exchange Commission (“SEC”), could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are anon-U.S. company, there are risks associated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this document, including the following risk factors.

Risk Factors Relating to our Company

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

Due to Brazilian law restrictions on foreign ownership of Brazilian airlines, LATAM does not control the voting shares or board of directors of TAM. As of February 28, 2017, the ownership structure of TAM is as follows:

 

 Holdco I owns 100% of the TAM common shares previously outstanding;

 

 the Amaro family (the “Amaro Group”) own approximately 51% of the outstanding Holdco I voting shares through TEP Chile (a Chilean entity wholly owned by the TAM Controlling Shareholders) and LAN owns the remainder of the voting shares;

 

 LATAM owns 100% of the outstanding Holdco Inon-voting shares, entitling it to substantially all of the economic rights in respect of the TAM common shares held by Holdco I; and

 

 LATAM owns 100% of the TAM preferred shares previously outstanding.

As a result of this ownership structure:

 

 The Amaro Group Controlling Shareholders retain voting and board control of TAM and each subsidiary of TAM; and

 

 LATAM is entitled to substantially all of the economic rights in TAM.

LATAM Airlines Group and TEP Chile and other parties have entered into shareholders’ agreements that establish agreements and restrictions relating to corporate governance with respect to TAM. Certain specified actions require supermajority approval, which in turn means they require the prior approval of both LATAM and TEP Chile. Examples of actions requiring supermajority approval by the board of directors of Holdco I or TAM include, among others, entering into acquisitions or business collaborations, amending or approving budgets, business plans, financial statements and accounting policies, incurring indebtedness, encumbering assets, entering into certain agreements, making certain investments, modifying rights or claims, entering into settlements, appointing executives, creating security interests, issuing, redeeming or repurchasing securities and voting on matters as a shareholder of affiliates

 

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of TAM. Actions requiring supermajority shareholder approval of Holdco I or TAM include, among others, certain changes to theby-laws of Holdco I, TAM or TAM’s affiliates or any dissolution/liquidation, corporate reorganization, payment of dividends, issuance of securities, disposal or encumbrance of certain assets, creation of security interests or entering into guarantees and agreements with related parties. For more information on the shareholders’ agreements, see “Item 7. Controlling Shareholders and Related Party Transactions—Shareholders’ Agreements.”

Our assets include a significant amount of goodwill.

Our assets included US$2,710.4 million of goodwill as of December 31, 2016, US$2,582.5 million of which results from the combination of LAN and 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. In 2016, mainly as a result of the appreciation of the Brazilian real against the U.S. dollar, the value of our goodwill increased by 18.8% as compared with 2015. Any impairment could result in the recognition of a significant charge to earnings in our statement of income, which could materially and adversely impact our consolidated results for the period in which the impairment occurs.

A failure to successfully implement our strategy or a failure adjusting the strategy to the current economic situation would harm our business and the market value of our ADSs and common shares.

We have developed a strategic plan with the goal of becoming one of the best airlines in the world and renewing our commitment to sustained profitability and superior returns to shareholders. Our strategy requires us to identify value propositions that are attractive to our clients, to find efficiencies in our daily operations, and to transform ourselves into a stronger and more risk-resilient company. A tenet of our strategic plan is the adoption of a new travel model for domestic services in the six countries where we have domestic operations to address the changing dynamics of customers and the industry, and to increase our competitiveness. The new travel model is based on a continued reduction in air fares that makes air travel accessible to a wider audience, and in particular to those wish to fly more frequently. This model requires continued cost reduction efforts, and in order to achieve this the Company is implementing a series of initiatives to reduce cost per ASK in all its domestic operations.

Difficulties in implementing our strategy may adversely affect our business, results of operation and the market value of our ADSs and common shares.

A failure to successfully transfer the value proposition of the LAN and TAM brands to a new single brand, may adversely affect our business and the market value of our ADSs and common shares.

Following the combination in 2012, LAN and TAM continued to operate with their original brands. During 2016, we began the transition of LAN and TAM into a single brand. LAN and TAM had different value propositions, and there can be no assurances that we will be able to fully transfer the value of the original LAN and TAM brands to our new single brand “LATAM”. Difficulties in implementing our single brand may prevent us from consolidating as a customer preferred carrier and may adversely affect our business and results of operations and the market value of our ADSs and common shares.

It may take time to combine the frequent flyer programs of LAN and TAM.

We have integrated the separate frequent flyer programs of LAN and TAM so that passengers can use frequent flyer miles earned with either LAN or TAM interchangeably. During 2016, LAN and TAM announced their revamped frequent flyer programs, which have new names: LATAM Pass and LATAM Fidelidade, respectively. The change is part of the process of consolidating the airline group’s new brand identity (LATAM) and the evolution of the programs, which enhances existing benefits and introduces new benefits for program members. However, there is no guarantee that full integration of the two plans will be completed in the near term or at all. Even if the integration occurs, the successful integration of these programs will involve some time and expense. Moreover, during 2016, LATAM Pass and LATAM Fidelidade approved changes in their mileage earning policy which may impact the attractiveness of the programs to passengers. Until we effectively combine these programs, passengers may prefer frequent flyer programs offered by other airlines, which may adversely affect our business.

Our financial results are exposed to foreign currency fluctuations.

We prepare and present our consolidated financial statements in U.S. dollars. LATAM and its affiliates operate in numerous countries and face the risk of variation in foreign currency exchange rates against the U.S. dollar or between the currencies of these various countries. Changes in the exchange rate between the U.S. dollar and the currencies in the countries in which we operate could adversely affect our business, financial condition and results of operations.. If the value of the Brazilian real, Chilean peso or other currencies in which revenues are denominated declines against the U.S. dollar, our results of operations and financial condition will be affected. The exchange rate of the Chilean peso, Brazilian real and other currencies against the U.S. dollar may fluctuate significantly in the future.

 

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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.

We depend on strategic alliances or commercial relationships in many of the countries in which we operate, and our business may suffer if any of our strategic alliances or commercial relationships terminates.

We maintain a number of alliances and other commercial relationships in many of the jurisdictions in which LATAM and its affiliates operate. These alliances or commercial relationships allow us to enhance our network and, in some cases, to offer our customers services that we could not otherwise offer. If any of our strategic alliances or commercial relationships, deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be adversely affected.

Our business and results of operations may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits.

Our business depends upon our access to key routes and airports. Bilateral aviation agreements between countries, open skies laws and local aviation approvals frequently involve political and other considerations outside of our control. Our operations could be constrained by any delay or inability to gain access to key routes or airports, including:

 

 limitations on our ability to process more passengers;

 

 the imposition of flight capacity restrictions;

 

 the inability to secure or maintain route rights in local markets or under bilateral agreements; or

 

 the inability to maintain our existing slots and obtain additional slots.

We operate numerous international routes, subject to bilateral agreements, and also internal flights within Chile, Peru, Brazil, Argentina, Ecuador, Colombia and other countries, subject to local route and airport access approvals. See “Item 4. Information on the Company—B. Business Overview—Regulation.”

There can be no assurance that existing bilateral agreements with the countries in which our companies are based and permits from foreign governments will continue. A modification, suspension or revocation of one or more bilateral agreements could have a material adverse effect on our business, financial condition and results of operations. The suspension of our permission to operate in certain airports, destinations or slots, or the imposition of other sanctions could also have a material adverse effect. A change in the administration of current laws and regulations or the adoption of new laws and regulations in any of the countries in which we operate that restrict our route, airport or other access may have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our cargo revenue comes from relatively few product types and may be impacted by events affecting their production, trade or demand.

Our cargo demand, especially from Latin American exporters, is concentrated in a small number of product categories, such as exports of fish, sea products and fruits from Chile, and asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia. Events that adversely affect the production, trade or demand for these goods may adversely affect the volume of goods that we transport and may have a significant impact on our results of operations. Some of our cargo products are sensitive to foreign exchange rates and, therefore, traffic volumes could be impacted by the appreciation or depreciation of local currencies.

Our operations are subject to fluctuations in the supply and cost of jet fuel, which could adversely impact our business.

Higher jet fuel prices could have a materially adverse effect on our business, financial condition and results of operations. Jet fuel costs have historically accounted for a significant amount of our operating expenses, and accounted for 23.0% of our operating expenses in 2016. 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 an increase in fuel prices in the near future or in the long term. Also, while these hedging arrangements are designed to limit the effect of an increase in fuel prices, our hedging methods may also limit our ability to take advantage of any decrease in fuel prices, as was the case in 2015 and, to a lesser extent, in 2016. Although we have implemented measures to pass a portion of incremental fuel costs to our customers, our ability to lessen the impact of any increase in fuel costs using these types of mechanisms may be limited.

We rely on maintaining a high aircraft utilization rate to increase our revenues and absorb our fixed costs, which makes us especially vulnerable to delays.

A key element of our strategy is to maintain a high daily aircraft utilization rate, which measures the number of flight hours we use our aircraft per day. High daily aircraft utilization allows us to maximize the amount of revenue we generate from our aircraft and

 

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absorb the fixed costs associated with our fleet and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to increase the average hours flown per day. Our rate of aircraft utilization could be adversely affected by a number of different factors that are beyond our control, including air traffic and airport congestion, adverse weather conditions, unanticipated maintenance and delays by third-party service providers relating to matters such as fueling and ground handling. If an aircraft falls behind schedule, the resulting delays could cause a disruption in our operating performance.

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, 2016, LATAM Airlines Group has a fleet of 250 Airbus and 82 Boeing aircraft. Risks relating to Airbus and Boeing include:

 

 our failure or inability to obtain Airbus or Boeing aircraft, parts or related support services on a timely basis because of high demand or other factors;

 

 the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft;

 

 the issuance by the Chilean or other aviation authorities of other directives restricting or prohibiting the use of our Airbus or Boeing aircraft, or requiring time-consuming inspections and maintenance;

 

 adverse public perception of a manufacturer as a result of an accident or other negative publicity; or

 

 delays between the time we realize the need for new aircraft and the time it takes us to arrange for Airbus and Boeing or for a third-party provider to deliver this aircraft.

The occurrence of any one or more of these factors could restrict our ability to use aircraft to generate profits, respond to increased demands, or could otherwise limit our operations and adversely affect our business.

If we are unable to incorporate leased aircraft into our fleet at acceptable rates and terms in the future, our business could be adversely affected.

A large portion of our aircraft fleet is subject to long-term operating leases. Our operating leases typically run from three to 12 years from the date of delivery. We may face more competition for, or a limited supply of, leased aircraft, making it difficult for us to negotiate on competitive terms upon expiration of our current operating leases or to lease additional capacity required for our targeted level of operations. If we are forced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, our profitability could be adversely affected.

Our business may be adversely affected if we are unable to service our debt or meet our future financing requirements.

We have a high degree of debt and payment obligations under our aircraft operating leases and financial debt arrangements. We require significant amounts of financing to meet our aircraft capital requirements and may require additional financing to fund our other business needs. We cannot guarantee that we will have access to or be able to arrange for financing in the future on favorable terms. Following the combination of LAN and TAM, Fitch Ratings Inc. and Standard and Poor’s downgraded LATAM Airlines Group S.A.’s credit rating to levels that are below investment grade. Any further securities rating agencies downgrades could increase our financing costs. Higher financing costs could affect our ability to expand or renew our fleet, which in turn could adversely affect our business.

In addition, the majority of our property and equipment is subject to liens securing our indebtedness. In the event that we fail to make payments on secured indebtedness, creditors’ enforcement of liens could limit or end our ability to use the affected property and equipment to fulfill our operational needs and thus generate revenue.

Moreover, external conditions in the financial and credit markets may limit the availability of funding at particular times or increase its costs, which could adversely affect our profitability, our competitive position and result in lower net interest margins, earnings and cash flows, as well as lower returns on shareholders’ equity and invested capital. Factors that may affect the availability of funding or cause an increase in our funding costs include global macro-economic crises, reduction of our credit rating, and other potential market disruptions.

We have significant exposure to LIBOR and other floating interest rates; increases in interest rates will increase our financing costs and may have adverse effects on our financial condition and results of operations.

We are exposed to the risk of interest rate variations, principally in relation to the U.S. dollar London Interbank Offer Rate (“LIBOR”). Many of our operating and financial leases are denominated in U.S. dollars and bear interest at a floating rate. 36.9% of our outstanding consolidated debt as of December 31, 2016 bears interest at a floating rate after giving effect to interest rate hedging agreements. Volatility in LIBOR or other reference rates could increase our periodic interest and lease payments and have an adverse effect on our total financing costs. We may be unable to adequately adjust our prices to offset any increased financing costs, which would have an adverse effect on our revenues and our results of operations.

 

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Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.

Major events affecting the aviation insurance industry (such as terrorist attacks, hijackings or airline crashes) may result in significant increases of airlines’ insurance premiums or in significant decreases of insurance coverage, as occurred after the September 11, 2001 terrorist attacks. 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 by the corresponding authorities in the markets in which we operate. Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our operations and financial results as well as our reputation.

We depend on a limited number of suppliers for certain aircraft and engine parts.

We depend on a limited number of suppliers for aircraft, aircraft engines and many aircraft and engine parts. As a result, we are vulnerable to any problems associated with the supply of those aircraft, parts and engines, including design defects, mechanical problems, contractual performance by the suppliers, or adverse perception by the public that would result in customer avoidance or in actions by the aviation authorities resulting in an inability to operate our aircraft.

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 a significant number of third-party service providers to perform a large number of functions that are integral to our business, including regional operations, operation of customer service call centers, distribution and sale of airline seat inventory, provision of information technology infrastructure and services, provision of aircraft maintenance and repairs, catering, ground services, and provision of various utilities and performance of aircraft fueling operations, among other vital functions and services. We do not directly control these third-party service providers, although we do enter into agreements with many of them that define expected service performance. Any of these third-party service providers, however, may materially fail to meet their service performance commitments, may suffer disruptions to their systems that could impact their services, or the agreements with such providers may be terminated. For example, flight reservations booked by customers and/or travel agencies via third-party GDSs (Global Distribution Systems) may be adversely affected by disruptions in our business relationships with GDS operators. Such disruptions, including a failure to agree upon acceptable contract terms when contracts expire or otherwise become subject to renegotiation, may cause the carriers’ flight information to be limited or unavailable for display, significantly increase fees for both us and GDS users, and impair our relationships with customers and travel agencies. The failure of any of our third-party service providers to adequately perform their service obligations, or other interruptions of services, may reduce our revenues and increase our expenses or prevent us from operating our flights and providing other services to our customers. In addition, our business, financial performance and reputation could be materially harmed if our customers believe that our services are unreliable or unsatisfactory.

Disruptions or security breaches of our information technology infrastructure or systems could interfere with our operations, compromise passenger or employee information, and expose us to liability, possibly causing our business and reputation to suffer.

A serious internal technology error or failure impacting systems hosted internally at our data centers or externally at third-party locations, or large-scale interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network with potential impacton our operations. Our technology systems and related data may also be vulnerable to a variety of sources of interruption, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, 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 so as 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 deception. Hardware or software we develop or acquire

 

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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.

Increases in our labor costs, which constitute a substantial portion of our total operating expenses, could directly impact our earnings.

Labor costs constitute a significant percentage of our total operating expenses (21.8% in 2016) and at times in our operating history we have experienced pressure to increase wages and benefits for our employees. A significant increase in our labor costs could result in a material reduction in our earnings.

Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with our unionized employees.

As of December 31, 2016, approximately 72.9% of our employees, including administrative personnel, cabin crew, flight attendants, pilots and maintenance technicians are members of unions and have contracts and collective bargaining agreements which expire on a regular basis. Our business, financial condition and results of operations could be materially adversely affected by a failure to reach agreement with any labor union representing such employees or by an agreement with a labor union that contains terms that are not in line with our expectations or that prevent us from competing effectively with other airlines.

Collective action by employees could cause operating disruptions and adversely impact our business.

Certain employee groups such as pilots, flight attendants, mechanics and our airport personnel have highly specialized skills. As a consequence, actions by these groups, such as strikes, walk-outs or stoppages, could severely disrupt our operations and adversely impact our operating and financial performance, as well as our image.

We may experience difficulty finding, training and retaining employees.

Our business is labor intensive. We employ a large number of pilots, flight attendants, maintenance technicians and other operating and administrative personnel. The airline industry has, from time to time, experienced a shortage of qualified personnel, especially pilots and maintenance technicians. In addition, as is common with most of our competitors, we may, from time to time, face considerable turnover of our employees. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, our training costs will be significantly higher. 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.

Risks Related to the Airline Industry and the Countries in Which We Operate

Our performance is heavily dependent on economic conditions in the countries in which we do business. Negative economic conditions in those countries could adversely impact our business and results of operations and cause the market price of our common shares and ADSs to decrease.

Passenger and cargo demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations, among other things. In the past, our business has been adversely affected by global economic recessionary conditions, weak economic growth in Chile, recession in Brazil and Argentina and poor economic performance in certain emerging market countries in which we operate. The occurrence of similar events in the future could adversely affect our business. We plan to continue to expand our operations based in Latin America and our performance will, therefore, continue to depend heavily on economic conditions in the region.

Any of the following factors could adversely affect our business, financial condition and results of operations in the countries in which we operate:

 

 changes in economic or other governmental policies;

 

 weak economic performance, including, but not limited to, low economic growth, low consumption and/or investment rates, and increased inflation rates; or

 

 other political or economic developments over which we have no control.

No assurance can be given that capacity reductions or other steps we may take in response to weakened demand will be adequate to offset any future reduction in our cargo and/or air travel demand in Brazil or in other markets in which we operate. Sustained weakened demand may adversely impact our revenues, results of operations or financial condition.

 

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We are exposed to increases in landing fees and other airport service charges that could adversely affect our margin and competitive position.

Airlines must pay fees to airport operators for the use of airport facilities. Passenger taxes and airport charges have increased substantially in recent years. We cannot assure you that the airports in which we operate will not increase or maintain high passenger taxes and service charges in the future. Any substantial increase in airport charges could have a material adverse impact on our results of operations. In addition, any increase in passenger taxes could negatively impact demand for air travel and affect our results.

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. 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:

 

 we will not need to increase our insurance coverage;

 

 our insurance premiums will not increase significantly;

 

 our insurance coverage will fully cover all of our liability; or

 

 we will not be forced to bear substantial losses.

Substantial claims resulting from an accident or significant incident in excess of our related insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Moreover, any aircraft accident, even if fully insured, could cause the negative public perception that our aircraft are less safe or reliable than those operated by other airlines, 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 or passenger transportation) could enter our markets and compete with us on any of these bases, including by offering lower prices, more attractive services or increasing their route offerings in an effort to gain greater market share.

Some of our competitors may receive external support, which could adversely impact our competitive position.

Some of our competitors may receive support from external sources, such as their national governments, which may be unavailable to us. Support may include, among others, subsidies, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our operations and financial performance.

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.

 

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In 2016, the ICAO adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize carbon dioxide (“CO2”) emissions in international civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). The CORSIA will be implemented in phases, starting with the participation of ICAO member states on a voluntary basis during a pilot phase (from 2021 through 2023), followed by a first phase (from 2024 through 2026) and a second phase (from 2027). Currently, CORSIA focuses on defining standards for monitoring, reporting and verification of emissions from air operators, as well as on defining steps to offset CO2 emissions after 2020. To the extent most of the countries in which we operate continue to be ICAO member states, in the future we may be affected by regulations adopted pursuant to the CORSIA framework.

The proliferation of national regulations and taxes on CO2 emissions in the countries that we have domestic operations, including recent enviromental regulations that the airline industry is facing in Colombia, may also affect our costs of operations and our margins.

Our business may be adversely affected by a downturn in the airline industry caused by exogenous events that affect travel behavior or increase costs, such as outbreak of disease, weather conditions and natural disasters, war or terrorist attacks.

Demand for air transportation may be adversely impacted by exogenous events, such as adverse weather conditions and natural disasters, epidemics (such as Ebola and Zika), 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.

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, byoil-producing countries. Such increases may result in both higher airline ticket prices and decreased demand for air travel generally, which could have an adverse effect on our revenues and results of operations.

We are subject to risks related to litigation and administrative proceedings that could adversely affect our business and financial performance in the event of an unfavorable ruling.

The nature of our business exposes us to litigation relating to labor, insurance and safety matters, regulatory, tax and administrative proceedings, governmental investigations, tort claims and contract disputes. Litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome among other matters. Currently, as in the past, we are subject to proceedings or investigations of actual or potential litigation. Although we establish provisions as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually pay due to the inherent uncertainties in the estimation process. We cannot assure you that these or other legal proceedings will not materially affect our business.

We are subject to anti-corruption, anti-bribery, anti-money laundering and antitrust laws and regulations in Chile, the United States and in the various countries we operate. Violations of any such laws or regulations could have a material adverse impact on our reputation and results of operations and financial condition.

We are subject to anti-corruption, anti-bribery, anti-money laundering, antitrust and other international laws and regulations and are required to comply with the applicable laws and regulations of Chile, Brazil, the United States and certain other jurisdictions where we operate. In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our affiliates, employees, directors, officers, partners, agents and service providers or that any such persons will not take actions in violation of our policies and procedures. Any violations by us of anti-bribery and anti-corruption laws or sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition.

The Brazilian government 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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Risks Related to our Common Shares and ADSs

Our major shareholders may have interests that differ from those of our other shareholders.

One of our major shareholder groups, the Cueto Group (the “LATAM Controlling Shareholders”),which as of February 28, 2017, beneficially owned 28.27% of our common shares, is entitled to elect three of the nine members of our board of directors and is in a position to direct our management. In addition, the LATAM Controlling Shareholders have entered into a shareholders agreement with the Amaro Group, which as of January 31, 2017, held a 3.02% of LATAM shares through TEP Chile, in addition to the indirect stake they have through the 21.88% interest they hold in Costa Verde Aeronáutica S.A., the main legal vehicle through which the Cueto Group holds LATAM shares), pursuant to which these two major shareholder groups have agreed to vote together to elect individuals to our board of directors in accordance with their direct and indirect shareholder interest in LATAM. Pursuant to a shareholders’ agreement, the LATAM Controlling Shareholders and the Amaro Group have also agreed to use their good faith efforts to reach an agreement and act jointly on all actions to be taken by our board of directors or shareholders meeting, and if unable to reach to such agreement, to follow the proposal made by our board of directors. Decisions by the Company that require supermajority votes under Chilean law are also subject to voting arrangements by the LATAM Controlling Shareholders and the Amaro Group. In addition, another major shareholder, Qatar Airways Investments (UK) Ltd., which as of January 31, 2017, held 10.03%1 of our outstanding common shares, is entitled to appoint one individual to our board of directors. The interests of our major shareholders may differ from those of our other shareholders. See “Item 7. Controlling Shareholders and Related Party Transactions—A. Major Shareholders.”

Under the terms of the deposit agreement governing the ADSs, if holders of ADSs do not provide JP Morgan Chase Bank, N.A., in its capacity as depositary for the ADSs, with timely instructions on the voting of the common shares underlying their ADRs, the depositary will be deemed to have been instructed to give a person designated by the board of directors the discretionary right to vote those common shares. The person designated by the board of directors to exercise this discretionary voting right may have interests that are aligned with our controlling shareholders, which may differ from those of our other shareholders. Historically, our board of directors has designated its chairman, currently Mauricio Amaro, to 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.

Our common shares are listed on the various Chilean stock exchanges. Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. In addition, Chilean securities markets may be materially affected by developments in other emerging markets, particularly other countries in Latin America. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying ADSs in the amount and at the price and time of your choice may be substantially limited. This limited trading market may also increase the price volatility of the ADSs or the common shares underlying the ADSs.

Holders of ADRs may be adversely affected by currency devaluations and foreign exchange fluctuations.

If the Chilean peso exchange rate falls relative to the U.S. dollar, the value of the ADSs and any distributions made thereon from the depositary could be adversely affected. Cash distributions made in respect of the ADSs are received by the depositary (represented by the custodian bank in Chile) in pesos, converted by the custodian bank into U.S. dollars at the then-prevailing exchange rate and distributed by the depositary to the holders of the ADRs evidencing those ADSs. In addition, the depositary will incur foreign currency conversion costs (to be borne by the holders of the ADRs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to the ADSs.

Future changes in Chilean foreign investment controls and withholding taxes could negatively affectnon-Chilean residents that invest in our shares.

Equity investments in Chile bynon-Chilean residents have been subject in the past to various exchange control regulations that govern investment repatriation and earnings thereon. Although not currently in effect, regulations of the Central Bank of Chile have in the past required, and could again require, foreign investors acquiring securities in the secondary market in Chile to maintain a cash reserve or to pay a fee upon conversion of foreign currency to purchase such securities. Furthermore, future changes in withholding taxes could negatively affectnon-Chilean residents that invest in our shares.

We cannot assure you that additional Chilean restrictions applicable to the holders of ADRs, the disposition of the common shares underlying ADSs or the repatriation of the proceeds from an acquisition, a disposition or a dividend payment, will not be imposed or required in the future, nor could we make an assessment as to the duration or impact, were any such restrictions to be imposed or required. For further information, see “Item 10. Additional Information—D. Exchange Controls—Foreign Investment and Exchange Controls in Chile.”

 

(1)Qatar owns 9.999999918% of the total issued shares of LATAM.

 

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Our ADS holders may not be able to exercise preemptive rights in certain circumstances.

The Chilean Corporation Law provides that preemptive rights shall be granted to all shareholders whenever a company issues new shares for cash, giving such holders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. We will not be able to offer shares to holders of ADSs and shareholders located in the United States pursuant to the preemptive rights granted to shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, (the “Securities Act”), is effective with respect to such rights and shares, or an exemption from the registration requirements of the Securities Act is available. At the time of any rights offering, we will evaluate the potential costs and liabilities associated with any such registration statement in light of any indirect benefit to us of enabling U.S. holders of ADRs evidencing ADSs and shareholders located in the United States to exercise preemptive rights, as well as any other factors that may be considered appropriate at that time, and we will then make a decision as to whether we will file a registration statement. We cannot assure you that we will decide to file a registration statement or that such rights will be available to ADS holders and shareholders located in the United States.

We are not required to disclose as much information to investors as a U.S. issuer is required to disclose and, as a result, you may receive less information about us than you would receive from a comparable U.S. company.

The corporate disclosure requirements that apply to us may not be equivalent to the disclosure requirements that apply to a U.S. company and, as a result, you may receive less information about us than you would receive from a comparable U.S. company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The disclosure requirements applicable to foreign issuers under the Exchange Act are more limited than the disclosure requirements applicable to U.S. issuers. Publicly available information about issuers of securities listed on Chilean stock exchanges also provides less detail in certain respects than the information regularly published by listed companies in the United States or in certain other countries. Furthermore, there is a lower level of regulation of the Chilean securities market and of the activities of investors in such markets as compared with the level of regulation of the securities markets in the United States and in certain other developed countries.

 

ITEM 4.INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

General

LATAM Airlines Group is a Chilean-based airline holding company formed 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 a subsidiary of LATAM. The Company is primarily involved in the transportation of passengers and cargo and operates as one unified business enterprise. During 2016, we began the transition of LAN and TAM into a single brand: LATAM.

LATAM’s airline holdings include LATAM and its affiliates in Peru, Argentina, Colombia and Ecuador, and LATAM Cargo and its affiliates MasAir (in Mexico) and LANCO (in Colombia), as well as TAM S.A. and its affiliates TAM Linhas Aereas S.A (LATAM Airlines Brazil), TAM Transportes Aereos del Mercosur S.A., (LATAM Airlines Paraguay), LATAM Cargo and Multiplus. LATAM is a publicly traded corporation listed in the Santiago Stock Exchange (“SSE”), the Valparaiso Stock Exchange, the Chilean Electronic Exchange and the New York Stock Exchange (“NYSE”).

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 the Scandinavian Airlines System. In 1994, LATAM’s current controlling shareholders, together with other major shareholders, acquired 98.7% of LAN’s stock, including the remaining shares then held by the Chilean government. In 1997, LAN became the first Latin American airline to list its shares (which trade in the form of ADRs) on the New York Stock Exchange. Over the past decade, LATAM has significantly expanded its operations in Latin America, initiating services in Peru in 1999, Argentina in 2005, Ecuador in 2009, and in Colombia in 2010 through the acquisition of Aerovias de Integracion Regional, Aires S.A. (dba “LAN Colombia”), and the combination with TAM in 2012.

LATAM Airlines Brazil is one of the leading domestic and international airlines in the Brazilian market, 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, its name was changed to TAM S.A. and its shares were listed on Bovespa in June 2005. From 2006 until the combination with LAN in 2012, TAM American Depositary Shares were also listed on the New York Stock Exchange.

 

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Our principal executive offices are located at Presidente Riesco 5711, 20th floor, Las Condes, Santiago, Chile and our general telephone number at this location is(56-2) 2565-2525. We have designated LATAM Airlines Group as our agent in the United States, located at 970 South Dixie Highway, Miami, Florida 33156. Our website address is www.latamairlinesgroup.net. Information obtained on, or accessible through, this website is not incorporated by reference herein and shall not be considered part of this annual report. For more information contact Gisela Escobar, Senior Vice President, Corporate Controller and Investor Relations, at InvestorRelations@latam.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.

In order to implement this combination, the Amaro Group controlling shareholders formed four newsociedades anónimas cerradas with limited liability under the laws of Chile: TEP Chile, Holdco I, Holdco II and Sister Holdco. After the transaction was completed, Holdco II and Sister Holdco ceased to exist. The beneficial ownership and organizational structure of LATAM Airlines Group as of January 31, 2017 was as follows:

 

LOGO

Capital Expenditures

For a description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”

B. BUSINESS OVERVIEW

General

LATAM Airlines Group is the largest passenger and cargo airline 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 24 countries and cargo services to approximately 139 destinations in 29 countries, with a fleet of 332 aircraft and a set of bilateral

 

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alliances. In total, LATAM Airlines Group has near to 46,000 employees. LATAM Airlines Group and its affiliates currently provide domestic services in Brazil, Chile, Perú, Argentina, Colombia and Ecuador; we also provide intra-regional and long-haul operations. The cargo affiliate carriers of LATAM in Chile, Brazil, Colombia and Mexico carry out cargo operations through the use of belly spaces on the passenger flights and dedicated cargo operations using freight aircraft. We also offer other services, such as ground handling, courier, logistics and maintenance.

As of December 31, 2016, we provided scheduled passenger service to 16 destinations in Chile, 17 destinations in Peru, five destinations in Ecuador, 15 destinations in Argentina, 14 destinations in Colombia, 41 destinations in Brazil, 12 destinations in other Latin American countries and the Caribbean, five destinations in North America, six destinations in Europe, three destinations in the South Pacific and one destination in Africa. In addition, as of December 31, 2016, through our various code-sharing and interline agreements, we offer service to 84 destinations in North America, 46 destinations in Europe, 22 destinations in Australasia, 9 destinations in Asia and 4 destinations in Africa.

Competitive Strengths

Our strategy is to maintain LATAM Airlines Group’s position as the leading airline in South America by leveraging our unique position in the airline industry. LATAM Airlines Group is the only airline group in the region with a local presence in six 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. Moreover, LATAM’s unique leadership position in a region with growth potential and the focus in our existing competitive strengths will allow us to continue building our business model and to fuel our future growth. We believe our most important competitive strengths are:

Leader in the South America Airlines space, with a Unique Leadership Position among Global Airlines

Through a successful regional expansion strategy, LATAM Airlines Group has become the leading international and domestic passenger airline group in South America, as well as the largest cargo operator in Latin America. LATAM and its affiliates have domestic passenger operations in Chile, Brazil, Peru, Argentina, Colombia and Ecuador. These six countries are among the most significant passenger markets in South America and represent approximately 96% of the domestic ASKs in the region. We are also the largest operator of intra-regional routes, connecting the main cities in South America. Furthermore, through our significant presence in the largest hubs in South America—Lima and São Paulo—we are able to offer the best connectivity between South America and the rest of the world. In addition, our cargo companies are the largest air cargo operators within, to and from Latin America, and particularly in Brazil.

Geographically Diversified Revenue Base, including both Passenger and Cargo Operations

The operations of LATAM Airlines Group are highly geographically diversified, including domestic operations in six different countries, as well as operations within South America and connecting South America with various international destinations. We believe this provides resilience to external shocks that may occur in any particular market. Furthermore, we believe that one of our distinct competitive advantages is our ability to profitably integrate our scheduled passenger and cargo operations. We take into account potential cargo services when planning passenger routes, and also serve certain dedicated cargo routes using our freighter aircraft when needed. By adding cargo revenues to our existing passenger service, we are able to increase the productivity of our assets and maximize revenue, contributing to our fixed operating expenses per flight, lowering break-even load factors and enhancing per flight profitability. Additionally, this revenue diversification helps offset seasonal revenue fluctuations and reduces the volatility of our business over time. For the year ended December 31, 2016, passenger, cargo and other revenues accounted for 82.7%, 11.7% and 5.7% of total revenues respectively.

Modern Fleet and Optimized Fleet Strategy

The average age of our fleet is approximately seven years, making it one of the most modern in Latin America and in the world. A younger fleet makes us more cost competitive because it reduces fuel consumption and maintenance costs, and enables us to enjoy a high degree of performance reliability. In addition, a modern and fuel-efficient fleet reflects our strong commitment to the environment as new aircraft incorporate the industry’s latest technology, allowing for a substantial reduction in emissions, and also decreasing noise levels.

We select our aircraft based on their ability to effectively and efficiently serve our short- and long-haul flight needs, while still striving to minimize the number of different aircraft types we operate.

The Company’s current fleet plans envisage a short-haul fleet formed exclusively by aircraft from the A320 family, with a focus on the A321 and A320neo. In 2016, LATAM incorporated two A320neo, are-engined A320, becoming the first airline in Latin America to fly this model.

 

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For long-haul passenger flights, we operate the Boeing767-300ER, the Boeing787-8 and Boeing787-9 aircraft, the Boeing777-300ER aircraft and the AirbusA350-900 that started operation in 2016. The Boeing 787 and Airbus A350 models allow us to achieve important savings in fuel consumption, while incorporating modern technology to deliver the best travel experience for our passengers. In 2016, we incorporated five Boeing787-9 and six Airbus350-900 into our fleet.

LATAM continues to take a flexible approach to its fleet plan in order to better align it to market conditions. During 2016, we achieved a significant reduction in our fleet commitments for the coming years, allowing us to defer capital expenditures and continue to strenghten our Balance Sheet.

Strong Brand Teamed with Key Global Strategic Alliances

In May 2016 our new brand, LATAM, was officially launched. We believe that our new brand is associated with superior service, aircraft and technologically advanced operations, and is well recognized and respected in the markets in which we operate. In 2016, our operations in Chile, Argentina, Ecuador, Peru and Colombia were awarded the top prize as the “Best Airlines in South America” by the SkyTrax World Airline Awards. These awards are considered a global barometer for customer satisfaction within the industry, thanks to their exclusive reliance on the opinion of passengers.

LAN joined theoneworld®alliance, one of the world’s leading airline alliances, in 2000. TAM (now LATAM Airlines Brazil) joinedoneworld®in 2014, marking a significant milestone and completing the entry of all LATAM Airlines into oneworld®. To our passengers, this means greater convenience when traveling, since they will have the same standard of high-quality customer service, regardless of their international destination. Our strategic global alliances and existing commercial agreements provide our customers with access to more than 1,000 destinations worldwide, a combined reservations system, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market.

In 2016 LATAM entered into two new joint business agreements: an agreement with American Airlines and an agreement with British Airways and Iberia. These agreements further strengthen our relationship with otheroneworld® partners. Both agreements will allow LATAM to expand its network to more than 420 destinations worldwide, operating routes from South America to the United States and Canada with American Airlines and routes from South America to Europe with British Airways and Iberia. The agreements remain subject to regulatory approval in different countries. Some approvals have already been granted: in March, 2017, the administrative court of economic defense of the CADE (Administrative Council for Economic Defense) in Brazil, approved the agreement with British Airways and Iberia, representing the final stage of an evaluation process that began in June 2016. During the review, the CADE evaluated the scope of the agreement in terms of free competition and the benefits that it will bring to passengers, including improved connectivity, an expansion of the destination network and reduced prices. Both agreements have been approved in Uruguay.

Financial Flexibility

We have historically managed our business to maintain financial flexibility and a strong balance sheet, seeking to accommodate our growth objectives while having the ability to respond to changing market conditions. Our financial flexibility has allowed us to secure large aircraft deliveries, including an important part of our currentre-fleeting program, at attractive financing rates.

Recognized Loyalty Programs

On March 1, 2016, we announced our rebranded and improved frequent flyer programs named LATAM Pass (corresponding to the previous LAN Pass) and LATAM Fidelidade (corresponding to the former TAM Fidelidade). The change is part of the process of consolidating our new brand identity (LATAM) and the evolution of our loyalty programs.

LATAM Fidelidade and LATAM Pass together represent the leading frequent flyer 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, class of ticket purchased, and elite level, as well as by using the services of outside partners in the program. In addition, in 2009 TAM launched its affiliate Multiplus, a coalition of loyalty programs, which allows members to accumulate points not just by flying with LATAM, but also by making purchases through credit cards or using services and products at partner establishments, and allows members to redeem points for LATAM Airlines Brazil flights and other products at partner establishments.

We believe these flexible programs are attractive to customers because they do not impose restrictions on those flights for which points can be redeemed, or the number of seats available on any particular flight to members using the loyalty program. LATAM Pass and LATAM Fidelidade members can also accrue and redeem points for flights on otheroneworld® member airlines.

 

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Business Strategy

Our mission is to connect people safely, with operational excellence and a personal touch, seeking to become one of the best airline groups in the world. In order to achieve our mission, the principal areas on which we plan to focus our efforts going forward are as follows:

Continually Strengthen Our Network

We intend to continue to strengthen our route network in South America, offering the best connectivity within the region at competitive prices and ensuring that we are the most convenient option for our passengers. We are the only airline group in the world with a local presence in six home markets and an international and intra-regional operation. This position is bolstered by our enhanced infrastructure in several of our key hubs, allowing us to further strengthen our network and connection. We intend to leverage our position to create a leading portfolio of services and destinations, providing more options to our passengers and building a platform to support continued growth.

Enhance Brand Leadership and Customer Experience

We will always seek to be the preferred choice of passengers in South America. Our efforts are supported by a differentiated passenger experience, and our leveraging of mobile digital technologies. We continue working on the implementation of our single, unified brand, culture, product and value proposition for our passengers. Additionally, we are focused on defining LATAM’s digital strategy, including applications to achieve ancillary revenues and improving the management of contingencies, so that we are able to provide information and solutions to our customers in a timely and transparent manner. We continually assess opportunities to incorporate service improvements in order to respond effectively to our customers’ needs.

Improving Efficiency and Cost Competitiveness

We are continually working to maintain a competitive cost structure and further improve our effectiveness, simplify our organization and increase flexibility and speed in decision-making. As previously announced, LATAM is embarked on an important project to introduce a new travel model for its domestic passenger services in South America, in order to increase competitiveness and ensure the sustainability of the domestic business model in the long term. This model requires continued cost efforts to reduce selling and distribution expenses, increase fleet utilization and operational productivity and simplify back-office and support functions, while controlling fixed 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 proposition to our customers, surpass our competitors consistently and operate sustainably for the long term.

Proactive Risk Management

We strive to have a holistic and responsible view of risk in decision-making. We put special focus on risks that have high potential impact and low probability of occurrence, which could significantly affect LATAM’s strategic objectives.

 

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Airline Operations and Route Network

The following tables sets forth our operating revenues by activity and point of sale for the periods indicated:

 

   Year ended December 31, 
   2016   2015   2014 
   (in US$ millions) 

Total passenger revenues

   7,877.7    8,410.6    10,380.1 

Total cargo revenues

   1,110.6    1,329.4    1,713.4 

Total traffic revenues

   8,988.3    9,740.0    12,093.5 
   Year ended December 31, 
   2016   2015   2014 
   (in US$ millions) 

Peru

   627.2    681.3    660.1 

Argentina

   1,031.0    979.3    813.5 

United States

   933.1    1,025.5    1,224.3 

Europe

   714.4    723.1    935.9 

Colombia

   343.0    353.0    391.7 

Brazil

   2,974.2    3,464.3    5,361.6 

Ecuador

   198.2    238.5    248.6 

Chile

   1,512.6    1,575.5    1,589.2 

Asia Pacific and rest of Latin America

   654.6    699.5    868.6 

Total Operating Revenues

       8,988.3        9,740.0        12,093.7 

Passenger Operations

General

As of December 31, 2016, our passenger operations were performed through airlines in Chile, Brazil, Peru, Argentina, Colombia and Ecuador, where we operate both domestic and international services. We collect and report operating data for our passenger operations in three categories: international (connecting more than one country), Domestic operations in Spanish speaking countries or “SSC” (including Chile, Peru, Argentina, Colombia, and Ecuador), and Domestic Brazil (wholly within Brazil).

The following table sets forth certain of our passenger operating data for international and domestic routes for the periods indicated:

 

   Year ended and as at December 31 
   2016   2015   2014 

ASKs (million) (at period end)

      

International

   73,541.9    69,615.9    65,574.6 

SSC

   23,847.1    22,072.8    21,065.8 

Domestic Brazil

   37,578.7    42,478.5    43,560.5 

Total

   134,967.7    134,167.1    130,200.9 

RPKs (million)

      

International

   63,392.6    59,003.4    55,980.1 

SSC

   19,293.7    17,858.4    16,964.3 

Domestic Brazil

   30,940.5    34,648.1    35,589.7 

Total

   113,626.9    111,509.9    108,534.0 

Passengers (thousands)

      

 

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   Year ended and as at December 31 
   2016  2015  2014 

International

   15,107   14,156   13,630 

SSC

   22,829   21,540   20,735 

Domestic Brazil

   29,024   32,139   33,468 

Total

   66,960   67,835   67,833 

Passenger RASK (passenger revenues/ASK, in US cents)

    

International(1)

   US¢5.8   US¢6.5   US¢7.6 

SSC(1)

   US¢6.9   US¢8.3   US¢9.1 

Domestic Brazil(1)

   US¢5.8   US¢5.9   US¢8.6 

Combined Passenger RASK(2)

   US¢5.8   US¢6.3   US¢8.0 

Passenger load factor (%)

    

International

   86.2  84.8  85.4

SSC

   80.9  80.9  80.5

Domestic Brazil

   82.3  81.6  81.7

Combined load factor

   84.2  83.1  83.4

 

(1)RASK information for each of our business units is provided because LATAM believes that it is useful information to understand trends in each of our operations. We use our revenues as defined under IFRS to calculate this metric. The revenues per business unit include ticket revenue, breakage, excess baggage fee, frequent flyer program revenues and other revenues. These operating measures may differ from similarly titled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance in accordance with IFRS. This unaudited operating data is not included in or derived from LATAM’s financial statements.
(2)The combined Passenger RASK for LATAM is calculated by dividing passenger revenues by total passenger ASKs.

International Passenger Operations

Our international network combines the international operations of our Chilean, Peruvian, and Ecuadorian, Argentinean, Colombian and Brazilian affiliates. We have 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, 2016, we offer 27 international destinations in 18 countries, in addition to our domestic destinations and international flights and connections between our domestic destinations. As of 2016, we combined all of our operations under the LATAM brand.

Our general strategy to expand our international network is aimed at enhancing our value proposition by offering customers more destinations and routing alternatives, and promoting tourism to and within South America. Sustained development of our international network has been a crucial factor in our long-term strategy. The group provides long-haul services out of Santiago, Lima, Guayaquil, Buenos Aires, Bogota, Sao Paulo and Rio de Janeiro. The group also provides regional services from Chile, Peru, Ecuador, Argentina, Colombia and Brazil.

During 2014, after the necessary infrastructure investments were made, we completed our move to the new Terminal 3 at Guarulhos Airport in Sao Paulo, with new slots for takeoff and landing, which has allowed us to significantly decrease our connection times. This is a key milestone in the development of our most important hub at Guarulhos airport. In addition, the group has continued to consolidate our secondary hubs in Lima and Santiago.

