LAN Airlines Reports Net Income of US$46.3 Million for the First Quart

LAN Airlines Reports Net Income of US$46.3 Million for the First Quarter of 2005

    Business Editors

    SANTIAGO, Chile--(BUSINESS WIRE)--April 28, 2005--LAN Airlines S.A., one of Latin America's leading passenger and cargo airlines, reported today its consolidated financial results for the first quarter ended March 31, 2005. "LAN" or "the Company" makes reference to the consolidated entity, which includes several passenger and cargo airlines in Latin America. All figures were prepared in accordance with generally accepted accounting principles in Chile and are expressed in U.S dollars.

    HIGHLIGHTS

--	LAN reported net income of US$46.3 million for the first quarter of 2005 compared to US$48.1 million in 2004. This is a significant accomplishment considering that during the first quarter of 2005 higher fuel prices led to US$37.3 million in additional costs.
--	Operating income for the first quarter was US$56.6 million while the operating margin amounted to 9.3%. Operating income and margin decreased, despite strong revenue growth and active cost controls, due to the sharp impact of high fuel prices.
--	Operating revenues for the quarter amounted to US$607.7 million, a 23.5% increase compared to the same period of 2004. Revenue growth was driven by strong performance in both the passenger and cargo businesses. Passenger and cargo revenues accounted for 61% and 35% of total revenues, respectively.
--	LAN continues to have a strong liquidity position with over US$303 million in cash and other liquid assets.
--	In March, Fitch Ratings improved the outlook on the Company's investment grade rating from "Stable" to "Positive", confirming LAN as one of the few airlines in the world with an investment grade rating.
--	In March, LAN and Korean Airlines signed a memorandum of understanding aimed at developing a cargo alliance between both companies. This agreement will complement a similar one signed by both companies to cooperate in the passenger business.
--	In April, together with local partners, LAN acquired a new Argentine carrier named Aero2000. LAN has a 49% stake in this venture, which will engage in passenger and cargo transport on both domestic and international routes. This new airline is expected to initiate domestic operations in June 2005.