During 2016, we received five Boeing787-9 Dreamliners (we have orders for nine more), which will allow us to achieve important savings on fuel consumption, while incorporating modern technology to deliver the best travel experience for our passengers and reduce our carbon footprint, as the Dreamliner produces up to 20% less CO2 than similar aircraft. We also took delivery of six Airbus A350 aircraft (we have orders for 20 more). In addition, we received the first two Airbus A320neo, out of an order of 34 aircraft of this model, becoming the first airline in Latin America to fly this model.

As part of our mission, LATAM seeks to promote tourism to South America. Due to our large network of services, visitors from around the world can experience world-renowned destinations such as Cusco, Easter Island, the Galapagos Islands, Iguazu Falls in Brazil, and Patagonia in Chile and Argentina, including the cities of Punta Arenas, Puerto Natales, Ushuaia, El Calafate and Bariloche.

 

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Market Share Information

The following table presents air passenger traffic information for international flights (including intra-regional flights) and LATAM’s market share in each geographic market in which we operate:

 

Country

  Industry passenger figures  LATAM’s Market Share 
  % variation 2016-2015  2016  2015  % variation 

Brazil(1)

   -0.3  78.9  78.5  +0.4 p.p. 

Chile(2)

   +11.5  61.7  62.5  -0.8 p.p. 

Argentina(3)

   +9.9  11.9  11.8  +0.1 p.p. 

Peru(4)

   +9.8  44.0  43.9  +0.1 p.p 

Colombia(5)

   +12.0  8.0  8.0    0.0 p.p 

Ecuador(3)

   +11.5  17.2  18.9   -1.7 p.p. 

 

(1)Source: ANAC Brazil’s website. Variation and market share considering RPK. Figures are considering only Brazilian airlines
(2)Source: JAC Chile’s website. Variation and market share considering number of passengers carried.
(3)Source: Diio.net. Variation and market share considering ASKs.
(4)Source: Ministry of Transportation Peru’s website. Variation and market share considering number of passengers carried.
(5)Source: DGAC Colombia’s website. Variation and market share considering RPK.

 

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Competitors in international routes

The following table shows LATAM’s main competitors in each geographic market in which we operate:

 

Country

  

Route

  

Competitors

Brazil  North America  American Airlines, United Airlines, Delta Air Lines, Azul Linhas Aereas, Air Canada and Aeromexico.
  Latin America  Copa, Gol, Avianca and Aerolineas Argentinas
  Europe  TAP Portugal, AirFrance-KLM, Lufthansa, Alitalia, Iberia and British Airways
Chile  North America  American Airlines, Air Canada, United Airlines, Delta Air Lines and Aeromexico.
  Latin America  Copa, Sky, Avianca and Gol.
  Europe  AirFrance-KLM, Iberia and Alitalia
  Pacific  Qantas Airways
Argentina  North America  Aerolíneas Argentinas, American Airlines, Aeromexico, Delta Air Lines and United Airlines.
  Latin America  Aerolineas Argentinas, Gol, Copa and Avianca
Peru  North America  American Airlines, United Airlines, Avianca, Aeromexico, Delta Air Lines and Air Canada.
  Latin America  Avianca, Copa, Sky Airlines and Aerolíneas Argentinas
  Europe  AirFrance-KLM, Iberia, Air Europa and British Airways
Colombia  North America  Avianca, American Airlines, JetBlue Airways, United Airlines, Aeromexico and Delta Air Lines.
  Latin America  Avianca, Copa, Aerolineas Argentinas and VivaColombia
Ecuador  North America  American Airlines, Tame, Delta Air Lines, United Airlines, Aeromexico and JetBlue Airways.
  Latin America  Copa, Avianca, Tame and Avior Airlines
  Europe  AirFrance-KLM and Iberia

Domestic Passenger Operations

As of December 31, 2016, domestic passenger services within Chile, Brazil, Peru, Ecuador, Argentina and Colombia were operated by LATAM Airlines Chile, LATAM Airlines Brazil, LATAM Airlines Peru, LATAM Airlines Ecuador, LATAM Airlines Argentina and LATAM Airlines Colombia, respectively.

Business Model for Domestic Operations

In November 2016, the group announced an important project to revamp the business model of our domestic services offering in the six domestic markets where the group operates in South America. The purpose of this change is to increase our competitiveness

 

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and ensure the long-term sustainability of our domestic business model. This project seeks to increase our operational efficiency, allowing us to provide more competitive fares, and contributing to the development of tourism and the growth of air travel per capita in the region. Our new domestic service model requires continuous cost reduction efforts, and we are implementing a series of initiatives to reduce cost per ASK in all domestic operations. These efforts are aimed at significantly reducing selling and distribution expenses, increasing fleet utilization and operational productivity and simplifying back-office and support functions, thereby allowing us to expand our operations while controlling fixed costs.

Another key element of this business model are initiatives to increase our ancillary revenues, while allowing passengers to customize their journey. Customers will be able to access a simpler sales platform, which will allow them to choose their fare depending on the type of journey they want, and to purchase additional services such as extra luggage, a variety of food and beverage options on board, preferred seating options and the flexibility to change tickets.

We continue to develop digital initiatives to empower passengers providing them an enhanced digital experience withend-to-end control of their reservation. LATAM customers will be able to buy,check-in and manage the after sale service in a simpler and faster manner through their smartphones.

We will implement our new domestic strategy by country, in stages starting in the first half of 2017.

 

   Brazil  Chile  Argentina  Peru  Colombia  Ecuador 

Destinations

   41   16   15   17   14   5 

Fleet

   100   27   15   18   17   6 

Passengers Transported (million)

   29.0   7.9   2.6   6.6   4.8   1.0 

Change (YoY)

   (9.7%)   8.1  7.0  6.7  4.4  (8.3%) 

Market share

   35%(1)   76%(2)   25%(3)   62%(4)   21%(5)   31%(6) 

Main competitors

   

Gol, Azul,
Avianca
Brazil
 
 
 
  Sky Airlines   
Aerolíneas
Argentinas
 
 
  


Avianca,
Peruvian
Airlines, Star
Perú
 
 
 
 
  

Avianca, Viva
Colombia,
Santena
 
 
 
  Tame, Avianca 

 

(1)Source: ANAC Brazil’s website. Market share considers RPKs.
(2)Source: JAC Chile’s website. Market share considers RPKs.
(3)Source: Company´s estimates.
(4)Source: Ministry of Transportation Peru’s website. Market share considers number of passengers carried as of November 2016.
(5)Source: DGAC Colombia’s website. Market share considers ASKs
(6)Source: Company´s estimates. Market share considers ASKs

Passenger Alliances and Commercial Agreements

LATAM is currently a member of the global marketing allianceoneworld, which includes Airberlin, American Airlines, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, Malaysia Airlines, Qantas, Qatar, Royal Jordanian, Sri Lankan and S7. In the aggregate,oneworld® members serve more than 1,000 destinations in 157 countries, operating over 13,000 daily departures.

LATAM and its affiliates have ongoing passenger commercial agreements with several airlines, including American Airlines, Iberia, Quantas, British Airways, Lufthansa, Swiss, Interjet, All Nippon Airways, Cathay Pacific, Japan Airlines, and Jetstar Airways, among others. These commercial agreements allow us to provide additional benefits to our passengers, including access to a wider network, more flight options with better connection times, more competitive fares to destinations not served by LATAM, and increased potential for developing new routes and adding direct flights to new destinations and to destinations already served by LATAM.

Moreover, on January 14, 2016, we entered into two new joint business agreements: an agreement with American Airlines and an agreement with British Airways and Iberia. These agreements further strengthen our relationship with theseoneworld® partners.

 

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The agreements remain subject to regulatory approval in different countries. Some approvals have already been granted: on March, 2017, the administrative court of economic defense of the CADE (Administrative Council for Economic Defense) in Brazil, approved the agreement with British Airways and Iberia, representing the final stage of an evaluation process that began in June 2016. During the review, the CADE evaluated the scope of the agreement in terms of free competition and the benefits that it will bring to passengers, including improved connectivity, an expansion of the destination network and reduced prices. Both agreements have been approved in Uruguay.

Passenger Marketing and Sales

Our long-haul marketing strategy emphasizes attributes valued by our international customers: reliable, high-quality service centered on comfort and entertainment for long-haul travel. We also highlight our extensive network, which covers the most important destinations in South America and the Caribbean and provides frequent service to major overseas gateways such as New York, Los Angeles, Miami, Orlando, Washington, DC, London, Madrid, Paris, Frankfurt, Milan, Barcelona and Sydney. In a continuing effort to strengthen our network, during 2016 we launched three new direct routes: Sao Paulo—Johannesburg, Lima—Barcelona and Santiago—Melbourne (the last being our longest flight).

Our short-haul operations are designed to fit our customers’ needs: punctuality, reliability, frequency, modern aircraft and efficient operations. To deliver this value proposition, we have been increasing our fleet and frequencies with morepoint-to-point flights, improved punctuality, and streamlined processes including Internet sales, web and mobilecheck-in and airportself-check-in.

We strive to deliver our promise to our customers. Therefore, we constantly monitor customer satisfaction within-flight surveys and research, and measure our performance against the highest standards. This commitment to excellence is reflected in the numerous prizes and recognitions earned by the Company, including Skytrax’s “2016, Best Airline in South America” and “2016, Best Airline to South America” by Global Travelers.

Branding

Our new brand, “LATAM”, was officially launched in May 2016. The new brand brings together all the passenger and cargo airline operations of the LATAM Airlines Group carriers: with the new brand, we will continue the legacy of leadership started decades ago by LAN, TAM and their respective affiliate carriers.

We are committed to the future of South America and to connecting it to the world. The new brand allows us to offer a better, consistent service throughout our network, which in turn strengthens our position in the region.

Using a single brand enables LATAM’s customers to better understand the common service and operating standards among its airlines. LATAM’s unified image has improved its visibility, thereby increasing the efficiency of its marketing efforts.

Since the launch of our new brand, we have made significant progress on its implementation, making our brand visible to our passengers. The new brand has been adopted at 15 airports, and we now offer a new single website for all of our different points of sale. The LATAM brand has also been applied to 43 aircraft, representing approximately 13% of our fleet. We also launched new uniforms for our crew, adopting the Company’s colors of indigo and coral while providing elegance and comfort for our crew.

During 2016, LATAM Airlines Brazil was the official airline sponsor of the Rio 2016 Olympic Games, reinforcing our brand positioning as a leader in the region through our presence in one of the most important sport events worldwide.

Distribution Channels

We are committed to being the preferred choice of our customers, placing the passenger at the center of our decision making. Our distribution structure is divided into direct and indirect distribution channels, both focused on improving their respective platforms to allow for easy interaction for our client in sales and services alike. Direct channels owned by LATAM are comprised of city ticket offices, contact-centers ande-Business (including website, mobile and smart business), and accounted for approximately 52% of total passengers in 2016. These direct channels support sales and service, both before and after the flight.

Thee-Business channel is an integral part of our commercial, marketing and service efforts, and during 2016 our Internet-related sales achieved a better channel mix with an increase of 0.5 percentage points out of our total sales. The Company will continue to improve oure-Business platforms to support expected future growth.

Our digital strategy includes mobile applications that provide information to our passengers regarding their trip. These applications improve our management of contingencies, enable us to provide information and solutions to our customers in a timely and transparent manner and will serve as a new direct sales channel.

 

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Our city ticket offices support the growth of our operations, providing a sales channel. Our contact centers are a multi-service channel providing support in six languages (Spanish, English, Portuguese, French, German and Italian).

Indirect channels currently include travel agencies, general sales agencies, direct channels from other airlines and online agencies, and accounted for a 48% of total passengers in 2016.

Frequent Flyer Programs

Our frequent flyer programs are a key element of our marketing and loyalty strategy. These programs reward customer loyalty, and, as a result, generate incremental revenue and customer retention.

During 2016, we announced our revamped frequent flyer programs named LATAM Pass and LATAM Fidelidade. This change is part of the process of consolidating the airline group’s new brand identity (LATAM) and the evolution of the programs, which enhances existing benefits and introduces new benefits for program members.

We continued working on the homologation of our programs’ features and benefits. Among other improvements, our initiatives include cross-level recognition of all members, for example, by allowing LATAM Pass members to upgrade on TAM flights and and LATAM Fidelidade members to upgrade on LAN flights, in addition to having the same services at the airport.

During 2017 LATAM Pass and LATAM Fidelidade will continue their harmonization efforts and will offer new cross benefits for their members, with the goal of remaining or becoming the leading loyalty program in all of LATAM’s home markets. Moreover, beginning on April 22, 2017, LATAM’s frequent flyer program will change the way our members earn kilometers from the current system (based on the distance flown) to a new method based on the price paid for the ticket.

LATAM Pass

As of December 31, 2016, LATAM Pass had 13 million members, an increase of 17% compared to 2015.

LATAM Pass members earn LATAM Pass kilometers in their accounts based on distance flown, class of ticket purchased and their status level, as well as by purchasing the services of other partners in the the LATAM Pass program. Customers can redeem kilometers for free tickets as well as for other products in an online catalogue. Under our current frequent flyer program, our passengers are grouped into four different elite levels based on their flying behavior: Gold, Platinum, Black and Black Signature. These different groups determine which benefits customers are eligible to receive, including kilometers earnings bonuses, free upgrades on a space-available basis, VIP lounge access, and preferred boarding andcheck-in. These categories have their equivalent in theoneworld® alliance: Ruby for Gold, Sapphire for Platinum, and Emerald for both Black and Black Signature.

In 2016 LATAM Pass had increases of 32 % in award tickets redeemed, and 9% innon-flight products redeemed. LATAM Pass has highly rated partners, including other airlines, hotels, car rental agencies, retailers, and credit card issuers from the main financial institutions in Chile, Peru, Ecuador, Argentina, Uruguay, the United States and Colombia, including Banco Santander in Chile and Banco de Bogotá and Occidente (both members of Grupo Aval) in Colombia. These commercial agreements give our customers the opportunity to earn additional kilometers for using their services.

In thenon-banking segment, LATAM Pass continues to leverage its members’ purchase behavior to partner with leading players in its markets and become the most attractive loyalty program. In recent years, LATAM Pass has expanded into new industries, such as retail, supermarkets, automotive, real estate, drugstores and health care centers.

In the past few years, we have implemented a number of marketing initiatives to increase customer engagement and activity with the program in all of its markets. In 2016, membership in LATAM Pass continued growing, expanding by 10% in Chile, 14% in Perú, 38% in Argentina, 6% in Ecuador, 14% in Colombia and 6% in the United States.

LATAM Fidelidade

LATAM Fidelidade was the first loyalty program launched by a Brazilian airline and represents a key element of LATAM’s marketing strategy. LATAM believes LATAM Fidelidade, like LATAM Pass, is one of the most flexible loyalty programs in the market because it imposes no restrictions on flight availability or on the number of seats available when members redeem accumulated points. LATAM Fidelidade currently has more than 13.2 million members, which represents an increase of 14% compared to 2015. Members of LATAM Fidelidade, like those of LATAM Pass, receive benefits and increased points for kilometers flown depending on their elite level, allowing them to accrue redeemable points for free travel more quickly. LATAM Fidelidade customers are classified in the same four elite levels as LATAM Pass: Gold, Platinum, Black and Black Signature.

 

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Multiplus

In 2009, TAM launched Multiplus, a company designed to create a broader network in which LATAM Airlines Brazil’s customers can earn points through the LATAM Fidelidade program. Multiplus is a coalition of loyalty programs that permits the accrual of points that can be redeemed for products and services offered by many different partner companies, in addition to LATAM Airlines Brazil. We believe this expanded network acts as a sales channel for LATAM Airlines Brazil, helping to capture and retain customers and increase sales. Multiplus is attractive to our less-frequent flyers because it allows them to accrue loyalty points in many ways besides flying. In 2016,non-air accrual reached 15% of the total points. At the end of 2016, Multiplus had more than 400 partners and approximately 16.5 million participants that can accrue Multiplus points directly (through LATAM Fidelidade,co-branded cards, apps, retail partners, etc.) and indirectly (by transferring points from a partner program).

Multiplus became a publicly traded company in Brazil following its initial public offering in February 2010. TAM S.A continues to own 72.74% of the ordinary shares of Multiplus.

On December 10, 2009, Multiplus entered into an Operating Agreement with LATAM Airlines Brazil, effective as of January 1, 2010, which established the terms and conditions governing the relationship with TLA (the “Operating Agreement”). Under the Operating Agreement, Multiplus became responsible for, among other tasks, processing information on accumulating and redeeming points under the LATAM Airlines Brazil Loyalty Program, and delivering awards to the members of said program, in accordance with the rules of the TAM Loyalty Program and the Multiplus network. The Operating Agreement is valid for 15 years and is automatically renewed every five years thereafter.

Aiming to increase the value created to Multiplus and LATAM shareholders, and to improve the alignment of interests between Multiplus and TLA, on May 4, 2015, the companies approved a new amendment to the Operating Agreement, effective on that date. This amendment provides that the cost for each 10,000 points redeemed on TLA air tickets shall be approximately 3% less than Multiplus’s current prices paid for those 10,000 points. Furthermore, the amendment establishes that from December 1, 2015, fixed prices for air tickets will come into force with objective rules for annual price adjustments for the purchase of air tickets, paid by Multiplus to TLA. The fixed prices of each are determined by both companies as a function of the market (domestic and international), fare class, demand, season, distance and flight origin/destination.

The remaining provisions established in the original Operating Agreement, including, without limitation, those relating to reciprocal exclusivity, term of effectiveness and situations for termination with or without cause, remain, in their essence, unchanged.

On December 14, 2015, Multiplus’ Board of Directors approved a management proposal for the establishment of a limited liability company, with the name of “Multiplus Corretora de Seguros Ltda.”, for the purpose of developing an insurance brokerage business. This project is in line with Multiplus’ main objectives of providing a differentiated experience for its participants, offering a new source for accrual of points and generating value to its shareholders.

On July 5, 2016, Multiplus S.A. and Banco Itaucard S/A (“Itaucard”) signed a Commercial Partnership Contract for the offering, promotion, distribution and sale ofco-branded credit cards (“Multiplus cards”), throughout Brazil’s national territory. The partnership’s key objective is to offer its network members a product which permits the direct accumulation of Multiplus Points by means of conversion and differentiated bonuses.

On July 12, 2016, Multiplus S.A. signed a partnership with the Expedia Affiliate Network, making 270,000 hotel options available to members, allowing them to accumulate Multiplus points when making their reservations.

On August 25, 2016, “Multiplus Corretora de Seguros Ltda.” started operations as “Pontus Corretora”. Pontus Corretora debuted with two types of insurance policies offered with different partners: residential insurance, in partnership with Seguradora Porto Seguro, and travel insurance through Assist Card. Pontus Corretora offers a totally original digital experience, with flexibility, innovation and excellent products from the main insurance companies in the market.

On December 27, 2016, Multiplus announced that it is expanding its “Points + Cash” offering to allow the redemption of points fornon-air products and services. This allows members who do not have sufficient accumulated points to redeem with network partners totop-up their points with a cash payment. The objective is to ensure the availability of attractive offers for all ’Multiplus members, with constant incentives for them to increasingly use and experience the loyalty network.

 

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Cargo Operations

Our Cargo division operates internationally and domestically through our affiliates under the unified LATAM Cargo brand, which has acquired significant market recognition. Our cargo business generally operates on the same route network used by our passenger airline business. It includes approximately 138 destinations, of which around 127 are served by passenger and/or freighter aircraft and approximately 11 are served only by freighter aircraft.

The following table sets forth certain of our cargo-operating statistics for domestic and international routes for the periods indicated:

 

   Year ended and as at
December 31,
 
   2016  2015  2014 

ATKs (millions)

   6,704.1   7,082.8   7,219.7 

RTKs (millions)

   3,465.9   3,797.0   4,317.2 

Weight of cargo carried (thousands of tons)

   944.3   1,008.7   1,102.2 

Total cargo yield (cargo revenues/RTKs, in U.S. cents)

   32.0   35.0   39.7 

Total cargo load factor (%)

   51.7  53.6  59.8

We derive our revenues roughly equally between the transport of cargo as follows:

1)Bellies of our passenger aircraft. We consider our passenger network to be a key competitive advantage due to the synergies between passenger and cargo operations and, accordingly, we have developed a strategy to increase our competitiveness by enhancing our belly offering.

2)Dedicated freighter fleet. As of December 31, 2016, our dedicated freighter fleet under operation consisted of eight Boeing767-300 freighters, each with a capacity for 58 structural tons of freight each, and two Boeing777-200 freighters, each with a capacity of 102 structural tons of freight. In 2016 we continued our freighter fleet optimization efforts, subleasing three B767-300F aircraft and one B777-200F to a third party (reclassified from property, plant and equipment to held for sale as of December 31, 2016). Our freighter fleet program has two main focus areas: first, to support the group’s belly business, improving its load factor by feeding cargo into our passenger routes, and second, to provide our customers flexibility in scheduling and destinations. With these two objectives in mind, we are complementing and enhancing our network. 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 on a small number of product categories, such as exports of fish, sea products and fruits from Chile, asparagus from Peru, and exports of fresh flowers from Ecuador and Colombia.

For our southbound flights, Brazil is the main import market. Southbound demand is mainly concentrated on a small number of product categories including high-tech equipment, electronics, auto parts and pharmaceuticals.

Our largest domestic cargo operations are in Brazil, where LATAM Cargo remains the market leader there, 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, LATAM Cargo continues to invest in infrastructure, service and security in key cargo terminals.

The United States accounts for the majority of cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, the United States is also the main supplier of goods transported by air to Latin American countries. We have thus headquartered our international cargo operations in Miami. This geographical location is a natural gateway between Latin America and the United States. We also transport cargo to and from eight destinations in Europe: London, Madrid, Milan, Paris, Barcelona, Frankfurt, Amsterdam and Basel. The first six are served via passenger aircraft, and we also serve Amsterdam, Frankfurt and Basel through freighter operations. In October 2016 LATAM Cargo added a new operation to its belly network: Sao Paulo, Brazil – Johannesburg, South Africa, opening a gateway between Latin American markets and the African continent.

During 2016, cargo traffic decreased 8.7%, mainly due to a strong decline in Brazilian imports resulting from economic weakness and currency depreciation in Brazil. However, Latin American exports remain at healthy levels, despite a contraction in production of fresh salmon in Chile.

The cargo business in the region is highly competitive, as international and regional carriers often have spare capacity in their cargo operations. Despite this, we have been able to maintain solid market shares through an efficient utilization of 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 America-Europe routes, our main competitors are Cargolux, Lufthansa Cargo, Martinair and Emirates Airlines.

 

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Marketing and Sales

Our cargo sales and marketing efforts are carried out directly in cities where we have a local office, or through general sales agents. In total, we have over 30 international offices. In Latin America, we have our own offices in all key markets. 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 our sales efforts are conducted through general sales agents. In total, we maintain a network of more than 30 independent cargo sales agencies domestically and internationally.

Our cargo marketing strategy emphasizes the combination of our unique freighter and passenger aircraft cargo network, which offers a wide variety of reliable cargo routing possibilities with different pricing options; strong connectivity to, from and within Latin America; and a clear focus on providing high-quality service for our clients. Our offering allows our customers to ship large, bulky freight, as well as smaller, high-density cargo, fresh products, express shipments and other types of cargo.

During 2016 we focused on various aspects of our value chain to improve our customer experience. We developed a new portfolio of LATAM Cargo products with an innovative proposition aligned to the needs of customers, allowing us to deliver greater consistency and a clear service offering to the market. In line with this, we made progress in transforming the Company’s internal processes to ensure they are aligned with our commitments to clients.

Cargo Agreements

During 2016 we maintained our Enhanced Cargo Transfer Interline and other commercial agreements with Asian carriers such as Air China, Korean Air and Cathay Pacific, among others. Under these agreements, we receive space allocations to move our cargo from the main gateways in Asia to hubs in the United States—Los Angeles, New York and Miami—and 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 of our Latin American destinations and also provide them with westbound cargo. These agreements have allowed us to achieve greater visibility, improved support and allowed us to provide better service recovery, further expanding our network between Latin America and Asia.

Cargo-Related Investigations

See “Item 8. Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal and Arbitration Proceedings.”

Fleet

General

As of December 31, 2016, we operated a fleet of 329 aircraft, comprised of 319 passenger aircraft and 10 cargo aircraft. Additionally, we subleased four cargo aircraft to third parties (one of them not included in the table below as it was reclassified from property plant and equipment held for sale).

 

   Number of aircraft in operation         
   Total   Owned(1)   Operating
Lease
   Average
term of
lease
remaining
(years)
   Average
age
(years)
 

Passenger aircraft(2)

          

Airbus A320-Family Aircraft

          

AirbusA319-100

   48    36    12    3.4    9.2 

AirbusA320-200

   146    93    53    2.6    8.6 

AirbusA321-200

   47    30    17    9.3    2.7 

Airbus A320-200neo

   2    1    1    9.7    0.2 

Airbus A350-Family Aircraft

          

AirbusA350-900

   7    5    2    11.8    0.5 

 

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Boeing Aircraft

          

Boeing767-300ER

   37    34    3    2.6    8.5 

Boeing787-8

   10    6    4    9.2    3.1 

Boeing787-9

   12    4    8    10.8    1.2 

Boeing 777-300ER

   10    4    6    2.1    5.7 

Total passenger aircraft

   319    213    106    4.8    7.0 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cargo aircraft

          

Boeing767-300 Freighter(3)

   11    8    3    2.0    13.1 

Boeing777-200 Freighter(4)

   2      2    0.4    7.6 

Total cargo aircraft

   13    8    5    1.4    12.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fleet

   332    221    111    4.7    7.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)Aircraft included within property, plant and equipment.
(2)All passenger aircraft bellies are available for cargo.
(3)Three aircraft leased to FEDEX
(4)Does not include two B777-200F (one currently leased to a third party), that were reclassified from property plant and equipment to held for sale.

The average utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below, in hours per day.

 

   2016   2015   2014 

Passenger aircraft

      

Boeing767-300ER

   10.0    11.3    10.5 

Boeing787-8/9

   11.0    11.7    10.5 

Airbus A320-Family

   8.9    9.5    9.8 

Boeing777-300ER

   11.7    12.2    12.9 

AirbusA330-200

   4.4    6.2    7.0 

AirbusA350-900

   8.5    0.8    —   

Cargo aircraft

      

Boeing767-300 Freighter

   12.1    10.9    9.5 

Boeing777-200 Freighter

   13.7    13.0    13.2 

We operate various different aircraft types that are best suited for our different services, which include short-haul domestic and regional trips as well as long-haul transcontinental flights. We have selected our aircraft based on their ability to effectively and efficiently serve these missions while trying to minimize the number of aircraft families we operate.

For short-haul domestic and regional flights, we principally operate Airbus A320-Family Aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to operating leases or has been acquired directly from Airbus pursuant to various purchase agreements since 1999. In 2016, we received our first two A320neo,re-engined A320s, which incorporate the latest technologies including new generation engines and Sharklet wing tip devices, resulting in approximately 15% in fuel savings compared with the original A320. LATAM was the first airline in the Americas, and the fifth on the world, to operate the A320neo.

For long-haul passenger and cargo flights, we operate Boeing767-300 passenger and cargo aircraft, Boeing787-800 and787-900 aircraft, Boeing 777 passenger and cargo aircraft and the AirbusA350-900 passenger aircraft that started operations in 2015. LATAM is the firstA350-900 operator in the Americas.

Fleet Leasing and Financing Arrangements

LATAM’s fleet financing and leasing structures include borrowing from financial institutions and leasing under financial leases, tax leases, sale-leaseback transactions and pure operating leases. As of December 31, 2016, LATAM had 332 aircraft, of which three were subleased to third parties resulting in 329 aircraft in operation. Of the aircraft in operation, 156 are operated by LAN and 163 aircraft are operated by TAM and 10 are operated by LATAM Airlines Cargo.

As of December 31, 2016, LATAM’s operating fleet was comprised of 192 financial leases, 12 tax leases, 102 operating leases, and 10 aircraft as loan guarantees and 13 unencumbered aircraft. Most of LATAM’s financial and tax leases are structured with a 12- year initial term. LATAM has 42 financial aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 85 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s operating lease maturities initially range from three to 12 years.

 

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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 tax leases also include third parties. 63.1%of our aircraft debt has a fixed interest rate and the balance has a floating rate based on USD LIBOR.

In order to reduce TAM’s balance sheet FX exposure to the Brazilian real, as part of the integration plan following the combination with TAM, we have sought to transfer the majority of the TAM aircraft under financial leases to the LATAM level. As of December 31, 2016, we have transferred 51 aircraft to LATAM, including 13 transferred during 2016. This program has helped reduce the exposure to approximately US$1.2 billion equivalent. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of financing” and “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a description of expected sources of financing and expected expenditures on aircraft.

Maintenance

LATAM Maintenance

Our heavy maintenance, line maintenance and component shops are equipped and certified to service our entire fleet of Airbus and Boeing aircraft. Our maintenance capabilities allow us flexibility in scheduling airframe maintenance, offering us an alternative to third-party maintenance providers.

LATAM Line Maintenance

Our Line Maintenance Network (the “Network”) provides a full range of aircraft maintenance services to ensure our fleet operates safely and in compliance with all local and international regulations. We strive to provide the best experience to our passengers, through the highest standards of on time performance and cabin condition.

The Network serves over 190 locations, which are staffed by over 4,000 LATAM maintenance professionals. In 2016, the Network effectively carried out over 2.1 million man hours of preventive and corrective maintenance tasks on the LATAM fleet. We also rely on certified third party services in a few destinations where it is economically convenient, such as in Frankfurt (where we are served by Lufthansa Technik), Milan (served by AirFrance-KLM), and Johannesburg (served by South African Airways).

LATAM Maintenance has used LEAN methodology and developed computerized systems to achieve improved automation and integration processes, offering sustainable and scalable planning, productive and operational processes.We have deployed more than 600 tablets in order to:

 

 1)Provide fast and simplified access to technical documents through a native app called Content Management System (CMS Mobile);

 

 2)Provide access to our Maintenance System called Maintenix andin-house coordination apps;

 

 3)Improve our internal communication through message and video call apps; and

 

 4)Allow use ofin-house developments systems like MaintCraft (allocates man hours resources and Gantt charts to each specific maintenance tasks) and MaintControl (manages the execution of the planned tasks of MaintCraft through a friendly interface, showing all the tasks that each technician has to perform throughout the shift). MaintControl also serves as a platform where the maintenance leaders can monitor their team’s progress and solve problems that arise.

LATAM Line Maintenance Network has hangar facilities in Santiago, São Carlos, São Paulo (CGH), Lima, Miami, Buenos Aires (AEP) and Brasilia, among others. These multiple locations improve the flexibility of the Network by allowing the execution of tasks that previously might be restricted because of adverse weather conditions and environmental authority restrictions.

In order to strictly comply with applicable regulations, all of our maintenance operations are supervised and audited by the local authorities and international entities around the Network, such as DGAC Chile, ANAC Brazil, the Federal Aviation Administration in the United States (“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. The audits are conducted in connection with each country’s certification procedures and enable us to perform maintenance for the aircraft types registered in the certificating jurisdictions. Our repair stations hold FAAPart-145 certifications under these approvals.

 

 

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In addition, to ensure the most qualified personnel as needed for safe, accurate andon-time Line Maintenance, we seek to improve our technicians’ skills through extensive training programs at our LATAM Technical Training Center and through specific training programs designed and conducted by our partnerships. Our Fleet and Engineering teams participate actively in periodic airline Fleet Reliability meetings, where we share best industry practices and updates of the latest Line Maintenance trends and top technical issues.

LATAM MRO

Our two MRO (“Maintenance, repair and Operations”) facilities, one in São Carlos (Brazil) and one in Santiago (Chile), are equipped and certified to service our fleet of Airbus and Boeing aircraft and provide 76% of all heavy maintenance services that LATAM demands. The services not executed internally are contracted to our extensive network of MRO partners around the globe. Both MRO facilities are FAAPart-145 certified repair stations. We occasionally perform certain heavy maintenance and component services for other airlines or OEMs. LATAM MRO is also responsible for the planning and execution of aircraft redeliveries.

In MRO São Carlos (LATAM Airlines Brazil MRO), we are prepared to service up to eight aircraft (narrow and wide body) simultaneously with a dedicated hangar for stripping and painting. In this facility we also have 22 technical component shops, including a full landing gear repair & overhaul shop, hydraulics, pneumatics, electronics (ATEC), electrical components, electroplating, composites, wheels & brakes, interiors and emergency equipment shops. This facility has a total area of 400 hectares and a hangar area of 100,000 m², with a dedicated runway of 1,720 meters. MRO São Carlos is certified and audited by major international aeronautical authorities such as the FAA, the European Aviation Safety Agency (“EASA”), ANAC Brazil, the Chilean DGAC, the ArgentineanAdministración Nacional de Aviación Civil (“ANAC Argentina”), the EcuadorianDirección General de Aviación Civil(“DGCA”), the ParaguayanDirección Nacional de Aeronautica Civil (“DINAC”), and Transport Canada (“TC”) , among others, for Heavy Maintenance and Components Repair and Overhaul for the AirbusA-320 family (A318, A319, A320 and A321) and Airbus A330, Boeing 767,ATR-42/72 and the EmbraerE-Jet 170/190 families. The MRO also has some minor capabilities for the repair and overhaul of Boeing 777 components. MRO São Carlos includes its own support engineering capabilities and a full technical training center.

In MRO Santiago, located near Comodoro Arturo Merino Benítez International Airport in Santiago, we have two hangars capable of servicing one wide body aircraft and two narrow body aircraft simultaneously. MRO Santiago is certified and audited by FAA, ANAC Brazil, DGAC, ANAC Argentina and DGCA, among others, for Heavy Maintenance for the Airbus A320-Family (A318, A319, A320 and A321) and Boeing 767. MRO Santiago has eight shops prepared to support hangar activities such as cabin shops, galleys, structures and composite materials. We also have the capability to retrofit aircraft interiors, including the installation of IFE(in-flight entertainment) equipment and blended winglets in the Boeing 767 fleet.

During 2016, LATAM MRO effectively executed 1.2 millionman-hours in more than 300 services, including C checks (114) and Special Checks (209) for the LATAM fleet, maintaining our 2015 labor production. Our shops delivered more than 50,000 components and performed 17 landing gear overhauls.

LATAM Safety and Security

Our most important priority is the safety of our passengers and employees. LATAM has been working to standardize our operational indicators regarding safety, audits and emergency response throughout our operations.

The divisions that currently support these functions are Safety Management, Emergency Response Management, and Security Management. These divisions function on the basis of uniform policies and procedures issued from the Corporate Safety and Security Vicepresidency located in Santiago, Chile, and that are represented in each affiliated company.

Organization of the LATAM Safety and Security Vicepresidency

Safety Management Corporate

We give the highest priority to providing safe and reliable air service. We have unified our Safety Management under a single organization (Corporate) that is responsible for the definition of processes and procedures for LATAM Safety Management and for the oversight of the affiliates that apply and implement those processes and procedures.

All LATAM affiliates have safety management system (“SMS”) documentation that provides 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.

 

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All systems are IOSA certified and have a Senior Safety 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 LATAM.

Emergency Response Management Corporate

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 and pandemics) with the purpose of mitigating the impacts of emergencies on passengers and their relatives, as well as on our operations. The ERP includes, among others, Emergency Process and Procedures, Emergency Control Centers, a Relatives & Passengers Assistance Team, a Notification Team, Aircraft Recovery, and a “Go Team” which is a special team that can be dispatched in the case of an emergency and assume responsibility for emergency management.

Security Management Corporate

The Company ensures the highest levels of security for all of its passengers, employees, aircraft, equipment and facilities against any threats or unlawful action.

Corporate Security policies and a Security Management System (“SeMS”) have been implemented to detect any vulnerabilities in our security operations and to prevent acts of unlawful interference. Through the use of audits, inspections and risk analysis, we are able to establish the different security protocols required in our international and domestic operations. The results of the SeMS are evaluated, analyzed and assigned a risk level (high, medium or low) by LATAM Corporate Security Managers, who are in turn responsible for determining security protocols. In addition, Corporate Security Management oversees all of the security processes and procedures through the execution of annual audits.

Furthermore, every LATAM affiliate has to abide by a Security Program approved by the relevant local authority. These Security Programs provide clear definitions of the security functions required for every operation.

Fuel Supplies

Fuel costs comprise one of the single largest categories of our operating expenses. Over the last years, our fuel consumption and operating expenses have increased due to the significant growth in our operations. However, in 2016 due to the significant drop in the international price of crude oil, LATAM saw a drop in its jet fuel costs. In 2016, total fuel costs represented 23.0% of our total operating expenses. Our average into-wing price for 2016 (fuel price plus taxes and transportation costs, including hedge) was US$1.70 per gallon, representing a decrease of 22.2% from the 2015 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, we believe it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs, 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.

 

   Year ended December 31,(1) 
   2016  2015  2014 

Fuel consumption (thousands of gallons)

   1,185,508.8   1,221,096.9   1,219,882.7 

ASK equivalents (millions)

   205,537.5   208,722.5   206,197.9 

Fuel gallons consumed per 1,000 ASK equivalents

   5.77   5.85   5.92 

Total fuel costs (US$ thousands)

   2,056,643   2,651,067   4,167,030 

Cost per gallon (US$)

   1.70   2.19   3.42 

Total fuel costs as a percentage of total operating expenses

   23.0  27.6  34.8

 

(1)See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2016 compared to year ended December 31, 2015.” Total fuel costs (US$ thousands) include Hedging gains/losses.

Our fuel supply arrangements vary by airport and are distributed among 34 providers, but are mainly concentrated in Brazil (42%), Chile (15%), the United States (11%) and Peru (11%). During 2016, were-negotiated our fuel supply contracts in all North American, major European, and certain South American airports.

Regarding our operations in the United States, we changed our strategy related to the term of our agreements. While previously we relied only on short term agreements, in 2016 we established medium term agreements, securing our supply in a complex market.

 

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As part of a comprehensive energy efficiency initiative, LATAM Airlines Group worked with a team of stakeholders to generate a streamlined fuel efficiency program (the “LATAM Fuel Efficiency Program”), which encompassess a wide range of different innovations and technologies for fuel efficiency:

 

 Investments in more modern and efficient aircraft, such as the Boeing 787, Airbus A350 and the Airbus A320neo. The main fleet has been fitted with winglets and sharklets, allowing an estimated 4% fuel consumption reduction.

 

 Weight reduction measures, such as minimizing unnecessary onboard water, using ultra-light service carts, optimizing fuel according to destination, improving the distribution of weight to have an optimal center of gravity and the improvement of freight factor (the combination of passenger and cargo services).

 

 Standardized operational procedures for approach and landing, as well as for minimizing the use of the auxiliary power unit when aircraft is on the ground.

 

 Periodically programmed engine washes, which allow more efficient combustion of fuel and reduce emissions in airport areas.

As a direct result of this program, LATAM Airlines Group has been recognized since 2014 by the Dow Jones Sustainability Index as one of the world’s leading companies ineco-efficiency. The magnitude of this program has allowed the Company to improve its environmental performance and to enhance environmental awareness both within the Company and externally.

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 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 at LATAM Airlines Brazil’s headquarters located at Congonhas International Airport in São Paulo, Brazil. In 2013, LATAM Airlines Brazil inaugurated two new facilities for ground handling equipment maintenance and repair (at São Paulo’s Guarulhos Airport with 9,000 m² and at Rio de Janeiro’s Galeão Airport with 4,000 m²).

We incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges,take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms andcheck-in counter space.

Ancillary Airline Activities

In 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-freein-flight sales, maintenance services for third parties, handling, storage and customs services, handling and activities and revenues of Multiplus and the sale of certain LATAM Pass kilometers to third parties. In 2016, LATAM generated other revenues of US$538.7 million from ancillary activities.

Insurance

We maintain insurance policies as required by law and in accordance with the terms of all aircraft financing and leasing agreements for aircraft that LATAM and its affiliates own, are responsible for or operate. 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. 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. Our current policies, which are in force through April 1, 2017 and are renewed annually, follow the best practices adopted by the international civil aviation industry.

 

 

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We have negotiated common terms for Hull All Risk, Aviation Legal Liabilities and Spares coverage, together with IAG Group (the parent of British Airways, Iberia and their affiliates and franchises), which allows us to obtain premium reductions and coverage improvements.

Information Technology

Passenger Service Systems

As part of our agenda of transformation of the customer experience 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 2012 combination of LAN and TAM, a series of projects have been implemented to communicate the unification of the companies to our customers. 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 and loyalty programs. 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 based on the needs of our target customer, reinforcing six key elements: transparency of information, early solutions, passenger choice, digital simplicity,end-to-end rapidity, and care for our customer. In order to implement this model, during 2016 we continued the work of previous years, adopting several measures for the unification of our processes and systems:

 

 We incorporated innovative products with functional features into our mobile platform for passenger service crews. Our new self service platform allows the cabin crew to be connected and updated with all relevant human resources and flight information.

 

 Airports: we implemented a unique solution for self service in kiosks, with self service bag tag functionality.

 

 Contingency: we continue improving our mobile platform for agents to manage contingency processes, adding features to manage basic services to our passengers in contingencies and compensation in case of disruption. We also implemented a passenger notification tool to manage both commercial and operational schedule changes.

 

 Contact Center: we developed new front-ends to simplify the interaction of our agents with passengers, with more intelligent recognition and more functionality to provide faster, more uniform and personalized attention. We implemented a world class solution to manage all customer service cases in a unified manner, solving problems faster and with fewer interactions. We also implemented an automatic tool to automate the calculation of refunds and reduced the time required to process refunds.

 

 Loyalty and customers: we continued to unify our systems to support our loyalty program with a world-class solution. We continued the implementation of a campaign management tool to centralize and control all the interactions with marketing campaigns with our customers.

 

 Digital Channels: We continue increasing the functionality available to digital channels.

From the integration perspective, we continue working to reach a simplified and consistent technological platform. For example, we implemented a unified Revenue Accounting System for the passenger business, and we have improved our airport management, loyalty program, contact center, customer database, and marketing tools applications. We continue to work with SABRE to unify the Passenger Service Platform in an effort to obtain operational and financial synergies, as set forth below.

During 2017, we expect to continue developing solutions aimed at improving our customers’ experience.

LATAM PSS Migration and Digital Platform

Prior to the 2012 combination, LAN and TAM used different passenger service platform (“PSP”) solutions, TAM used Amadeus and LAN used SABRE. LATAM has since decided to unify the Passenger Service Platform in an effort to obtain operational and financial synergies. As a result, the PSS Migration Program began in 2014.

After running a Request for Proposal (“RFP”) process with both providers (SABRE and Amadeus) in May 2015, LATAM signed a10-year contract with SABRE. Since June 2015, LATAM and SABRE have jointly started the execution of PSS Migration, which should be fully implemented by 2018.

 

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Maintenance

In 2013, LATAM Airlines Brazil began a Maintenix implementation project which was completed in the first quarter of 2016. This project included standardization of all of our network’s maintenance processes, permitting optimization of stocks of components and seeking to take advantage of synergies in the maintenance process, while maintaining operational safety as the key pillar.

Disaster Recovery Plan

As of December 2016, LATAM has two data centers in Chile and one in Brazil. Design and configuration of two data centers and a Disaster Recovery Plan for LATAM was completed in 2015 and implementation and testing was done during 2016.

Regulation

Below is a brief reference to the material effects of aeronautical and other regulations in force in the relevant jurisdictions in which we operate.

We are subject to the jurisdiction of various regulatory and enforcement agencies in each of the countries where we operate. We believe we have obtained and maintain the necessary authority, including authorizations and operative certificates where required, which are subject to ongoing compliance with statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.

The countries where we carry out most of our operations are contracting states and permanent members of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transportation. The ICAO establishes technical standards for the international aviation industry. In the absence of an applicable local regulation concerning safety or maintenance, the countries where we operate have incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all such relevant technical standards.

Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon airlines, applicable to aircraft, or that otherwise affect us, except for environmental laws and regulations of general applicability.

In Argentina, Brazil, Colombia, Ecuador, Peru and the United States, aircraft should comply with certain noise restrictions. We believe our aircraft substantially complies with all such restrictions. Chilean authorities are planning to pass a noise-related regulation governing aircraft that fly to and within Chile, observing a standard known as “Stage 3 requirements”. Our fleet already complies with such standards, so we do not believe that enactment of the proposed standards would impose a material burden on us.

In 2016, the ICAO adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize CO2 emissions in international civil aviation (i.e., civil aviation flights that depart in one country and arrive in a different country). With the adoption of this framework, the aviation industry became the first industry to achieve an agreement with respect to its CO2 emissions. The scheme, which defines a unified standard to regulate CO2 emissions in international flights, will be implemented in various phases by ICAO member states starting in 2020.

 

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Safety and Security. Our operations are subject to the jurisdiction of various agencies in each of the countries where we operate, which set standards and requirements for the operation of aircraft and its maintenance.

In the United States, the Aviation and Transporation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Funding for airline and airport security required under the Aviation Security Act is provided in part by a US$5.60 per segment passenger security fee, subject to a US$11.20 per roundtrip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, Congress has mandated, and the TSA has implemented, numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.

Below are some specific aeronautical regulations related to route rights and pricing policy in the countries where we operate.

Chile

Aeronautical Regulation

Both the Dirección Nacional de Aeronáutica Civil (“DGAC”) and the Junta de Aeronáutica Civil (“JAC”) oversee and regulate the Chilean aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for supervising compliance with Chilean laws and regulations relating to air navigation. The JAC is the Chilean civil aviation authority. Primarily on the basis of Decree Law No. 2,564, which regulates commercial aviation, the JAC establishes the main commercial policies for the aviation industry in Chile and regulates the assignment of international routes and the compliance with certain insurance requirements, while the DGAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authority from the Chilean government to conduct flight operations, including authorization certificates from the JAC and technical operative certificates from the DGAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.

Chile is a contracting state, as well as a permanent member, of the ICAO. Chilean authorities have incorporated ICAO’s technical standards for the international aviation industry into Chilean laws and regulations. In the absence of an applicable Chilean regulation concerning safety or maintenance, the DGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all such relevant technical standards.

Route Rights

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

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

International route rights, as well as the corresponding landing rights, are derived from a variety of air transportation agreements negotiated between Chile and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Chile, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency, the JAC awards it through a public auction for a period of five years. The JAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.

Airfare Pricing Policy.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

 

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routes deemed“non-competitive” by the JAC and any decrease in fares on “competitive” routes at least 20 days in advance. We must file notice with the JAC of any increase in fares on “competitive” routes at least 10 days in advance. In addition, the Chilean authorities now require that we justify any modification that we make to our fares onnon-competitive routes. We must also ensure that our average yields on anon-competitive route are not higher than those on competitive routes of similar distance.

Argentina

Aeronautical Regulation

Both the Administración Nacional de Aviación Civil (“ANAC”) and the Ministry of Transport oversee and regulate the Argentinean aviation industry. ANAC regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management, and reports directly to the Ministry of Transport. ANAC also is responsible for supervising compliance with Argentinean laws and regulations relating to air navigation. The Ministry of Transport regulates the assignment of international routes and matters related to tariff regulation policies. We have obtained and maintain the necessary authorizations from the Argentinean government to conduct flight operations, including authorization certificates and technical operative certificates from ANAC, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.

Argentina is a contracting state and a permanent member of the ICAO, an agency of the United Nations established in 1947 to assist in the planning and development of international air transport. The ICAO establishes technical standards for the international aviation industry, which Argentinean authorities have incorporated into Argentinean laws and regulations. In the absence of applicable Argentinean regulation concerning safety or maintenance, the ANAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all such relevant technical standards.

Route Rights

Domestic Routes. In Argentina, airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes, and to comply with the technical requirements established by the local authority. There are no regulatory barriers preventing a foreign airline from creating an Argentine subsidiary and entering the Argentine domestic market using that subsidiary. However, ownership of such subsidiary by the foreign airline may not be direct, but through a subsidiary formed in Argentina, which in turn may be directly or indirectly owned by the foreign company. However, such subsidiary should operate Argentine-registered aircraft and employ Argentine aeronautical personnel.

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

International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Argentina and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Argentina, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the ANAC may terminate its rights to that route.

Airfare Pricing Policy. Argentine airlines are permitted to establish their own international fares without government regulation, as long as they do not abuse any dominant market position they may enjoy. However, there are government-fixed minimum prices for domestic flights. Government-fixed maximum prices were in place until February 3, 2016, when the government eliminated the controls that limited maximum prices, while retaining the minimum prices.

Peru

Aeronautical Regulation

The Peruvian DGAC (“PDGAC”) oversees and regulates the Peruvian aviation industry. The PDGAC reports directly to the Ministry of Transportation and Communications and is responsible for supervising compliance with Peruvian laws and regulations relating to air navigation. In addition, the PDGAC regulates the assignment of national and international routes, and the compliance with certain insurance requirements, and it regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authorizations from the Peruvian government to conduct flight operations, including authorization and technical operative certificates, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.

 

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Peru is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Peruvian authorities have incorporated into Peruvian laws and regulations. In the absence of an applicable Peruvian regulation concerning safety or maintenance, the PDGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.

Route Rights

Domestic Routes.Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the PDGAC.Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.

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

International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Peru and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Peru, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency, the PDGAC awards it through a public auction for a period of four years. The PDGAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline fails to operate a route for a period of 90 days or more, the PDGAC may terminate its rights to that route, although that has never happened in practice.

Ecuador

Aeronautical Regulation

There are two institutions that control commercial aviation on behalf of the State: (i) The National Civil Aviation Board (“CNAC”), which directs aviation policy; and (ii) the General Civil Aviation Bureau (“EDGAC”), which is a technical regulatory and control agency. The CNAC issues operating permits and grants operating concessions to national and international airlines. It also issues opinions on bilateral and multilateral air transportation treaties, allocates routes and traffic rights, and approves joint operating agreements such as wet leases and shared codes.

Fundamentally, the EDGAC is responsible for:

 

  ensuring that the national standards and technical regulations and international ICAO standards and regulations are observed;

 

  keeping records on insurance, airworthiness and licenses of Ecuadorian civil aircraft;

 

  maintaining the National Aircraft Registry;

 

  issuing licenses to crews;

 

  controlling air traffic control inside domestic air space;

 

  approving shared codes; and

 

  modifying operations permits.

The EDGAC also must comply with the standards and recommended methods of ICAO since Ecuador is a signatory of the 1944 Chicago Convention.

Route Rights

Domestic Routes.Airlines must obtain authorization from CNAC (an operating permit or concession) to provide air transportation. For domestic operations, only companies incorporated in Ecuador can operate locally, and only Ecuadorian-licensed aircraft and dry leases are authorized to operate domestically.

 

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International Routes.Permits for international operations are based on air transportation treaties signed by Ecuador or, otherwise, the principle of reciprocity is applied. All airlines doing business in Latin America that are incorporated in countries that are members of theComunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.

Airfare Pricing Policy.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.

Brazil

Aeronautical Regulation

The Brazilian aviation industry is regulated and overseen by the ANAC. The ANAC reports directly to the Civil Aviation Secretary, which is subordinated by the Federal Executive Power of this country. Primarily on the basis of Law No. 11.182/2005, ANAC was created to regulate commercial aviation, air navigation, the assignment of domestic and international routes, compliance with certain insurance requirements, flight operations, including personnel, aircraft and security standards, air traffic control, in this case sharing its activities and responsibilities with theDepartamento de Controle do Espaço Aéreo (Department of Airspace Control) (“DECEA”),which is a public secretary also subordinated to the Brazilian Defense Ministry, and airport management, in this last case sharing responsibilities with theEmpresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially (with the exception of Guarulhos International Airport, Viracopos International Airport and Brasilia International Airport, which were privatized in 2012 and are administrated by concession agreement).

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

ANAC is the Brazilian civil aviation authority and it is responsible for supervising compliance with Brazilian laws and regulations relating to air navigation. Brazil is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Brazilian authorities, represented by the Brazilian Defense Ministry, have incorporated into Brazilian laws and regulations. In the absence of an applicable Brazilian regulation concerning safety or maintenance, ANAC has incorporated by reference the majority of the ICAO’s technical standards.

Route Rights

Domestic Routes. Brazilian airlines 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 andnon-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operate them on a permanent basis. If an airline 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.

 

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Airfare Pricing Policy. Brazilian andnon-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.

Colombia

Aeronautical Regulation

The governmental entity in charge of regulating, directing and supervising civil aviation in Colombia is the Aeronáutica Civil (“AC”), a technical agency ascribed to the Ministry of Transportation. The AC is the aeronautical authority for the entire domestic territory, in charge of regulating and supervising the Colombian air space. The AC may interpret, apply and complement all civil aviation and air transportation regulation to ensure compliance with the Colombian Aeronautical Regulations (“RAC”). The AC also grants the necessary permits for air transportation.

Route Rights

The AC grants operation permits to domestic and foreign carriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit the company must comply with the RAC and fulfill legal, economic and technical requirements, to later be subject to public hearings where the public convenience and necessity of the service is considered. The same process must be followed to add national or international routes, 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 authority ceased to impose the obligation of charging a fuel surcharge for both domestic and international transportation of passengers and cargo. As of April 1, 2012, air carriers may now freely decide whether or not to charge a fuel surcharge. In the case that a fuel surcharge charged, it must be part of the fare, but shall be informed separately on the tickets, advertising or other methods of marketing used by the company.

In the same line, as of April 1, 2012 there is no longer any restriction on maximum fares published by the airlines or with respect to the obligations for air carriers to report to the Aeronautical civil authority the fares and conditions the day after being published.

Administrative fares are not subject to any changes, and its charge is mandatory for the transport of passengers under Aeronautical Civil Regulations. Differential administrative fares apply to ticket sales made through internet channels.

Antitrust Regulation

The Chilean antitrust authority, which we refer to as the Antitrust Court (previously the Antitrust Commission), oversees antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the Antitrust Law. The Antitrust Law prohibits any entity from preventing, restricting or distorting competition in any market or any part of any market. The Antitrust Law also prohibits any business or businesses that have a dominant position in any market or a substantial part of any market from abusing that dominant position. An aggrieved person may sue for damages arising from a breach of Antitrust Law and/or file a complaint with the Antitrust Court requesting an order to enjoin the violation of the Antitrust Law. The Antitrust Court has the authority to impose a variety of sanctions for violations of the Antitrust Law, including termination of contracts contrary to the Antitrust Law, dissolution of a company and imposition of fines and daily penalties on businesses. Courts may award damages and other remedies (such as an injunction) in appropriate circumstances. As described above under “—Route Rights—Airfare Pricing Policy,” in October 1997, the Antitrust Court approved a specific self-regulatory fare plan for us consistent with the Antitrust Court’s directive to maintain a competitive environment within the domestic market.

Since October 1997, LATAM and LATAM Chile 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.

 

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As a condition to the combination between LAN and TAM in June 2012, the antitrust authorities in Chile and in Brazil each imposed certain mitigation measures as part of their approval of the combination . Furthermore, the association was submitted to the antitrust authorities in Germany, Italy and Spain. All these jurisdictions granted unconditional clearances for this transaction. The association was filed with the Argentinean antitrust authorities, which approval is still pending. For more information regarding these mitigation measures please see below:

Chile

On September 21, 2011, the TDLC issued a decision (the “Decision”) with respect to the consultation procedure initiated on January 28, 2011 in connection with the proposed combination between LAN and TAM. The TDLC, in the Decision, approved the proposed combination between LAN and TAM, subject to 14 conditions, as generally described below:

 

 1.exchange of certain slots in the Guarulhos Airport at Sao Paulo, Brazil;

 

 2.extension of the frequent flyer program to airlines operating or willing to operate theSantiago-Sao Paulo,Santiago-Río de Janeiro, Santiago-Montevideo and Santiago-Asunción routes during the five-year period from the effective time of the combination;

 

 3.execution of interline agreements with airlines operating theSantiago-Sao Paulo,Santiago-Río de Janeiro and Santiago-Asunción routes;

 

 4.certain capacity and other transitory restrictions applicable to theSantiago-São Paulo route;

 

 5.certain amendments to LAN’s self-regulatory fare plan approved by the TDLC with respect to LAN’s domestic passenger business;

 

 6.the obligation of LATAM to renounce to one global airline alliance within 24 months from the date in which the combination becomes effective, except in the case that the TDLC approves otherwise, or to elect not to participate in any global airline alliance;

 

 7.certain restrictions on code-sharing agreements outside the global airline alliance to which LATAM belongs for routes with origin or destination in Chile or that connect to North America and Europe, or with Avianca/TACA or Gol for international routes in South America, including the obligation to consult with, and obtain approval from, the TDLC prior to its execution of certain of those codeshare agreements;

 

 8.the abandonment of four air traffic frequencies with fifth freedom rights between Chile and Perú and limitations on acquiring in excess of 75%, as applicable, of the air traffic frequencies in that route and the period that certain air traffic frequencies may be granted by the Chilean air transport authorities to LATAM;

 

 9.issuance of a statement by LATAM supporting the unilateral opening of the Chilean domestic skies (cabotage) and abstention from any actions that would prevent such opening;

 

 10.promotion by LATAM of the growth and normal operation of the Guarulhos (Brazil) and Arturo Merino Benítez (Chile) airports, to facilitate access thereto to other airlines;

 

 11.certain restrictions regarding incentives to travel agencies;

 

 12.to maintain temporarily 12 round trip flights per week between Chile and the United States and at least seven round tripnon-stop flights per week between Chile and Europe;

 

 13.certain transitory restrictions on increasing fares in theSantiago-Sao Paulo andSantiago-Río de Janeiro routes for the passenger business and for theChile-Brazil routes for the cargo business; and

 

 14.engaging an independent consultant, expert in airline operations, which for 36 months, and in coordination with the FNE, will monitor and audit compliance with the conditions imposed by the Decision.

 

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On or about June 2015, the FNE initiated a legal claim against LATAM before the TDLC alleging that LATAM was not complying with certain mitigation conditions related to the code share agreements with airlines outside LATAM’s global alliance as referenced above. Although LATAM opposed this allegation and responded the claim accordingly, a settlement agreement was reached between the FNE and LATAM. The Settlement Agreement approved by the TDLC on December 22, 2015 terminated the legal proceeding initiated by the FNE and did not establish any violation of the TDLC resolutions or any applicable antitrust regulations by LATAM. The Agreement did establish the obligation of LATAM to amend/terminate certain code share agreements and contract an independent third party consultant, which would act as an advisor to the FNE to monitor the compliance by LATAM of the Seventh Condition and the Agreement.

Brazil

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

C. ORGANIZATIONAL STRUCTURE

LATAM operates through seven main airlines: LATAM Airlines Group S.A., incorporated in Chile; Transporte Aéreo S.A. (“LATAM Airlines Chile”), a Chilean subsidiary; LAN Peru S.A. (“LATAM Airlines Peru”), a Peruvian subsidiary, Aerolane, Líneas Aéreas Nacionales del Ecuador S.A. (“LATAM Airlines Ecuador”), and Ecuadorian subsidiary, LAN Argentina S.A. (“LATAM Airlines Argentina,” previously Aero 2000 S.A.), an Argentinian subsidiary, Aerovías de Integración Regional, Aires S.A. (“LATAM Airlines Colombia”), a Colombian subsidiary; TAM Linhas Aereas S.A. (“LATAM Airlines Brazil”) incorporated in Brazil; and Transportes Aéreos del Mercosur S.A. (“LATAM Airlines Paraguay”), a Paraguayan subsidiary.

As of January 31, 2017 we held a 100% stake in Transporte Aéreo S.A. through direct and indirect interests, a 70% stake in LAN Peru through direct and indirect interests, a 55.00% stake of the voting shares of LAN Ecuador and a 100% of thenon-voting shares of Holdco Ecuador S.A., who has 45.00% of the voting shares of LAN Ecuador, a 95% indirect stake in LAN Argentina, a 99.19% indirect stake in LAN Colombia and a 100.00% stake of thenon-voting shares of TAM, and 48.99% of the voting shares and 100% ofthenon-voting of Holdco I S.A., who has 100.00% of the voting shares of TAM. Following changes in Brazilian law, which now permit foreign persons to own up to 49% of the voting capital of Brazilian airlines, on April 20, 2016, we increased our ownership of the voting shares of Holdco I S.A. to 48.99%. For a description of the 2012 combination with TAM, including TAM’s operating structure, see “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM.”

Our cargo operations are carried out by our affiliates under the new brand LATAM Cargo. Our cargo operations are complemented by the operations of certain related companies, such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”) in Mexico, Aerolinhas Brasileiras S.A. (“ABSA”) in Brazil and Linea Aérea Carguera de Colombia S.A. (“LANCO”) in Colombia. As of January 31, 2016, we indirectly held 100% of thenon-voting shares and 24.99% of the voting shares of MasAir, 100% of thenon-voting shares and 20% of the voting shares of ABSA, and a 90% stake in LANCO through direct and indirect participations. TAM S.A. has 100% of thenon-voting shares and 100% of the voting shares of ABSA. Following the combination between LAN and TAM, we have coordinated the operations of ABSA and TAM Cargo in Brazil. In the cargo business, we market ourselves primarily under the LATAM Cargo brand internationally.

D. PROPERTY, PLANT AND EQUIPMENT

Chile

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 andmock-up cabins used for crew instruction.

In addition, we occupy 17,715 square feet for our executive offices in a more central location of Santiago, Chile. This space includes five floors owned by LATAM in one building and 16 leased floors in an adjacent building. We also own one additional floor of 11,840 square feet at the Arrau Building in Santiago, Chile.

 

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Maintenance Base

Our 877,258 square foot 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 foot office building plus a 10,000 square foot 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 a duration of 14 years.

Other Facilities

We own sixteen acres of land and a building on the west side of the Comodoro Arturo Merino Benítez International Airport that houses a flight-training center. This facility features three full-flight simulators for Boeing 767, Airbus A320 and Boeing 737 aircraft.

Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our affiliates that operates import customs warehouses, utilizes an import warehouse and office building at the Comodoro Arturo Merino Benítez International Airport. This 172,000 square foot building was developed in conjunction with two other operators. We have leased these facilities since 2004 and we will continue to operate there until March 2017. During April 2017, we will transfer our operations to a 5,600 m² warehouses located at Comodoro Arturo Merino Benítez International Airport.

Brazil

Headquarters

LATAM Airlines Brazil’s main facilities are located in São Paulo, in hangars within the Congonhas Airport and nearby. At Congonhas Airport, LATAM Airlines Brazil leases office facilities in converted hangars belonging to INFRAERO (the Local Airport Administrator). These facilities comprise 60,380 m².

The LATAM Service Academy is located at Rua Atica, about 2.5 km from Congonhas Airport. This property, which LATAM Airlines Brazil owns, is used for human resources selection, medical services, training,mock-ups and offices- The Service Academy comprises 15,342 m² of land area and 9,032 m² of building area.

We also lease office space for corporate purposes in the city of São Paulo, where we operate 1,500 workstations distributed in 11 floors.

Base Maintenance

At Hangars II and V in Congonhas Airport, which TAM leases from INFRAERO, LATAM Airlines Brazil has 21,727 m² of offices and hangars with about 1,300 workstations. This site also houses the aircraft maintenance, procurement, aeronautical materials logistics and retrofitting departments.

Headquarters of the Presidency

Completed in 2013, the Headquarters of the Presidency has an area of 5,066 m², space for 641 workstations. The headquarters is located at the Tower Bridge Building in the Brooklin region of São Paulo.

Other Facilities

In São Paulo, LATAM Airlines Brazil has other facilities, including: Uniform Building, used for storage and delivery of uniforms; a Call Center Building with 3,199 m2, distributed over 5 floors (plus a ground floor and a basement) that currently holds about 400 workstations and support rooms (meetings / training / dining room / coordination) of the operations of Call Center Reservations, Talk to People and LATAM Cargo Brazil back office.

In Guarulhos, LATAM has a total area of approximately 12,894 m2 distributed within the Passenger Terminal, including areas such asCheck-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 8,534 m2 of open area. Our Distribution Centre Supplies area occupies 3,030 m2.

 

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New Facilities

TAM completed several infrastructure projects in Brazil during 2016. The main highlights are:

1. New Cargo Warehouses in Fortaleza and Rio de Janeiro: total of 3,500 m².

2. Terminal transfers in São Paulo- Viracopos and Goiânia: total of 250 m².

3. Relocation of office areas in Rio de Janeiro and São José do Rio Preto: total of 650 m².

4. Improvement of Hangar 3 at Congonhas: 4,060 m2.

Other locations

We occupy a 36.3 acre site at the Miami International Airport that has been leased to us under a concession agreement by the Miami Dade Aviation Department. Our facilities include a 44,650 square feet corporate building, a 380,000 square feet cargo warehouse (including an 116,670 square meter cooling area) and a 783,000 square feet aircraft-parking platform. These facilities were constructed and are now leased to us under a long-term contract by Aero Term, a division of Real Term Global. The rent we pay annually for all facilities totals US$9.6 million.

In June 2016 we received the final occupancy permit for a new hangar at the Miami International Airport. The property has a 50,785 square feet aircraft maintenance space, sufficient to house a Boeing B777 aircraft, in addition to a 32,440 square feet area designated for office space.

In addition, LATAM holds leases to airport concessions, administrative and sale offices, hangars and maintenance areas in Argentina, Colombia, Ecuador, and Peru.

 

ITEM 4AUNRESOLVED STAFF COMMENTS

None.

 

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the accompanying notes beginning on pageF-1 of this annual report.

The summary consolidated annual financial information as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 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 2016, 82.7% of our total revenues (including for this purpose other income from operating activities) came from passenger revenues and 11.7% came from our cargo business. The remaining 5.7% was classified as other operating income, which consists primarily of revenues generated from our coalition and loyalty program Multiplus, tour operator services, aircraft leasing, customs and warehouseing services, third-party maintenance, duty free sales and other miscellaneous income.

Our operating environment in 2016 was marked by a generally weak macroeconomic environment in Latin America, including slower GDP growth or GDP contraction. In Brazil specifically, where GDP declined by 3.5% in 2016, the macroeconomic environment was marked by political corruption issues leading to a marked decrease in business and consumer confidence levels. LATAM Airlines Group successfully managed capacity throughout its markets in order to address this challenging environment, and continued to rationalize capacity in line with demand conditions on both domestic and international operations in the Brazilian market.

Passenger Operations

In general, our passenger revenues are driven by international and country-specific political and economic conditions, competitive activity, and the attractiveness of the destinations that we serve. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. Our capacity is measured in terms of available seat kilometers, or ASKs, which represents the sum, across our network, of the number of seats we make available for sale on each flight, multiplied by the kilometers flown by the respective flight. We measure traffic in RPKs, as the sum, across our network, of the number of passengers on each flight multiplied by the number of kilometers flown by the respective flight. Load factors represent RPKs (traffic) as a percentage of ASKs (capacity), or the percentage of our capacity that is actually used by paying customers. Last, 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—A. Selected Financial Data.”

 

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Passenger demand over the past years has been affected as a result of weaker economic environments in some Latin American countries, reflected in slower GDP growth trends and depreciated currencies, and increases in competition from operators to South America and within the region.

During 2016, domestic operations of our affiliate carriers based in the Spanish speaking countries (“SSC”, which includes Chile, Peru, Argentina, Colombia and Ecuador) continued to show growth in terms of traffic and remained profitable, in spite of the economic slowdown in some countries. Our SSC business in 2016 grew at a higher pace than in 2015; we increased capacity (as measured in ASKs) by 8.0% as compared to 2015, in line with our 8.0% growth in passenger traffic (as measured in RPKs), maintaining our load factors at 80.9%. However, yields in the SSC domestic markets continue to be under pressure, due largely to the decline of fuel prices, the depreciation of local currencies, (mainly the Argentinian Peso and the Colombian Peso, which depreciated by 59.2% and 11.0% respectively, during 2016), and increased competition in certain markets. The combination of these factors resulted in a 16.5% decline in revenue per ASK in US dollars as compared to 2015.

In our domestic operations in Brazil, we continued to adjust capacity in response to a weak demand environment. LATAM Airlines Brazil reduced capacity (as measured by ASKs) by 11.5%, while passenger traffic (as measured in RPKs) decreased by 10.7%, allowing for an improvement of 0.8 percentage points in load factors, which reached a healthy 82.3%. LATAM Airlines Brazil ended the year with an increase of 6.3% in our revenues per ASK in Brazilian Reais as compared to 2015. Moreover, during the fourth quarter of 2016, revenues per ASK (RASK) increased by 34.8% as compared to the same quarter of 2015, driven by a 14.8% increase in RASK in BRL as well as by the 14.3% average appreciation of the Brazilian Real.

In our international operations, we increased our passenger capacity by adding new destinations and strengthening the use of our regional hubs, consistent with the Company’s focus on network improvements. Brazilian international demand was also adversely affected by the weak macroeconomic conditions in the country. For this reason, LATAM Airlines Brazil reduced its capacity on routes with weaker demand, specifically between Brazil and the US, with a significant recovery in unit revenues as compared to 2015, especially in the second half of the year. On the other hand, the other affiliates added capacity on healthy routes, primarily from the Spanish Speaking Countries to destinations in the US and Europe. As a result, capacity in those markets (as measured by ASKs) increased by 5.6%, while traffic (as measured in RPKs) increased 7.4%, resulting in an improvement of 1.4 percentage points in load factors, which reached 86.2%, while the revenue per ASK (RASK) declined 9.9% in US dollars. A portion of the RASK decline is related to lower fuel prices and devaluation of local currencies during 2016 as compared to 2015.

Although 2016 was a challenging year, with weakening regional economies and recession in Brazil, devalued local currencies and high inflation rates in certain countries, LATAM continues to be the best positioned airline group in Latin America to respond to these challenging conditions, as we continue to improve our margins, generate cash flow and deleverage our balance sheet, showing the resilience of our business model. Our management has been proactive in addressing these economic challenges. We continue to pursue initiatives to further reduce costs, and we also successfully restructured our fleet commitments to adapt fleet deliveries to the current demand environment in the region, reaching historically low levels of fleet commitments for 2017.

Cargo Operations

Our cargo operations depend on exports from South America to North America and Europe, and imports from North America and Europe to South America, where Brazil is the main import market. Cargo markets are affected by economic conditions, foreign exchange rates, changes in international trade, the health of particular industries and competition and fuel prices (which we usually pass on to our customers through a cargo fuel surcharge). Cargo revenues are affected by our capacity, traffic, load factors and yield. Our capacity is measured in terms of available ton kilometers, or ATKs, which represents the number of tons available across our network for the transportation of cargo on each flight, multiplied by the kilometers flown by the respective flights. We measure traffic in revenue ton kilometers, or RTKs, as the amount of cargo loads (measured in tons) on each flight multiplied by the number of kilometers flown by the respective flights. Load factors represent RTKs (traffic) as a percentage of ATKs (capacity), or the percentage of our cargo capacity that is actually used to transport cargo for our customers.

Finally, we use cargo yield, or revenue from cargo operations divided by RTKs, to measure the average amount that our customers pay to transport one ton of cargo one kilometer.

During 2016, cargo traffic decreased 8.7%, reflecting a challenging scenario in Latin American cargo markets mainly due to a strong decline in Brazilian imports affected by recessionary conditions and currency devaluation. However, Latin American exports remain at healthy levels, notwithstanding lower production in the salmon industry in Chile. Revenues per ATK declined by 8.5% as fares continued to be pressured by the competitive landscape and low fuel prices. The Company continued its rational and disciplined approach toward freighter capacity utilization, while focused on maximizing the belly utilization of our passenger fleet. Consistent with this approach, we are currentlysub-leasing three of our767-300Fs and one of our777-200Fs to a third party operating in a different market.Our cargo capacity decreased by 5.3% in 2016, resulting in a load factor of 51.7%.

 

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Cost Structure

LATAM Airlines Group’s costs are largely driven by the size of our operations, fuel prices, fleet costs and exchange rates. Our operating expenses are calculated in accordance with IFRS and comprise the sum of the line items “cost of sales” plus “distribution costs” plus “administrative expenses” plus “other operating expenses,” as shown on our consolidated statement of comprehensive income. These operating expenses include wages and benefits, fuel, depreciation and amortization, commissions to agents, aircraft rentals, other rental and landing fees, passenger services, aircraft maintenance and other operating expenses. The following is a discussion of the drivers of the most important costs.

As an airline, we are subject to fluctuations in costs that are outside of our control, particularly fuel prices. At the end of 2015, fuel prices were relatively low, principally due to an aggregate excess supply from exporter countries (mainly OPEC members and Russia), which offset the lower production by shale oil companies in the U.S. In 2016, fuel prices followed the same trend largely due to the agreement reached by Iran and the largest economies regarding Iran’s nuclear program, ending the penalties imposed on that country’s oil exports. However, the concerns and speculations regarding the actual implementation of this agreement put pressure on fuel prices toward the end of 2016. LATAM Airlines Group has a hedging policy to protect medium term liquidity risk from fuel price increases, while participating of benefits from fuel price reduction. Cost of fuel is also affected by the amount of gallons we consume, which depends on the size of our operation, the efficiency of our fleet and the impact of our efficiency programs.

Personnel expenses are another significant component of our overall costs. Because a significant portion of our labor costs 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. Other important drivers of personnel expenses are average headcount and average wages.

Commissions paid to travel and cargo agents are also a significant cost to the Company. We compete with other airlines over the amount of commission we pay per sale, particularly in connection with special programs and marketing efforts, and to maintain competitive incentives with travel agents.

Fleet related expenses, namely aircraft rentals and depreciation, are another significant cost, and mainly depend on the number and type of aircraft that are owned and that are under operating leases. These costs are largely fixed and can be reduced on a per unit basis by achieving higher aircraft utilization rates.

Results of Operations

LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2016 compared to year ended December 31, 2015.

The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2016, and December 31, 2015. For certain operating data for these periods, see “Item 3. Key Information—A. Selected Financial Data.”

 

   Year Ended December 31, 
   2016  2015  2016  2015  2016/2015
% change
 
   (in US$ millions, except per
share and capital stock data)
  As a percentage of total
operating revenues
  

Consolidated Results of Income by Function

      

Operating revenues

      

Passenger

   7,877.7   8,410.6   87.6  86.4  (6.3%) 

Cargo

   1,110.6   1,329.4   12.4  13.6  (16.5%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating revenues

   8,988.3   9,740.0   100.0  100.0  (7.7%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of sales

   (6,967.0  (7,636.7  (77.5%)   (78.4%)   (8.8%) 

Gross margin

   2,021.3   2,103.3   22.5  21.6  (3.9%) 

Other operating income

   538.7   385.8   6.0  4.0  39.6

Distribution costs

   (747.4  (783.3  (8.3%)   (8.0%)   (4.6%) 

Administrative expenses

   (873.0  (878.0  (9.7%)   (9.0%)   (0.6%) 

Other operating expenses

   (373.7  (324.0  (4.2%)   (3.3%)   15.4

Financial income

   74.9   75.1   0.8  0.8  (0.3%) 

Financial costs

   (416.3  (413.4  (4.6%)   (4.2%)   0.7

Share of profit of investments accounted for using the equity method

   0.0   0.0   0.0  0.0  0.0

Foreign exchange gains/(losses)

   121.7   (467.9  1.4  (4.8%)   (126.0%) 

 

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   Year Ended December 31, 
   2016  2015  2016  2015  2016/2015
% change
 
   (in US$ millions, except per
share and capital stock data)
  As a percentage of total
operating revenues
  

Result of indexation units

   0.3   0.6   0.0  0.0  (50.0%) 

Other gains/(losses)

   (72.6  (55.3  (0.8%)   (0.6%)   31.3
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   273.9   (357.1  3.1  (3.5%)   (17.7%) 

Income (loss) tax expense

   (163.2  178.4   (1.8%)   1.8  (16.2%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) for the period

   110.7   (178.7  1.3  (1.7%)   (38.1%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) for the period attributable to the parent company’s equity holders

   69.2   (219.3  0.8  (2.3%)   (131.6%) 

Income (loss) for the period attributable tonon-controlling interests

   41.5   40.5   0.5  0.4  2.2

Net income (loss) for the period

   110.7   (178.7  1.3  (1.7%)   (38.1%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share

      

Basic earnings per share (US$)

   0.12665   (0.40193  n.a.   n.a.  (131.5%) 

Diluted earnings per share (US$)

   0.12665   (0.40193  n.a.   n.a.  (131.5%) 

 

*The abbreviation “n.a.” means not available.

Net Income

Net income for the year ended December 31, 2016 equaled US$110.7 million, representing an improvement of US$289.4 million from a net loss of US$178.7 million in 2015. Net income attributable to the parent company’s shareholders was US$69.2 million in 2016, compared with a net loss of US$219.3 million in 2015. Results were positively impacted by a foreign exchange gain of US$ 121.7 million, compared to a net foreign exchange loss of US$467.9 million in 2015.

Operating Revenues

Our total operating revenues decreased by 7.7% to US$8,988.3 million in the year ended December 31, 2016 compared to revenues of US$9,740.0 million in 2015. The 2016 decrease in operating revenues was attributable to a 6.3% decrease in passenger revenues, and a 16.5% decrease in cargo revenues. Passenger and cargo revenues accounted for 87.6% and 12.4% of total operating revenues in 2016, respectively.

Our consolidated passenger revenues decreased by 6.3% to US$7,877.7 million in 2016 from US$8,410.6 million in 2015, as a result of a decrease of 6.9% in our unit revenues (“RASK”). Our capacity increased by 0.6%. The increase in capacity was a result of an 8.0% increase in our domestic Spanish-speaking countries operations and a 5.6% increase in our international operations, partially offset by a decrease of 11.5% in capacity in our domestic Brazil operations. Decreases in RASK reflect a decrease of 8.1% in consolidated yields, resulting from the slowdown in economic activity in the region, the depreciation of local currencies, a more competitive environment, and the pass-through of the savings in fuel costs to customers.

Cargo revenues decreased by 16.5%, to US$1,110.6 million in 2016 from US$1,329.4 million in 2015, as a result of a decrease of 5.3% in capacity (ATK) and a decrease of 11.7% in unit revenues (“RATK”). Capacity decreased in our cargo operations mainly as a result of a reduced freighter operation. Decreases in RATK reflect the still challenging cargo scenario in South America and in particular the weakness of the imports into the region, mainly to Brazil from North America and Europe, which has affected our cargo yields, which decreased by 8.5% in 2016 as compared to 2015.

Cost of Sales

Cost of sales decreased by 8.8% to US$6,967.0 million for the year ended December 31, 2016 (from US$7,636.7 million in 2015), mainly due to lower fuel expenses during the year and the positive impact of the depreciation of local currencies as well as our ongoing cost reduction program. As a percentage of total operating revenues, cost of sales decreased from 78.4% in 2015 to 77.5% in 2016.

 

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The table below presents cost of sales information for the fiscal year ended December 31, 2016 and 2015.

 

   Year Ended December 31, 
   2016  2015  2016  2015  2016/2015
% change
 
   

(in US$ millions, except

as otherwise stated)

  

As a percentage of total

operating revenues

    

Revenues

   8,988.3   9,740.0   100.0  100.0  (7.8%) 

Cost of sales

   (6,967.0  (7,636.7  (77.5%)   (78.4%)   (8.8%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Aircraft Fuel

   (2,056.6  (2,651.1  (22.9%)   (27.2%)   (22.4%) 

Wages and Benefits

   (1,479.5  (1,553.8  (16.5%)   (16.0%)   (4.8%) 

Other Rental and Landing Fees

   (1,077.4  (1,109.8  (12.0%)   (11.4%)   (2.9%) 

Depreciation and Amortization

   (960.3  (934.4  (10.7%)   (9.6%)   2.8

Aircraft Rentals

   (569.0  (525.1  (6.3%)   (5.4%)   8.3

Aircraft Maintenance

   (366.2  (437.2  (4.1%)   (4.5%)   (16.3%) 

Passenger Services

   (286.6  (295.4  (3.2%)   (3.0%)   (3.0%) 

Other Costs of Sales

   (171.4  (129.9  (2.8%)   (1.3%)   49.8

The decrease in our cost of sales was driven by lower aircraft fuel expenses, which decreased by 22.4% to US$2,056.6 million in 2016 as a result of a 16.6% decrease in the full year average fuel price (excluding hedge). LATAM recognized a net loss of US$48.0 million in fuel hedging in 2016, compared to a fuel hedge loss of US$239.4 million in 2015. In 2016, the Company also recognized a US$40.3 million hedge loss related to foreign currency contracts, which were recognized in the fuel cost line compared to a US$19.2 gain million in 2015.

Depreciation and amortization increased by US$25.9 million, amounting to US$960.3 million, which represents an increase of 2.8% due to the increase in the number of owned aircraft, partially offset by the positive impact of the 4.5% depreciation of the Brazilian real.

Other rental and landing fees decreased by 2.9% to US$1,077.4 million in 2016 from U$1,109.8 million in 2015, mainly due to a decline in the rental of passenger and cargo capacity from third parties as well as lower handling costs.

Aircraft maintenance expenses decreased by 16.3%, from US$437.2 million in 2015 to US$366.2 million in 2016, mainly due to cost efficiencies related with the renewal of our fleet and lower maintenance expenses related to the redelivery of aircraft.

Aircraft rentals increased by 8.3% to US$569.0 million in 2016 from US$525.1 million in 2015 as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s and Airbus A350s), whereas returned aircraft have mainly been older models (i.e. Airbus A319s and A330s).

Passenger service expenses decreased by 3.0%, to US$286.6 million in 2016 compared to US$295.4 million in 2015, due mainly to a decrease of 1.3% in the number of passengers transported, as well as the decrease in on board services expenses, offset in part by an increase in passenger compensation.

As a result of the above, gross margin(defined as operating revenue minus cost of sales)decreasedby 3.9% from US$2,103.3 million in 2015 to US$2,021.3 million in 2016.

Other Consolidated Results

Other operating income increased in 2016 by 39.6%, from US$385.8 million in 2015 to US$538.7 million in 2016, mainly due to a US$80.1 million gains derived from aircraft sales and leaseback transaction (resulting in an operating lease) as well as a US$41.8 million increase in revenues from freighter aircraft leases and sales of fixed assets.

Distribution costs decreased by 4.6% from US$783.3 million in 2015 to US$747.4 million in 2016, mainly as a result of lower commissions to agents (which decreased by 11.1%, from US$302.8 million to US$269.3 million), in both the passenger and cargo businesses, representing a greater percentage decline than the 7.7% decline in passenger and cargo revenues.

Administrative expenses decreased by 0.6% from US$878.0 million in 2015 to US$873.0 million in 2016, mainly due to a decrease of 4.8% in wages and benefits (as a result of a 6.2% decline in average headcount), as well as the positive impact of the depreciation of certain local currencies on wages denominated in those currencies.

 

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Other operating expenses increased by 15.4% from US$324.0 million in 2015 to US$373.7 million in 2016, driven by higher costs associated with fleet sales and redeliveries, and due to lower cost in 2015 as a result of negotiations with third parties relating to our passenger service system.

Financial income was essentially unchanged US$74.9 million in the year ended December 31, 2016 compared with US$75.1 million in 2015).

Financial costs increased by 0.7% to US$416.3 million in 2016 from US$413.4 million in 2015, mainly due to base interest rate increases on floating rate debt.

Exchange rate differences increased to a gain of US$121.7 million in 2016 from a loss of US$467.9 million in 2015, mainly resulting from the 16.5% appreciation of the Brazilian real between December 31, 2015 and December 31, 2016.

Income tax expense for 2016 amounted to US$163.2 million, as compared to an income tax benefit of US$178.4 million in 2015. This variation is explained mainly by improvedpre-tax results in 2016 (US$273.9 million gain) compared with 2015 (US$357.1 million loss) resulting in increased income tax charges of US$196 million; thenon-recognition of deferred taxes related to tax losses in Brazil from the fourth quarter of 2015(non-recognition of US$90.4 million in 2016 vs US$16.9 million in 2015); the reversal in 2016 of tax provisions in Brazil in the amount of US$61.2 million in 2015; and other items of US$10 million. For more information, see Note 18 to our audited consolidated financial statements.

Out of Period Adjustments

The Company recorded out of period adjustments resulting in an aggregate net decrease of US$18.2 million to “Net income (loss) for the period” for the year ended December 31, 2016. These adjustments include a loss of US$39.5 million resulting from an account reconciliation process initiated after TAM S.A. and its subsidiaries completed the implementation of the SAP system. A further US$11.0 million decrease reflects adjustments related to foreign exchange differences, also relating to the Company’s subsidiaries in Brazil. The balance of US$32.3 million includes mainly the adjustment of unclaimed fees for expired tickets for the Company and its affiliates outside Brazil. Management of TAM S.A. has concluded that the out of period adjustments that have been identified are material to the 2015 financial statements of TAM S.A., which should therefore require a restatement of TAM’s financial statements. However, LATAM has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that due to their relative size and to qualitative factors they are not material to the annual consolidated financial statements of LATAM for the year ended December 31, 2016, or to any previously reported consolidated financial statements, therefore no restatement or revision is necessary.

LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2015 compared to year ended December 31, 2014.

The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2015, and December 31, 2014. For certain operating data for these periods, see “Item 3. Key Information—A. Selected Financial Data.”

 

   Year Ended December 31, 
   2015  2014  2015  2014  2015/2014
% change
 
   (in US$ millions, except per
share and capital stock data)
  As a percentage of total
operating revenues
  

Consolidated Results of Income by Function

      

Operating revenues

      

Passenger

   8,410.6   10,380.1   86.4  85.8  (19.0%) 

Cargo

   1,329.4   1,713.4   13.6  14.2  (22.4%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating revenues

   9,740.0   12,093.5   100.0  100.0  (19.5%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cost of sales

   (7,636.7  (9,624.5  (78.4%)   (79.6%)   (20.7%) 

Gross margin

   2,103.3   2,469.0   21.6  20.4  (14.8%) 

Other operating income

   385.8   377.6   4.0  3.1  2.2

Distribution costs

   (783.3  (957.1  (8.0%)   (7.9%)   (18.2%) 

Administrative expenses

   (878.0  (980.7  (9.0%)   (8.1%)   (10.5%) 

Other operating expenses

   (324.0  (401.0  (3.3%)   (3.3%)   (19.2%) 

Financial income

   75.1   90.5   0.8  0.7  (17.0%) 

Financial costs

   (413.4  (430.0  (4.2%)   (3.6%)   (3.9%) 

 

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   Year Ended December 31, 
   2015  2014  2015  2014  2015/2014
% change
 
   (in US$ millions, except per
share and capital stock data)
  As a percentage of total
operating revenues
  

Share of profit of investments accounted for using the equity method

   0.0   (6.5  0.0  (0.1%)   100.0

Foreign exchange gains/(losses)

   (467.9  (130.2  (4.8%)   (1.1%)   259.4

Result of indexation units

   0.6   0.1   0.0  0.0  500.0

Other gains/(losses)

   (55.3  33.5   (0.5%)   0.3  (265.0%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   (357.1  65.2   (3.4%)   0.4  (647.6%) 

Income (loss) tax expense

   178.4   (292.4  1.8  (2.4%)   39.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) for the period

   (178.7  (227.2  (1.6%)   (2.0%)   (21.3%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) for the period attributable to the parent company’s equity holders

   (219.3  (260.0  (2.2%)   (2.2%)   (15.7%) 

Income (loss) for the period attributable tonon-controlling interests

   40.5   32.8   0.4  0.3  23.5

Net income (loss) for the period

   (178.7  (227.2  (1.8%)   (1.9%)   (161.0%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share

      

Basic earnings per share (US$)

   (0.40193  (0.47656  n.a.   n.a.  (15.7%) 

Diluted earnings per share (US$)

   (0.40193  (0.47656  n.a.   n.a.  (15.7%) 

 

*The abbreviation “n.a.” means not available.

Net Income / Loss

Net loss for the year ended December 31, 2015 equaled US$ 178.7 million, representing an improvement of US$ 48.5 million from a net loss of US$227.2 million in 2014. Net loss attributable to the parent company’s shareholders improved to US$ 219.3 million in 2015 from US$260.0 million in 2014. Results for 2015 include an US$ 80 million provision recognized during the fourth quarter of the year for aircraft redelivery costs associated with the 2016phase-out of the Airbus A330 (for more information, see Financial Statements Note 27 (e) – Restructuring Costs). Results were also impacted by a foreign exchange loss of US$ 467.9 million, (mainly resulting from the 49.0% depreciation of the Brazilian real between December 31, 2014 and December 31, 2015, and a US$41.0 million charge related to the adjustment in the exchange rate of cash held in Venezuela), as compared to a foreign exchange loss of US$130.2 million in 2014.

Operating Revenues

Our total operating revenues decreased by 19.5% to US$ 9,740.0 million for the year ended December 31, 2015, compared to revenues of US$ 12,093.5 million in 2014. The 2015 decrease in operating revenues was attributable to a 19.0% decrease in passenger revenues, and a 22.4% decrease in cargo revenues. Passenger and cargo revenues accounted for 86.4% and 13.6% of total operating revenues (defined as revenues from passenger and cargo operations, plus other operating income) in 2015, respectively.

Our consolidated passenger revenues decreased by 19.0% to US$8,410.6 million in 2015 from US$10,380.1 million in 2014, largely as a result of a decrease of 21.4% in our unit revenues (RASK). Our capacity increased by 3.1%. The increase in capacity was a result of a 6.4% increase in our international operations and a 4.8% increase in our domestic Spanish-Speaking Countries operations, and was partially offset by a decrease of 2.5% in capacity in our domestic Brazil operations. Decreases in RASK reflect a decrease of 21.1% in consolidated yields, resulting from the slowdown in economic activity in the region and depreciation of local currencies, mainly in Brazil.

Cargo revenues decreased by 22.4%, to US$1,329.4 million in 2015 from US$1,713.4 million in 2014, as a result of a decrease of 1.9% in capacity (ATK) and a decrease of 20.9% in unit revenues (RATK). Capacity decreased in our cargo operations mainly as a result of a reduced freighter operation and thesub-lease of two additional aircraft to another company. Decreases in RATK reflect the still challenging cargo scenario in South America and in particular the weakness of the imports into the region, mainly to Brazil, which have affected our cargo yields. During 2015, cargo yields decreased by 11.8% as compared to 2014.

 

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Cost of Sales

Cost of sales decreased by 20.7% to US$7,636.7 million in the year ended December 31, 2015 from US$9,624.5 million in 2014, mainly due to lower fuel expenses in the year. As a percentage of total operating revenues, cost of sales decreased from 79.6% in 2014 to 78.4% in 2015.

The table below presents cost of sales information for the fiscal year ended December 31, 2015 and 2014.

 

   Year Ended December 31, 
   2015  2014  2015  2014  2015/2014
% change
 
   

(in US$ millions, except

as otherwise stated)

  

As a percentage of total

operating revenues

    

Revenues

   9,740.0   12,093.5   100.0  100.0  (19.5%) 

Cost of sales

   (7,636.7  (9,624.5  (78.4%)   (79.6%)   (20.7%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Aircraft Fuel

   (2,651.1  (4,167.0  (27.2%)   (34.5%)   (36.4%) 

Wages and Benefits

   (1,553.8  (1,751.3  (16.0%)   (14.5%)   (11.3%) 

Other Rental and Landing Fees

   (1,109.8  (1,327.2  (11.4%)   (11.0%)   (16.4%) 

Depreciation and Amortization

   (934.4  (991.3  (9.6%)   (8.2%)   (5.7%) 

Aircraft Rentals

   (525.1  (521.4  (5.4%)   (4.3%)   0.7

Aircraft Maintenance

   (437.2  (452.7  (4.5%)   (3.7%)   (3.4%) 

Passenger Services

   (295.4  (300.3  (3.0%)   (2.5%)   (1.6%) 

Other Costs of Sales

   (129.9  (113.3  (1.3%)   (0.9%)   14.6

The decrease in cost of sales was driven by largely lower aircraft fuel expenses, which decreased by 36.4% to US$2,651.1 million in 2015 as a result of a 40.2% decrease in the full year average fuel price (excluding hedge losses). LATAM recognized a net loss of US$239.4 million in fuel hedging in 2015, compared to a fuel hedge loss of US$108.8 million in 2014. In 2015 the Company also recognized a US$19.2 million hedge gain related to foreign currency contracts, which were recognized in the fuel cost line.

Depreciation and amortization decreased by US$56.9 million, amounting to US$934.4 million, which represents a decrease of 5.7% (despite the increase in modern owned aircraft in our fleet), mainly as a result of thephase-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 2014.

Other rental and landing fees decreased by 16.4% to US$1,109.8 million in 2015 from U$1,327.2 million in 2014, mainly resulting from lower aeronautical rates (in dollars) as a result of the depreciation of local currencies.

Aircraft maintenance expenses decreased by 3.4%, from US$452.7 million in 2014 to US$437.2 million in 2015, mainly as a result of fleet renewal initiatives and reduced operations.

Aircraft rentals increased by 0.7% to US$525.1 million in 2015 from US$521.4 million in 2014 despite fewer leased aircraft, as a result of the incorporation of larger and more modern aircraft under operating leases (i.e. Boeing 787s), whereas returned aircraft were mainly been older and smaller models (i.e. Airbus A319, Dash8 Q400 aircraft).

Passenger service expenses decreased by 1.6%, to US$295.4 million in 2015 compared to US$300.3 million in 2014, despite a flat the number of passengers transported, mainly due a decrease in passenger compensations and the positive effect of the depreciation of the Brazilian real on supplier costs.

As a result of the above, gross margin(defined as operating revenue minus cost of sales)decreasedby 14.8% from US$2,469.0 million in 2014 to US$2,103.3 million in 2015.

Other Consolidated Results

Other operating income increased in 2015 by 2.2%, from US$377.6 million in 2014 to US$385.8 million in 2015, mainly due to an increase of US$15.4 million in revenue from aircraft leased to third parties.

 

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Distribution costs decreased by 18.2% from US$957.1 million in 2014 to US$783.3 million in 2015, mainly as a result of lower commissions to agents (which decreased by 17.2% from US$365.5 million to US$302.8 million),related to lower revenues, lower sales fulfillments in some countries and depreciation of local currencies.

Administrative expenses decreased by 10.5% from US$980.7 million in 2014 to US$878.0 million in 2015, mainly due to a decrease of 11.3% in wages and benefits resulting from a 5.0% decline in average headcount and the positive impact of the depreciation of the Brazilian real and Chilean peso on wages denominated in those currencies.

Other operating expenses decreased by 19.2% from US$401.0 million in 2014 to US$324.0 million in 2015, mainly due to lower tax contingencies in 2015 as well as the reversal of certain tax contingencies established during 2014.

Financial income decreased to US$75.1 million in the year ended December 31, 2015 from US$90.5 million in 2014, mainly due to an increase in interest rates in Brazil and due to the depreciation of the local currency affecting the investments the Company held in Brazil and Argentina.

Financial costs (fromnon-financial activities) decreased by 3.9% to US$413.4 million in 2015 from US$430.0 million in 2014, mainly due to the recognition of US$23 million in breakage costs related to the sale and leaseback of four of our Boeing 777 aircraft during the first quarter of 2014.

Exchange rate differences worsened, from a loss of US$130.2 million in 2014 to a loss of US$467.9 million in 2015, mainly resulting from the 49.0% depreciation of the Brazilian real between December 31, 2014 and December 31, 2015.

We obtained an income tax benefit for 2015 of US$178.4 million, compared to an income tax expense of US$292.4 million in 2014. This variation is partially explained by an accounting charge of US$150.2 million in 2014 due to modifications made to the Chilean Tax System, consisting in a gradual increase of corporate income tax from 20% in 2014 to 27% by 2018. For more information, see “—Critical Accounting Policies—Deferred Taxes” below and Note 17 to our audited consolidated financial statements.

U.S. Dollar Presentation and Price-Level Adjustments

General

Foreign currency transactions

(a) Presentation and functional currencies

The items included in the financial statements of LATAM are valued using the currency of the main economic environment in which each 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 affiliates.

(b) Transactions and balances

Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation, at the closing exchange rates, of the monetary assets and liabilities denominated in foreign currency, are shown in the consolidated statement of income.

(c) Group entities

The results and financial position of all the LATAM entities (none of which operated in a hyper-inflationary economy) that have a functional currency other than the currency of presentation are translated to the currency of presentation as follows:

 

 (i)The assets and liabilities of each consolidated statement of financial position are translated at the closing exchange rate on the date of the consolidated statement of financial position;

 

 (ii)The revenues and expenses of each results account are translated at monthly average rates; and

 

 (iii)All the resulting exchange differences are shown as a separate component in net equity.

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.

 

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Adjustments to the goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at theperiod-end exchange rate.

Effects of Exchange Rate Fluctuations

Our functional currency is the U.S. dollar in terms of the pricing of our products, composition of our balance sheet and effects on our results of operations. Most of our revenues (58% in 2016) are in U.S. dollars or in prices pegged to the U.S. dollar and a substantial portion of our expenses (56% in 2016) is denominated in dollars or pegged to the U.S. dollar, particularly fuel costs, landing and over-flight fees, aircraft rentals, insurance and aircraft components and supplies.

A substantial majority of our liabilities are denominated in U.S. dollars (70.6% as of December 31, 2016), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2016, 61.8% of our assets were denominated in U.S. dollars, principally aircraft, cash and cash equivalents, accounts receivable and other fixed assets. Substantially all of our commitments, including operating lease and purchase commitments for aircraft, are denominated in U.S. dollars.

Balance sheet imbalance denominated in currencies other than the functional currency of each specific entity creates a foreign exchange rate exposure that impacts our foreign exchange losses and gains due to exchange rate fluctuations. We recorded net foreign exchange losses of US$467.9 million in 2015 and net foreign exchange gains US$121.7 million gain in 2016, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses).” For more information, see Notes 2.3 and 29 to our audited consolidated financial statements.

Critical Accounting Policies

The Company has used estimates to value and record certain assets, liabilities, revenue, expenditure, and commitments. These estimates principally relate to:

(a) Evaluation of possible losses through impairment of goodwill and intangible assets with an indefinite useful life.

As of December 31, 2016 goodwill amounted to US$2,710.4 million (US$2,280.6 million as of December 31, 2015), while intangible assets with an indefinite useful life comprised airport slots of US$978.8 million (US$817.0 million as of December 31, 2015), loyalty program assets of US$326.3 million (US$272.3 million as of December 31, 2015) and trade marksof US$53.0 million at December 31, 2015.

At least once per year the Company verifies whether goodwill and intangible assets with an indefinite useful life have suffered any losses through impairment. For the purposes of this evaluation, the Company has identified two cash-generating units (CGUs): “Air transport” and “Multiplus loyalty and coalition program.” The book value of goodwill assigned to each CGU as of December 31, 2016, amounted to US$2,176.7 million and US$533.7 million (US$1,835.1 million and US$445.5 million as of December 31, 2015), which included intangible assets with undefined useful life.

 

   

Air Transport

CGU

   

Coalition and loyalty

Program Multiplus CGU

 
   As of   As of   As of   As of 
   December 31,   December 31,   December 31,   December 31, 
   2016   2015   2016   2015 
   (in US$ million) 

Airport Slots

   978.8    817.0    —      —   

Trade marks(1)

     53.0    —      —   

Loyalty program

   —      —      326.3    272.3 

 

(1)At December 31, 2016, the Company has changed the estimated useful life of the brands from an indefinite useful life to a five-year period (see Note 15 to our audited consolidated financial statements).

The recoverable value of these cash-generating units (CGUs) has been determined based on calculations of their value in use. The principal assumptions used by the management include: growth rate, exchange rate, discount rate, fuel prices, and other economic assumptions. The estimation of these assumptions requires significant judgment by management, as these variables feature inherent uncertainty; however, the assumptions used are consistent with Company’s internal planning. Therefore, management evaluates and updates these estimates on an annual basis, in light of conditions that affect these variables. The principal assumptions used, as well as the corresponding sensitivity analyses, are shown in Note 16 to our audited consolidated financial statements.

 

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(b) Useful life, residual value, and impairment of property, plant, and equipment

The depreciation of assets is calculated based on a straight-line model, except for certain technical components depreciated on cycles and hours flown. Useful lives are reviewed on an annual basis according with the Company’s future economic benefits associated with them.

Changes in circumstances such as: technological advances, business model, planned use of assets or capital strategy may render the useful life different to the lifespan estimated. When it is determined that the useful life of property, plant, and equipment must be reduced, as may occur in line with changes in planned usage of assets, the difference between the net book value and estimated recoverable value is depreciated, in accordance with the revised remaining useful life.

Residual values are estimated in accordance with the market value that these assets will have at the end of their useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once a year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.8 to our audited consolidated financial statements).

(c) Recoverability of deferred tax assets

Deferred taxes are calculated in accordance with the liability method, applied over temporary differences that arise between the fiscal base of assets and liabilities, and their book value. Deferred tax assets for tax losses are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company makes tax and financial projections to evaluate the realization of our deferred tax asset over the course of time. Additionally, these projections are tested to be consistent with those used to measure other long term assets. As of December 31, 2016 the company recognized deferred tax assets amounting to US$384.6 million (US$376.6 million at December 31, 2015), and had ceased to recognize deferred tax assets for tax losses amounting to US$115.8 million (US$15.5 million at December 31, 2015) (see Note 18 to our audited consolidated financial statements).

(d) Air tickets sold that are not actually used.

The Company treats advance sales of tickets as deferred revenue. Revenue from ticket sales is recognized in the income statement when the service is provided or when tickets expires unused, reducing corresponding deferred revenue. The Company evaluates on a monthly basis the probability that tickets will expire unused, based on the history of ticket utilization. Changes in this probability would have an impact on our revenue in the year in which the change occurs and in future years. As of December 31, 2016, deferred revenue associated with air tickets sold amounted to US$1,535.2 million (US$1,223.9 million as of December 31, 2015). As of December 31, 2016, we estimate that a hypothetical change of one percentage point in passenger behavior regarding to ticket usage, (that is, if during the 6 months after a sale the probability of utilization were 89% rather than 90%), would have a revenue impact of up to US$20.0 million.

(e) Valuation of loyalty points and kilometers issued to loyalty program members, pending usage.

As of December 31, 2016 and 2015, the Company operated the following loyalty programs: LATAM Pass, LATAM Fidelidade, and Multiplus, with the objective of enhancing customer loyalty by offering points or kilometers (see Note 22 to our audited consolidated financial statements).

When kilometers and points are redeemed for products and services other than the services provided by the Company, revenue is recognized immediately; when they are redeemed for air tickets issued by LATAM Airlines Group S.A. and affiliates, revenue is deferred until the transport service is provided or the corresponding tickets expire.

Deferred revenue from loyalty programs at the closing date corresponds to the valuation of unutilized points and kilometers issued to loyalty program members, adjusted for redemption probability.

According toIFRIC-13, the value of kilometers and points that the Company estimates are not likely to be redeemed (“breakage”), is recognized proportionally during the period in which the remaining kilometers or points are expected to be redeemed. The Company uses statistical models to estimate the breakage, based on historical redemption patterns. Changes in breakage would have a significant impact on our revenue in the year in which the change occurs and in future years.

 

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As of December 31, 2016, deferred revenue associated with the LATAM Pass loyalty program amounted to US$896.2 million (US$973.3 million at December 31, 2015). As of December 31, 2016 a hypothetical change of 1% in the probability of usage would result in an impact of approximately US$30.6 million (US$30.0 million as of December 31, 2015). Deferred revenue associated with the LATAM Fidelidade and Multiplus loyalty programs amounted to US$392.1 million (US$452.3 million as of December 31, 2015). As of December 31, 2016 a hypothetical change of 2% in the probability of usage in these programs would result in an impact of approximately US$14.6 million (US$11.7 million as of December 31, 2015).

The fair value of kilometers is determined by the Company based on its best estimate of the price at which they have been sold in the past. As of December 31, 2016 a hypothetical change of 1% in the fair value of unused kilometers would result in an impact of approximately US$8.4 million (US$8.8 million as of December 31, 2015).

(f) Required provisions and their valuation as necessary

Known contingencies are recognized when the Company has an effective legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. The Company applies professional judgment, experience, and knowledge to use available information to determine these values, in light of the specific characteristics of known risks. This process facilitates the early assessment and valuation of potential risks in individual cases or in the development of contingencies.

(g) Investment in subsidiary (TAM)

Management has applied its judgment in determining that LATAM Airlines Group S.A. controls TAM S.A. and its affiliates, for accounting purposes, and has therefore consolidated the financial statements of TAM S.A. and its affiliates.

The grounds for this decision are that LATAM issued ordinary shares in exchange for the majority of circulating ordinary and preferential shares in TAM, entitling LATAM to substantially all economic benefits generated by TAM, and thus exposing it to substantially all risks relating to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the controlling shareholders of TAM, thus insuring that the shareholders and directors of TAM shall have no incentive to exercise their rights in a manner that would be beneficial to TAM but detrimental to LATAM. Furthermore, all significant actions necessary for the operation of the airlines require affirmative votes by the controlling shareholders of both LATAM and TAM.

Since the integration of LAN and TAM, the most critical airline operations in Brazil have been managed by the CEO of TAM while global activities have been managed by the CEO of LATAM, who is in charge of the operation of the LATAM Group as a whole and reports to the LATAM Board. The CEO of TAM functionally reports to the CEO of LATAM.

The CEO of LATAM also evaluates the performance of LATAM Group executives including the CEO of TAM and, together with the LATAM Board, determines compensation. Although Brazilian law currently imposes restrictions on the percentages of voting rights that may be held by foreign investors, LATAM believes that the economic basis of these agreements meets the requirements of accounting standards in force, and that the consolidation of the operations of LAN and LATAM is appropriate.

These estimates were made based on the best information available relating to the matters analyzed. In any case, it is possible that events that may take place in the future could lead to their modification in future reporting periods, which would be made in a prospective manner.

Recently Issued Accounting Pronouncements

 

(a) Accounting pronouncements with implementation effective from January 1, 2016:

  

Date of issue

  

Mandatory
Application:
Annual periods
beginning on or
after

(i) Standards and amendments      
Amendment to IFRS 11: Joint arrangements.  Accounting for acquisitions of interests in joint operations  May 2014  

January 1, 2016

Amendment to IAS 16: Property, plant and equipment, and IAS 38: Intangible assets.  Clarification of acceptable methods of depreciation and amortization  May 2014  

January 1, 2016

 

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Amendment to IAS 27: Separate financial statements.  Equity Method in Separate Financial Statements  August 2014  

January 1, 2016

Amendment IAS 1: Presentation of Financial Statements.  Disclosure initiative  December 2014  

January 1, 2016

Amendment to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of interests in other entities and IAS 28: Investments in associates and joint ventures.  Investment Entities: Applying the consolidation exception  December 2014  

January 1, 2016

Improvements to International Financial Reporting Standards (2012-2014 cycle):  September 2014  

January 1, 2016

IFRS 5Non-current assets held for sale and discontinued operations.  Changes in methods of disposal.    
IFRS 7 Financial instruments: Disclosures.  Servicing contracts. Applicability of the amendments to IFRS 7 to condensed interim financial statements    
IAS 19 Employee benefits.  Discount rate: regional market issue.    
IAS 34 Interim financial reporting.  Disclosure of information ‘elsewhere in the interim financial report’.    

The application of standards, amendments, interpretations and improvements had no material impact on the consolidated financial statements of the Company.

 

(b) Accounting pronouncements not yet in force for financial years beginning on January 1, 2016 and
for which early adoption has not been effected :

  

Date of issue

  

Mandatory
Application:
Annual periods
beginning on or
after

(i) Standards and amendments      
Amendment to IAS 7: Statement of Cash Flows.  Disclosure initiative  January 2016  

January 1, 2017

Amendment to IAS 12: Income Taxes.  Recognition of Deferred Tax Assets for Unrealised Losses  January 2016  

January 1, 2017

IFRS 9: Financial instruments.  Disclosure initiative  December 2009  

January 1, 2018

Amendment to IFRS 9: Financial instruments.  Novation of derivatives and continuation of hedge accounting  November 2013  

January 1, 2018

IFRS 15: Revenue from contracts with customers(1).  Implementation  May 2014  

January 1, 2018

Amendment to IFRS 15: Revenue from contracts with customers.  Clarifications  April 2016  

January 1, 2018

Amendment to IFRS 2: Share-based payments  classification and measurement of share☐based payment transactions  June 2016  

January 1, 2018

Amendment to IFRS 4: Insurance contracts.  Pendiente Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts  September 2016  

January 1, 2018

Amendment to IFRS 40: Investment property  Transfers of investment property  December 2016  

January 1, 2018

IFRS 16: Leases(2).  Disclosure initiative  January 2016  

January 1, 2019

Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures.  Sale or contribution of assets between an Investor and its associate or joint venture  September 2014  To be determined

 

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(b) Accounting pronouncements not yet in force for financial years beginning on January 1, 2016 and
for which early adoption has not been effected :

  

Date of issue

  

Mandatory
Application:
Annual periods
beginning on or
after

(ii) Improvements      
Improvements to International Financial Reporting Standards (2012-2014 cycle):  December 2016  
IFRS 1: First-time adoption of international financial reporting standards.  Deletion of short-term exemptions for first-time adopters    

January 1, 2018

IFRS 12 Disclosure of interests in other entities.  Clarification of the scope of the Standard    

January 1, 2017

IAS 28 investments in associates and joint ventures.  Measuring an associate or joint venture at fair value    

January 1, 2018

(iii) Interpretations      
IFRIC 22: Foreign currency transactions and advance consideration  Disclosure initiative  December 2016  

January 1, 2018

 

(1)The Company’s management believes that the 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, except for IFRS 15 and IFRS 16.

IFRS 15 – “Revenue from Contracts with Customers” supersedes the standard for revenue recognition currently used by the Company, i.e. IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 supersedes the following standards and interpretations: IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers; andSIC-31 Revenue—Barter Transactions Involving Advertising Services.

We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements. Interpretations areon-going and could have a significant impact on our implementation. We currently believe the adoption will not have a significant impact on passenger and cargo revenue recognition. However, the impact on revenue and liability for our frequent flyer program is still being analyzed.

(2)IFRS 16 – “Leases” adds important changes in the accounting for lessees by introducing a similar treatment to financial leases for all operating leases with a term of more than 12 months. This means, in general terms, that an asset should be recognized for the right to use the underlying leased assets and a liability representing its present value of payments associated with the agreement. Monthly lease payments will be replaced by asset depreciation and a financial cost on the income statement.

We are currently evaluating how the adoption of the leases recognition standard will impact our Consolidated Financial Statements. Interpretations areon-going and could have a material impact on our implementation. Currently, we expect that the adoption of the new lease standard will have a material impact on our consolidated balance sheet due to the recognition ofright-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

LATAM Airlines Group S.A. and affiliates are still assessing these standards to determine the effect on their Financial Statements, covenants and other financial indicators.

IFRS/Non-IFRS Reconciliation

We use “Cost perASK-equivalent” and “Cost perASK-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 totalASK-equivalents. “Total costs” are calculated by starting with operating expenses as defined under IFRS and making certain adjustments for interest costs and other revenues. The cost component is further adjusted to obtain “costs perASK-equivalents excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost perASK-equivalent” and “Cost perASK-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.

 

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The table below reconciles our operating expenses (as defined by IFRS) for 2016, 2015 and 2014 to costs used in the calculation of “Cost perASK-equivalent” and “Cost perASK-equivalent excluding fuel price variations” for such periods.

 

   2016   2015   2014 

Cost perASK-equivalent

      

Operating expenses (US$ thousands)

   8,959,185    9,611,907    11,957,780 

+ Interest expense (US$ thousands)

   416,336    413,357    430,034 

– Interest income (US$ thousands)

   74,949    75,080    90,500 

Divided by system’sASK-equivalents (million)

   205,537.5    208,722.5    206,197.9 

= Cost per ASK equivalent (US$ cents)

   4.52    4.77    5.96 

Cost perASK-equivalent excluding fuel price variations

      

Operating expenses (US$ thousands)

   8.959,185    9,611,907    11,957,780 

+ Interest expense (US$ thousands)

   416,336    413,357    430,034 

– Interest income (US$ thousands)

   74,949    75,080    90,500 

– Aircraft fuel (US$ thousands)

   2,056,643    2,651,067    4,167,030 

Divided by system’s ASK equivalents (millions)

   205,537.5    208,722.5    206,197.9 

= Cost perASK-equivalent excluding fuel price variations (US$ cents)

   3.52    3.50    3.94 

Other Operating Measures

LATAM uses revenues per ASK or ATK, as applicable, in analyzing revenues on a per unit basis. To obtain unit revenues, we divide our passenger revenues by our total ASKs and our cargo revenues by our total ATKs. We use our revenues as defined under IFRS for purposes of the calculation of this metric. Revenues per ASK or ATK, as the case may be, do not have a standardized meaning, and as such may not be comparable to similarly titled measures provided by other companies. This metric is not an IFRS measure of performance or liquidity. It should not be considered in isolation or as a substitute for revenues or as indicators of performance or cash flows as a measure of liquidity.

The table below shows the calculation of our revenues per ASK or ATK, as applicable, in each of the periods indicated.

 

   2016   2015   2014 

Passenger Revenues (US$ million)

   7,877.72    8,410.61    10,380.12 

ASK (million)

   134,967.69    134,167.14    130,200.94 

Passenger Revenues/ASK (US$ cents)

   5.84    6.27    7.97 

Cargo Revenues (US$ million)

   1,110.63    1,329.43    1,713.38 

ATK (million)

   6,704.13    7,082.76    7,219.71 

Cargo Revenues/ATK (US$ cents)

   16.57    18.77    23.73 

Seasonality

Our operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. Our passenger revenues are generally higher in the first and fourth quarters of each year, during the southern hemisphere’s spring and summer. In the Brazilian passenger air transportation market, there is generally higher demand for air transportation services in the second half of the year, making the second quarter the weakest for the Company. However, seasonality is partially mitigated by LATAM’s having higher-than-market average concentration of business travel (which is less sensitive to seasonality). Additionally, the expansion of the Company into other countries with different seasonal patterns has also moderated the overall seasonality of the passenger business.

 

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B. Liquidity and Capital Resources

LATAM’s cash and cash equivalents totaled US$949.3 million as of December 31, 2016, US$753.5 million as of December 31, 2015 and US$989.4 million as of December 31, 2014. Additionally, the Company had short term marketable securities totaling US$537.0 million as of December 31, 2016, US$606.4 million as of December 31, 2015 and US$544.4 million as of December 31, 2014. In the aggregate, LATAM’s cash and cash equivalents and marketable securities totaled US$1,486.3 million as of December 31, 2016, US$1,361.1 million as of December 31, 2015 and US$1,533.8 million as of December 31, 2014.

The US$126.4 million increase in our cash and cash equivalents and marketable securities from 2015 to 2016 is the result of a reduction in the cash flow from operation that was offest bya US$560 million inflow frompre-delivery payments during 2016 and the subscription by Qatar Airways of a capital increase of US$608.5 million into LATAM.

The US$173.9 million decrease in our cash and cash equivalents and marketable securities from 2014 to 2015 is the result of positive cash flows from operations of US$1,715.5 million used to pay financial obligations and investment commitments, and to initiatives including LATAM’s liability management of its TAM notes together with the financing of its arriving fleet through the issuance of Enhanced Equipment Trust Certificates (“EETC”). In June 2015, LATAM executed a liability management transaction in which the Company redeemed US$300.0 million senior unsecured notes issued by TAM’s subsidiary, Tam Capital 2 Inc. and issued LATAM’s inaugural US$500.0 million senior unsecured notes. Additionally in June 2015, LATAM issued Enhanced EquipmentTrust Certificates (“EETC”) for an aggregate face amount of approximately US$1,020.8 million to finance 17 new aircraft deliveries. LATAM recognized the EETCs as debt upon delivery of each Aircraft. At December 31, 2015 the escrow of proceeds from the issuance of the EETC amounted US$345.1 corresponding to five aircraft received during 2016 and one to be received in 2016.

Cash position and liquidity

The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2016, 2015 and 2014 and our total cash position as of December 31, 2016, 2015 and 2014.

 

   2016   2015   2014 
   (in US$ millions) 

Net cash flows from operating activities

   992.1    1,715.5    1,331.4 

Net cash flow from (used in) investing activities

   (443.0   (1,739.1   (899.1

Net cash flows from (used in) financing activities

   (396.3   (128.4   (1,320.2

Effects of variation in the exchange rate on cash and cash equivalents

   43.0    (83.9   (107.6

Cash and cash equivalents at the beginning of the year

   753.5    989.4    1,984.9 

Cash and cash equivalents at the end of the year

   949.3    753.5    989.4 

In addition to cash and marketable securities LATAM has access to short term credit lines. As of December 31, 2016, LATAM had working capital uncommitted credit facilities for a total amount of US$1,193.0 million, of which US$830.0 million was drawn as of December 31, 2016, and committed credit lines in the form of a revolving credit facility (“RCF”) for an amount of US$325.0 million, of which $0 was drawn. The Company’s plan is to maintain the RCF undrawn, in line with maintaining adequate levels of liquidity considering the current volatile market conditions. The RCF is secured by spare parts, engines, and aircraft.

Net cash flows from operating activities

Cash from operations is derived primarily from providing air passenger and cargo transportation to customers. Operating cash outflows are primarily related to expenses of airline operations, including fuel consumption. Net cash inflows from operating activities in 2016 decreased US$723.3 million, or 42.2%, from US$1,715.5 million, mainly due to changes in working capital.

The main impacts on working capital were the reduction in prepayments of credit card receivables in Brazil in the amount of US$255.4 and the US$ 108.0 million related to thenon-payment in 2015 of the performance bonuses of 2014. Other impacts include the appreciation of the Brazilian Real contingencies, and contingencies reflected the payment of a guarantee to continue certain legal proceedings at the tax courts in Brazil.

Net cash inflows from operating activities in 2015 increased US$384.1 million, or 28.8%, from US$1,331.4 million, mainly driven by a significant reduction in operating costs due to lower fuel prices, as well as by the Company’s ongoing cost savings initiatives. Net cash from operations was negatively affected by fuel hedging, hedging margin guarantees and other guarantees by US$ 184.6 million (for more information see to Note 6 – Cash and Cash Equivalents of our audited consolidated financial statements).

 

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Net cash flow used in investing activities

Net cash used in investing activities in 2016 decreased US$1,296.1 million from US$1,739.1 million in 2015 to US$443.0 million in 2016, due to a reduction in purchases of property, plant and equipment. This reduction resulted mainly from a US$559.5 million inflow from pre delivery payments during 2016, as opposed to an outflow of US$128.4 million during 2015. In addition, during 2016, there was a net inflow of US$263.0 million from sale and purchase of debt instruments of other entities, in constrast to an outflow of US$184.7 million during 2015.

Net cash used in investing activities in 2015 increased US$840.0 million from US$899.1 million in 2014 to US$1,739.1 million in 2015, due primarily to aone-time impact related to the sale and leaseback of four B777 aircraft recognized during 2014 as an asset sale of US$510.5 million. Capital expenditures for aircraft increased US$127.0 million in 2015 compared to 2014, including costs to acquire eight narrow body aircraft and four wide body aircraft, compared to nine narrow body aircraft and three wide body aircraft in 2014.

Net cash flows used in financing activities

In 2016, net cash used in financing activities totaled US$396.3 million, an increase of US$267.9 million from the US$128.4 million in cash generated by financing activities in 2015. The variation resulted primarily from a significant increase in loan repayments from US$1,263.8 million to US$2,121.1 million, which was compensated by the capital increase of US$608.5 million subscribed and paid during 2016.

In 2015, net cash used in financing activities totaled US$128.4 million, a decrease of US$1,191.8 million from the US$1,320.2 million in cash used in financing activities in 2014. This reduction reflects the conclusion of the liability restructuring and reduction plan executed during the same period in 2014, whereby the Company reduced its financial obligations by approximately US$ 1,049.0 million.

Sources of financing

Long term

We typically finance our fleet with long-term loans covering between 80% and 100% of the net purchase price. We also finance our aircraft under sale and leaseback arrangements in order to add flexibility to our fleet. For more information regarding fleet financing, please refer to certain information below and to “—F. Long Term Indebtedness—Tabular Disclosure of Contractual Obligations.”

From time to time in the past, we have considered, and may consider in the future, other forms of financing 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, 2016, we maintained US$ 1,518 million in short-term credit lines with both local and foreign banks, including US$325 million of committed credit lines of which $0 was drawn as of December 31, 2016.

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 advances, a financial alternative where the bank advances to the Company a percentage of the cash inflows related to the credit card sales on installments.

Capital expenditures

Our capital expenditures are related to the acquisition of aircraft, aircraft-related equipment, IT equipment, support infrastructure and the funding ofpre-delivery deposits. LATAM’s capital expenditures totaled US$694.4 million in 2016, US$1,569.7 million in 2015 and US$1,440.4 million in 2014, and purchases of intangible assets totaled US$88.6 million in 2016, US$52.5 million in 2015 and US$55.8 million in 2014. See “—Sources of financing” above.

 

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The following chart sets forth the Company’s estimated capital expenditures for 2017, 2018 and 2019 calendar years:

 

       Estimated capital
expenditures by year,

as of December 31, 2016
 
   2017   2018   2019   2020 
   (in US$ millions) 

Fleet Commitments(1)

   469    555  �� 1,589    1,503 

PDPs (2)

   135    269    (41   (18

Other expenditures(3)

   524    504    530    531 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The amount of Fleet Commitments presented includes all the commited deliveries with estimates regarding (i) changes in scheduled delivery dates; (ii) conversion of certain aircraft types and (iii) aircraft of which we do not expect to take delivery, regardless of the financiation the aircraft will have upon arrival, thus representing the sum of aircraft capex and future sale and leasebacks.
(2) Representspre-delivery payments made by LATAM, or inflows received by LATAM after the delivery of the aircraft is made.
(3) Other Expenditures include expenditures on spare engines and parts, maintenance of on balance fleet, projects and others, plus purchases of intangible assets.

C. Research and Development, Patents and Licenses, etc.

LATAM has registered the trademarks “LATAM,” “LATAM Airlines Chile,” “LATAM Airlines Peru,” “LATAM Airlines Argentina” and “LATAM Airlines Ecuador” with the trademark office in Chile, Peru, Argentina and Ecuador, respectively. We license certain brands, logos and trade dress under the alliance agreement withoneworld® related to LATAM’s alliance. As long as LATAM is a member ofoneworld®, it will have the right to continue to use current logos on its aircraft.

TAM holds or has filed registration applications for 216 trademarks before the Instituto Nacional da Propriedade Industrial (“INPI”), the body with jurisdiction for registering trademarks and patents in Brazil, and 100 trademarks before the bodies with jurisdiction for registering trademarks in other countries in which TAM operates. Currently, TAM is aware of one opposition filed by a third party challenging one of these applications.

D. Trend Information

For 2017, LATAM expects total passenger ASK growth to be between 0% and 2%. International passenger ASK growth for full year 2017 is expected to be between 0% and 2%. LATAM Airlines Brazil’s domestic passenger ASKs in the Brazilian market are expected to decrease between 2% and 0%. ASKs in Spanish-speaking countries are expected to increase by approximately 4% to 6%.

Regarding cargo operations, LATAM expects cargo ATKs to decrease between 12% and 10% for full year 2017, driven by the withdrawals of two of four Boeing 777s-200F, which are currently classified as held for sale, and, two Boeing767-300F, during 2017.

 

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In a context of increasing competitive pressures from different players across the region, including low cost operators, it is our goal to continue to increase the efficiency of our operations, allowing us to provide the best and most convenient options for our customers with the distinctive customer experience LATAM passengers expect. In this context, LATAM has undertaken an important project to introduce a new travel model for domestic operations in the six domestic markets where we operate in South America, in order to address the changing dynamics of customers and the industry. The main objective of this project is to increase our competitiveness and ensure the sustainability of our domestic operations business model in the long term. For more information on this new travel model, see “Item 4. Information on the Company—B. Business Overview—Passenger Operations—Business Model for Domestic Operations”.

Over the last year, we have implemented significant changes with the objective of transforming LATAM into a simpler, leaner and more efficient group. We have made these changes amidst a challenging and volatile macroeconomic scenario in the region. At the same time, the Company continues to strengthen its network, taking advantage of specific opportunities for profitable growth in LATAM’s South American Spanish-speaking markets (SSC, which include Chile, Peru, Argentina, Colombia and Ecuador). During 2016, we inaugurated new routes connecting our Lima hub with secondary cities (mainly in Argentina), as well as launched a new flight from Lima to Washington, DC. In addition, in October 2016 we launched the route between São Paulo and Johannesburg, becoming the first airline in Latin America to connect our region with a country in the African continent. We have also announced the launch of our longestnon-stop flight (between Santiago, Chile and Melbourne, Australia), starting in October 2017.

During 2016, we also announced joint business agreements with American Airlines and British Airways and Iberia, subject to regulatory approval in different countries, which will allow our passengers access to a wider network, more flight options with better connection times, more competitive fares to destinations not served by LATAM, increased potential for developing new routes and adding more direct flights to new destinations, as well as to destinations already served by LATAM, among other initiatives.

In response to the macroeconomic slowdown in South America and the resulting deceleration in growth of demand for air travel, we are currently working on rightsizing our fleet, targeting a decrease of US$2.0 to US$3.0 billion in our expected fleet assets for 2018 through postponements, cancellations, redeliveries and asset sales. During 2016, the Company achieved a total asset reduction of US$ 2.2 billion and expects to continue with further adjustments for the upcoming years.

Regarding fuel, we will continue to use fuel hedging programs and fuel surcharge mechanisms in both our passenger and cargo businesses to help minimize the impact of short-term movements in crude oil prices. LATAM has hedged approximately 33%, 45% and 19% of its estimated fuel consumption for the first, second and third quarters of 2017 respectively.

E.Off-Balance Sheet Arrangements

As of December 31, 2016 the Company had 102 aircraft (of which 19 are obligations of TAM and 83 are obligations of LATAM) and 10 aircraft engines under operating leases. These operating leases provide us with flexibility to adjust our fleet to any demand volatility that may affect the airline industry and therefore we consider such arrangements to be of great value to our strategy and financial performance. The total future lease payments related to our operating leases as of December 31, 2016 was US$ 3,255 million, for all remaining periods through maturity (the latest of which expires in 2028). See “—F. Long Term Indebtedness—Tabular Disclosure of Contractual Obligations.”

Under the aforementioned operating leases, LATAM is responsible for all maintenance, insurance and other costs associated with operating these aircraft. The Company has not made any residual value or similar guarantees to our lessors. There are certain guarantees and indemnities to other unrelated parties that are not reflected on the Company’s balance sheet, but we believe that these will not have a significant impact on our results of operations or financial condition.

LATAM operates 12 aircraft under tax leasing structures. These methods involve the creation of special purpose entities that acquire aircraft with bank and third-party financing. Under IFRS, these aircraft are shown in the consolidated statement of financial position as part of “Property, plant and equipment” and the corresponding debt is shown as a liability. Of LATAM’s total tax leases, nine TAM tax leases are classified as operating leases for accounting purposes as of December 31, 2016.

As of December 31, 2016, we are not aware of any event, lawsuit, commitment, trend or uncertainty that may result in, or is reasonably likely to result in, the termination of the operating leases. See Note 33 to our audited consolidated financial statements for a more detailed discussion of these commitments.

F. Long Term Indebtedness

Long Term Indebtedness

Secured Debt

Aircraft Debt

 

 1.ECA/EX-IM: Bank guaranteed bonds like Export-Import Bank of the United States(“EX-IM Bank”) and Export Credit Agency (“ECA”) guaranteed loan debt, as of December 31, 2016, was US$ 3,269 million. In general, ECA ans EX –IM financing have a12-year repayment profiles.

 

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 2.Enhanced Equipment Trust Certificates (“EETC”): In June 2015, LATAM issued the first EETC in Latin America for an aggregate face amount of approximately US$ 1,021 million to finance 17 new aircraft deliveries composed by 11 AirbusA321-200, 2 AirbusA350-900 and 4 Boeing787-9, with delivery dates from July 2015 through March 2016. The offering is comprised of Class A Certificates maturing in November 2027 and Class B Certificates maturing in November 2023. The annual interest rate for Class A and B Certificates are 4.20% and 4.50%, respectively. As of December 31, 2016, the EETC debt was US$ 962 million.

 

 3.Bank Commercial Loans: As of December 31, 2016, bank commercial loans debt was US$ 1,697 million.

 

 4.Tax Leases: LATAM has secured debt with tax leases through Japanese Leases with a call option (“JOLCO”) and Spanish Leases (“SOL”) structures. As of December 31, 2016, tax leases were US$ 108 million.

Non Aircraft Debt

 

 1.2013-1 Series Note: Regardingnon-aircraft debt, LATAM issued a securitized bond for an amount of US$ 450 million in November 2013 with a seven year term and a two year interest-only period (the“2013-1 Series Note”). 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. As of December 31, 2016, the2013-1 Series Note was US$ 368 million.

 

 2.Bank Commercial Loans: As of December 31, 2016, bank commercial loans debt was US$ 52 million.

Others

 

 1.Pre-Delivery Payments (“PDP”) financing: As of December 31, 2016, PDP financing outstanding amount was US$ 214 million.

 

 2.Revolving Credit Facility (“RCF”): In March 2016, LATAM structured a Revolving Credit Facility secured by aircraft, engines, spare parts and supplies for a total amount available of US$ 325 million. The facility was disbursed for an initial amount of US$ 275 million increasing up to US$ 325 million by November, 2016. On December 2016, the facility was prepaid and remains fully available to be drawn.

 

 3.Multiplus Shares Backed Loan (“Margin Loan”): In September 2016, TAM S.A. structured a financing amounting to US $ 200 million with the guarantee of approximately 18% ownership of the shares of Multiplus S.A., percentage subject to adjustment depending on the value of the stock as collateral. As of December 31, 2016, the Multiplus Shares Backed Loan outstanding amount was US$ 200 million.

Unsecured Debt

 

 1.LATAM 2020 Notes: On June 9, 2015 LATAM Airlines Group S.A. issued and placed on the international market an unsecured long-term bond in the amount of US$ 500 million maturing 2020, at interest rate of 7.25% per year. As of December 31, 2016, the LATAM 2020 Notes outstanding amount was US$ 492 million.

 

 2.TAM Capital 2017 Notes: As of December 31, 2016, TAM has a senior note outstanding US$ 300 million due in 2017, with a fixed interest rate of 7.375% payable semi-annually, issued by TAM Capital Inc. and guaranteed on a senior unsecured basis by TAM S.A. and TAM Linhas Aereas. These notes are listed on the Euro MTF market of the Luxembourg Stock Exchange. On December 18, 2007, TAM completed an exchange offer pursuant to which 99.2% of the holders exchanged these notes for new notes that are registered under the Securities Act and otherwise have identical terms. As of December 31, 2016, the TAM Capital 2017 Notes outstanding amount was US$ 304 million.

 

 3.TAM Capital 2021 Notes: As of December 31, 2016, TAM has a senior note outstanding US$ 500 million due in 2021, with a fixed interest rate of 8.375% payable semi-annually, issued by TAM Capital 3 Inc. and guaranteed on a senior unsecured basis by TAM S.A. and TAM Linhas Aereas. As of December 31, 2016, the TAM Capital 2021 Notes outstanding amount was US$ 513 million.

 

 4.Commercial Bank Loans: As of December 31, 2016, unsecured Bank Commercial loans debt was US$ 426 million.

 

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As of December 31, 2016, the average interest rate of our debt was 4.01%. Out of the total debt, 63.1% accrues interest at a fixed rate (either through a stated fixed interest rate or through the use of interest rate swap agreements) or is subject to interest rate caps.

As of December 31, 2016, LATAM had US$ 1,773 million in current debt liabilities. Of this amount, US$ 228 million consisted of short-term debt, which represents 13% of our total current debt liabilities.

VariousEX-IM Bank loans signed by LATAM for the financing of Boeing 767, 767 freighter, 777 freighter and 787 aircraft contain financial covenants and other restrictions, including restrictions in shareholder composition and disposal of assets. As of December 31, 2016, we also had purchase obligations totaling US$ 7.0 billion, with deliveries between 2017 and 2022, as set forth below:

 

 Airbus A320-Family, passenger aircraft deliveries: 54

 

 Wide-body passenger aircraft deliveries (which include the Airbus A350 900XWB, the Airbus A350 1000XWB, the Boeing787-8, and the Boeing787-9): 28

Tabular Disclosure of Contractual Obligations

The following table sets forth our material expected obligations and commitments as of December 31, 2016:

 

   Payments due by period, as of December 31, 2016 

(US$ in millions)

  Total(2)   Less than 1
year
   1-3 years   3-5 years   More than
5 years
 

Financial debt obligations(1)

  US$8,714   US$1,773   US$2,241   US$2,544   US$2,156 

Operating lease obligations

  US$3,255   US$533   US$838   US$621   US$1,263 

Fleet Commitments(3)

  US$6,966   US$469   US$2,144   US$4,002   US$351 

TOTAL

  US$ 18,935   US$ 2,775   US$ 5,223   US$ 7,167   US$
 

3,770
 
 

 

(1)Financial debt obligations reflect principal payments on outstanding debt obligations, including aircraft debt, senior notes issued by LAN and TAM, long-term and short-term bank loans and PDP financing.
(2)The amount presented reflects LATAM’s estimates regarding (i) changes in scheduled delivery dates; (ii) conversion of certain aircraft types and (iii) aircraft of which we do not expect to take delivery. For the amounts of material obligations and commitments as of December 31, 2016, please see Note 16 to our audited consolidated financial statements.
(3)Fleet commitments represent the capex equivalent of purchasing all fleet arrivals.

2016 Fleet Acquisitions

During 2016, LATAM completed the acquisition of the following wide body aircraft:

 

 One Boeing787-9 passenger aircraft, financed through an operating lease.

 

 Three Boeing787-9 and two Airbus350-900 passenger aircraft, financed through sale and leaseback transactions.

 

 One Boeing787-9 and one Airbus350-900 passenger aircraft, financed through the EETC facility.

 

 Three Airbus350-900 passenger aircraft, financed through commercial loans.

The Boeing787-9 aircraft financed through an operating lease has a 12 year term and monthly payments. The four Boeing787-9 and two Airbus350-900 aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments. Aircraft financed through EETC are under the terms described above. The three Airbus350-900 financed through commercial loans have a Senior and Junior tranche, which have terms of 12 and 7 years, respectively.

 

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During 2016, LATAM completed the acquisition of the following narrow body aircraft:

 

 Seven A321 231 and one A320neo passenger aircraft, financed through sale and leaseback transactions.

 

 Four A321 231 passenger aircraft, financed through the EETC facility.

 

 One A320neo passenger aircraft, financed through commercial loans.

Narrow body aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments. Aircraft financed through EETC are under the terms described above. The A320neo passenger aircraft financed through commercial loans has a Senior and Junior tranche, which have terms of 12 and 7 years, respectively.

TheECA-guaranteed loans have an advance rate equal to 80% of the net purchase price of the aircraft for a12-year period, with the remaining 20% of the aircraft being financed by the Company’s available cash flows.

2015 Fleet Acquisitions

During 2015, LATAM completed the acquisition of the following wide body aircraft:

 

 Four Boeing 7879 passenger aircraft, financed through operating leases.

 

 Three Boeing 7879 and 1 Airbus350-900 passenger aircraft, financed through the EETC facility.

The four Boeing787-9 aircraft financed through operating lease transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments. Aircraft financed through EETC are under the terms described above.

During 2015, LATAM completed the acquisition of the following narrow body aircraft:

 

 One A321 231 passenger aircraft, financed through a commercial loan.

 

 Seven A321 231 passenger aircraft, financed through sale and leaseback transactions.

 

 Seven A321 231 passenger aircraft, financed through the EETC facility.

The aircraft financed under commercial financing is part of the 2014 facility under a12-year floating rate amortizing loan. Narrow body aircraft financed through sale and leaseback transactions have lease terms of 12 years. These leases are denominated in U.S. dollars and have monthly payments. Finally, aircraft financed through EETC are under the terms described above.

TheECA-guaranteed loans have an advance rate equal to 80% of the net purchase price of the aircraft for a12-year period, with the remaining 20% of the aircraft being financed by the Company’s available cash flows.

 

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The LATAM Airlines Group board of directors consists of nine directors who are elected every two years fortwo-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may bere-elected. The board of directors may appoint replacements to fill any vacancies that occur during periods between elections. Scheduled meetings of the board of directors are held once a month and extraordinary board of directors’ meetings are called when summoned by the chairman of the board of directors. Extraordinary meetings can be summoned by the chairman, or when requested by one or more directors if the need for such meeting is previously approved by the chairman, unless the meeting is requested by a majority of the directors, in which case the meeting must be held without the previous approval of the chairman.

 

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The current board of directors was elected at the ordinary shareholders’ meeting held on April 28, 2015. Its term expires in April 2017. On June 7, 2016, Mr. Ricardo J. Caballero resigned as a member of the board of directors, which elected on January 24th, 2017 Mr. Giles Agutter in his place.

The following are LATAM Airlines Group’s directors:

 

Directors

  

Position

Mauricio Rolim Amaro(1)

  

Director / Chairman

Henri Philippe Reichstul

  

Director

Juan José Cueto Plaza(2)

  

Director

Ramón Eblen Kadis(3)

  

Director

Georges de Bourguignon

  

Director

Giles Agutter

  

Director

Carlos Heller Solari(4)

  

Director

Gerardo Jofré Miranda

  

Director

Francisco Luzón López

  

Director

Senior Management

  

Position

Enrique Cueto Plaza(2)

  

CEO LATAM

Ignacio Cueto Plaza(2)

  

CEO LAN

Ramiro Alfonsín

  

CFO LATAM

Armando Valdivieso Montes

  

Senior VP Commercial LATAM

Claudia Sender

  

President TAM

Emilio del Real Sota

  

Senior VP Human Resources

Juan Carlos Mencio

  

Senior VP Legal

 

(1) Mr. Mauricio Rolim Amaro is a member of the Amaro Group, which is defined in “Item 7” as a “Major Shareholder”
(2) Messrs. Ignacio, Juan José and Enrique Cueto Plaza are brothers. All three are members of the Cueto Group, which is defined in “Item 7” as a “Major Shareholder,” and are the LATAM Controlling Shareholders.
(3) Mr. Ramón Eblen Kadis is a member of the Eblen Group, which is defined in “Item 7” as a “Major Shareholder.”
(4) Mr. Carlos Heller Solari is a member of the Bethia Group, which is defined in “Item 7” as a “Major Shareholder.”

Biographical Information

Set forth below are brief biographical descriptions of LATAM Airlines Group’s directors and senior management. All of LATAM’s directors were elected or reelected, as the case may be, in April 28, 2015 for atwo-year term, which expires in April 2017, with the exception of Mr. Giles Agutter who was elected by the Board of Directors to fill the vacancy left by Mr. Ricardo J. Caballero due to his resignation.

Directors

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 2015 and has served as Chairman since September 2012. Mr. Amaro has previously held various positions in the TAM Group and served as a professional pilot at TAM Linhas Aéreas S.A. and TAM Aviação Executiva S.A. Mr. Amaro has been a member of the Board of TAM S.A. since 2004, and vice-chairman of the Board since April 2007. He is also an executive officer at TAM Empreendimentos e Participações S.A. and chairman of the boards of Multiplus S.A. (subsidiary of TAM S.A.) and of TAM Aviação Executiva e Taxi Aéreo S.A. As of January 31, 2017, according to shareholder registration data in Chile, Mr. Amaro shared in the beneficial ownership of 18,342,913 common shares of LATAM Airlines Group (3.02% of LATAM Airlines Group’s outstanding shares), held directly by TEP Chile S.A. and 35,292,908 common shares of LATAM Airlines Group (5.82% of LATAM Airlines Group’s outstanding shares), held indirectly by TEP Chile. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”

 

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Mr. Henri Philippe Reichstul, joined LATAM’s board of directors in April 2014. Mr. Reichstul has served as President of Petrobras and the IPEA-Institute for Economic and Social Planning and Executive Vice President of Banco Inter American Express S.A. Currently, in addition to his roles as Administrative Board member of TAM and LATAM Group, he is also a member of the Board of Directors of Repsol YPF, Peugeot Citroen, AES Brasil, and SEMCO Partners, among others. Mr. Reichstul is an economist with an undergraduate degree from the Faculty of Economics and Administration, University of São Paulo, and postgraduate work degrees in the same discipline—Hertford College—Oxford University.

Mr. Juan José Cueto Plaza,has served on LAN’s board of directors since 1994 and was reelected to the board of directors of LATAM in April 2015. Mr. Cueto currently serves as Executive Vice President of Inversiones Costa Verde S.A., a position he has held since 1990, and serves on the boards of directors of Consorcio Maderero S.A., Inversiones del Buen Retiro S.A., Costa Verde Aeronáutica S.A., Sinergia Inmobiliaria S.A., Valle Escondido S.A., Fundación Colunga and Universidad San Sebastián. Mr. Cueto is the brother of Messrs. Enrique and Ignacio Cueto Plaza, LATAM Airlines Group Executive Vice-President and LAN CEO, respectively. Mr. Cueto is a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2017, Mr. Cueto shared in the beneficial ownership of 171,430,090 common shares of LATAM Airlines Group (28.27% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”

Mr. Georges de Bourguignon, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2015. Mr. de Bourguignon has been a partner and executive director of Asset Chile S.A., a Chilean investment bank, since 1993. He is currently member of the board of directors K+S Chile S.A. andEmbotelladora Andina S.A. In the past he has served on several other boards of public and private companies, as well as of boards of non profit organizations. Between 1990 and 1993, he was manager of the Financial Institutions Group at Citibank S.A. in Chile, and was a professor of economics at the Catholic University of Chile. He is an economist from Catholic University of Chile and a graduate of Harvard Business School. As of January 31, 2017, Mr. de Bourguignon indirectly held 3,153 common shares of LATAM Airlines Group (0.0005%) of LATAM Airlines Group outstanding shares).

Mr. Ramón Eblen Kadis, has served on LAN’s board of directors since June 1994 and was reelected to the board of directors of LATAM in April 2015. Mr. Eblen has served as President of Comercial Los Lagos Ltda., Inversiones Santa Blanca S.A., Inversiones Andes SpA, Granja Marina Tornagaleones S.A. and TJC Chile S.A. Mr. Eblen is a member of the Eblen Group (a major shareholder of LATAM Airlines Group). As of January 31, 2017, The Eblen Group had the beneficial ownership of 35,945,199 common shares of LATAM Airlines Group (5.93% of LATAM Airlines Group’s outstanding shares). For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”

Mr. Giles Agutter is the owner and Chief Executive Officer of Southern Sky Ltd, an airline consultant company specializing in airline strategy, fleet planning, aircraft acquisition and aircraft financing. Mr. Agutter has had vast experience in advising airlines, including Qatar Airways, on significant Merger and Acquisition projects within the airline industry. Mr Agutter has a degree in Aerospace Engineering from Manchester University and he currently resides in England.

Mr. Carlos Heller Solari, joined the board of LAN in May 2010 and wasre-elected to the Board of Directors of LATAM in April 2015. Mr. Heller has vast experience in retail, communications, transport and agriculture industries. Mr. Heller is president of Bethia S.A. (“Bethia”) (parent company of Axxion S.A. and Inversiones HS SpA). He is also President of the Boards of Falabella Retail S.A., Red Televisiva Megavision S.A., Club Hípico de Santiago S.A., Sotraser S.A., Blue Express S.A., Aero Andina S.A. and “Azul Azul S.A.” concessionaire of the Corporación de Fútbol Profesional de la Universidad de Chile. He is also a member of the Board of Directors of S.A.C.I Falabella, Viña Indómita S.A., Viña Santa Alicia S.A. and Viña Dos Andes S.A. On January 31, 2017, Mr. Heller indirectly held 33,367,357 ordinary shares of LATAM Airlines Group through Axxion S.A. and Inversiones HS Spa (5.50% of the shares of LATAM Airlines Group).

Mr. Gerardo Jofré Miranda, joined LATAM Airlines’ Board of directors on May 2010 and was reelected to the board of directors of LATAM in April 2015. Mr. Jofré is member of the board of directors of Codelco, Enel Chile and member of the Real Estate Investment Council of Santander Real Estate Funds. From 2010 to 2014 he served as president of the board of directors of Codelco. From 2005 to 2010 he served as member of the boards of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A., Inmobiliaria Titanium S.A. Construmart S.A., Inmobiliaria Playa Amarilla S.A. and Inmobiliaria Parque del Sendero S.A. and was President of Saber Más Foundation. Mr. Jofré was Director of Insurance for America for Santander Group of Spain between the years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as Vice Chairman of the Group and as CEO, member of the boards of directors and Chairman of many of the Group’s companies. As of January 31, 2017, Mr. Jofré held 106,843 common shares of LATAM Airlines Group (0.017% of LATAM Airlines Group’s outstanding shares).

Mr. Francisco Luzón López, has served on LATAM Airlines Group’s board of directors since September 2012 and was reelected to the board of directors of LATAM in April 2015. He has served as a consultant of the Inter-American Development Bank (BID) and he has been Teacher “Visiting Leader” of the School of Business China-Europe (“CEIBS”) in Shanghai (2012-2013). He is

 

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currently a member of the board of La Haya Real Estate and served as Independent Director at Willis Group between June 2013 and January 2016. Between 1999 and 2012, Mr. Luzon served as Executive Vice President for Latin America of Banco Santander. In this period, he was also Worldwide Vice President of Universia S.A. Between 1991 and 1996 he was Chairman and CEO of Argentaria Bank Group. Previously, in 1987, he was appointed Director and General Manager of Banco de Vizcaya and in 1988, Counselor and General Director of Banking Group at BBV. During his career Mr. Luzon has held positions on the boards of several companies, most recently participating in the council of the global textile company Inditex-Zara from 1997 until 2012.

Senior Management

Mr. Enrique Cueto Plaza, is LATAM Airlines Group’s Chief Executive Officer (“CEO”) and has been in this position since the combination between LAN and TAM in June 2012. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air, a Chilean Cargo airline. From 1993 to 1994, Mr Cueto was a member of the board of LAN Airlines. Thereafter, Mr. Cueto held the position of CEO of LAN until June 2012. Mr. Cueto hasin-depth knowledge of passenger and cargo airline management, both in commercial and operational aspects, gained during his 30 years in the airline industry. Mr. Cueto is an active member of theoneworld® Alliance Governing Board, the IATA (International Air Transport Association) Board of Governors. He is also member of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile, and president of the Latin American and Caribbean Air Transport Association (ALTA). Mr. Cueto is the brother of Messrs. Juan José and Ignacio Cueto Plaza, member of the board and LAN CEO, respectively. Mr. Cueto is also a member of the Cueto Group (LATAM Airlines Group’s Controlling Shareholder). As of January 31, 2017, Mr. Cueto jointly shared in the beneficial ownership of 171,430,090 common shares of LATAM Airlines Group (28.27% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.”

Mr. Ignacio Cueto Plaza, is LAN’s CEO. His career in the airline industry extends over 30 years. In 1985, Mr. Cueto assumed the position of Vice President of Sales at Fast Air Carrier, the biggest national cargo company of that time. In 1985, Mr. Cueto assumed as Service Manager and Commercial Manager for the Miami sales office. Mr. Cueto later served on the board of directors of Ladeco (from 1994 to 1997) and LAN (from 1995 to 1997). Mr. Cueto served as President of LAN Cargo from 1995 to 1998, as Chief Executive Officer-Passenger Business from 1999 to 2005, and as President and Chief Operating Officer of LAN since 2005 until the combination with TAM in 2012. Mr. Cueto also led the establishment of the different affiliates that the Company has in South America, as well as the implementation of key alliances with other airlines. Mr. Cueto is the brother of Messrs. Juan José and Enrique Cueto Plaza, Director and LATAM’s CEO, respectively. Mr. Cueto is also a member of the Cueto Group (which is a controlling shareholder of LATAM). As of January 31, 2017, Mr. Cueto shared in the beneficial ownership of 171,430,090 common shares of LATAM (28.27% of LATAM’s outstanding shares) held by the Cueto Group. For more information see “Item 7. Controlling Shareholders and Related Party Transactions.” Mr. Cueto is expected to leave the Company’s senior management team inmid-April 2017 and is applying to become a member of LATAM’s board of directors.

Mr. Armando Valdivieso Montes,is Senior Commercial Vice President of LATAM since 2015. After the combination between LAN and TAM in 2012, Mr. Valdivieso served as General Manager of LAN, and from 2006 until 2012 he served as the General Manager-Passenger. Between 1997 and 2005 he served as Chief Executive Officer-Cargo Business of LAN. From 1995 to 1997, Mr. Valdivieso was President of Fast Air, and from 1991 to 1994, Mr. Valdivieso served as Vice President, North America of Fast Air Miami. Mr. Valdivieso is a civil engineer and obtained an AMP (Advance Managements Program) from Harvard Business School. Mr. Valdivieso will leave the Company during August 2017 as was announced by the Company on March 16, 2017. As of January 31, 2016, Mr. Valdivieso owned 95,859 common shares of LATAM (0.016% of LATAM Airlines Group’s outstanding shares).

Mrs. Claudia Sender Ramirez, has served as TAM Airlines’ President since May 2013. Mrs. Sender joined the company in December 2011, as Commercial and Marketing Vice-President. After June 2012, with the conclusion ofTAM-LAN combination and the creation of LATAM Airlines Group, she became the head of Brazil Domestic Business Unit, and her functions were expanded in order to include TAM’s entire Customer Service structure. Mrs. Prior to joining LATAM Airlines, she was Marketing Vice-President at Whirlpool Latin America for 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’s degree in Chemical Engineering from the Polytechnic School at the University of São Paulo (“USP”) and a MBA from Harvard Business School.

 

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Mr. Juan Carlos Mencio, is Senior Vice President of Legal Affairs and Compliance for LATAM Airlines Group since September 1, 2014. Mr. Mencio had previously held the position of General Counsel for North America for LATAM Airlines Group and its related companies, as well as General Counsel for its worldwide Cargo Operations, both since 1998. Prior to joining LAN, he was in private practice in New York and Florida representing various international airlines. Mr. Mencio obtained his Bachelor’s Degree in International Finance and Marketing from the School of Business at the University of Miami and his Juris Doctor Degree from Loyola University.

Mr. Ramiro Alfonsín, is LATAM’s Chief Financial Officer (“CFO”), a position he holds since July 2016. Over the past 16 years, before joining LATAM, he worked for Endesa, a leading utility company, in Spain, Italy and Chile, having served as Deputy Chief Executive Officer and Chief Financial Officer for their Latin American operations. Before joining the utility sector, he worked for 5 years in Corporate and Investment Banking in large European banks. Mr. Alfonsín holds a degree in business administration from Pontificia Universidad Católica de Argentina.

Mr. Emilio del Real Sota, is LATAM’s HR Executive Vice-President, a position he assumed (with LAN) in August 2005. Between 2003 and 2005, Mr. del Real was the Human Resource Manager of D&S, a Chilean retail company. Between 1997 and 2003 Mr. del Real served in various positions in Unilever, including Human Resource Manager for Chile, and Training and Recruitment Manager and Management Development Manager for Latin America. Mr. del Real has a Psychology degree from Universidad Gabriela Mistral.

During 2017, the Company will implement a new organizational structure focused on four basic areas –Clients, Revenue, Operations and Fleet, and Finance– which will be the pillars of the Company’s business strategy and will report directly to the CEO LATAM. The new structure will be simpler, more efficient and more functional, and will enable the Company to face an increasingly competitive environment. With this reorganization that will focus on functions instead of business units, the Company expects to optimize its internal synergies and strengthen its structure.

 

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The Clients area will be initially led by Claudia Sender. This area will focus on providing the client with a complete experience. The Revenues area, focused on maximizing revenues for the Company, will be initially led by Roberto Alvo Milosawlewitsch, who will be LATAM’s Chief Commercial Officer. The Operations and Fleet area will be initially led by Hernan Pasman, who will be responsible for the Operations and Fleet Vice-presidency. The Finance area will preserve its existing organization and structure, and will be led by Ramiro Alfonsín, the current Chief Financial Officer of the Company

B. Compensation

In 2016, 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$40,194,453. After the incentives for performance paid during 2015, the Company paid its principal executives total gross remunerations of US$55,174,744.

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 participated 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.

As set forth in further detail in the following table, in 2016 the members of our board of directors currently in office received fees and salaries in the aggregate amount of US$282,364.

 

Board Members

  Fees (US$)(1) 

Mauricio Rolim Amaro

   27,021 

Henri Philippe Reichstul

   23,798 

Ricardo J. Caballero

   9,188 

Juan José Cueto Plaza

   32,950 

Ramon Eblen Kadis

   57,123 

Georges de Bourguignon

   57,115 

Carlos Heller Solari

   15,576 

Juan Gerardo Jofre Miranda

   57,123 

Francisco Luzón López(

   2,470 

Total

   282,364 
  

 

 

 

 

(1) Includes fees paid to members of the board of directors’ committee, as described below.

All of the above-mentioned directors were elected to the LATAM board of directors in April 2015.

As required by Chilean law, LATAM Airlines Group makes obligatory contributions to the privatized pension fund system on behalf of its senior managers and executives, but it does not maintain any separate program to provide pension, retirement or similar benefits to these or any other employees.

C. Board Practices

Our board of directors is currently comprised of nine members. The terms of each of our current directors will expire in April 2017. See “—Directors and Senior Management” above.

 

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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:

 

 examining the reports of LATAM Airlines Group’s external auditors, the balance sheets and other financial statements submitted by LATAM Airlines Group’s administrators to the shareholders, and issuing an opinion with respect thereto prior to their presentation to the shareholders for their approval;

 

 proposing external auditors and rating agencies to the board of directors;

 

 evaluating and proposing external auditors and rating agencies;

 

 reviewing internal control reports pertaining to related-party transactions;

 

 examining and reporting on all related-party transactions; and

 

 reviewing the pay scale of LATAM Airlines Group’s senior management.

Under Chilean Corporation Law we are required, to the extent possible, to appoint a majority of independent 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. Reserved—G. Corporate Governance.”

Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in Rule10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our Board of Directors’ Committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule10A-3 under the Exchange Act.

As of December 31, 2016, all of the members of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule10A-3 of the Exchange Act. As of December 31, 2016, the committee members were Mr. Gerardo Jofré Miranda, Mr. Ramón Eblen Kadis and Mr. Georges de Bourguignon. 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 for the first time the Company’s Corporate Practices Report prepared according to General Rule N° 341, current N°385 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:

 

 how the Board works;

 

 the relationship between the company, shareholders and the public in general;

 

 how senior officers are replaced and compensated; and

 

 the definition, implementation and supervision of internal control and risk management policies and procedures inside the company.

 

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D. Employees

The following table sets forth the number of employees in various positions at the Company.

 

Employees ending the period

  As of December 31, 
   2016(1)   2015   2014 

Administrative

   8,010    9,118    10,077 

Sales

   4,235    5,022    5,246 

Maintenance

   4,895    5,990    6,986 

Operations

   15,924    16,878    17,517 

Cabin crew

   8,970    9,383    9,237 

Cockpit crew

   3,882    4,022    4,009 
  

 

 

   

 

 

   

 

 

 

Total

   45,916    50,413    53,072 
  

 

 

   

 

 

   

 

 

 

 

(1)At December 31, 2016, approximately 51% of our employees worked in Brazil, 25% in Chile, 21% in other Latin American countries and 3% in the rest of the world.

Our salary structure is comprised of: (a) fixed payments (base salary and other fixed payments such as legal gratifications, local bonus, company seniority and others, depending on each country’s law and market practice); (b) short term incentives (associated with corporate, area and individual performance), applicable to our ground staff; (c) long term incentives (applicable to our senior executives (Senior Directors and above)).

According to the local law requirements, we make pension and social security contributions on behalf of our employees. Additionally, for our air staff and specialized professionals such as mechanics, we have fixed and variable payments, subject to the local collective agreements.

Regarding benefits, we usually provide life insurance and medical insurance, complementary of the coverage provided by the legal system. We also grant other benefits, according to local market practice (meal, transportation, maternal and paternal leave, etc.). Additionally, we have a global staff travel program, which grants free and discounted tickets to our permanent employees.

Long Term Incentive Compensation Program

1. Compensation plan 2011

On December 21, 2016, the subscription and payment period of the 4,800,000 shares corresponding to the compensation plan approved at the Extraordinary Shareholders Meeting held on December 21, 2011 (the “2011 Compensation Plan”), expired. Of the total shares allocated to the 2011 Compensation Plan, only 10,282 shares were subscribed and paid and were placed on the market in January 2014. At the expiration date, the 2011 Compensation Plan had a balance of 4,789,718 unsubscribed and unpaid shares, which was deducted from the authorized capital of the Company.

2. Compensation plan 2013

At the Extraordinary Shareholders Meeting held on June 11, 2013, the Company’s shareholders approved a capital increase and the allocation of 1,500,000 shares to compensation plans for employees of the Company pursuant to Article 24 of the Chilean Corporations Law. The Company has not defined a date for implementation of this compensation plan yet.

3. Compensation plan 2016-2018

The Company implemented a long-term retention plan for executives, with an end date of December 2018 and a vesting period between October 2018 and March 2019. The plan contemplates an extraordinary bonus to be paid in cash, whose calculation formula based on the variation of the value of the Company’s shares over a certain period of time.

For more information, please see note 34 Note to our consolidated financial statements.

Labor Relations

We believe we generally maintain good relations with our employees and the unions, and expect to continue to enjoy good relations with our employees and the unions in the future. We also believe that we have built a solid base among our employees that

 

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will support and facilitate our growth plans. We can provide no assurance, however, that our employee compensation arrangements may not be subject to change or modification after the expiration of the contracts currently in effect, or that we will not be subject to labor-related disruptions due to strikes, stoppages or walk-outs.

Chile

As a general labor relations policy in Chile, we negotiate labor contracts with unions in anticipation of their scheduled expirations. As anon-negotiable clause, all collective bargaining agreements are signed for the maximum legal term, namely, four years. During 2016, we renegotiated our collective bargaining agreements with the following unions: Transporte Aéreo (LATAM Airlines Chile) Pilots’ Union, LATAM maintenance union, LATAM airport union, Transporte Aéreo maintenance union and LATAM Cargo administrative union.All these collective agreements will be in force for the maximum legal term.

LATAM Cargo pilots’ union, in the context of a ruled negotiation, rejected the Company’s last offer, and the negotiation ended by in a unilateral extension of the collective agreement’s validity for 18 months. Thus, a new negotiation process should take place during the first quarter of 2018.

Ecuador

 

 LATAM:Three employee associations were formed in 2012: of pilots, other general but composed mostly by maintenance employees and other general but composed mostly by employees of airports/administration. In November 2015 the Company signed a voluntary agreement with the association of pilots, in force until July 2019.

Additionally, in 2011 a union previously exclusive to cabin crew became general. This group maintains relations with the Company, but does not have the right to enter into or negotiate collective bargaining agreements under Ecuadorian law because less than 50% of our employees eligible for membership are members of this union.

 

 ANDES:In 2013 two unions of ground handling employees were formed in Andes. 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. Additionally, in 2015 one employees association was formed in Andes. This group also has no right to enter negotiate collective bargaining agreements under Ecuadorian law, because less than 50% of our employees eligible for membership are members of the association.

Argentina

In Argentina, 75.9% percent of LATAM employees are affiliated in at least in one of nine unions.

In November 2016 we started to negotiate the annual adjustment for inflation with the seven unions. In January 2017, we reached an agreement with the unions.

In 2016 we succeeded in implementing the Company’s planned changes to reduce operational labor and overhead costs, without significant protests or union intervention.

Colombia

In Colombia we have 4 different unions. The company held negotiations with them, as follows: (i) with the Technicians Union (ACMA), in 2014, and it will be in force until June of 2018, (ii) With the Cabin Crew Union (ACAV), in 2014, and it will be in force until December of 2018, (iii) with the Industrial Union of Aviation Workers (SINTRATAC), held in June of 2016 and it will be in force until May of 2018, and (iv) in October 2016, an arbitration court ruled that the negotiation with the Pilots Union (ACDAC) will be in force until November 2017.

Peru

LATAM Airlines Peru will begin negotiations with the pilots’ union during the second quarter of 2016. Negotiations are expected to conclude with a collective agreement in June 2017.In 2017, negotiations will begin with the cabin crew’s union and the aircraft technicians’ union. In Peru we have in total six unions representing workers from different areas: pilots, cabin crew, aircraft technicians, flight dispatchers and airport workers. Our current collective agreements have a term of four years.

Brazil

Under Brazilian law, the term 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

 

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collective bargaining agreements with ten unions in Brazil—one crew flight union, which represents pilots, copilots and flight attendants, and nine ground staff unions. In December 2016, TAM renegotiated collective bargaining agreements with all the unions, which included a wage increase of 7.4%, in line with the inflation rate of the last 12 mounths. For ground staff workers with salaries up to ten thousand dollars, the increase was R$ 739.00.

E. Share Ownership

As of December 31, 2016, the members of our Board of Directors and our executive officers as a group owned 47.7% 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.”

 

ITEM 7.CONTROLLING SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Mr. Ignacio Cueto Plaza (the CEO of LAN), Mr. Enrique Cueto Plaza (the CEO LATAM) and certain other Cueto family members and entities controlled by them, comprise the Cueto Group. As of January 31, 2017 the Cueto Group beneficially owned (as defined in Rule13d-3 under the Securities Exchange Act) 28.27% of LATAM Airlines Group’s common shares. The Cueto Group is entitled to elect three of the nine members of our board of directors and is in a position to direct the management of the Company. In connection with our combination with TAM, members of the Cueto Group (which we also refer to collectively as the “LATAM Controlling Shareholders”) entered into a shareholder’s agreement with the Amaro Family, acting through TEP Chile, and TEP Chile entered into shareholder’s agreements with LATAM and TAM. See “—Shareholders’ Agreements.”

Following our combination with TAM, the Amaro Group is also a major shareholder of LATAM Airlines Group. Through their 100% ownership of TEP Chile and majority ownership of the voting shares of Holdco I, which in turn owns 100% of the common shares of TAM,the Amaro Group, are controlling shareholders of TAM. This is the case even though LATAM is entitled to substantially all the economic rights arising from the operations of TAM by virtue of LATAM’s ownership of 100% of Holdco I and TAMnon-voting shares. Members of the Amaro Group’ include our chairman, Mauricio Rolim Amaro and our former director Maria Claudia Amaro. As of January 31, 2017, the Amaro Group owned 3.02%(2) of LATAM Airlines Group’s common shares. The terms of the shareholders’ agreement among the Amaro Group, LATAM and the LATAM Controlling Shareholders require the LATAM Controlling Shareholders and the Amaro Group to vote to elect individuals nominated to our board of directors in accordance with the direct and indirect shareholder interests in LATAM. See “—Shareholders’ Agreements.”

In addition to the Cueto Group and the Amaro Group, three other groups or entities are major shareholders of LATAM. As of January 31, 2017, the Eblen Group, which includes our director Ramón Eblen Cádiz, owned 5.93% of our common shares; the Bethia Group, which includes our director Carlos Heller Solari, owned 5.50% of our common shares; and Qatar Airways Investments (UK) Ltd., whose nominee Giles Agutter became one of our directors effective January 24, 2017, owned 10.03%(4)of our outstanding common shares.

The table below sets forth additional information regarding the beneficial ownership of our common shares, as of January 31, 2017, by our controlling shareholders, other major shareholders or shareholder groups, and minority shareholders.

 

   Beneficial ownership
(as of January 31, 2017)
 
   Number of shares
of common stock
beneficially owned
   Percentage of
common stock
beneficially owned
 

Shareholder

    

Cueto Group(1)

   171,430,090    28.27

Costa Verde Aeronautica S.A(2) (3)

   90,427,620    14.91

Inversiones Costa Verde Aeronautica Tres SpA

   35,300,000    5.82

Inversiones Nueva Costa Verde Aeronautica Ltda.

   23,578,077    3.89

Costa Verde Aeronautica SpA

   12,000,000    1.98

Others

   10,124,393    1.67

Qatar Airways(4)

   60,837,452    10.03

 

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   Beneficial ownership
(as of January 31, 2017)
 
   Number of shares
of common stock
beneficially owned
   Percentage of
common stock
beneficially owned
 

Qatar Airways Investments (UK) Ltda.

   60,837,452    10.03

Eblen Group.

   35,945,199    5.93

Inversiones Andes SpA.

   17,146,529    2.83

Inversiones Andes II SpA

   8,000,000    1.32

Inversiones PIA SpA.

   5,403,804    0.89

Comercial las Vertientes SpA

   5,394,866    0.89

Bethia Group.

   33,367,357    5.50

Axxion S.A.

   18,473,333    3.05

Inversiones HS SpA.

   14,894,024    2.45

Amaro Group(2)(3)

   18,342,913    3.02

TEP Chile S.A.

   18,342,913    3.02

All other minority shareholders

   288,484,682    47.24

Total

   606,407,693    100.00

 

(1)The ownership figures for the Cueto Group in this table exclude shares held directly by TEP Chile S.A. which are subject to the shareholders’ agreements described below.
(2)Members of the Amaro Group also hold a 21.88% interest in Costa Verde Aeronáutica S.A.
(3)The ownership figures for the Amaro Group in this table exclude shares held by the Cueto Group which are subject to the shareholders’ agreements described below.
(4)Qatar owns 9.999999918% of the total issued shares of LATAM.

As of January 31, 2017, 4.55% of our capital stock was held in the form of ADSs. Chilean pension funds held 19.41% of our capital stock and other minority investors held 23.28% in the form of common shares. It is not practicable for us to determine the number of ADSs or common shares beneficially owned in the United States. As of January 31, 2017, we had 1,585 record holders of our common shares. It is not practicable for us to determine the portion of shares held in Chile or the number of record holders in Chile. All of our shareholders have identical voting rights.

Shareholders’ Agreements

As described above under “Item 4. Information on the Company—A. History and Development of the Company—Combination of LAN and TAM,” following 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 combination, LATAM Airlines Group and the LATAM Controlling Shareholders entered into several shareholders’ agreements with TAM, the Amaro Group (acting through TEP Chile) and Holdco I, establishing agreements and restrictions relating to corporate governance in an attempt to balance LATAM Airlines Group’s interests, as the owner of substantially all of the economic rights in TAM, and those of the Amaro Group, as the continuing controlling shareholders of TAM under Brazilian law, by prohibiting the taking of certain specified material corporate actions and decisions without prior supermajority approval of the shareholders and/or the board of directors of Holdco I or TAM. These shareholders’ agreements also set forth the parties’ agreement regarding the governance and management of the LATAM Airlines Group following the consummation of the combination of LAN and TAM.

Governance and Management of LATAM Airlines Group

We refer to the shareholders’ agreement among the LATAM Controlling Shareholders and the Amaro Group (acting through TEP Chile), which sets forth the parties’ agreement concerning the governance, management and operation of the LATAM Airlines Group, and voting and transfer of their respective LATAM Airlines Group common shares and TEP Chile’s voting shares of Holdco I,

 

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as the “control group shareholders’ agreement.” We refer to the shareholders’ agreement between LATAM Airlines Group S.A. and TEP Chile, which sets forth agreements concerning the governance, management and operation of the LATAM Airlines Group, as the “LATAM AirlinesGroup-TEP shareholders’ agreement.” The control group shareholders’ agreement and the LATAM AirlinesGroup-TEP shareholders’ agreement set forth the parties’ agreement on the governance and management of the LATAM Airlines Group following the effective time.

This section describes the key provisions of the control group shareholders’ agreement and the LATAM AirlinesGroup-TEP shareholders’ agreement. The description of the LATAM AirlinesGroup-TEP shareholders’ agreement summarized below and elsewhere in this annual report on Form20-F is qualified in its entirety by reference to the full text of such shareholders’ agreement, which has been filed as exhibit to this annual report on Form20-F.

Composition of the LATAM Airlines Group Board

Mr. Maurício Rolim Amaro was reelected to the LATAM Airlines Group board of directors in April 2014 and April 2015. If Mr. Amaro vacates this position for any reason before April 2017, 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 the LATAM Airlines Group’sby-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, pursuant to Chilean law, Mr. Henri Philippe Reichstul was appointed by the board to fill her seat until the next general shareholders meeting. Mr. Reichstul wasre-elected to the board in April 2015.

Management of the LATAM Airlines 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 AirlinesGroup-TEP shareholders’ agreement. After any departure of the current CEO LATAM, our board of directors will select his or her successor after receiving the recommendation of the Leadership Committee.

Mr. Ignacio Cueto Plaza has served as CEO of LAN (“CEO LAN”) since June 2012. The CEO LAN reports directly to the CEO LATAM and has general supervision, direction and control of the passenger and cargo operations of the LATAM Airlines Group, excluding those conducted by Holdco I, TAM and its affiliates, and the international passenger business of the LATAM Airlines Group. The CEO LAN, together with Mrs. Claudia Sender, the current CEO of TAM (“CEO TAM”), are responsible for recommending a candidate to the CEO LATAM to serve as the head of the international passenger business of the LATAM Airlines Group (including both long haul and regional operations), who shall report jointly to the CEO LAN and the CEO TAM. The key executives of the LATAM Airlines Group (other than the CEO LATAM and those in the TAM Group) will be appointed by, and will report, directly or indirectly, to the CEO LATAM. Mr. Cueto will leave the Company’s senior management team inmid-April 2017 and is applying to become a member of LATAM’s board of directors.

The head office of the LATAM Airlines Group continues to be located in Santiago, Chile.

Governance and Management of Holdco I and TAM

We refer to the shareholders’ agreement between us, Holdco I and TEP Chile, which sets forth our agreement concerning the governance, management and operation of Holdco I, and voting and transfer of voting shares of Holdco I, as the “Holdco I shareholders’ agreement” and to the shareholders’ agreement between us, Holdco I, TAM and TEP Chile, which sets forth our agreement concerning the governance, management and operation of TAM and its subsidiaries following the effective time, as the “TAM shareholders’ agreement.” The Holdco I shareholders’ agreement and the TAM shareholders’ agreement set forth the parties’ agreement on the governance and management of Holdco I, TAM and its subsidiaries (collectively, the “TAM Group”) following the combination of LAN and TAM.

This section describes the key provisions of the Holdco I shareholders’ agreement and the TAM shareholders’ agreement. The description of the Holdco I shareholders’ agreement and the TAM shareholders’ agreement summarized below and elsewhere in this annual report on Form20-F are qualified in their entirety by reference to the full text of the aforementioned shareholders’ agreements, which have been filed as exhibits to this annual report on Form20-F.

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).

 

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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 Amaro Group to our board of directors must also serve on the boards of directors of both Holdco I and TAM.

Management of Holdco I and TAM

Theday-to-day business and affairs of Holdco I will be managed by the TAM Group CEO under the oversight of the board of directors of Holdco I. Theday-to-day business and affairs of TAM will be managed by the TAM Diretoria under the oversight of the board of directors of TAM. The TAM Diretoria will be comprised of the TAM Group CEO, the TAM CFO, the TAM COO and the TAM CCO, currently the CEO of TAM, will be the initial CEO of Holdco I and TAM, or the “TAM Group CEO” and any successor CEO will be selected by LATAM from three candidates proposed by TEP Chile. The TAM Group CEO will have general supervision, direction and control of the business and operations of the TAM Group (other than the international passenger business of the LATAM Airlines Group) and will carry out all orders and resolutions of the board of directors of TAM. The initial chief financial officer of TAM, or the “TAM CFO,” has been jointly selected by LATAM and TEP Chile and any successor CFO will be selected by TEP Chile from three candidates proposed by LATAM. The chief operating officer of TAM, or the “TAM COO,” and chief commercial officer of TAM, or the “TAM CCO,” will be jointly selected and recommended to the TAM board of directors by the TAM Group CEO and TAM CFO and approved by the TAM board of directors. These shareholders’ agreements also regulate the composition of the boards of directors of subsidiaries of TAM.

Following the combination, TAM continues to be headquartered in São Paulo, Brazil.

Supermajority Actions

Certain actions by Holdco I or TAM require supermajority approval by the board of directors or the shareholders of Holdco I or TAM which effectively require the approval of both LATAM and TEP Chile before the specified actions can be taken. Actions that require supermajority approval of the Holdco I board of directors or the TAM board of directors include, as applicable:

 

 to approve the annual budget and business plan and the multi-year business (which we refer to collectively as the “approved plans”), as well as any amendments to these plans;

 

 to take or agree to take any action which causes, or will reasonably cause, individually, or in the aggregate, any capital, operating or other expense of any TAM Company and its subsidiaries to be greater than (i) the lesser of 1% of revenue or 10% of profit under the approved plans, with respect to actions affecting the profit and loss statement, or (ii) the lesser of 2% of assets or 10% of cash and cash equivalents (as defined by IFRS) as set forth in the approved plan then in effect, with respect to actions affecting the cash flow statement;

 

 to create, dispose of or admit new shareholders to any subsidiary of the relevant company, except to the extent expressly contemplated in the approved plans;

 

 to approve the acquisition, disposal, modification or encumbrance by any TAM company of any asset greater than $15 million or of any equity securities or securities convertible into equity securities of any TAM Company or other company, except to the extent expressly contemplated in the approved plans;

 

 to approve any investment in assets not related to the corporate purpose of any TAM company, except to the extent expressly contemplated in the approved plans;

 

 to enter into any agreement in an amount greater than $15 million, except to the extent expressly contemplated in the approved plans;

 

 to enter into any agreement related to profit sharing, joint ventures, business collaborations, alliance memberships, code sharing arrangements, except as approved by the business plans and budget then in effect, except to the extent expressly contemplated in the approved plans;

 

 to terminate, modify or waive any rights or claims of a relevant company or its subsidiaries under any arrangement in any amount greater than $15 million, except to the extent expressly contemplated in the approved plans;

 

 to commence, participate in, compromise or settle any material action with respect to any litigation or proceeding in an amount greater than $15 million, relating to the relevant company, except to the extent expressly permitted in the approved plans;

 

 to approve the execution, amendment, termination or ratification of agreements with related parties, except to the extent expressly contemplated in the approved plans;

 

 to approve any financial statements, amendments, or any accounting, dividend or tax policy of the relevant company;

 

 to approve the grant of any security interest or guarantee to secure obligations of third parties;

 

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 to appoint executives other than the Holdco I CEO or the TAM Diretoria or tore-elect the then current TAM CEO or TAM CFO; and

 

 to approve any vote to be cast by the relevant company or its subsidiaries in its capacity as a shareholder.

Actions requiring supermajority shareholder approval include:

 

 to approve any amendments to theby-laws of any relevant company or its subsdiaries in respect to the following matters: (i) corporate purpose; (ii) corporate capital; (iii) the rights inherent to each class of shares and its shareholders; (iv) the attributions of shareholder regular meetings or limitations to attributions of the board of directors; (v) changes in the number of directors or officers; (vi) the term; (vii) the change in the corporate headquarters of a relevant company; (viii) the composition, attributions and liabilities of management of any relevant company; and (ix) dividends and other distributions;

 

 to approve the dissolution, liquidation, or winding up of a relevant company;

 

 to approve the transformation, merger,spin-up or any kind of corporatere-organization of a relevant company;

 

 to pay or distribute dividends or any other kind of distribution to the shareholders;

 

 to approve the issuance, redemption or amortization of any debt securities, equity securities or convertible securities;

 

 to approve a plan or the disposal by sale, encumbrance or otherwise of 50% or more of the assets, as determined by the balance sheet of the previous year, of Holdco I;

 

 to approve the disposal by sale, encumbrance of otherwise of 50% or more of the assets of a subsidiary of Holdco I representing at least 20% of Holdco I or to approve the sale, encumbrance or disposition of equity securities such that Holdco I loses control;

 

 to approve the grant of any security interest or guarantee to secure obligations in excess of 50% of the assets of the relevant company; and

 

 to approve the execution, amendment, termination or ratification of acts or agreement with related parties but only if applicable law requires approval of such matters.

Voting Agreements, Transfers and Other Arrangements

Voting Agreements

The LATAM Controlling Shareholders and TEP Chile have agreed in the control group shareholders agreement to vote their respective LATAM Airlines Group common shares as follows:

 

 the parties agree to vote their LATAM Airlines Group common shares to assist the other parties in removing and replacing the directors such other parties elected to the LATAM Airlines Group board of directors;

 

 the parties agree to consult with one another and use their good faith efforts to reach an agreement on all actions (other than actions requiring supermajority approval under Chilean law) to be taken by the LATAM board of directors or the LATAM shareholders, and if unable to reach such agreement, to follow the proposal made by our board of directors;

 

 the parties agree to maintain the size of the LATAM Airlines Group board of directors at a total of nine directors and to maintain the quorum required for action by the LATAM Airlines Group board of directors at a majority of the total number of directors of the LATAM Airlines Group board of directors; and

 

 if, after good faith efforts to reach an agreement with respect to any action that requires supermajority approval under Chilean law and a mediation period, the parties do not reach such an agreement, then TEP Chile has agreed to vote its shares on such supermajority matter as directed by the LATAM Airlines Group controlling shareholders, which we refer to as a “directed vote.”

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 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 were permitted to sell any of their LATAM Airlines Group common shares, and TEP Chile was not permitted to sell its voting shares of Holdco I, until June 2015. Since then, sales of

 

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LATAM Airlines Group common shares by either party are permitted, subject to (i) certain limitations on the volume and frequency of such sales and (ii) in the case of TEP Chile only, TEP Chile satisfying certain minimum ownership requirements. On or after December 31, 2021, TEP Chile may sell all of its LATAM Airlines Group common shares and voting shares of Holdco I as a block, subject to (x) approval of the transferee by the LATAM board of directors, (y) the condition that the sale not have an adverse effect and (z) a right of first offer in favor of the LATAM Airlines Group controlling shareholders, 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 December 21, 2021 if a release event (as described below) occurs or if TEP Chile is required to make two or more directed votes during any24-month period at two meetings (consecutive or not) of the shareholders of LATAM Airlines Group held at least 12 months apart and LATAM Airlines Group has not yet fully exercised its conversion option described below. A “release event” will occur if (i) a capital increase of LATAM Airlines Group occurs, (ii) TEP Chile does not fully exercise the preemptive rights granted to it under applicable law in Chile with respect to such capital increase in respect of all of its restricted LATAM Airlines Group common shares, and (iii) after such capital increase is completed, the individual designated by TEP Chile for election to the board of directors of LATAM Airlines Group with the assistance of the LATAM Airlines Group controlling shareholders is not elected to the board of directors of LATAM Airlines Group.

In addition, after December 31, 2021 and after the occurrence of the full ownership trigger date (as described below under the “—Conversion Option” section), TEP Chile may sell all or any portion of its LATAM Airlines Group common shares, subject to (x) a right of first offer in favor of the LATAM Airlines Group controlling shareholders and (y) the restrictions on sales of LATAM Airlines Group common shares more than once in a12-month period.

The control group shareholders agreement provides certain exceptions to these restrictions on transfer for certain pledges of LATAM Airlines Group common shares made by the parties and for transfers to affiliates, in each case under certain limited circumstances.

In addition, TEP Chile agreed in the Holdco I shareholders agreement not to vote its voting shares of Holdco I, or to take any other action, in support of any transfer by Holdco I of any equity securities or convertible securities issued by it or by any of TAM or its subsidiaries without our prior written consent.

Restriction on transfer of TAM shares

LATAM agreed in the Holdco I shareholders’ agreement not to sell or transfer any shares of TAM stock to any person (other than our affiliates) at any time when TEP Chile owns any voting shares of Holdco I. However, LATAM will have the right to effect such a sale or transfer if, at the same time as such sale or transfer, LATAM (or its assignee) acquires all the voting shares of Holdco I beneficially owned by TEP Chile for an amount equal to TEP Chile’s then current tax basis in such shares and any costs TEP Chile is required to incur to effect such sale or transfer. TEP Chile has irrevocably granted us the assignable right to purchase all of the voting shares of Holdco 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 ofnon-voting stock of Holdco I into shares of voting stock of Holdco I to the maximum extent allowed under law and to increase our representation on the TAM and Holdco I boards of directors if and when permitted in accordance with foreign ownership control laws in Brazil and other applicable laws if the conversion would not have an adverse effect (as defined above under the “— Transfer Restrictions” section).

On or after December 31, 2021, and after we have fully converted all of our shares ofnon-voting stock of Holdco I into shares of voting stock of Holdco I as permitted by Brazilian law and other applicable laws, we will have the right to purchase all of the voting shares of Holdco I held by the controlling shareholders of TAM for an amount equal to their then current tax basis in such shares and any costs incurred by them to effect such sale, which amount we refer to as the “sale consideration.” If we do not timely exercise our right to purchase these shares or if, after December 31, 2021, we have the right under applicable law in Brazil and other applicable law to fully convert all the shares ofnon-voting stock of Holdco I beneficially owned by us into shares of voting stock of Holdco I and such conversion would not have an adverse effect but we have not fully exercised such right within a specified period, then the controlling shareholders of TAM will have the right to put their shares of voting stock of Holdco I to us for an amount equal to the sale consideration.

 

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Acquisitions of TAM Stock

The parties have agreed that all acquisitions of TAM common shares by LATAM Airlines Group, Holdco I, TAM or any of their respective subsidiaries from and after the effective time of the combination will be made by Holdco I.

B. Related Party Transactions

General

We have engaged in a variety of transactions with our affiliates, including entities owned or controlled by certain of our controlling shareholders. In the ordinary course of our business we render to and receive from related companies services of various types, including aircraft leases, aircraft interchanges, freight transportation and reservation services. Such transactions, none of which is individually material, are summarized in Note 35 to our audited consolidated financial statements for the fiscal year ended December 31, 2016.

On August 2, 2016, the Board of Directors recently approved the Policy on Control of Related-Party Transactions of LATAM Airlines Group S.A. and its subsidiaries, which states:

 

 Related-party means, among others, subsidiaries, affiliates, natural persons or legal entities with control of 10% or more of the Company’s voting stock, vice presidents, directors or senior executives as well as their respective spouses, relatives, and companies in which said persons are either direct or indirect owners of 10% or more of the Company’s voting stock, or in which they have held a position over the last 18 months.

 

 Related-Party Transactions can only be executed if said transactions are in LATAM’s interest and adjust to price, terms and conditions prevalent in the market for similar transactions with other third parties at the time of its approval.

 

 Any and all negotiations, acts, contracts or operations in which a company of the LATAM Group and a party related to such company serve as the participants will be subject to the Policy.

 

ITEM 8.FINANCIAL INFORMATION

A. Consolidated Financial Statements and Other Financial Information

See “Item 3. Key Information—A. Selected Financial Data,” “Item 18. Financial Statements” and pagesF-1 throughF-194.

Legal and Arbitration Proceedings

We are involved in routine litigation and other proceedings relating to the ordinary course of our business. The following is a description of all the material legal and arbitration proceedings.

In February 2006 the European Commission (“EC”), the Department of Justice of the United States (“DOJ”), the Canadian Competition Bureau (“CCB”), and Conselho Administrativo de Defesa Econômica (“CADE”), among others, initiated a global investigation of a large number of international cargo airlines (among them LAN Cargo) for possible price fixing of cargo fuel surcharges and other fees in the European and United States air cargo markets. As previously announced, LAN Cargo reached plea agreements with the DOJ and the CCB, which included the payment of fines, in relation to such investigation. On November 9, 2010, the EC imposed fines on 11 air carriers for a total amount of €799.4 million (equivalent to approximately US$1.1 billion). The fine imposed against LAN Cargo and its parent company, LAN, totaled €8.2 million (equivalent to approximately US$10.9 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. The European Court of Justice overtuned the Commission’s decision on December 16, 2015. On May 20 2016 the EC confirmed that they have decided not to appeal the case and to issue a new decision with the aim of correcting the faults identified in the judgement by the European Court of Justice. On 17 March 2017, the ECre-adopted its decision and imposed on LAN Cargo and its parent company, LATAM, a fine in the same amount, €8.2 million, as the original fine.

 

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On September 3, 2013, CADE published its decision to impose a fine of US$51.0 million against ABSA, after an investigation, commenced in 2008, against several cargo airlines and airlines officers over allegations of anticompetitive practices regarding fuel surcharges in the air cargo business. CADE also imposed fines upon a former Director and two former employees in the amounts of US$1.0 million and US$510,000 respectively. On December 5, 2013 ABSA filed its application for Administrative Reconsideration before CADE. On December 19, 2014, CADE issued a new decision which reduced the fine against ABSA to US$15,382,082 (based on an exchange rate of US$ 1 = R$ 3.2591). CADE also reduced the fines against ABSA’s Director and employees to US$251,616 and US$125,800, respectively (also based on an exchange rate of US$ 1 = R$ 3.2591). ABSA has initiated a judicial appeal against the Union Federal seeking an additional reduction of the fine amount. In the light of said pending judicial appeal, we cannot predict the ultimate outcome of this matter at this time.

The investigations by the DOJ, CCB and the EC prompted the filing of civil actions and claims by freight forwarding and shipping companies against many airlines, including LAN Cargo and LATAM Airlines Group. LAN Cargo and ABSA reached a settlement agreement with the class action plaintiffs /non-class action claimants in the United States on August 6, 2012, and in Canada on August 20, 2013.

Civil actions have also been initiated against many airlines, including LAN Cargo and LATAM Airlines Group, in various European countries (Great Britain, Norway, Holland and Germany). The activity and progress of said civil actions is limited, in that they are now directly contingent upon the decision of the EC to issue a new decision correcting the faults identified in the judgement. We cannot predict the ultimate outcome of these cases at this time.

Agreements with the DOJ and the SEC. In 2011, authorities in Chile and the United States initiated investigations relating to certain payments by LATAM Airlines Group S.A. (formerly LAN Airlines S.A.) to a consultant who assisted in the resolution of labor issues in Argentina in 2006-2007. The Company voluntarily reported this situation to the Securities and Exchange Commission (“SEC”) and the Justice Department of the United States (“DOJ”) and actively cooperated in those investigations. On February 4, 2016, Ignacio Cueto, the CEO of LAN, consented to entry of acease-and-desist order by the SEC relating to the payments described above. Mr. Cueto agreed to pay a US$75,000 penalty to the SEC, to remain in compliance with LATAM’s compliance structure and internal accounting controls and to comply with the SEC’s books and records requirements. In July 2016, after multiple and prolonged exchanges of opinions and conversations with the DOJ and the SEC, LATAM also reached definitive agreements with both authorities.

In the case of the DOJ, the agreement took the form of a Deferred Prosecution Agreement (“DPA”), pursuant to which the DOJ will dismiss the charges after the expiration of a three-year period if LATAM complies with all terms of the DPA. Pursuant to the DPA, LATAM has admitted that the accounting for the payments made to the consultant in Argentina was incorrect and that, at the time that such payments were made (2006-2007), it lacked adequate internal controls. LATAM has also accepted an independent consultant, for 27 months, whose function will be to monitor, evaluate, and report to the DOJ on the effectiveness of LATAM’s compliance program. LATAM also committed to reporting to the DOJ on the effectiveness of the aforementioned compliance program for 9 months after the work of the independent consultant is finished. Lastly, LATAM also agreed to pay a fine of US$12,750,000 to the DOJ.

The settlement with the SEC included the issuance by the SEC of acease-and-desist order, which is an administrative order closing the investigation whereby LATAM has accepted certain obligations and statements of fact. The order also refers to the obligations related to the monitorship agreed under the DPA with the DOJ. LATAM also agreed to pay an amount of US$6,700,000 plus interest to the SEC. As of December 31, 2016, a balance of US$ 4,718,894 was payable to the SEC. .

Legal proceedings involving TAM

TAM Linhas Aéreas is party to one action filed by relatives of victims of an accident that occurred in October 1996 involving one of its Fokker 100 aircraft which crashed during departure, in addition to 22 actions filed by residents of the region where the accident occurred, who are 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 Itaú Unibanco Seguros 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.

 

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TAM Linhas Aereas filed an ordinary action with a request for injunctive relief fornon-payment of the Airline Workers Fund, a tax charged monthly at the rate of 2.5% of an airline’s total payroll. Currently, judgment is pending on an appeal that TAM lodged challenging the initial decision (which was ruled in favor of the Brazilian National Institute of Social Security (“INSS”)). 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 US$43.3 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 US$43.3 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 thebreak-up of an air transportation concession agreement that resulted in the freezing of TAM’s prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period. The process is currently being heard before the Federal Regional Court and judgment is pending an appeal by TAM requesting clarification of the initial decision. 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$1,696 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 2.794 million. Since February 2016 the administrative proceeding awaits a decision. In the opinion of our legal advisors, the chance of losing in this proceeding is possible.

For additional Legal Proceedings relating to the ordinary course of our business, please see Note 30 – Contingencies – to our audited consolidated financial statements.

Dividend Policy

In accordance with the Chilean Corporation Law, LATAM must distribute cash dividends equal to at least 30% of its annual consolidated net income calculated in accordance with IFRS subject to the terms ofOficio Circular No. 856 issued on October 17, 2014 by the Chilean Superintendency of Securities and Insurance. If there is no net income in a given year, LATAM can elect but is not legally obligated to distribute dividends out of retained earnings. The board of directors may declare interim dividends out of profits earned during such interim period. Pursuant to LATAM’sby-laws, the annual cash dividend is approved by the shareholders at the annual ordinary shareholders’ meeting held between February 1 and April 30 of the year following the year with respect to which the dividend is proposed. All outstanding common shares are entitled to share equally in all dividends declared by LATAM, unless the shares have not been fully paid by the shareholder after being subscribed.

Holders of ADSs will be entitled to receive dividends on the underlying common shares to the same extent as holders of common shares. Holders of ADRs on the applicable record dates will be entitled to receive dividends paid on the common shares represented by the ADSs evidenced by such ADRs. Dividends payable to holders of ADSs will be paid by us to the depositary in Chilean pesos and remitted by the depositary to such holders net of foreign currency conversion fees and expenses of the depositary and will be subject to Chilean withholding tax currently imposed at a rate of 35% (subject to credits in certain cases as described under “Item 10. Additional Information— E. Taxation—Cash Dividends and Other Distributions”). Owners of the ADSs will not be charged any dividend remittance fee by the depositary with respect to cash dividends.

Chilean law requires that holders of shares of Chilean companies that are not residents of Chile register as foreign investors under one of the foreign investment regimes established by Chilean law in order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market (Mercado Cambiario Formal). Under our Foreign Investment Contract, the depositary, on behalf of ADS holders, will be granted access to the Formal Exchange Market to convert cash dividends from pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile.

B. Significant Changes

None.

 

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ITEM 9.THE OFFER AND LISTING

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. The outstanding ADSs are identified by the CUSIP number 501723100. The following table sets forth, for the periods indicated, the high and low closing sale prices on the SSE for the common shares and the high and low closing prices on the NYSE for the common shares represented by ADSs. The information set forth in the table below reflects actual historical amounts and has not been restated in constant Chilean pesos.

 

Period

  Ch$ per Common Share   US$ per ADS   R$ per BDR 
  Low   High   Low   High   Low  High 

2012(1)

   10,481.4    14,230.5    21.89    29.11    44.86   52.79 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

2013

   5,967.3    11,755.4    11.62    24.84    26.53   49.00 
  

 

 

   

 

 

   

 

 

   

 

 

    

2014

   6,533.3    8,791.6    10.60    16.36    25.00   38.00 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

2015

         

Quarters:

         

First

   5,123.7    7,198.3    8.06    11.82    26.35   29.50 

Second

   4,521.3    6,163.4    6.88    10.02    21.41   29.05 

Third

   3,320.8    4,596.5    4.64    7.11    17.50   21.69 

Fourth

   3,270.2    4,150.5    4.70    6.07    18.06   24.00 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Annual:

         

Annual 2015

   3,270.2    7,198.3    4.64    11.82    17.50   29.50 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

2016

         

Quarters:

         

First

   3,276.4    4,730.5    4.49    7.00    19.80   23.00 

Second

   4,163.5    4,893.4    5.86    7.40    20.00 (2)   22.68 

Third

   4,350.6    5,855.8    6.53    8.96    —     —   

Fourth

   5,341.6    6,460.4    8.18    9.86    —     —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Months:

         

September

   5,243.1    5,499.6    7.66    8.38    —     —   

October

   5,341.6    6,460.4    8.22    9.86    —     —   

November

   5,827.4    6,393.9    8.59    9.80    —     —   

December

   5,549.8    6,091.8    8.18    9.40    —     —   

Annual:

         

Annual 2016

   3,276.4    6,460.4    4.49    9.86    19.80   23.00 

 

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Period

  Ch$ per Common Share   US$ per ADS   R$ per
BDR
 
  Low   High   Low   High   Low   High 

2017

            

Months:

          

January

   5,574,1    6,166.0    8.18    9.45    —      —   

February

   5,931.8    6,663.2    9.19    10.45    —      —   

Source: Santiago Stock Exchange, the New York Stock Exchange and the Bovespa

(1)From June 22, 2012, following the combination of LAN and TAM, the trading stock continues to be listed as “LFL” on the NYSE and as “LAN” on the SSE, but reflects the value of the combined operating entity, LATAM Airlines Group.
(2)Last trade prior the discontinuation of Brazilian LATAM depositary receipts-BDRS level III was on April 29, 2016.

As of December 31, 2016, a total of 606,407,693 million common shares were outstanding, including common shares represented by ADSs.

B. Plan of Distribution

Not applicable.

C. Markets

Trading

Chile

The Chilean stock market, which is regulated by the 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 andnon-member brokerage houses. The remaining equity trading is conducted on the Valparaíso Stock Exchange.

Equities,closed-end funds, fixed-income securities, short-term and money market securities, gold and U.S. dollars are traded on the SSE. In 1991, the SSE initiated a futures market with two instruments: U.S. dollar futures and Selective Shares Price Index, or IPSA, futures. Securities are traded primarily through an open voice auction system; a firm offers system or daily auctions. Trading through the open voice system occurs on each business day from 9:30 a.m. to 4:30 p.m. The SSE has an electronic system of trade, calledTelepregón HT, which operates continuously for stocks trading in high volumes from 9:30 a.m. to 4:00 p.m. (or 5:00 p.m., depending on the period of the year). The Chilean Electronic Stock Exchange operates continuously from 9:30 a.m. to 4:30 p.m. (or 5:30 p.m., depending on the period of the year) on each business day. In February 2000, the SSEOff-Shore Market began operations. In theOff-Shore Market, publicly offered foreign securities are traded and quoted in U.S. dollars.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

 

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ITEM 10.ADDITIONAL INFORMATION    

This Item reflects legal amendments effected by Chilean Law No. 20,382 on Corporate Governance, which was enacted on October 13, 2009, and came into effect on October 20, 2009, and Chilean Law No. 20,552, which modernized and encouraged competition in the financial system, was enacted on November 6, 2011 and came into effect on December 17, 2011.

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Set forth below is information concerning our share capital and a brief summary of certain significant provisions of ourby-laws and Chilean law. This description contains all material information concerning the common shares but does not purport to be complete and is qualified in its entirety by reference to ourby-laws, the Chilean Corporation Law and the Securities Market Law, each referred to below. For additional information regarding the common shares, reference is made to ourby-laws, a copy of which is included as Exhibit 1.1 to this annual report on Form20-F.

Organization and Register

LATAM Airlines Group is a publicly held stock corporation (sociedad anónima abierta) incorporated under the laws of Chile. LATAM Airlines Group was incorporated by a public deed dated December 30, 1983, an abstract of which was published in the Chilean Official Gazette (Diario Oficial de la República de Chile) No. 31.759 on December 31, 1983, and registered on page 20,341, No. 11,248 of the Chilean Real Estate and Commercial Registrar (Registro de Comercio del Conservador de Bienes Raices de Santiago) for the year 1983. Our corporate purpose, as stated in ourby-laws, is to provide a broad range of transportation and related services, as more fully set forth in Article Four thereof.

General

Shareholders’ rights in a Chilean company are generally governed by the company’sby-laws and the Chilean Corporation Law. Article 22 of the Chilean Corporation Law states that the purchaser of shares of a company implicitly accepts itsby-laws and any prior agreements adopted at shareholders’ meetings. Additionally, the Chilean Corporation Law regulates the government and operation of corporations (“sociedades anónimas,” or S.A.) and provides for certain shareholder rights. Article 137 of the Chilean Corporation Law provides that the provisions of the Chilean Corporation Law take precedence over any contrary provision in a corporation’sby-laws. The Chilean Corporation Law and ourby-laws also provide that all disputes arising among shareholders in their capacity as such or between us or our administrators and the shareholders may either be submitted to arbitration in Chile or to the courts of Chile at the election of the plaintiff initiating the action. Despite the foregoing, a recent legal amendment 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 theRegistro 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:

 

 one with 500 or more shareholders; and

 

 one in which 100 or more shareholders own at least 10% of the subscribed capital (excluding any direct or indirect individual holdings exceeding 10%).

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.

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:

 

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 any acquisition or sale of shares; and

 

 any acquisition or sale of contracts or securities the price or performance of which depends on the price variation of the LATAM Airlines Group’s shares.

These obligations are extended (i) to certain individuals (immediate family, next of kin and others) if the ADS holder is a natural person; (ii) to any entity controlled by the holder, if the ADS is a legal entity; and (iii) to groups, if a holder has any joint action agreement with other holders and the group reaches or exceeds the cited threshold.

In addition, majority shareholders must state in their report whether their purpose is to acquire control of the company or if they are making a financial investment.

Under Article 54 of the Securities Market Law and under 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 acquiror 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 acquiror must also inform the public of its planned acquisition by means of a publication in two Chilean newspapers with national distribution and by uploading such notice to the acquiror’s website, if available. Both requirements shall be met at least ten business days prior to the date on which the acquisition transaction is to close, and in any event, as soon as negotiations regarding the change of control have been formalized or when confidential information or documents concerning the target are delivered to the potential acquiror. 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:

 

 an offer which allows the taking control of a publicly traded company, unless the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange;

 

 an offer for all the outstanding shares of a publicly traded company upon acquiringtwo-thirds or more of its voting shares (this offer must be made at a price not lower than the price at which appraisal rights may be exercised, that is, book value if the shares of the company are not actively traded or, if the shares of the company are actively traded, the weighted average price at which the stock has been traded during the 60stock-exchange-business-day period between the 30th and the 90th stock-exchange-business-days-preceding immediately preceding the acquisition); and

 

 an offer for a controlling percentage of the shares of a publicly traded company if the acquiror intends to take control of the company (whether publicly traded or privately held) controlling such publicly traded company, to the extent that the latter represents 75.0% or more of the consolidated net assets of the former.

Article 200 of the Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of 12 months from the date of the transaction that granted it control of the publicly traded company, a number of shares equal to or higher than 3.0% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on the floor of a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.

Title XV of the Securities Market Law sets forth the basis for determining what constitutes a controlling power, a direct holding and a related party.

 

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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 theby-laws, also grant the right to receive dividends of distribution of capital despite not having paid for the subscribed shares. The investor becomes eligible to receive dividends once it has paid for the shares, or, if it has paid for only a portion of such shares, it is entitled to receive a corresponding pro rata portion of the dividends declared with respect to such shares, unless the company’sby-laws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on the appropriate stock exchange, and it has a cause of action against the investor to recover the difference between the subscription price and the price received for the sale of those shares at auction. However, until such shares are sold at auction, the investor continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital, as noted above). Regarding shares issued but not paid for within the period determined by the extraordinary shareholders’ meeting for their payment (which period cannot exceed three years from the date of such shareholders’ meeting), until January 1, 2010 they were canceled and no longer available for issuance by us. As of January 1, 2010, the board of directors of LATAM Airlines Group has a legal obligation to initiate the necessary legal actions to collect the unpaid amounts, unless the shareholders’ meeting which authorized the capital increase allowed the board to abstain from taking such action by a vote of two thirds of the issued shares, in which case the former rule still applies. Once the foregoing legal actions are exhausted, the board of directors shall propose to the shareholders’ meeting the appropriate capital adjustment measures, to be decided by simple majority. Fully paid shares are not subject to further calls or assessments or to liabilities of LATAM Airlines Group.

As of February, 28, 2017, our share capital consisted of 608,374,525 common shares of which 606,407,693 are subscribed and fully paid shares and 1,966,832 shares are pending of subscription and payment. The unsubscribed shares include (i) 1,500,000 shares allocated to stock option compensation plans and (ii) 466,832 that remain unsubscribed following our most recent capital increase. The current share capital amount reflects the expiration of stock options, covering 4,789,718 shares that had been granted under employee compensation plans. Upon the expiration of the stock options on December 21, 2016, the Company’s capital stock was reduced to 608,374,525 shares.

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 one employee compensation plan approved by extraordinary shareholders’ meeting held on June 11, 2013, the issuance of the shares for this compensation plan has been authorized but has not been made effective, as such issuance is subject to the exercising of rights granted to certain employees that expire on November 15, 2017.

Preemptive Rights and Increases in Share Capital

The Chilean Corporation Law requires Chilean companies to offer existing shareholders the right to purchase a sufficient number of shares to maintain their existing percentage of ownership in a company whenever that company issues new shares for cash, except for up to 10% of the 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 a30-day period commencing upon publication of the official notice announcing the start of the preemptive rights period in the newspaper designated by the shareholders’ meeting. The preemptive right of the shareholders is the pro rata amount of the shares registered in their name in the shareholders’ registry of LATAM Airlines Group as of the fifth business day prior to the date of publication of the notice announcing the start of the preemptive rights period. During such30-day period (except for shares as to which preemptive rights have been waived), Chilean companies are not permitted to offer any newly issued common shares for sale to third parties. For that30-day

 

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period and an additional30-day period, Chilean publicly held corporations are not permitted to offer any unsubscribed common shares for sale to third parties on terms that are more favorable to the purchaser than those offered to shareholders. At the end of such additional30-day period, Chilean publicly held corporations are authorized to sellnon-subscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange.

Directors

Ourby-laws provide for a board of nine directors. Compensation to be paid to directors must be approved by vote at the annual shareholders’ meeting. We hold elections for all positions on the board of directors every two years. Under ourby-laws, directors are elected by cumulative voting. Each shareholder has one vote per share and may cast all of his or her votes in favor of one nominee or may apportion his or her votes among any number of nominees. These voting provisions currently ensure that a shareholder owning more than 10% of our outstanding shares is able to elect at least one representative to our board of directors.

Under the Chilean Corporation Law, transactions of a publicly-traded company with a “related” party must be conducted on anarm’s-length basis and must satisfy certain approval and disclosure requirements which are different from the ones that apply to a privately-held company. The conditions apply to the publicly-traded company and to all of its subsidiaries .

These transactions include any negotiation, act, contract or operation in which the publicly-traded company intervenes together with either (i) parties which are legally deemed related pursuant to article 100 of the Chilean Securities Market Law, (ii) a director, senior manager, administrator, main executive or liquidator of the company, either on their own behalf or on behalf of a third party, including those individuals’ spouses or close relatives, (iii) companies in which the foregoing individuals own at least 10% (directly or indirectly), or in which they serve as directors, senior managers, administrators or main executives, (iv) parties indicated as such in the publicly-traded company’sby-laws, or identified by the directors’ committee or (v) those who have served as directors, senior managers, administrators, main executives or liquidators of the counterparty in the last 18 months and are now serving in one of those positions at the publicly-traded company.

Corporations may enter into transactions with related parties if (i) the transaction is in the interest of the corporation, (ii) the transaction is made on anarm’s-length basis at market conditions, (iii) the individuals involved in the transactions report them immediately to the board, (iv) the transaction is approved after a reasoned explanation by the majority of the board, excluding those directors or liquidators that are involved in the transaction (who shall, nonetheless, render an opinion on the matter if required by the board), (v) the decisions of the board are disclosed at the next shareholders’ meeting, and (vi) in case the majority of the board is disqualified to vote, the majority of thenon-involved directors have approved the transaction, or two thirds of the voting shares have approved the transaction).

If, as noted in clause (vi) of the preceding paragraph, the transaction is to be approved by the shareholders’ meeting, the following additional rules apply: (i) the board shall appoint an independent appraiser that shall report to the shareholders on the transaction, (ii) the director’s committee or thenon-involved directors may appoint a second independent appraiser, (iii) the appraiser’s reports shall be made available for 15 days, (iv) the receipt and availability of the reports shall be disclosed as a material fact and (iv) directors shall render an opinion on the transaction within five business days after receiving the reports.

Transactions which do not meet the foregoing requirements are valid and enforceable, but neither the corporation nor its shareholders shall have a cause of action to sue the infringing party for reimbursement on behalf of the corporation, for a total of the benefits reported to the interested party, in addition to indemnification for the damages caused. In such proceedings, the defendant shall prove that the transaction met the legal requirements.

The Chilean Corporation Law sets forth a number of exceptions to the foregoing rules. In the following situations, transactions with related parties may be carried out without complying with the foregoing rules: (i) if a transaction does not involve a substantial amount (if it 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 Form20-F) unless such a transaction exceeds 20,000 UF (for this calculation all similar transactions carried out within a consecutive12-month period between the same parties or for the same subject matter, shall be deemed as a single transaction), (ii) transactions which according to the policies determined by the board of directors, are deemed to be within the ordinary course of business (the determination of such policies shall be disclosed as a material fact and made available to shareholders), and (iii) if the counterparty is an entity in which the publicly-traded company has, directly or indirectly, at least a 95.0% ownership. As per the exemption indicated in (ii) above, on December 29, 2009, the 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

 

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financial statements, including the report of our auditors, for the previous fiscal year). LATAM Airlines Group’sby-laws further provide that the ordinary annual meeting of shareholders must take place between February 1 and April 30. The shareholders at the ordinary annual meeting approve the annual financial statements, including the report of our auditors, the annual report, the dividend policy and the final dividend on the prior year’s profits, elect the board of directors (in our case, every two years or earlier if a vacancy occurs) and approve any other matter that does not require an extraordinary shareholders’ meeting. The most recent extraordinary meeting of our shareholders was held on August 18, 2016, and the most recent ordinary annual meeting of our shareholders was held on April 26, 2016.

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 company, and (ii) any kind of shareholders’ meeting may be self-convened and take place if all voting shares attend, regardless of the fulfillment of the notice and other type of procedural requirements.

Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago, Chile) designated by the shareholders at their annual meeting and, if the shareholders fail to make such designation, the notice must be published in the Chilean Official Gazette pursuant to legal requirements. The first notice must be published not less than 15 days and not more than 20 days in advance of the scheduled meeting. Notice also must be mailed not less than 15 days in advance of the meeting to each shareholder and to the SVS and the Chilean stock exchanges. Currently, we publish our official notices in the newspaperLa Tercera(available online at www.latercera.com).

The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing a majority of our issued common shares. If that quorum is not reached, the meeting can be reconvened within 45 days, and at the second meeting the shareholders present are deemed to constitute a quorum regardless of the percentage of the common shares that they represent.

Only shareholders registered with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his or her proxy to attend and vote on his or her behalf. Proxies addressed to us that do not designate a person to exercise the proxy are taken into account in order to determine if there is a sufficient quorum to hold the meeting, but the shares represented thereby are not entitled to vote at the meeting. The proxies must fulfill the requirements set forth by the Chilean Corporation Law and its regulatory norms. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed.

The following matters can only be considered at an extraordinary shareholders’ meeting:

 

 our dissolution;

 

 a merger, transformation, division or other change in our corporate form or the amendment of ourby-laws;

 

 the issuance of bonds or debentures convertible into shares;

 

 the conveyance of 50% or more of our assets (whether or not it includes our liabilities);

 

 the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;

 

 the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;

 

 the conveyance of shares of a subsidiary which entails the transfer of control;

 

 granting of a security interest or a personal guarantee in each case to secure the obligations of third parties, unless to secure or guarantee the obligations of a subsidiary, in which case only the approval of the board of directors will suffice; and

 

 other matters that require shareholder approval according to Chilean law or theby-laws.

The matters referred to in the first seven items listed above may only be approved at a meeting held before a notary public, who shall certify that the minutes are a true record of the events and resolutions of the meeting.

Theby-laws establish that resolutions are passed at shareholders’ meetings by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. However, under the Chilean Corporation Law, the vote of atwo-thirds majority of the outstanding voting shares is required to approve any of the following actions:

 

 a change in our corporate form, division or merger with another entity;

 

 amendment to our term of existence, if any;

 

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 our early dissolution;

 

 change in our corporate domicile;

 

 decrease of our capital stock;

 

 approval of contributions and the assessment thereof whenever consisting of assets other than money;

 

 any modification of the authority reserved for the shareholders’ meetings or limitations on the powers of the board of directors;

 

 decrease in the number of members of the board of directors;

 

 the conveyance of 50% or more of our assets (whether or not it includes our liabilities);

 

 the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;

 

 the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;

 

 the conveyance of shares of a subsidiary which entails the transfer of control;

 

 the form that dividends are paid in;

 

 granting a security interest or a personal guarantee in each case to secure obligations of third parties that exceeds 50% of our assets, unless to secure or guarantee the obligations of a subsidiary, in which case only approval of the board of directors will suffice;

 

 the acquisition of our own shares, when, and on the terms and conditions, permitted by law;

 

 all other matters provided for in theby-laws;

 

 the correction of any formal defect in our incorporation or any amendment to ourby-laws that refers to any of the matters indicated in the first 13 items listed above;

 

 the institution of the right of the controlling shareholder who has purchased at least 95% of the shares to purchase shares of the outstanding minority shareholders pursuant to the procedure set forth in article 71 bis of the Corporation Law; and

 

 the approval or ratification of transactions with related parties, as per article 147 of the Corporation Law (described above).

Amendments to theby-laws that have the effect of establishing, modifying or eliminating any special rights pertaining to any series of shares require the consenting vote of holders oftwo-thirds of the shares of the affected series. As noted above, LATAM Airlines Group does not have special series of shares.

In general, Chilean law does not require a publicly held corporation to provide the level and type of information that the U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of the company and its subsidiaries within the15-day period before a scheduled meeting. No later than 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 make available to the shareholders the annual report and the financial statements of the company, and to publish such information in the company’s webpage at least 10 days in advance of the scheduled shareholders meeting. In addition to these requirements, we regularly have provided, and currently intend to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend for shareholder approval. See “—Dividend and Liquidation Rights” below.

The Chilean Corporation Law provides that, whenever shareholders representing 10% or more of the issued voting shares so request, a Chilean company’s annual report must include such shareholders’ comments and proposal in relation to the company’s affairs, together with the comments and proposals set forth by the directors’ committee. Similarly, the Chilean Corporation Law provides that whenever the board of directors of a publicly held corporation convenes an ordinary meeting of the shareholders and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be included, together with the comments and proposals set forth by the directors’ committee.

Dividend and Liquidation Rights

In accordance with the Chilean Corporation Law, LATAM Airlines Group must distribute an annual cash dividend equal to at least 30% of its annual net income calculated in accordance with IFRS, unless otherwise decided by a unanimous vote of the holders

 

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of all issued shares, and unless and except to the extent it has accumulated losses. If there is no net income in a given year, LATAM Airlines Group can elect but is not legally obligated to distribute dividends out of retained earnings. All outstanding common shares are entitled to share equally in all dividends declared by LATAM Airlines Group, unless the shares have not been fully paid by the shareholder after being subscribed.

For all dividend distributions agreed by the board of directors in excess of the mandatory minimum of 30% noted in the preceding paragraph, LATAM Airlines Group may grant an option to its shareholders to receive those dividends in cash, or in shares issued by either LATAM Airlines Group or other corporations. Shareholders who do not expressly elect to receive a dividend other than in cash are legally presumed to have decided to receive the dividend in cash. A U.S. holder of ADSs may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively is required to receive a dividend in cash. See “—Preemptive Rights and Increases in Share Capital” above.

Dividends that are declared but not paid within the appropriate time period set forth in the Chilean Corporation Law (as to minimum dividends, 30 days after declaration; as to additional dividends, the date set for payment at the time of declaration) are adjusted to reflect the change in the value of the UF. The UF is a daily indexed, Chilean peso-denominated accounting unit designed to discount the effect of Chilean inflation and it is based on the previous month’s inflation rate as officially determined. Such dividends also accrue interest at the then-prevailing rate forUF-denominated deposits during such period. The right to receive a dividend lapses if it is not claimed within five years from the date such dividend is payable. After that period, the amount not claimed is given to anon-profit organization, theCuerpos de Bomberos de Chile(the National Corporation of Firefighters).

In the event of LATAM Airlines Group’s liquidation, the holders of fully paid common shares would participate pro rata in the distribution of assets remaining after payment of all creditors. Holders of shares not fully paid will participate in such distribution in proportion to the amount paid.

Approval of Financial Statements

The board of directors is required to submit our consolidated financial statements to the shareholders for their approval at the annual ordinary shareholders’ meeting. If the shareholders reject the financial statements, the board of directors must submit new financial statements not later than 60 days from the date of that meeting. If the shareholders reject the new financial statements, the entire board of directors is deemed removed from office and a new board is to be elected at the same meeting. Directors who approved such financial statements are disqualified forre-election for the ensuing period.

Right of Dissenting Shareholders to Tender Their Shares

The Chilean Corporation Law provides that, upon the adoption at an extraordinary meeting of shareholders of any of the resolutions or if any of the situations enumerated below takes place, dissenting or affected shareholders acquire the right to withdraw and to compel the company to repurchase their shares, subject to the fulfillment of certain terms and conditions. However, such right shall be suspended if we are a debtor in a bankruptcy liquidation proceeding, or if we are subject to a reorganization agreement approved in accordance with Chilean law No. 20,720, unless such agreement allows the right to withdraw, or unless it is terminated by the issuance of a liquidation resolution.Such holders of ADRs would need to perfect the withdrawal of the common shares on or before the fifth business day prior to the date of the meeting.

“Dissenting shareholders” are defined as those who attend a shareholders’ meeting and vote against a resolution which results in the withdrawal right, or, if absent at such a meeting, those who state in writing to the company their opposition to such resolution within the following 30 days. Dissenting shareholders must perfect their withdrawal rights by tendering their stock to the company within thirty days after adoption of the resolution.

The price paid to a dissenting shareholder of a publicly held corporation is the weighted average of the sales prices for the shares as reported on the Chilean stock exchanges on which the shares are quoted during the 60stock-exchange-business-day period elapsed between the 30th and the 90th stock-exchange-business-days-preceding the 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:

 

 the transformation of the company into • the merger of the company with or into another company;

 

 the conveyance of 50% or more of the assets of the company, whether or not such sale includes the company’s liabilities;

 

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 the adoption or amendment of any business plan which contemplates the conveyance of assets in excess of the foregoing percentage;

 

 the conveyance of 50% or more of the assets of a subsidiary, if the latter represents at least 20% of our assets;

 

 the conveyance of shares of a subsidiary which entails the transfer of control;

 

 the creation of preferential rights for a class of shares or an extension, amendment or reduction to those already existing, in which case the right to withdraw only accrues to the dissenting shareholders of the class or classes of shares adversely affected;

 

 the correction of any formal defect in the incorporation of the company or any amendment to the company’sby-laws that grants the right to withdraw;

 

 the granting of security interests or personal guarantees to secure or guarantee third parties’ obligations exceeding 50% of the company’s assets, except with regard to subsidiaries;

 

 resolutions of the shareholders’ meeting approving the decision to make private a public corporation in case the requirements set forth in “—General” cease to be met;

 

 if a publicly-traded company ceases to be obligated to register its shares in the Securities Registry of the SVS, and an extraordinary shareholders’ meeting agrees tode-register the shares and finalize its disclosure obligations mandated by the Corporation Law;

 

 if the controlling shareholder of a publicly-traded company reaches over 95% of the shares (in such case, the right must be exercised within 30 days of the date in which the threshold is reached, circumstance that must be communicated by means of a publication); and

 

 such other causes as may be established by the company’sby-laws (no such additional resolutions currently are specified in ourby-laws).

In addition, shareholders of publicly held corporations have the right to withdraw if a person acquirestwo-thirds or more of the outstanding shares of such corporation with the right to vote (except as a result of other shareholders not having subscribed and paid a capital increase) and does not make a tender offer for the remaining shares within 30 days after acquisition.

Under article 69 bis of the Chilean Corporation Law, the right to withdraw also is granted to shareholders (other than pension funds that administer private pension plans under the national pension law), under certain terms and conditions, if a company were to become controlled by the Chilean government, directly or through any of its agencies, and if two independent rating agencies downgrade the rating of its stock from first class because of certain actions specified in Article 69 bis undertaken by the company or the Chilean government that affect negatively and substantially the earnings of the company. Shareholders must perfect their withdrawal rights by tendering their shares to the company within 30 days of the date of the publication of the new rating by two independent rating agencies. If the withdrawal right is exercised by a shareholder invoking Article 69 bis, the price paid to the dissenting shareholder shall be the weighted average of the sales price for the shares as reported on the stock exchanges on which the company’s shares are quoted for thesix-month period preceding the publication of the new rating by two independent rating agencies. If, as previously described, the 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 maybuy-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, anattorney-in-fact must be appointed to represent the joint owners in dealings with us.

 

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C. Material Contracts

Boeing

Boeing767-300 Fleet

On May 9, 1997, we entered into the Aircraft General Terms Agreement with The Boeing Company (“AGTA”), applicable to all Boeing aircraft contracted for purchase from The Boeing Company.

On January 30, 1998, we entered into Purchase Agreement No. 2126 with The Boeing Company (“Purchase Agreement No. 2126”) to acquire two Boeing767-300 passenger aircraft.

On November 11, 2004, we entered into supplemental agreement No. 16 to the Purchase Agreement No. 2126 to acquire one additional Boeing767-300 freighter aircraft and three Boeing767-300 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 Boeing767-300 freighter aircraft and one Boeing767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$300,000,000.

On July 20, 2005, we entered into supplemental agreement No. 21 to the Purchase Agreement No. 2126 to acquire three Boeing767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$410,000,000.

On March 31, 2006, we entered into supplemental agreement No. 22 to the Purchase Agreement No. 2126 to acquire three Boeing767-300 aircraft. Furthermore, we converted two Boeing767-300 freighter aircraft to two Boeing767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$430,000,000.

On December 14, 2006, we entered into supplemental agreement No. 23 to the Purchase Agreement No. 2126 to acquire three additional Boeing767-300 passenger aircraft. The estimated gross value (at list prices) of these aircraft was US$460,000,000.

On November 10, 2008, we entered into supplemental agreement No. 24 to the Purchase Agreement No. 2126 to acquire four additional Boeing767-300 passenger aircraft and two purchase rights for Boeing767-300 aircraft. Two of these aircraft were delivered in 2011, while the other two aircraft had a scheduled delivery date in 2012. The estimated gross value (at list prices) of these aircraft was US$636 million.

On March 22, 2010, we entered into supplemental agreement No. 28 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of ten787-8 aircraft, substitute four aircraft from787-916 to787-816 and substitute three767-316ER to767-316F freighter aircraft. Moreover, on November 10, 2010, we entered into supplemental agreement No. 29 to the Purchase Agreement No. 2126, whereby we agreed to accelerate the delivery of three Aircraft and substitute those three aircraft from767-316F to767-316ER.

On February 15, 2011, we entered into supplemental agreement No. 30 to the Purchase Agreement No. 2126 to acquire three additional Boeing767-300 passenger aircraft. Delivery was scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$510 million.

On May 10, 2011, we entered into supplemental agreement No. 31 to the Purchase Agreement No. 2126 to acquire five additional Boeing767-300 passenger aircraft and four purchase rights for Boeing767-300 passenger aircraft. Delivery was scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$870 million.

On December 22, 2011 we entered into supplemental agreement No. 32 to the Purchase Agreement No. 2126 to exercise two purchase options for two additional Boeing767-300 passenger aircraft, while the remaining purchase options were deleted. Delivery was scheduled to take place in 2012. The estimated gross value (at list prices) of these aircraft was US$340 million.

Boeing787-8/9 Fleet

On October 29, 2007, we entered into Purchase Agreement No. 3256 with the Boeing Company (“Purchase Agreement No. 3256”) to acquire 18 Boeing787-8 aircraft and eight Boeing787-9 aircraft to be delivered between 2012 and 2016. This purchase agreement provides us with the option of purchasing 15 additional aircraft to be delivered in 2017 and 2018. The estimated gross value (at list prices) 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 scheduled delivery date of ten Boeing787-8 aircraft and substitute four Boeing787-9 aircraft into four Boeing787-8 aircraft.

 

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On July 8, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3256 to advance the scheduled delivery date of two Boeing787-8 aircraft.

On August 24, 2012, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3256 to replace two Boeing787-8 aircraft with two Boeing787-8 aircraft with a later delivery.

On September 16, 2013, we entered into a delay settlement agreement with respect to Purchase Agreement No. 3256, whereby we agreed to update delivery dates, settle consequences of the currently known delays and convert several future deliveries ofB787-8 aircraft toB787-9 aircraft. This delay settlement agreement was amended on April 22, 2015 to update delivery dates of certain aircraft.

On April 22, 2015, we entered into Supplemental Agreement No. 4 to Purchase Agreement No. 3256 to reschedule the delivery dates of four Boeing787-8 aircraft and replace four Boeing787-8 aircraft with four Boeing787-9 aircraft.

On July 3, 2015, we entered into Supplemental Agreement No. 5 to Purchase Agreement No. 3256 to reschedule the delivery date of one Boeing787-8 aircraft.

On May 27, 2016, we entered into Supplemental Agreement No. 6 to Purchase Agreement No. 3256 to (i) convert four Model787-816 Aircraft to four Model787-916 Aircraft, and (ii) defer of two Model787-916 Aircraft from 1Q 2018 and 2Q 2018 to 3Q 2018 and 4Q 2018 respectively.

On December 20, 2016, we entered into Supplemental Agreement No. 7 to Purchase Agreement No. 3256 to reschedule the delivery of four Model787-916 Aircraft and document the actual delivery months for two Model787-916 Aircraft in 2019.

Boeing 777 Freighter Fleet

On July 3, 2007, we entered into Purchase Agreement No. 3194 with the Boeing Company (“Purchase Agreement No. 3194”) to acquire two Boeing 777 freighter aircraft with schedule deliveries dates in 2011 and 2012. The estimated gross value (at list prices) of the Boeing aircraft for which we had firm commitments to take delivery under this contract was US$545 million.

On March 22, 2010, we entered into letter agreement6-1162-KSW-6454R2 to the Purchase Agreement No. 3194 to transfer two purchase rights from Purchase Agreement No. 2126 to Purchase Agreement No. 3194.

On November 2, 2010, we entered into supplemental agreement No. 2 to the Purchase Agreement No. 3194, to exercise one of the two options for a Boeing 777 freighter aircraft with scheduled delivery date in 2012. The estimated gross value (at list prices) of this aircraft was US$280 million.

On September 22, 2011, we entered into supplemental agreement No. 3 to the Purchase Agreement No. 3194 to advance the scheduled delivery date of one firm Boeing 777 freighter aircraft during 2012.

On August 9, 2012, we entered into supplemental agreement No. 4 to the Purchase Agreement No. 3194 to reflect the configuration of the aircraft covered under such Purchase Agreement.

Airbus A320-Family Fleet

On March 20, 1998, we entered into the Second A320-Family Purchase Agreement with Airbus S.A.S. (“Second A320-Family Purchase Agreement”) to acquire five Airbus A320-Family Aircraft.

On November 14, 2003, we entered into amendment No. 1 to the Second A320-Family Purchase Agreement to exercise three purchase rights for Airbus 319 aircraft, among other things.

On October 4, 2005, we entered into amendment No. 2 to the Second A320-Family Purchase Agreement to acquire 25 additional Airbus 320 family aircraft and 15 purchase rights for Airbus A320-Family aircraft.

On March 6, 2007, we entered into amendment No. 3 to the Second A320-Family Purchase Agreement to exercise 15 purchase rights for 15 Airbus A320-Family Aircraft.

On December 23, 2009, we entered into amendment No. 5 to the Second A320-Family Purchase Agreement to acquire 30 additional Airbus A320-Family Aircraft. The estimated gross value (at list prices) of these aircraft was US$2.0 billion.

According to clause 12.2 of the Second A320-Family Purchase Agreement, applicable to all subsequent amendments, in case of a failure, as defined in such agreement, a service life policy for a period of 12 years after delivery of any given aircraft shall apply.

 

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On May 10, 2010, we entered into amendment No. 6 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft and advance the scheduled delivery date of 13 aircraft.

On May 19, 2010, we entered into amendment No. 7 to the Second A320-Family Purchase Agreement to advance the scheduled delivery date of three aircraft.

On September 23, 2010, we entered into amendment No. 8 to the Second A320-Family Purchase Agreement to convert the aircraft type of one aircraft and advance the scheduled delivery date of four aircraft.

On December 21, 2010, we entered into amendment No. 9 to the Second A320-Family Purchase Agreement to acquire 50 additional Airbus A320-Family Aircraft. The estimated gross value (at list prices) of these aircraft was US$2,600,000,000.

On June 10, 2011, we entered into amendment No. 10 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft, to select sharklets for some aircraft and to notify delivery dates for some aircraft.

On November 3, 2011, we entered into amendment No. 11 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft and defer the scheduled delivery date of four aircraft.

On November 19, 2012, we entered into amendment No. 12 to the Second A320-Family Purchase Agreement to convert the aircraft type of three aircraft, identify certain Aircraft as Sharklet Installed Aircraft and others as Sharklet Capable Aircraft, as those are defined in such Purchase Agreement, and notify the scheduled delivery month for certain aircraft.

On August 19, 2013, we entered into amendment No. 13 to the Second A320-Family Purchase Agreement to convert several A320 aircraft to A321 aircraft and to postpone the scheduled delivery dates of several aircraft.

On 31 March, 2014, we entered into amendment No. 14 to the Second A320 Family Purchase Agreement covering the rescheduling of the scheduled delivery date of one Aircraft.

On May 16, 2014, we entered into amendment No. 15 to the Second A320 Family Purchase Agreement covering the rescheduling of the scheduled delivery month of certain Aircraft.

On July 15, 2014, we entered into amendment No. 16 to the Second A320 Family Purchase Agreement covering cancellation and substitution of certain Aircraft.

On October 30, 2014, we entered into a novation agreement covering the novation of the original TAM A320/A330 Family Purchase Agreement from TAM to LATAM.

On December 11, 2014, we entered into amendment No. 17 to the Second A320 Family Purchase Agreement covering the substitution of certain Aircraft.

Between April and August 2011, we entered into Buyback Agreements No. 3001, 3030, 3062, 3214 and 3216 with Airbus Financial Services for the sale of five A318 aircraft for approximately US$107 million.

Between August 2012 and January 2013, we entered into Buyback Agreements No. 3371, 3390, 3438, 3469 and 3509 with Airbus Financial Services for the sale of five A318 aircraft for approximately US$102 million.

Airbus A320NEO-Family Fleet

On June 22, 2011, we entered into A320 NEO Purchase Agreement (“A320 NEO Purchase Agreement”) to acquire 20 Airbus 320 NEO family aircraft with scheduled delivery dates in 2017 and 2018. The estimated gross value (at list prices) of these aircraft is US$1.7 billion.

On February 27, 2014, we entered into amendment No. 1 to the A320 NEO Purchase Agreement covering the advancement of the date by which LATAM selects the propulsion systems.

On July 15, 2014, we entered into amendment No. 2 to the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft.

On December 11, 2014, we entered into amendment No. 3 to the A320 NEO Purchase Agreement covering the order of incremental A320 NEO Aircraft and A321 NEO Aircraft.

On April 15, 2016, we entered into amendment No. 4 to the A320 NEO Purchase Agreement covering the reschedule of the delivery of eight Original NEO Aircraft and the conversion of four Original NEO Aircraft into A321 NEO Aircraft.

 

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On April 15, 2016, we entered into amendment No. 5 to the A320 NEO Purchase Agreement to reflect the changes in the technical specifications of the aircraft to be received under this agreement.

On August 8, 2016, we entered into amendment No. 6 to the A320 NEO Purchase Agreement covering the cancellation of the delivery of four A320 NEO Aircraft.

Aercap Holdings N.V.

On May 28, 2013, we entered into a framework deed with Aercap Holdings N.V. for the sale and leaseback of severalA330-200 aircraft already in fleet and several new aircraft to be received from the manufacturer includingA350-900,B787-8 andB787-9 aircraft. The estimated gross value (at list prices) of these aircraft is US$3.0 billion.

Aircastle Holding Corporation Limited

On February 21, 2014, we entered into a framework deed with Aircastle Holding Corporation Limited for the lease of four B777-300ER already in fleet. The four aircraft were manufactured in 2012 and the estimated market value (at list prices) of these aircraft is US$580 million. The average term of the 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 ofCF6-80C2B6F engines (which powers our B767 fleet) during 200 shop visits or 10 years, whichever occurs first.

On July 28, 2009, TAM Linhas Aereas S.A. entered into an engine services agreement with GE Engine Services, Inc. for the provision of maintenance services of GE90-115BL engines, which power 10 B777 passenger fleet and 4 spare engines, for a period of 12 years per engine.

Société AIR FRANCE

On February 22, 2010, we entered into an engine services agreement with Société AIR FRANCE for the provision of maintenance services for GE90-110BL engines, which power 2 B777 freighter fleet and 1 spare engine, for a period of eight years per engine.

CFM International

On December 17, 2010, we entered into General Terms Agreement No.CFM-1-2377460475 (the “GTA”) and Letter Agreement No. 1 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM ofCFM56-5B engines to power 70 A320 family aircraft and up to 14CFM56-5B spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with CFM for the provision by CFM of maintenance services for the above-mentioned installed and spare engines.

On December 31, 2014, we entered Letter Agreement No. 2 to GTA with CFM International, Inc. (“CFM”) for the sale and support by CFM ofCFM56-5B engines to power 20 A320 family aircraft and one spare engine.

On March 15, 2006, TAM Linhas Aereas S.A. entered into an engine services agreement with GE Celma Ltda. for the provision of maintenance services forCFM56-5B engines, which power 47 A320 Fam passenger fleet and 6 spare engines, for a period of 15 years per engine.

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 ofPW1100G-JM engines to power 42 A320NEO family aircraft and nine spare engines. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for LATAM.

 

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Rolls-Royce PLC & Rolls-Royce TotalCare Services Limited

On September 30, 2009, we entered into General Terms Agreement No. DEG5307 (the “GTA”) with Rolls-Royce PLC for the sale and support by Rolls-Royce of Trent 1000 engines to power 32 B787 family aircraft and up to 10 Trent 1000 spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with Rolls-Royce TotalCare Services Limited for the provision by Rolls-Royce of maintenance services for the above-mentioned installed and spare engines, for a period of 15 years per engine.

On January 11, 2011, TAM Linhas Aereas S.A. entered into General Terms Agreement No. DEG5292 (the “GTA”) with Rolls-Royce PLC for the sale and support by Rolls-Royce of Trent XWB engines to power 27 A350XWB family aircraft and up to 7 Trent XWB spare engines. On the same date, we entered into a Rate Per Flight Hour Engine Shop Maintenance Services Agreement with Rolls-Royce TotalCare Services Limited for the provision by Rolls-Royce of maintenance services for the above-mentioned installed and spare engines, for a period of 12 years per engine. Subsequently, on July 31, 2015, the aforementioned agreements were novated, so that LATAM Airlines Group S.A. replaces TAM Linhas Aereas S.A. in both agreements.

International Aero Engines AG

On October 12, 2006, we entered into an engine services agreement with IAE International Aero Engines AG for the provision of maintenance services ofV2500-A5 engines, which power 53 A320 Fam passenger fleet and 9 spare engines, for a period of 12 years per engine.

On October 21, 2010, TAM Linhas Aereas S.A. entered into an engine services agreement with IAE International Aero Engines AG for the provision of maintenance services ofV2500-A5 engines, which power 26 A320 Fam passenger fleet and 7 spare engines, for a period of 12 years per engine.

CFM International

On June 29, 2016, we entered into a Rate Per Flight Hour Agreement for Engine Shop Maintenance Services with CFM International, Inc., covering the maintenance, repair and overhaul of certainCFM56-5B engines.

PAAL Gemini Company Limited – PAAL Aquila Company Limited

During 2016, we entered into operating lease agreements with PAAL Gemini Company Limited and PAAL Aquila Company Limited, for the sale and lease back of four Airbus A321 received in our fleet in 2016. The term of each of the leases is 10 years and the estimated market value (at list prices) of these aircraft is US$200 million.

Jackson Square

During 2016, we entered into operating lease agreements with JSA Aircraft 7126, LLC, JSA Aircraft 7128, LLC, JSA Aircraft 7239, LLC and JSA Aircraft 7298, LLC, for the sale and lease back of three Airbus A321 and one Airbus A320 Neo received in our fleet in 2016. The term of each of the leases is 10 years and the estimated market value (at list prices) of these aircraft is US$200 million.

SABRE Contract

In November 2009, 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, on May 4, 2015, we entered into a Master Services License Agreement with SABRE Inc. Pursuant to this agreement SABRE Inc., will grant LATAM access and use of certain reservation systems. This agreement will enter into force after the expiration of Work Order No. 1 to the agreement entered in November 2009 by LATAM and SABRE Inc. and will be effective for an initial period of 10 years.

In addition, LATAM has distribution agreements in place with SABRE as well as with other distribution providers.

TAM Material Contracts

A320/A330 Family Purchase Agreements

In November 2006, TAM entered into a purchase agreement with Airbus S.A.S. for the purchase of 31 A320-Family Aircraft and sixA330-200 aircraft, with deliveries between 2007 and 2010.

In January 2008, TAM entered into a new purchase agreement for 20 A320-Family Aircraft and fourA330-200 aircraft, with deliveries between 2007 and 2014.

 

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In July 2010, TAM entered a purchase agreement for 20 A320-Family Aircraft with deliveries between 2014 and 2015.

In October 2011, TAM entered into a new purchase agreement for 10 A320-Family Aircraft with deliveries between 2016 and 2017, plus 22 A320 NEO Family Aircraft with deliveries between 2016 and 2018, plus 10 options rights for A320 NEO Family Aircraft.

In January 2012, TAM entered into Amendment No. 12 to the A320/A330 Purchase Agreement to reschedule the delivery dates of certain aircraft.

In November 2012, TAM entered into Amendment No. 13 to the A320/A330 Purchase Agreement to convert the aircraft type of A320 family aircraft.

In December 2012, TAM entered into Amendment No. 14 to the A320/A330 Purchase Agreement to convert the aircraft type of an A320 family aircraft and reschedule the delivery date of such aircraft.

In February 2013, TAM entered into Amendment No. 15 to the A320/A330 Purchase Agreement to make some changes to the scheduled delivery month of certain A320 Family Aircraft.

In February 2013, TAM entered into Amendment No. 16 to the A320/A330 Purchase Agreement to make a change to the aircraft type of certain A320 Family Aircraft, to the scheduled delivery month/quarter of certain A320 Family Aircraft and to make certain changes to the dates by which TAM will select the propulsion systems and NEO propulsion systems for certain Aircraft.

In August 2013, TAM entered into Amendment No. 17 to the A320/A330 Purchase Agreement to make a change to the scheduled delivery month of a certain A320 Family Aircraft and to make the selection of the propulsion systems and NEO propulsion systems for certain Aircraft.

In December 2014, TAM entered into Amendment No. 19 to the A320/A330 Purchase Agreement to reschedule and substitute certain A321 Aircraft.

In June 2015, TAM entered into Amendment No. 20 to the A320/A330 Purchase Agreement to make a change to the schedule delivery month of one A321 Aircraft.

In December 2015, TAM entered into Amendment No. 21 to the A320/A330 Purchase Agreement to make a change to the schedule delivery month of two A320 NEO Aircraft.

On April 15, 2016, we entered into amendment No. 22 to the A320/A330 Purchase Agreement covering the rescheduling of the delivery of one A321 Aircraft.

On April 15, 2016, we entered into amendment No. 23 to the A320/A330 Purchase Agreement to reflect the changes in the technical specifications of the aircraft to be received under this agreement.

On August 8, 2016, we entered into amendment No. 24 to the A320/A330 Purchase Agreement to cancel the delivery of eight A320 NEO Aircraft.

A350 Family Purchase Agreement

In January 2008, TAM entered into a purchase agreement with Airbus S.A.S. for the purchase of 22 A350 aircraft plus 10 options rights for A350 aircraft.

In July 2010, TAM entered into amendment No. 1 to the A350 purchase agreement to exercise its option of five A350 XWB options.

In July 2014, TAM entered into amendment No. 2 to the A350 purchase agreement to reschedule the delivery of certain A350-900XWB and to amend certain provisions to reflect the latest aircraft specification.

In July 2014, TAM, LATAM and Airbus entered into a novation agreement novating the A350 purchase agreement from TAM to LATAM.

In October 2014, we entered into amendment No. 3 to the A350 purchase agreement to reschedule the scheduled delivery month of a certain A350-900XWB aircraft.

In September 2015, we entered into amendment No. 4 to the A350 purchase agreement to modifiy certain terms and conditions of such agreement and to convert a number ofA350-900 XWB Aircraft into A350-1000 XWB Aircraft.

 

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In November 2015, we entered into amendment No. 5 to the A350 purchase agreement to convert a number ofA350-900 XWB aircraft into six A350-1000 XWB aircraft and to reschedule the delivery of certainA350-900 XWB.

On February 3, 2016, we entered into amendment No. 6 to the A350 purchase agreement to reschedule the delivery of two A350—900 XWB Aircraft.

On August 8, 2016, we entered into amendment No. 7 to the A350 purchase agreement to change aircraft type, from twoA350-900 XWB Aircraft to two A350—1000 XWB Aircraft.

On September 9, 2016, we entered into amendment No. 8 to the A350 purchase agreement to reschedule the delivery of two A350—900 XWB Aircraft.

Boeing 777 Purchase Agreement

In February 2007, TAM entered into a purchase agreement with Boeing for the purchase of four Boeing777-32WER aircraft.

In August 2007, TAM entered into supplemental agreement No. 1 to the 777 Purchase Agreement to exercise four option aircraft and to define certain aircraft configuration.

In March 2008, TAM entered into supplemental agreement No. 2 to the 777 Purchase Agreement to document its agreement on the descriptions and pricing of some options and master changes related to certain aircraft.

In December 2008, TAM entered into supplemental agreement No. 3 to the 777 Purchase Agreement for the purchase of two incremental 777 aircraft.

In July 2010, TAM entered into supplemental agreement No. 5 to the 777 Purchase Agreement to reschedule the delivery of certain aircraft.

In February 2011, TAM entered into supplemental agreement No. 6 to the 777 Purchase Agreement for the purchase of two incremental 777 aircraft.

In May 2014, TAM entered into supplemental agreement No. 7 to the 777 purchase agreement to substitute two777-300ER Aircraft originally scheduled for delivery in 2014 for two777-F aircraft for scheduled delivery in 2017.

In April 2015, TAM entered into supplemental agreement No. 8 to the 777 purchase agreement to reschedule the delivery of certain aircraft.

CFM56-5B Engine Maintenance Contract

In March 2006, TAM entered into a services agreement with GE Celma, a Brazilian subsidiary of General Electric Engine Services division, for the maintenance by GE Celma ofCFM56-5B engines to power 25 A320 family aircraft and four spare engines.

In March 2007 TAM entered into the Amendment 1 to the above-mentioned services agreement with GE Celma, extending the maintenance services to the engines powering additional 16 A320 family aircraft and two spare engines.

V2500-A5 Engine Maintenance Agreement

In 2000, TAM entered into an engine maintenance contract with MTUMotoren-und Turbinen-Union München GmbH, or MTU, pursuant to which MTU agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105TAY650-15 aircraft engines. This contract is complemented by a novation and amendment agreement between us and Rolls-Royce Brazil Ltda. pursuant to which Rolls-Royce Brazil Ltda. replaced MTU as contract counterparty. This agreement terminates on June 30, 2015.

PW4168 Engine Maintenance Agreement

In June 2007, TAM Linhas Aéreas S.A. entered into a purchase and support agreement engine sale, support and maintenance services agreement with Pratt & Whitney covering 20 engines contained in TAM’sA330-200 fleet six aircraft plus two spares. It is also a rate per engine flight hour contract agreement, which includes cost control mechanisms for TAM. Amendment 3 July 2010 10 aircraft 4 spares.

 

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SABRE Contract

In October 2003, TAM entered into a general services agreement with SABRE Travel International Limited, pursuant to which TAM was granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup. The term of the agreement was tacitly and automatically extended to cover all Work Orders currently in force under the agreement and will expire at the same time with the expiration of the last Work Order. In addition, TAM has distribution agreements in place with SABRE as well as with other distribution providers.

In adittion, on May 4, 2015, we entered into a Master Services License Agreement with SABRE Inc. Pursuant to this agreement SABRE Inc., will grant TAM access and use of certain reservation systems. This agreement will enter into force after the expiration of that Work Order No. 1 to the November 2009 agreement between LATAM and SABRE Inc., and will be effective for an initial period of 10 years.

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. The term of this agreement was ten years, unless terminated early by either party. On March 1, 2016, as part of LATAM’s plan to unify the Passenger Service Platform and migrate to a single service provider, TAM sent Amadeus an early termination notice to be effective during 2017. In addition, TAM has distribution agreements in place with Amadeus as well as with other distribution providers.

D. Exchange Controls

Foreign Investment and Exchange Controls in Chile

The Central Bank of Chile is responsible, among other things, for monetary policies and exchange controls in Chile. Equity investments, including investments in shares of stock by persons who arenon-Chilean residents, have been generally subject in the past to various exchange control regulations restricting the repatriation of their investments and the earnings thereon.

Article 47 of the Central Bank Act and former Chapter XXVI of the Central Bank Foreign Exchange Regulations regulated the foreign exchange aspects of the issuance of ADSs by a Chilean company until April 2001. According to former Chapter XXVI, the Central Bank of Chile and the depositary had to enter into an agreement in order to gain access to the formal exchange market. The issuers of the shares underlying the ADSs and the custodian could also be parties to these agreements.

On April 16, 2001, the Central Bank of Chile agreed that, effective April 19, 2001:

 

 prior foreign exchange restrictions would be eliminated; and

 

 a new Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) would be applied.

The main objective of these amendments, as declared by the Central Bank of Chile, is to facilitate movement of capital in and out of Chile and to encourage foreign investment.

In connection with the change in policy, the Central Bank of Chile eliminated the following restrictions:

 

 a reserve requirement with the Central Bank of Chile for a period of one year (this mandatory reserve was imposed on foreign loans and funds brought into Chile to purchase shares other than those acquired in the establishment of a new company or in the capital increase of the issuing company; the reserve requirement was gradually decreased from 30% of the proposed investment to 0%);

 

 the requirement of prior approval by the Central Bank of Chile for certain operations;

 

 mandatory return of foreign currency to Chile; and

 

 mandatory conversion of foreign currency into Chilean pesos.

 

 Underthe new regulations, only the following limitations apply to these operations:

 

 the Central Bank of Chile must be provided with information related to certain operations; and

 

 certain operations must be conducted with the Formal Exchange Market.

The Central Bank of Chile also eliminated Chapter XXVI of the Compendium of Foreign Exchange Regulations, which regulated the establishment of an ADR facility by a Chilean company. Pursuant to the new rules, it is no longer necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADR facility or to enter into a foreign investment contract with the

 

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Central Bank of Chile. The establishment of an ADR facility is now regarded as an ordinary foreign investment, and simply requires that the Central Bank of Chile be informed of the transaction pursuant to Chapter XIV of the amended Compendium of Foreign Exchange Regulations and that the foreign currency transactions related thereby be conducted through the Formal Exchange Market.

However, all contracts executed under the provisions of former Chapter XXVI (including the foreign investment contract among LATAM Airlines Group, the Central Bank of Chile and the ADS depositary, or the “Foreign Investment Contract”), remained in full force and effect and continued to be governed by the provisions, and continued to be subject to the restrictions, set forth in former Chapter XXVI at the time of its abrogation. Our Foreign Investment Contract guaranteed ADS investors access to the Formal Exchange Market to convert amounts from Chilean pesos into U.S. dollars and repatriate amounts received with respect to deposited common shares or common shares withdrawn from deposit or surrender of ADRs (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying common shares and any rights arising from them).

On May 10, 2007, the Board of the Central Bank of Chile resolved to interpret the regulations regarding the former Chapter XXVI in connection with the access granted to the Formal Exchange Market. These regulations allowed entities that carry out capital increases by means of the issuance of cash shares before August 31, 2007 to apply the aforementioned regulation to their capital increases, but only once and only if those shares can be fully subscribed and paid by August 31, 2008, among other conditions. Consequently, capital increases carried out after August 31, 2007 will have no guaranteed access to the Formal Exchange Market.

On October 17, 2012, the Central Bank of Chile, the depositary and LATAM Airlines Group entered into a termination agreement in respect of LATAM’s existing foreign investment contract. ADR holders were notified about this termination in accordance with Section 16 of the Deposit Agreement. Upon termination of the foreign investment contract, holders of ADSs and the depositary no longer have guaranteed access to the Formal Exchange Market. Currently, the ADS facility is governed by Chapter XIV of the Compendium on “Regulations applicable to Credits, Deposits, Investments and Capital Contributions from Abroad.” According to Chapter XIV, the establishment or maintenance of an ADS facility is regarded as an ordinary foreign investment, and it is not necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADS facility. The establishment or maintenance of an ADS facility only requires that the Central Bank of Chile be informed of the transaction, and that the foreign currency transactions related thereby be conducted through the Formal Exchange Market.

Investment in Our Shares and ADRs after the business combination with TAM

As a result of the combination with TAM, investments made in shares of our common stock are subject to the following requirements:

 

 any foreign investor acquiring shares of our common stock who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;

 

 any foreign investor acquiring shares of our common stock to be converted into ADSs or deposited into an ADR program who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;

 

 in both cases, the entity of the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank of Chile;

 

 all remittances of funds from Chile to the foreign investor upon the sale of the acquired shares of our common stock or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market;

 

 all remittances of funds from Chile to the foreign investor upon the sale of shares underlying ADSs or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and

 

 all remittances of funds made to the foreign investor must be reported to the Central Bank of Chile by the intervening entity of the Formal Exchange Market.

When funds are brought into Chile for a purpose other than to acquire shares to convert them into ADSs or deposit them into an ADR program and subsequently such funds are used to acquire shares to be converted into ADSs or deposited into an ADR program such investment must be reported to the Central Bank of Chile by the custodian within 10 days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank of Chile.

When funds to acquire shares of our common stock or to acquire shares to convert them into ADSs or deposit them into an ADR program are received by us abroad (i.e., outside of Chile), such investment must be reported to the Central Bank of Chile directly by the foreign investor or by an entity participating in the Formal Exchange Market within ten days following the end of the month in which the investment was made.

All payments in foreign currency in connection with our shares of common stock or ADSs made from Chile through the Formal Exchange Market must be reported to the Central Bank of Chile by the entity participating in the transaction. In the event there

 

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are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.

There can be no assurance that additional Chilean restrictions applicable to the holders of ADSs, the disposition of shares of our common shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restriction if imposed.

This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank of Chile’s Foreign Exchange Regulations, a copy of which is available in Spanish and English versions at the Central Bank’s website at www.bcentral.cl.

Voting Rights

Holders of our ADSs, which represent common shares, may instruct the depositary to vote the shares underlying their ADRs. If we ask holders for instructions, the depositary will notify such holders of the upcoming vote and arrange to deliver our voting materials to such holders. The materials will describe the matters to be voted on and explain how holders may instruct the depositary to vote the shares or other deposited securities underlying their ADSs as they direct by a specified date. For instructions to be valid, the depositary must receive them on or before the date specified as “VoteCut-Off Date.” The depositary will try, as far as practical, subject to Chilean law and the provisions of ourby-laws, to vote or to have its agents vote the shares or other deposited securities as holders instruct. Otherwise, holders will not be able to exercise their right to vote unless they withdraw the shares. However, holders may not know about the meeting far enough in advance to withdraw the shares. We will use our best efforts to request that the depositary notify holders of upcoming votes and ask for their instructions.

If the depositary does not receive voting instructions from a holder by the specified date, it will consider such holder to have authorized and directed it to give a discretionary proxy to a person designated by our board of directors to vote the number of deposited securities represented by such holder’s ADSs. The depositary will give a discretionary proxy in those circumstances to vote on all questions to be voted upon unless we notify the depositary that:

 

 we do not wish to receive a discretionary proxy;

 

 we think there is substantial shareholder opposition to the particular question; or

 

 we think the particular question would have an adverse impact on our shareholders.

The depositary will only vote or attempt to vote as such holder instructs or as described above.

We cannot assure holders that they receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. This means that holders may not be able to exercise their right to vote and there may be nothing they can do if their shares are not voted as they requested.

Exchange Rates

Prior to 1989, Chilean law permitted the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank of Chile. The Central Bank Act liberalized the rules that govern the ability to buy and sell foreign currency. The Central Bank Act empowers the Central Bank of Chile to determine that certain purchases and sales of foreign currency specified by law must be carried out exclusively in the Formal Exchange Market, which is made up of the banks and other entities authorized by the Central Bank of Chile. All payments and distributions with respect to the ADSs must be conducted exclusively in the Formal Exchange Market.

For purposes of the operation of the Formal Exchange Market, the Central Bank of Chile sets a reference exchange rate (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.

 

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Purchases and sales of foreign exchange may be effected outside the Formal Exchange Market through the Informal Exchange Market (Mercado Cambiario Informal) established by the Central Bank in 1990. There are no limits on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the observed exchange rate.

Although our results of operations have not been significantly affected by fluctuations in the exchange rates between the peso and the U.S. dollar because our functional currency is the U.S. dollar, we are exposed to foreign exchange losses and gains due to exchange rate fluctuations. Even though the majority of our revenues are denominated in or pegged to the U.S. dollar, the Chilean government’s economic policies affecting foreign exchange and future fluctuations in the value of the peso against the U.S. dollar could adversely affect our results of operations and an investor’s return on an investment in ADSs.

E. Taxation

Chilean Tax

The following discussion relates to Chilean income tax laws presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue Service (“Chilean IRS”) and other applicable regulations and rulings, all of which are subject to change. The discussion summarizes the principal Chilean income tax consequences of an investment in the ADSs or common shares by a person who is neither domiciled in, nor a resident of, Chile or by a legal entity that is incorporated abroad not organized under the laws of Chile and does not have a branch or a permanent establishment located in Chile (such an individual or entity is referred to herein as a Foreign Holder). For purposes of Chilean tax law, an individual holder is a resident of Chile if such person has resided in Chile for more than six consecutive months in one calendar year or for a total of six months in two consecutive tax years. In addition, an individual is considered domiciled in Chile in case he or she resides in Chile with the actual or presumptive intent of staying in the country. The discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor’s particular tax situation.

Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign investors, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may only be amended by another statute. In addition, the Chilean tax authorities enact rulings and regulations of either general or specific application and interpret the provisions of Chilean tax law. Chilean tax may not be assessed retroactively against taxpayers who act in good faith relying on such rulings, regulations and interpretations, but Chilean tax authorities may change these rulings, regulations and interpretations prospectively. On February 4, 2010, representatives of the governments of the United States and Chile signed an income tax treaty. The treaty will have to be approved by the U.S. Senate before it may become effective.

Law No. 20,780, enacted on September 29, 2014, in conjunction with Law No. 20,899, enacted on February 8, 2016 (both, the “Tax Reform Act”) introduced a comprehensive modification to the Chilean income tax system. The Tax Reform Act introduced changes to the corporate tax rate, mandating a gradual increase of the rate from 20% to 25% or 27% in certain cases, the rules regarding minimum capitalization, and the taxation of Chilean investments abroad (the controlled-foreign-corporation rules), and introduced two new alternative general income tax regimes for Chilean taxpayers (Fully Integrated Regime and Partially Integrated Regime), among others. The new rules are set to come into effect gradually, with the implementation process having commenced on October 1, 2014 and set to be completed by January 1, 2018. The Fully Integrated Regime and the Partially Integrated Regime apply as from January 1, 2017. The mandatory regime for entities organized as stock corporations like Latam Airlines Group S.A. is the Partially Integrated System. The Corporate Income Tax rate for companies under this regime is 27% from 2018 onward. A transition rate of 25.5% applies in 2017.

Cash Dividends and Other Distributions

Under the new Partially Integrated Regime, cash dividends we pay with respect to the ADSs or common shares held by a Foreign Holder will be subject to a 35% Chilean withholding tax, which we withhold and pay over to the Chilean tax authorities and which we refer to as the Withholding Tax. A credit against the Withholding Tax is available based on the corporate income tax rate of the year of distribution and provided a sufficient balance of accumulated corporate income tax credits is available. These credits correspond to corporate income tax we actually paid on the accumulated income (referred to herein as the First Category Tax or FCIT). However, this credit does not reduce the Withholding Tax on aone-for-one basis because it also increases the base on which the Withholding Tax is imposed. If we register net income but taxable losses, no credit against the Withholding Tax may be available. In addition, if we distribute less than all of our distributable income, the credit for First Category Tax we pay is proportionately reduced.

The Partially Integrated Regime reduces the amount of First Category Tax creditable against the Withholding Tax for certain

 

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Foreign Holders. As a general rule, only 65% of the First Category Income Tax credit will actually offset the Withholding Tax. 35% of the credit must be added back to the Withholding Tax amount to be paid into the Treasury (referred to herein as First Category Tax Credit Restitution). However, if a tax treaty is in place between Chile and the country of domicile of a Foreign Holder and such Foreign Holder is entitled to treaty benefits in relation to the income, the full First Category Tax credit will continue to be available to offset against the Withholding Tax.

Under a transitory provision in force until December 31, 2019, the full 27% First Category Tax will also be creditable against the 35% Withholding Tax if the recipient of a dividend distribution is a shareholder resident in a country with which Chile has a tax treaty signed before January 1st, 2017, although such treaty is not yet in force.

In general, the example below illustrates the effective Withholding Tax burden on a cash dividend received by a Foreign Holder assuming a Withholding Tax rate of 35%, a First Category Tax rate of 27% and a distribution of 30% of the consolidated net income of the Company after payment of the First Category Tax:

 

   Foreign Holder
in Treaty
Country
  Foreign Holder
in Non Treaty
country
 

The Company’s taxable income

   100.00   100.00 

First Category Tax (27% of Ch$100)(*)

   (27.00  (27.00

Net distributable income

   73.00   73.00 

Dividend distributed (*)

   21.90   21.90 

First category increase

   8.10   8.10 

Amount subject to Withholding Tax (**)

   30.00   30.00 

Withholding Tax

   (10.50  (10.50

Credit for First Category Tax

   8.10   8.10 

Add back 35% of the First Category Tax

   N/A   (2.84

Net tax withheld

   (2.40  (5.24

Net dividend received

   19.5   16.66 

Effective dividend withholding rate

   11  24

 

(*)Special considerations apply to a distribution in 2017
(**)30% of net distributable income.
(**)The dividend of Ch$21.90 grossed up with the First Category Tax credit of Ch$8.10.

 

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The effective rate of Withholding Tax to be imposed on dividends we pay will depend on the First Category Tax rate applicable in the year of distribution and on the balance of First Category Income Tax credits accumulated by the company. The First Category Tax rate will be 27% for 2018 and following years. Special considerations apply to a distribution in 2017. These considerations are set out in a separate paragraph further below. The First Category Income Tax credits generated under the new tax regime, i.e. as of 2017, will be allocated first. Once the balance of First Category Tax credits generated as of 2017 are exhausted, the First Category Tax credits accumulated until December 31, 2016 will be used. In that event the First Category Tax credit available against the Withholding Tax will not correspond to the First Category Tax rate of the year of distribution but to the average rate of First Category Tax credits accumulated until December 31, 2016. This average rate will be determined by dividing the aggregate First Category Tax Credits accumulated until December 31, 2016 by the aggregate retained taxable profits accumulated at the same date. The First Category Tax credits accumulated until December 31, 2016 are not subject to the First Category Tax Credit Restitution irrespective of whether a tax treaty is in place with the country of the Foreign Holder or not.

The First Category Tax credits accumulated until December 31, 2016 correspond to the First Category Tax we actually paid on the income generated in a given year. For earnings generated from 1991 until 2001, the First Category Tax rate was 15%. The rate was 16.0% in 2002, 16.5% in 2003, 17% from 2004 until 2010, 20% from 2011 until 2013, 21% in 2014, 22.5% in 2015 and 24% in 2016.

In the event that the accumulated First Category Tax credits are not sufficient to cover any particular dividend, we will generally withhold tax from the dividend at the full 35% rate.

Dividend distributions made in 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.

Special Considerations for distributions in 2017

The First Category Tax rate for 2017 is 25.5%. However, in 2017 the First Category Tax credit available against the Withholding Tax will not correspond to the First Category Tax rate of the year but to the average rate of First Category Tax credits accumulated until December 31, 2016. This average rate will be determined by dividing the aggregate First Category Tax Credits accumulated until December 31, 2016 by the aggregate retained taxable profits accumulated at the same date. These credits are not subject to the First Category Tax Credit Restitution, irrespective of whether a tax treaty is in place with the country of the Foreign Holder or not.

Capital Gains

Gain from the sale or other disposition by a Foreign Holder of ADRs evidencing ADSs outside Chile will not be subject to Chilean taxation. The deposit and withdrawal of common shares in exchange for ADRs will not be subject to any Chilean taxes.

Gain recognized on a sale or disposition of common shares by a Foreign Holder (as distinguished from sales or exchanges of ADRs evidencing ADSs representing such common shares) may be subject to a 35% Withholding Tax. Moreover, a gain not exceeding 10 Annual Tax Units (US$8,278 as of December 31, 2016) recognized by a Foreign Holder without taxable presence in Chile in a sale to anon-related buyer will not be taxable.

The gain on the sale of shares of common stock by a Foreign Holder is subject to a withholding of 35% of the gain. If the gain subject to taxation cannot be determined, the Foreign Holder is subject to a provisional withholding of 10% of the total (sale price) amount, without any deduction, when the amounts are paid to, credited to, accounted for, put at the disposal of, or corresponding to, the Foreign Holder.The Foreign Holder would be entitled to request a tax refund for any amounts withheld in excess of the taxes actually due in April of the following year upon filing its corresponding tax return. Gain recognized in the transfer of common shares that have a high presence in the stock exchange, however, is not subject to capital gains tax in Chile, provided that the common shares are transferred in a local stock exchange or within the process of a public tender of common shares governed by the Securities Market Law.

The common shares must have been acquired either in a local stock exchange, within the process of a public tender of common shares governed by the Securities Market Law, in an initial public offer of common shares resulting from the formation of a corporation or a capital increase of the same, or in an exchange of convertible bonds.

 

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Please note that, Chile’s IRS Ruling No. 1,480 (issued on August 22, 2014) confirmed that capital gains stemming from the sale of shares with high stock market presence acquired through the exchange of American Depositary Receipts (ADRs) for shares is not subject to capital gains tax in Chile. Such exemption is applicable provided that the ADRs comply with the requirements established by the Chilean Superintendence for Securities and Insurance (SVS) for the public offering of securities in Chile (i.e. if the ADRs are registered in the Foreign Securities Registry of the SVS, or their registration has been exempted by the SVS under a cooperation agreement signed with regulators of foreign markets), and the underlying shares have been registered in the Securities Registry of the SVS and on a Chilean Stock exchange. Shares are considered to have a high presence in the stock exchange when they:

 

are registered in the Securities Registry;

 

are registered in a Chilean Stock exchange; and

 

meet at least one of the following requirements:

 

 i.have an adjusted presence equal to or above 25%;

 

 ii.have a Market Maker.

To calculate the adjusted presence of a particular share, the aforementioned regulation first requires a determination of the number of days in which the operations regarding the stock exceeded, in Chilean pesos, the equivalent of 1,000 UF (US$39,356 as of December 31, 2016) within the previous 180 business days of the stock market. That number must then be divided by 180, multiplied by 100, and expressed in a percentage value. This tax regime does not apply if the transaction involves an amount of shares that would allow the acquirer to take control of the publicly traded corporation, in which case the ordinary tax regime referred to in the previous paragraph will apply, unless the transfer is part of a tender offer governed by the Securities Market Law or the transfer is done on a Chilean stock exchange, without substantially exceeding the market price.

To meet the “Market Maker” requirement the issuer of the shares must execute a written contract with a stock broker incorporated in Chile that fulfills some additional requirements.

A capital gains tax exemption for “foreign institutional investors” such as mutual funds and pension funds was repealed as from May 1, 2014 by Law 20,712. However, the law includes a grandfathering provision for shares acquired before May 1, 2014. This provision establishes an exemption on the capital gain obtained in the sale of shares that are publicly traded and have a high presence in a stock exchange when the sale is made by a foreign institutional investor, provided that the sale is made in a local stock exchange or in a public tender in accordance with the provisions of the Securities Market Law, or in the redemption of fund quotas, and the shares were acquired before May 1, 2014.

Pursuant to the regulations of the grandfathering rule, to qualify as a foreign institutional investor an entity must be formed outside of Chile, not have a domicile in Chile, and must be at least one of the following:

 

 a fund registered with a regulatory authority of a EU or OECD country, or other country duly authorized by the SVS;

 

 a pension fund that is formed exclusively by natural persons that receive pensions out of an accumulated capital in the fund, regulated by an authority of the countries mentioned above;

 

 an insurance company regulated by the competent regulatory authority of the insurance business, as appropriate, which must be part of IAIS,International Association of Insurance Supervisors, or ASSAL,Asociación de Supervisores de Seguros de América Latina;

 

 a foreign State or a division with political autonomy recognized by Chile, whether they invest through its government, central bank, issuing bank or corresponding monetary authority. Moreover, the investment can be made through investment authorities, investment agencies, investment corporations or other entities, provided that its purpose is to provide financial resources for the exclusive benefit of the foreign State or territorial division, and provided that the vehicle is not used also for investments or resources other than those of the sovereign fund;

 

 endowment funds duly registered in a EU or OECD country, or other country duly authorized by the SVS.

 

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The foreign institutional investor must not directly or indirectly participate in the control of the corporations issuing the shares it invests in, nor possess or participate directly or indirectly in 10% or more of the capital or the profits of such corporations.

Another requirement for the exemption is that the foreign institutional investor must execute a written contract with a bank or a stock broker incorporated in Chile. In this contract, the bank or stock broker must undertake to execute purchase and sale orders, verify the applicability of the tax exemption or tax withholding and inform the Chilean IRS of the investors it works with and the transactions it performs. Finally, the foreign institutional investor must register with the Chilean IRS by means of a sworn statement issued by such bank or stock broker.

The tax basis of common shares received in exchange for ADRs will be the acquisition value of the common shares on the date of exchange duly adjusted for local inflation. The valuation procedure set forth in the deposit agreement, which values common shares which are being exchanged at the highest price at which they trade on the SSE on the date of the exchange, will determine the acquisition value for this purpose. Consequently, the surrender of ADRs for common shares and the immediate sale of the common shares for the value established under the Deposit Agreement will not generate a capital gain subject to taxation in Chile, provided that the sale of the common shares is made on the same date on which the exchange of ADRs for common shares is recorded, or if the price of the common shares at the exchange date, as determined above, is higher than the price at which the common shares are sold.

The exercise of preemptive rights relating to the common shares will not be subject to Chilean taxation. Any gain obtained by a Foreign Holder without taxable presence in Chile on the sale of preemptive rights relating to the common shares will be subject to Withholding Tax (the former being creditable against the latter).

Other Chilean Taxes

There are no Chilean inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by gift of the common shares by a Foreign Holder. There are no Chilean stamp, issue, registration or similar taxes or duties payable by Foreign Holders of ADSs or common shares.

Withholding Tax Certificates

Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of the Withholding Tax (net of the applicable First Category Tax credit).

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:

 

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a dealer in securities,

 

a trader in securities that elects to use amark-to-market method of accounting for securities holdings,

 

atax-exempt organization,

 

a life insurance company,

 

a person liable for alternative minimum tax,

 

a person that actually or constructively owns 10% or more of our voting stock,

 

a person that holds common shares or ADSs as part of a straddle or a hedging or conversion transaction,

 

a person that purchases or sells common shares or ADSs as part of a wash sale for tax purposes, or

 

a U.S. holder (as defined below) whose functional currency is not the U.S. dollar.

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:

 

a citizen or resident of the United States,

 

a domestic corporation,

 

an estate whose income is subject to United States federal income tax regardless of its source, or

 

a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

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.

 

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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 or common shares that constitute qualified dividend income will be taxable to you at the preferential rates applicable to long-term capital gains if you hold the ADSs or common shares for more than 60 days during the121-day period beginning 60 days before theex-dividend date and meet other holding period requirements. Dividends paid on the ADSs or common shares will be treated as qualified dividend income if:

 

the ADSs or common shares are readily tradable on an established securities market in the United States; and

 

we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC.

We believe that our common shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes. See “—PFIC Rules” below. 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 anon-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.

 

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Consequently, you may not be able to use the foreign tax credit arising from any Chilean tax imposed on the disposition of common shares or ADSs unless such credit can be applied against tax due on other income treated as derived from foreign sources in the appropriate limitation category.

Medicare Tax

A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” (or “undistributed net investment income” in the case of an estate or trust) for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on the individual’s circumstances). A holder’s net investment income generally includes its dividend income and its net gains from the disposition of shares or ADSs, unless such dividend income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares or ADSs.

PFIC Rules

We believe that common shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, gain realized on the sale or other disposition of your common shares or ADSs would in general not be treated as capital gain. Instead, if you are a U.S. holder, unless you elect to be taxed annually on amark-to-market basis with respect to your common shares or ADSs, or you elect to be taxed annually on the earnings of the PFIC attributable to your shares or ADSs as a “qualified electing fund”, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the common shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your common 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 common 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

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to the information requirements of the Exchange Act, as amended. In accordance with these requirements, we file reports, including annual reports on Form20-F and other information with the SEC. These materials, including this annual report and the exhibits hereto, may be inspected and copied at the SEC’s public reference rooms in Washington, D.C. Please call the SEC at1-800-SEC-0330 for further information on the public reference rooms. In addition, some of our SEC filings, including those filed on and after February 19, 2002, are also available to the public through the SEC’s website at www.sec.gov.

As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we furnish our shareholders with annual reports containing financial statements audited by our independent auditors and make available to our shareholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year. We file such quarterly reports with the SEC within two months of each quarter of our fiscal year, and we file annual reports on Form20-F within the time period required by the SEC, which is currently six months from December 31, the end of our fiscal year.

I. Subsidiary Information

Not applicable.

 

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ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

Given the nature of its business, LATAM is exposed mainly to three types of market risk:

 

 Fuel price fluctuations;

 

 Foreign exchange fluctuations; and

 

 Interest rate fluctuations.

Management assesses the level of our exposure to these risks periodically to determine the extent to which 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.

LATAM fuel consumption for 2016 was 1,185.5 million gallons and the consumption forecast for 2017 is 1,179.6 million gallons. To manage its exposure to the cost of fuel, LATAM has a hedging program based on an approved policy. This policy aims to hedge approximately20-60% of our aggregate fuel consumption, using commodity derivatives for the expected fuel consumption in the short term3-6 months, where the pass-through of cost changes is limited.

Jet Fuel is not the only underlying asset that LATAM may use for hedging purposes. It may also consider derivative instruments in other underlying commodity assets such as crude oil (BRENT), West Texas intermediate (WTI) or heating oil (HO).

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. To manage this credit risk, we select counterparties based on their credit ratings and monitor our relative market position on a daily basis. We generally are not required to post collateral and do not require our counterparties to post collateral in respect of positions under our fuel hedging transactions. For more information see “Item 3. Key Information— D. Risk Factors—Risks Related to Our Operations and the Airline Industry—Our operations are subject to fluctuations in the supply and cost of jet fuel, which could adversely impact our business.

During 2016, 2015 and 2014 we entered into a mix of swaps and option contracts on BRENT, WTI 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:

 

   LATAM Fuel Hedging
Year ended December 31,
 
   2016
LATAM
  2015
LATAM
  2014
LATAM
 

Gallons Purchased (million)

   781.2   544.7   684.3 

% Total Annual Fuel Consumption

   66.7  43.6  55.6

Combined Result of Hedges (in million of US$)

   (48.0  (239.4  (108.7

As of December 31, 2016, the fair value of our outstanding fuel related derivative contracts was estimated to be US$ 8.1 million (positive).

Gains and losses on the hedging contracts outlined above are recognized as a cost of sales in the income statement when the fuel subject to the hedge is consumed. Premiums paid related to fuel derivative contracts are recorded as prepaid expenses (current assets) and recorded as an expense at the time the contract expires.

Under IFRS, the fair value of the hedging derivatives is booked as anon-current asset or liability if the remaining maturity of the item is hedged for more than 12 months, and as a current asset or liability if the remaining term of the item is hedged for less than 12 months. The fair value of the derivative contracts is deferred within an equity reserve account. Please see Note 2.10 to our audited consolidated financial statements. As the current positions do not represent changes in cash flows but a variation in the exposure to the market value, the Company’s current hedge positions have no impact on income; they are booked as cash flow hedge contracts, so a variation in fuel prices has an impact on the Company’s net equity.

 

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The following table shows the sensitivity analysis of our hedging contracts to reasonable changes in fuel prices and their effect on equity. The term used for the projection was June 30, 2017, the last maturity date of our current fuel hedge contracts. The calculations were made considering a parallel movement of US$5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of December 2016, 2015 and 2014.

 

   LATAM fuel price sensitivity (effect on equity)
Position as of December 31,
 
   2016
LATAM
   2015
LATAM
   2014
LATAM
 
   (millions of US$ per barrel) 

BRENT or JET benchmark price

  

+5

   +3.1    +5.4    +24.9 

–5

   -4.8    –2.8    –25.1 

During the periods presented, the Company has not recorded amounts for ineffectiveness in the consolidated income statement pursuant to IFRS principles for recognizing and measuring financial instruments.

Given the fuel hedge structure as of December 31, 2016, which reflects only a partial hedge of our expected fuel consumption, a vertical fall by US$5 in the BRENT and JET benchmark price (the monthly daily average) for each month would have meant savings of approximately US$ 116.3 million in the cost of the Company’s total fuel consumption. A vertical increase by US$5 in the JET and BRENT benchmark price (the monthly daily average) for each month would have meant an additional cost of approximately US$ 114.5 million of the Company’s total fuel consumption.

Risk of Variation in Foreign Exchange Rates

The functional currency of the LATAM holding company is the U.S. dollar. Because LATAM conducts its business in local currencies in several countries, it faces the risk of variations in multiple foreign currency exchange rates. Depreciation of these currencies against the U.S. dollar could have adverse effects both transactional and translational, because part of our revenues and expenses are denominated in those currencies.

At the same time, LATAM’s affiliates are exposed to foreign exchange risk, which could in turn impact the consolidated results of the Company.

The greatest exposure to future cash flows is mainly presented by the subsidiary TAM S.A. and volatility in the R$/US$ exchange rate. TAM S.A.’s earnings are generated largely in R$. We actively manage the R$/US$ exchange rate risk by entering into FX derivative contracts and carrying out internal operations for obtaining natural hedging. Additionally, LATAM manages its economic exposures of future flows revenues on Great Britain Pound (GBP), by entering into FX derivative contracts.

In lower concentration, the company also faces foreign exchange risk relating to additional currencies such as: Euro, Chilean Peso, Australian Dollars, Argentinean Peso, Paraguayan Guaraní, Mexican Peso, Peruvian Nuevo Sol, Colombian Peso and New Zealand Dollars.

As of December 31, 2016, the fair value of our FX derivative contracts was estimated to be US$ 1.1 million (negative).

Because changes in the values of existing FX derivative positions do not represent changes in cash flows, but a variation in the exposure of market value, the outstanding hedging positions do not impact results (they are registered as cash flow hedges under IFRS, therefore, a change in the foreign exchange rate has an impact on the equity of the Company).

The following table shows the sensitivity of the fair value of financial instruments as a result of reasonable changes in the exchange rates of British Pounds and Brazilian reais. The term projection is defined until the end of the last hedging contract in force:

 

LATAM foreign exchange sensitivity Derivatives

Position as of December 31, 2016

 

Appreciation
(depreciation) of US$

  

Effect on equity

(Millions of US$)

 
+10%   +3.4 
-10%   -1.0 

 

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As of December 31, 2016, the Company has FX derivatives of US$60 million (notional) for FX BRL and US$10 million (notional) for FX GBP.

Balance sheet exposure of LATAM to the Brazilian Real is related to the functional currency of TAM and its balance sheet currency mismatch, as TAM has a net US$ liability position. 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 been reduced from over US$4.0 billion since the combination in June 2012 to around US$1.2 billion as of December 31, 2016. The Company continues working to mitigate this exposure through the execution of the fleet transfer from TAM to LATAM and payment of TAM’s debt denominated in USD.

The following table shows the sensitivity of TAM’s financial results to changes in the R$/US$ exchange rate:

 

   TAM exchange rate sensitivity
Position effect onpre-tax earnings
as of December 31,
 
   2016   2015   2014 
   LATAM   LATAM   LATAM 
   (millions of US$) 

Appreciation (depreciation) of R$/US$

      

–10%

   +119.2    +67.6    +69.8 

+10%

   -119.2    –67.6    –69.8 

Our foreign currency exchange exposure as of December 31, 2016 was as follows:

 

   LATAM foreign currency exchange exposure 
   U.S.
Dollars
MUS$
   % of
total
  Brazilian
real
MUS$
   % of
total
  Chilean
pesos
MUS$
   % of
total
  Other
currencies
MUS$
   % of
total
  Total
MUS$
 

Current assets

   1,727,743    47.6  1,438,613    39,7  155,611    4,3  304,808    8.4  3,626,775 

Other assets

   10,140,422    65.1  5,285,025    33,9  11,475    0,1  134,497    0.9  15,571,419 

Total assets

   11,868,165    61.8  6,723,638    35,0  167,086    0,9  439,305    2.3  19,198,194 

Current liabilities

   3,582,543    57.6  2,121,915    34,1  257,405    4,1  260,328    4.2  6,222,191 

Long-term liabilities

   11,400,803    75.9  2,919,683    19,4  413,118    2,8  279,286    1.9  15,012,890 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

Total liabilities and shareholders’ equity

   14,983,346    70.6  5,041,598    23,7  670,523    3,2  539,614    2,5  21,235,081 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

 

For more information on Market Risk, see Note 3 “Financial Risk Management” to our audited consolidated financial statements.

Risk of Fluctuations in Interest Rates

As of December 31, 2016, LATAM had US$ 8,710 million in outstanding interest bearing loans. LATAM uses interest rate derivatives to reduce the impact of an increase of interest rates. 63.1% of LATAM outstanding debt as of December 31, 2016 was effectively at a fixed rate, either as fixed rate loans or variable rate loans hedged using a floating to fixed rate derivative instrument.

LATAM’s interest bearing loans can be classified by: variable interest rate debt, fixed interest rate debt and interest rate hedged debt. LATAM’s variable interest rate debt amounts to US$ 3,216 million, from which 84.2% is assigned to aircraft financing and 15.8% tonon-aircraft financing. The fixed interest rate debt amounts are US$ 5,494 million of which 62.6% is assigned to aircraft financing and 37.4% tonon-aircraft financing. The interest rate hedged debt amounts to US$ 406 million of which 100% is assigned to interest rate swaps.

Under IFRS, the positive fair value of these interest rate swaps is reflected in the balance sheet as hedging assets and the negative fair value of these agreements is reflected as hedging liabilities. As of December 31, 2016, the fair value of all the interest rate swaps was US$ 17.2 million (negative).

The use of the aforementioned hedging instruments, combined with fixed interest rate financing for our aircraft financing, has enabled the Company to have predictable interest rate costs, reducing the cash volatility.

 

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As of December 31 2016, the average interest rate of our entire outstanding interest-bearing long-term debt rate was 4.0%.

The following table summarizes our principal payment obligations on all of our interest-bearing debt as of December 31, 2016 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, 2016 for each loan.

 

   LATAM’s principal payment obligations by year of expected  maturity(1) 
   Average
interest rate(2)
  2017   2018   2019   2020   2021   2022 and
thereafter
 
   (millions of US$) 

Interest-bearing liabilities

   4.0  1,771    1,119    1,120    1,440    1,105    2,156 

 

(1) At cost.
(2) Average interest rate means the average prevailing interest rate on our debt on December 31, 2016 after giving effect to hedging arrangements.

The following table shows the sensitivity of changes in our long-term interest bearing liabilities and capital leases that are not hedged against interest-rate variations. These changes are considered reasonably possible based on current market conditions.

 

   LATAM’s interest rate sensitivity
(effect on pre-tax  earnings)
Position as of December 31,
 
   2016
LATAM
   2015
LATAM
   2014
LATAM
 
   (millions of US$) 

Increase (decrease) in LIBOR

      

+100 basis points

   -32.2    -26.7    –27.5 

–100 basis points

   +32.2    +26.7    +27.5 

Changes in market conditions produce a change in the valuation of current financial instruments hedging against fluctuations in interest rates, causing an effect on the Company’s equity (because they are booked as cash-flow hedges). These changes are considered reasonably possible based on current market conditions. The calculations were made by increasing (decreasing) 100 basis points of the three-month Libor futures curve.

 

   LATAM’s interest rate sensitivity
(effect on equity)
Position as of December 31,
 
   2016
LATAM
   2015
LATAM
   2014
LATAM
 
   (millions of US$) 

Increase (decrease) in three month LIBOR

    

Future rates

    

+100 basis points

   +3,9    +8.7    +15.3 

–100 basis points

   -4,0    +9.0    –16.0 

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.

 

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ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

In the United States, our common shares trade in the form of ADS. Since August 2007, each ADS represents one common share, issued by The Bank of New York Mellon, as Depositary pursuant to a Deposit Agreement. ADSs commenced trading on the NYSE in 1997. In October 2011, our Depositary bank changed from The Bank of New York Mellon to JP Morgan Chase Bank, N.A. (“JP Morgan”).

Fees and Charges for ADR Holders

The Bank of New York Mellon, and since October 2011 JP Morgan, as depositary, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees. The depositary may also collect its annual fee for depositary services by deductions from cash distributions, by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to providefee-attracting services until its fees for those services are paid.

 

Persons depositing or withdrawing shares must pay:  For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)  

•       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

US$$0.05 (or less) per ADS  

•       Any cash distribution to ADS registered holders

A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs  

•       Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders

US$$0.051 (or less) per ADSs per calendar year  

•       Depositary services

Registration or transfer fees  

•       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

Expenses of the depositary  

•       Cable, telex and facsimile transmissions

 

•       Conversion of foreign currencies into U.S. dollars

 

1 Withdrawing Deposited Securities; there are no such fees in respect of the Shares as of the date of the Deposit Agreement), and (iv) expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency). Such charges may at any time and from time to time be changed by agreement between the Company and the Depositary.

 

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Persons depositing or withdrawing shares must pay:  For:
Taxes and other governmental charges the depositary or the custodian has to pay on any ADS or share underlying an ADS, such as stock transfer taxes, stamp duty or withholding taxes  

•       As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities  

•       As necessary

Fees and Direct and Indirect Payments Made by the Depositary to the Foreign Issuer

Past Fees and Payments

During 2016, the Company received from the depositary US$443,339.9 for continuing annual stock exchange listing fees, standardout-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), payments related to applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

Future Fees and Payments

JP Morgan, as the depositary bank, has agreed to reimburse the Company for certain of our reasonable expenses related to our ADS program and incurred by us in connection with the program. The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form20-F and ongoing SEC compliance and listing requirements, listing fees, investor relations expenses, advertising and public relations expenses and fees payable to service providers for the distribution of hard copy materials to beneficial ADR holders in the Depositary Trust Company, such as information related to shareholders’ meetings and related voting instruction cards); and indirect payments (third-party expenses paid directly and fees waived).

PART II

 

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

 

ITEM 15.CONTROLS AND PROCEDURES

Controls and Procedures

Management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon such evaluation, management, with the participation of the chief executive officer and chief financial officer concluded that the disclosure controls and procedures, as of December 31, 2016, 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 Rules13a-15(f) and15d-15(f) under the Exchange Act, as amended.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

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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, 2016 based on the criteria established in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, LATAM Airlines Group S.A.’s management has concluded that, as of December 31, 2016 , the Company’s internal control over financial reporting is effective. The company’s internal control over financial reporting effectiveness as of December 31, 2016 has been audited by PricewaterhouseCoopers Consultores Auditores SpA, an independent registered public accounting firm, as stated in their report included herein.

(c)Attestation report of the registered public accounting firm. See pageF-156 of our audited consolidated financial statements.

 

 -(d) Changes in internal control over financial reporting.There have been no changes in our internal control over financial reporting during 2016 that materialy affected, or are reasonablely likely to materially affect, our internal control over financial reporting.

 

ITEM 16.RESERVED

A. AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has designated Georges de Bourguignon as an “audit committee financial expert” within the meaning of this Item 16. A. Mr. de Bourguignon is independent within the meaning of Rule10A-3 under the Exchange Act. See “Item 6. Directors, Senior Management and Employees— A. Directors and Senior Management.”

B. CODE OF ETHICS

We have adopted a code of ethics and conduct, as defined in Item 16B of Form20-F under the Exchange Act. Our code of ethics applies to our senior management, including our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer, as well as to other employees. Our code is freely available online at our website, www.latam.com, under the heading “Corporate Governance” on the Investor Relations page. In addition, upon written request, by regular mail, to the following address: LATAM Airlines Group S.A., Investor Relations Department, attention: Investor Relations, Av. Presidente Riesco 5711, Piso 20, Comuna Las Condes, Santiago, Chile, or bye-mail atInvestor.Relations@latam.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 andNon-Audit Fees

The following table sets forth the fees paid to our independent registered public accounting firm, PricewaterhouseCoopers, during the fiscal years ended December 31, 2016 and 2015:

 

   2016   2015 
   USD (in thousands) 

Audit fees

   1,734    1,910 

Audit-related fees

   21    7 

Tax fees

   —      6 

All Other fees

   40    11 
  

 

 

   

 

 

 

Total fees

   1,795    1,934 
  

 

 

   

 

 

 

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 2016 correspond to review over sustentability report and attestation services related with revenues in Argentina. Fees in 2015 correspond to attestation services related with revenues in Argentina.

 

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Other fees in the above table are fees billed by PricewaterhouseCoopers as of December 31, 2016 and correspond primarily for review of requirements necessary for building construction authorization and 0survey salary in Peru. Fees in 2015 correspond to a survey salary and salary special studies in Peru and Chile.

Board of Directors’ CommitteePre-Approval Policies and Procedures

Since January 2004, LATAM has complied with SEC regulations regarding the type of additional services our independent auditors are authorized to offer to us. In addition, our 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

None.

E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

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 and our ADSs listed on the NYSE. Our corporate governance practices are governed by our bylaws, the Chilean Corporation Law and the Securities Market Law.

The table below discloses the significant differences between our corporate governance practices and the NYSE standards.

 

NYSE Standards  Our Corporate Governance Practice
Director Independence.Majority of board of directors must be independent. §303A.01  Under Chilean law, we are not required to have a majority of independent directors on our board.
  Our board of directors’ committee (all of whom are members of our board of directors) is composed of three directors, two of whom must be independent if we have a sufficient number of independent directors on our board.
  The definition of independence applicable to us pursuant to the Chilean Corporation Law differs in certain respects from the definition applicable to U.S. issuers under the NYSE rules.
  Pursuant to Law No. 20,382 on Corporate Governance, which came into effect on January 1, 2010, we are also required to have at least one independent director.

 

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NYSE Standards  Our Corporate Governance Practice
  Starting on January 1, 2010, directors are deemed to be independent if they have not fallen within any of the following categories during the 18 months prior to their election: (i) had a relevant relationship, interest or dependence on us, our affiliates, controlling shareholders, main executives, or had served any of the foregoing in a senior position; (ii) had a close family relationship with any of the individuals indicated in (i); (iii) had served in anon-profit organization which received significant funds from the individuals indicated in (i); (iv) had been a partner or shareholder (with a direct or indirect participation in excess of 10%) in, or had a senior position at a company which has rendered significant services to, the individuals indicated in (i); (v) had been a partner or shareholder (with a direct or indirect participation in excess of 10%) in, or had a senior position at, our main competitors, suppliers or clients. In addition, the election of such an independent director is subject to a procedure set forth by the cited Corporation Law.
Executive Sessions.Non-management directors must meet regularly in executive sessions without management. Independent directors should meet alone in an executive session at least once a year. §303A.03  There is no similar requirement under our bylaws or under applicable Chilean law.
Audit committee.Audit committee satisfying the independence and other requirements of Rule10A-3 under the Exchange Act, as amended, and the more stringent requirements under the NYSE standards is required. §§303A.06, 303A.07  We are in compliance with Rule10A-3. We are not required to satisfy the NYSE independence and other audit committee standards that are not prescribed by Rule10A-3.
Nominating/corporate governance committee.Nominating/corporate governance committee of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. §303A.04  We are not required to have, and do not have, a nominating/corporate governance committee.
Compensation committee.Compensation committee of independent directors is required, which must approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. §303A.05  We are not required to have a compensation committee. Pursuant to the Chilean Corporation Law, our board of directors’ committee must approve our senior management’s and employee’s compensation.
Equity compensation plans.Equity compensation plans require shareholder approval, subject to limited exemptions.  Under the Chilean Corporation Law, equity compensation plans require shareholder approval.
Code of Ethics.Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver for directors or executive officers. §303A.10  We have adopted a code of ethics and conduct applicable to our senior management, including our chief executive officer, our chief financial officer and our chief accounting officer, as well as to other employees. Our code is freely available online at our website, www.latamairlinesgroup.net, under the heading “Corporate Governance” in the Investor Relations informational page. In addition, upon written request, by regular mail to LATAM Airlines Group S.A., Investor Relations Department, attention: Investor Relations, Av. Presidente Riesco 5711, 20th floor, Comuna Las Condes, Santiago, Chile or bye-mail at Investor.Relations@latam.com, we will provide any person with a copy of our code of ethics without charge. We are required by Item 16B of Form20-F to disclose any waivers granted to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions.

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

 

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H. Mine Safety Disclosure

Not applicable.

 

ITEM 17.FINANCIAL STATEMENTS

See “Item 18. Financial Statements.”

 

ITEM 18.FINANCIAL STATEMENTS

See our consolidated Financial Statements beginning on pageF-1. The following is an index of the financial statements.

 

ITEM 19.EXHIBITS

Documents filed as exhibits to this annual report:

 

Exhibit

No.

  

Description

1.1*  AmendedBy-laws of LATAM Airlines Group S.A.
2.1  Second Amended and Restated Deposit Agreement, dated as of October 28, 2011, between the Company and JPMorgan Chase Bank, N.A. (incorporated by reference to our amended registration statement on FormF-4 (FileNo. 333-177984), filed on November 15, 2011).
2.3  Indenture, dated as of April 25, 2007, among TAM Capital Inc., Tam S.A., TAM Linhas Aéreas S.A., The Bank of New York and The Bank of New York (Luxembourg) S.A., incorporated herein by reference from our secondpre-effective amendment to our Registration Statement on FormF-4, FileNo. 333-131938.
2.4  Indenture, dated as of October 29, 2009, among TAM Capital 2 Inc., TAM S.A., TAM Linhas Aéreas S.A., The Bank of New York Mellon and The Bank of New York Mellon (Luxembourg) S.A., incorporated herein by reference from our Annual Report for the fiscal year ended December 31, 2009 on Form20-F, filed June 30, 2010, FileNo. 333-131938.
2.5  Indenture, dated as of June 3, 2011, between TAM Capital 3 Inc., TAM S.A., TAM Linhas Aéreas S.A., The Bank of New York Mellon and The Bank of New York Mellon (Luxembourg) S.A., incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016.
2.6  Indenture, dated as of November 7, 2013, between Guanay Finance Limited and Citibank N.A., incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016.
2.7  Form of Indenture and Security Agreement between Parina Leasing Limited, Cuclillo Leasing Limited, Rayador Leasing Limited or Canastero Leasing Limited and Wilmington Trust Company (including Annex A), incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016.
2.8  Indenture, dated as of June 9, 2015, between LATAM Airlines Group S.A. and The Bank of New York Mellon, incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016.
2.9  We hereby agree to furnish to the SEC, upon its request, copies of any instruments defining the rights of holders of our long-term debt (or any long-term debt of our subsidiaries for which we are required to filed consolidated or unconsolidated financial statements), where such indebtedness does not exceed 10% of our total consolidated assets.
4.1  Second A320-Family Purchase Agreement, dated March 20, 1998, between the Company and Airbus Industry relating to Airbus A320-Family Aircraft (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on June 24, 2001, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.1  Amendment No. 1, dated as of November 14, 2003, and Amendment No. 2, dated as of October 4, 2005, to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (as successor to Airbus Industry) (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 30, 2006, and portions of which have been omitted pursuant to a request for confidential treatment).

 

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Exhibit

No.

  

Description

4.1.2  Amendment No. 3, dated as of March 6, 2007, to the Second A320-Family Purchase Agreement, dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 30, 2006, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.3  Amendment No. 5, dated as of December 23, 2009, to the Second A320-Family Purchase Agreement, dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 29, 2010, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.4  Amendments No. 6, 7, 8 and 9 (dated as of May 10, 2010, May 19, 2010, September 23, 2010 and December 21, 2010, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.5  Amendments No. 10 and 11 (dated as of June 10, 2011 and November 8, 2011, respectively), to the Second A320-Family Purchase Agreement, dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.6  Amendment No. 12 (dated as of November 19, 2012), to the Second A320-Family Purchase Agreement, dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.7  Amendment No. 13 (dated as of August 19, 2013), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2014, and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.8  Amendments No. 14, 15, 16 and 17 (dated as of March 31, 2014, May 16, 2014, July 15, 2015 and December 11, 2014, respectively), to the Second A320-Family Purchase Agreement dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.1.9  Novation Agreement (dated as of October 30, 2014) between TAM Linhas Aereas S.A., LATAM Airlines Group S.A. and Airbus S.A.S., relating to the A320 Family/A330 purchase agreement dated November 14, 2006, as amended and restated, between Airbus S.A.S. and TAM Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.2  Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company as amended and supplemented, relating to Model767-316ER, Model767-38EF, and Model767-316F Aircraft (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on December 21, 2004, and portions of which have been omitted pursuant to a request for confidential treatment).
4.2.1  Supplemental Agreements No. 16, 19, 20, 21 and 22 (dated as of November 11, 2004, January 21, March 10, April 1, April 28, and July 20, 2005, and March 31, 2006, respectively) to the Purchase Agreement No. 2126, dated January 30, 1998, between the Company and The Boeing Company, relating to Model767-316ER, Model767-38EF, and Model767-316F Aircraft (incorporated by reference to our amended annual report filed on Form20-F (FileNo. 001-14728) filed on May 7, 2007 and portions of which have been omitted pursuant to a request for confidential treatment).
4.2.2  Supplemental Agreement No. 23, dated as of March 6, 2007, to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on April 23, 2007, and portions of which have been omitted pursuant to a request for confidential treatment).
4.2.3  Supplemental Agreement No. 24, dated as of November 10, 2008, to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 25, 2009, and portions of which have been omitted pursuant to a request for confidential treatment).

 

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Exhibit

No.

  

Description

4.2.4  Supplemental Agreements No. 28 and 29 (dated as of March 22, 2010 and November 10, 2010, respectively), to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company. Portions of these documents have been omitted pursuant to a request for confidential treatment (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.2.5  Supplemental Agreements No. 30, 31 and 32 (dated as of February 15, 2011, May 10, 2011 and December 22, 2011, respectively), to the Purchase Agreement No. 2126, dated as of January 30, 1998, between the Company and The Boeing Company (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.3  Aircraft Lease Common Terms Agreement between GE Commercial Aviation Services Limited and LAN Cargo S.A., dated as of April 30, 2007, and Aircraft Lease Agreements between Wells Fargo Bank Northwest N.A., as owner trustee, and LAN Cargo S.A., dated as of April 30, 2007 (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 7, 2007, and portions of which have been omitted pursuant to a request for confidential treatment).
4.4  Purchase Agreement No. 3194 between the Company and The Boeing Company relating to Boeing Model777-Freighter aircraft, dated as of July 3, 2007, (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 25, 2008, and portions of which have been omitted pursuant to a request for confidential treatment).
4.4.1  Supplemental Agreement No. 2, dated as of November 2, 2010, to the Purchase Agreement No. 3194 between the Company and The Boeing Company, dated as of July 3, 2007 (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.4.2  Supplemental Agreement No. 3, dated as of September 24, 2011, to the Purchase Agreement No. 3194 between the Company and The Boeing Company, dated as of July 3, 2007 (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.4.3  Supplemental Agreement No. 4, dated as of August 9, 2012, to the Purchase Agreement No. 3194 between the Company and The Boeing Company, dated as of July 3, 2007 (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.5  Purchase Agreement No. 3256 between the Company and The Boeing Company relating to Boeing Model787-8 and787-9 aircraft, dated as of October 29, 2007, (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on June 25, 2008, and portions of which have been omitted pursuant to a request for confidential treatment).
4.5.1  Supplemental Agreements No. 1 and 2, (dated March 22, 2010 and July 8, 2010, respectively) to the Purchase Agreement No. 3256, dated October 29, 2007, as amended, between the Company and The Boeing Company (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.5.2  Supplemental Agreement No. 3, dated as of August 24, 2012, to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007 (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.5.3  Delay Settlement Agreement, dated as of September 16, 2013, to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007 (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 30, 2014 and portions of which have been omitted pursuant to a request for confidential treatment)..

 

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Exhibit

No.

  

Description

4.5.4  Supplemental Agreements No. 4 and 5 (dated as of April 22, 2015 and July 3, 2015, respectively) to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007 (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016 and portions of which have been omitted pursuant to a request for confidential treatment).
4.5.5*  Supplemental Agreements No. 6 and 7 (dated as of May 27, 2016 and December 20, 2016, respectively) to the Purchase Agreement No. 3256, as amended, between the Company and The Boeing Company, dated as of October 29, 2007. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.6  General Terms Agreement No.CFM-1-2377460475 and Letter Agreement No. 1 to General Terms Agreement No.CFM-1-2377460475 between the Company and CFM International, Inc., both dated December 17, 2010 (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.7  Rate Per Flight Hour Engine Shop Maintenance Services Agreement between the Company and CFM International, Inc., dated December 17, 2010 (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011, and portions of which have been omitted pursuant to a request for confidential treatment).
4.8  Implementation Agreement, dated as of January 18, 2011, among the Company, Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A., TAM S.A., TAM Empreedimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011).
4.8.1  Extension Letter to the Implementation Agreement and Exchange Offer Agreement, dated January 12, 2012, among the Company, Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A., TAM S.A., TAM Empreedimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (incorporated by reference to our amended registration statement on FormF-4 (FileNo. 333-177984), filed on November 15, 2011).
4.9  Exchange Offer Agreement, dated as of January 18, 2011, among LAN Airlines S.A., Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A., TAM S.A., TAM Empreedimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (incorporated by reference to our amended annual report on Form20-F (FileNo. 001-14728), filed on May 5, 2011).
4.10  Shareholders Agreement, dated as of January 25, 2012, between the Company and TEP Chile S.A. (incorporated by reference to our amended registration statement on FormF-4 (FileNo. 333-177984), filed on November 15, 2011).
4.11  Shareholders Agreement, dated as of January 25, 2012, among the Company, TEP Chile S.A. and Holdco I S.A. (incorporated by reference to our amended registration statement on FormF-4 (FileNo. 333-177984), filed on November 15, 2011).
4.12  Shareholders Agreement, dated as of January 25, 2012, among the Company, TEP Chile S.A., Holdco I S.A. and TAM S.A. (incorporated by reference to our amended registration statement on FormF-4 (FileNo. 333-177984) filed on November 15, 2011).
4.13  Letter Agreement No. 12 (GTANo. 6-9576), dated July 11, 2011, between the Company and the General Electric Company (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012 and portions of which have been omitted pursuant to a request for confidential treatment).
4.14  A320 NEO Purchase Agreement, dated as of June 22, 2011, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.14.1  Amendments No. 1, 2 and 3 (dated as of February 27, 2013, July 15, 2014 and December 11, 2014, respectively), to the A320 NEO Purchase Agreement dated as of June 22, 2011, between the Company and Airbus S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).

 

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Exhibit

No.

  

Description

4.14.2  Letter Agreement No. 1 (dated as of July 15, 2014) to Amendment No. 2 (dated as of July 15, 2014) to the A320 NEO Purchase Agreement dated as of June 22, 2011, between the Company and Airbus S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.14.3*  Amendment No. 4, 5 and 6 (dated as of April 15, 2016, April 15, 2016, and August 8, 2016, respectively), to the A320 NEO Purchase Agreement dated as of June 22, 2011, between the Company and Airbus S.A.. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.15  Buyback Agreement No. 3001 relating to One (1) AirbusA318-100 Aircraft MSN 3001, dated as of April 14, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.16  Buyback Agreement No. 3030 relating to One (1) AirbusA318-100 Aircraft MSN 3003, dated as of August 10, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.17  Buyback Agreement No. 3062, to One (1) AirbusA318-100 Aircraft MSN 3062, dated as of May 13, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.18  Buyback Agreement No. 3214, to One (1) AirbusA318-100 Aircraft MSN 3214, dated as of June 9, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.19  Buyback Agreement No. 3216, to One (1) AirbusA318-100 Aircraft MSN 3216, dated as of July 13, 2011, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.20  Aircraft General Terms Agreement NumberAGTA-LAN, dated May 9, 1997, between the Company and The Boeing Company (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 2, 2012, and portions of which have been omitted pursuant to a request for confidential treatment).
4.21  Buyback Agreement No. 3371, dated as of July 25, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.22  Buyback Agreement No. 3390, dated as of October 26, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.23  Buyback Agreement No. 3438, dated as of December 5, 2012, between the Company and Airbus Financial Services. Portions of this document have been omitted pursuant to a request for confidential treatment (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.24  Buyback Agreement No. 3469, dated as of January 4, 2013, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).

 

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Exhibit

No.

  

Description

4.25  Buyback Agreement No. 3509, dated as of February 20, 2013, between the Company and Airbus Financial Services (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.26  A320 Family Purchase Agreement, dated March 19, 1998, between Airbus S.A.S. (formerly known as Airbus Industrie GIE) and TAM Linhas Aéreas S.A. (formerly known as TAM Transportes Aéreas Meridionais S.A. and as successor in interest inTAM-Transportes Aéreas Regionais S.A.), incorporated herein by reference from our sixthpre-effective amendment to our Registration Statement on FormF-1, filed March 2, 2006, FileNo. 333-131938.
4.26.1  Amendments No. 12, 13 and 14 (dated as of January 27, 2012 and November 30, 2012 and December 14, 2012, respectively), to the Second A320-Family Purchase Agreement, dated as of March 20, 1998, as amended and restated, between the Company and Airbus S.A.S. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728), filed on April 30, 2013, and portions of which have been omitted pursuant to a request for confidential treatment).
4.27  A350 Family Purchase Agreement, dated December 20, 2005, between Airbus S.A.S. and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixthpre-effective amendment to our Registration Statement on FormF-1, filed March 2, 2006, FileNo. 333-131938.
4.27.1  A350 Family Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.27.2  Amendments No. 1, 2 and 3 (dated July 28, 2010, July 15, 2014 and October 30, 2014, respectively) to the A350 Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.27.3  Novation Agreement (dated as of July 21, 2014) between TAM Linhas Aereas S.A., LATAM Airlines Group S.A. and Airbus S.A.S., relating to the A350 Family Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.27.4  Amendments No. 4 and 5 (dated September 15, 2015 and November 19, 2015, respectively) to the A350 Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016 and portions of which have been omitted pursuant to a request for confidential treatment).
4.27.5*  Amendments No. 6, 7 and 8 (dated February 3, 2016, August 8, 2016, and September 9, 2016, respectively) to the A350 Purchase Agreement, dated December 20, 2005, as amended and restated on January 21, 2008, between Airbus S.A.S. and TAM Linhas Aereas S.A.. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.29  V2500 Maintenance Agreement, dated September 14, 2000, between TAM Transportes Aéreos Regionais S.A. (incorporated by TAM Linhas Aéreas S.A.) and MTU Maintenance Hannover GmbH (MTU), incorporated herein by reference from our sixthpre-effective amendment to our Registration Statement on FormF-1, filed March 2, 2006, FileNo. 333-131938.
4.30  PW1100G-JM Engine Support and Maintenance Agreement, dated February 26, 2014, between LATAM Airlines Group S.A. and Pratt & Whitney Division. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.31  Framework Deed, dated May 28, 2013, between LATAM Airlines Group S.A. and Aercap Holdings N.V. Portions of this document have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.32  A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).

 

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Exhibit

No.

  

Description

4.32.1  Amendments No. 15, 16, 17, 18, and 19 (dated as of February 18, 2013, February 27, 2013, August 19, 2013, July 15, 2014 and December 11, 2014, respectively) to the A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.32.2  Amendments No. 20 and 21 (dated as of June 3, 2015 and December 21, 2015, respectively) to the A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A. (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.32.3*  Amendments No. 22, 23 and 24 (dated as of April 15, 2016, April 15, 2016, and August 8, 2016, respectively) to the A320 Family/A330 Purchase Agreement (dated as of November 14, 2006) between Airbus S.A.S. and TAM – Linhas Aereas S.A.. Portions of these documents have been omitted pursuant to a request for confidential treatment. Such omitted portions have been filed separately with the Securities and Exchange Commission.
4.33  Supplemental Agreement No. 7 (dated as of May 2014) to the Boeing777-32WER Purchase Agreement (dated as of February 2007) between TAM – Linhas Aereas S.A. and The Boeing Company (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 1, 2015 and portions of which have been omitted pursuant to a request for confidential treatment).
4.33.1  Supplemental Agreement No. 8, dated as of April 22, 2015, to the Boeing777-32WER Purchase Agreement (dated as of February 2007) between TAM Linhas Aéreas and The Boeing Company (incorporated by reference to our annual report on Form20-F (FileNo. 001-14728) filed on April 29, 2016 and portions of which have been omitted pursuant to a request for confidential treatment).
8.1*  List of subsidiaries of the Company.
12.1*  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2*  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1*  Certifications of Chief Financial Officer and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*Filed herewith

 

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Table of Contents

LOGO

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

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

 

CLP  -  CHILEAN PESO
ARS  -  ARGENTINE PESO
US$  -  UNITED STATES DOLLAR
THUS$  -  THOUSANDS OF UNITED STATES DOLLARS
COP  -  COLOMBIAN PESO
BRL/R$  -  BRAZILIAN REAL
THR$  -  THOUSANDS OF BRAZILIAN REAL
MXN  -  MEXICAN PESO
VEF  -  STRONG BOLIVAR


Table of Contents

Contents of the notes to the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.

 

Notes   Page 
1 - General information   1 
2 - Summary of significant accounting policies   6 

2.1. Basis of Preparation

   6 

2.2. Basis of Consolidation

   10 

2.3. Foreign currency transactions

   11 

2.4. Property, plant and equipment

   12 

2.5. Intangible assets other than goodwill

   12 

2.6. Goodwill

   13 

2.7. Borrowing costs

   13 

2.8. Losses for impairment of non-financial assets

   13 

2.9. Financial assets

   14 

2.10. Derivative financial instruments and hedging activities

   15 

2.11. Inventories

   16 

2.12. Trade and other accounts receivable

   16 

2.13. Cash and cash equivalents

   16 

2.14. Capital

   16 

2.15. Trade and other accounts payables

   17 

2.16. Interest-bearing loans

   17 

2.17. Current and deferred taxes

   17 

2.18. Employee benefits

   17 

2.19. Provisions

   18 

2.20. Revenue recognition

   18 

2.21. Leases

   19 

2.22. Non-current assets (or disposal groups) classified as held for sale

   20 

2.23. Maintenance

   20 

2.24. Environmental costs

   20 
3 - Financial risk management   20 

3.1. Financial risk factors

   20 

3.2. Capital risk management

   34 

3.3. Estimates of fair value

   34 
4 - Accounting estimates and judgments   37 
5 - Segmental information   40 
6 - Cash and cash equivalents   42 
7 - Financial instruments   44 

7.1. Financial instruments by category

   44 

7.2. Financial instruments by currency

   46 
8 - Trade, other accounts receivable and non-current accounts receivable   47 
9 - Accounts receivable from/payable to related entities   50 
10 - Inventories   51 
11 - Other financial assets   52 
12 - Other non-financial assets   53 
13 - Non-current assets and disposal group classified as held for sale   54 
14 - Investments in subsidiaries   55 


Table of Contents
15 - Intangible assets other than goodwill   59 
16 - Goodwill   60 
17 - Property, plant and equipment   62 
18 - Current and deferred tax   68 
19 - Other financial liabilities   74 
20 - Trade and other accounts payables   81 
21 - Other provisions   83 
22 - Other non-financial liabilities   86 
23 - Employee benefits   87 
24 - Accounts payable, non-current   89 
25 - Equity   89 
26 - Revenue   96 
27 - Costs and expenses by nature   96 
28 - Other income, by function   98 
29 - Foreign currency and exchange rate differences   98 
30 - Earnings per share   107 
31 - Contingencies   108 
32 - Commitments   116 
33 - Transactions with related parties   121 
34 - Share based payments   122 
35 - Statement of cash flows   126 
36 - The environment   127 
37 - Events subsequent to the date of the financial statements   128 
38 - Consolidation schedule   128 


Table of Contents

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

ASSETS

 

   Note   As of
December 31,
2016
   As of
December 31,
2015
 
       ThUS$   ThUS$ 

Current assets

      

Cash and cash equivalents

   6 -7    949,327    753,497 

Other financial assets

   7 -11    712,828    651,348 

Other non-financial assets

   12    212,242    330,016 

Trade and other accounts receivable

   7 - 8    1,107,889    796,974 

Accounts receivable from related entities

   7 - 9    554    183 

Inventories

   10    241,363    224,908 

Tax assets

   18    65,377    64,015 
    

 

 

   

 

 

 

Total current assets other than non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners

     3,289,580    2,820,941 
    

 

 

   

 

 

 

Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners

   13    337,195    1,960 
    

 

 

   

 

 

 

Total current assets

     3,626,775    2,822,901 
    

 

 

   

 

 

 

Non-current assets

      

Other financial assets

   7 -11    102,125    89,458 

Other non-financial assets

   12    237,344    235,463 

Accounts receivable

   7 - 8    8,254    10,715 

Intangible assets other than goodwill

   15    1,610,313    1,321,425 

Goodwill

   16    2,710,382    2,280,575 

Property, plant and equipment

   17    10,498,149    10,938,657 

Tax assets

   18    20,272    25,629 

Deferred tax assets

   18    384,580    376,595 
    

 

 

   

 

 

 

Total non-current assets

     15,571,419    15,278,517 
    

 

 

   

 

 

 

Total assets

     19,198,194    18,101,418 
    

 

 

   

 

 

 

The accompanying Notes 1 to 38 form an integral part of these consolidated financial statements.


Table of Contents

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

LIABILITIES AND EQUITY

 

   Note   As of
December 31,
2016
  As of
December 31,
2015
 
       ThUS$  ThUS$ 

LIABILITIES

     

Current liabilities

     

Other fin