    LAN earned US$46.3 million in net income for the first quarter of 2005. This result is slightly below the US$48.1 million in net income recorded for the same period last year, and is almost flat considering a US$1.3 million one-time credit to expenses in 2004. First quarter performance is highly significant as LAN has been able to maintain profitability despite record fuel prices, which led to US$37.3 million in additional costs. The Company's ability to overcome this scenario not only highlights the strengths of its business model, but has also allowed it to continue advancing its development strategy. The recent acquisition of a stake in an Argentine carrier, Aero2000, and the securing of attractive financing packages to fund new aircraft are clear examples of the Company's consistent progress across different areas.
    Operating income for the quarter amounted to US$56.6 million, on total revenues of US$607.7 million. As a consequence, operating margin amounted to 9.3%. Total revenues grew 23.5%, or US$115.8 million, year-over-year, while operating expenses increased US$122.2 million, or 28.5%. Operating costs were impacted significantly by the 39% increase in average fuel prices that led to US$37.3 million in additional expenses. Higher fuel hedging gains (US$7.3 million and US$9.0 million in 2004 and 2005, respectively) led to a reduction in non-operating losses, from US$4.4 million in 2004 to a US$1.6 million in 2005.
    Passenger revenues for the first quarter increased 26.6% compared to last year, driven by a 19.4% increase in traffic and a 6.1% improvement in yields. Load factors increased 2.4 points to 76.4% as capacity increased 15.5% and, as a consequence, revenues per ASK increased 9.6%. Market conditions were in line with those observed in previous quarters, with demand evolving favorably and competitive activity increasing gradually. In response to these conditions, LAN selectively added capacity and implemented strategies aimed at consolidating its presence in new markets. Specifically, frequencies were added on intercontinental routes to the United States and the South Pacific, and itineraries were adjusted to leverage higher leisure demand during the Southern Cone's summer season. The Company also benefited from positive results in its new regional routes, the expansion of its domestic operations in Peru, and an early Easter holiday. Yields increased because of shorter average trip lengths, improved segmentation, and fuel-related fare increases.
    Cargo revenues increased 24.3% and accounted for 35% of total revenues. Cargo revenue growth was driven by a 13.3% increase in traffic and a 9.6% improvement in yields. Load-factors declined 0.9 points as traffic growth was outpaced by a 15.0% increase in capacity. Consequently, cargo revenues per ATK increased 8.1% year-over-year. LAN added capacity to respond to continued strength in northbound routes and higher, although decelerating, demand on southbound routes. Despite moderate increases in competitive activity on specific routes, LAN has maintained a strong competitive position and has also continued to expand into new segments. Yields increased, driven mainly by higher cargo fuel surcharges.
    Operating expenses for the quarter grew 28.5% as system capacity expanded 16.2%. Consequently, costs per ATK(1) increased 12.3% compared to the same quarter of last year. Record fuel prices were responsible for the majority of this rise as they generated US$ 37.3 million in additional expenses. Excluding the fuel-price impact, operating expenses grew 19.8% and costs per ATK rose 4.4%. Ex-fuel unit costs increased as the impact from shorter average stage lengths, higher passenger load-factor, headcount additions and higher sales expenses was partially offset by efficiency gains on aircraft utilization. Operating expenses also increased year-over-year because of a US$1.3 million one-time credit to expenses in 2004 due to adjustments to maintenance provisions.
    As a result of its strong cash generation LAN has continued to improve its financial condition. As of March 31, 2005, LAN had more than US$303 million in cash and equivalents. The Company continues to have no short-term debt and its long-term debt finances only aircraft and features very attractive terms and conditions. During the quarter, Fitch Ratings improved the outlook on LAN's investment grade credit from "Stable" to "Positive". Fitch based this decision on LAN's strong business position in the passenger and cargo segments, its low-cost structure, solid financial profile and liquidity.
    LAN has taken advantage of its positive performance, healthy financial condition and well-positioned brand to continue developing its operations. Consistent with this strategy, during the quarter, LAN announced the acquisition, in conjunction with local partners, of Argentine carrier Aero2000. Aero2000 is a carrier that has not yet initiated operations as it is waiting to be granted the traffic permits required to begin domestic and international flights. Aero2000 will be renamed LAN Argentina. LAN Argentina's operations are expected to begin during the second quarter of 2005. LAN offered the personnel currently employed by LAFSA (a government-owned carrier) the opportunity to join LAN Argentina. Employees who accept LAN's offer will begin joining LAN Argentina once it is ready to launch operations. LAN expects that this new venture will provide new growth opportunities and significantly enhance its regional and intercontinental network.
    Careful implementation of its growth strategy, a distinct business model, world-class service standards, and a competitive cost base have enabled LAN to deliver very positive results during a challenging period. As a consequence, today LAN is in an advantageous position to launch new ventures that consolidate it as one of Latin America's leading airlines. In addition to expanding into new markets, LAN remains committed to strengthening its competitive advantages through a number of initiatives such as product upgrades and efficiency-enhancing programs. LAN expects these measures to provide the Company with sustained revenue growth, improved long-term profitability, and consistent value creation for shareholders.

    Consolidated First Quarter Results

    Net income for the first quarter of 2005 amounted to US$46.3 million compared to US$48.1 million for the same period of 2004. Net margin decreased 2.2 points from 9.8% in 2004 to 7.6% in 2005.
    Operating income amounted to US$56.6 million compared to US$63.0 million in 2004. Operating margin for the quarter decreased 3.5 points to 9.3%.
    Total operating revenues amounted to US$607.7 million, a 23.5% increase compared with the first quarter of 2004. This reflected a:

    -- 26.6% increase in passenger revenues to US$370.1 million,

    -- 24.3% increase in cargo revenues to US$210.9 million, and a

    -- 10.7% decrease in other revenues to US$26.7 million.

    Passenger and cargo revenues accounted for 61% and 35% of total revenues for the first quarter, respectively.
    Passenger revenues grew driven by a 19.4% increase in traffic and a 6.1% increase in yields. Load factor increased 2.4 points to 76.4% as traffic growth outpaced a 15.5% capacity increase. Overall, revenues per ASK increased 9.6%. Traffic grew as 0.9% decrease in Chilean domestic traffic was offset by a 24.1% increase in international traffic (including domestic operations in Peru). International traffic accounted for 84.2% of total passenger traffic during the quarter. Yields grew mainly due to lower average trip lengths, improved segmentation and fuel-related fare increases.
    Cargo revenues grew due to a 13.3% increase in traffic and a 9.7% improvement in yields, measured in RTKs. Yields rose primarily due the application of a higher fuel surcharge. Growth in cargo traffic outpaced a 15.0% increase in capacity, resulting in a 0.9-point decrease in cargo load factors to 65.5%. As a consequence, revenues per ATK rose 8.1%.
    Other revenues decreased 10.7% as lower aircraft leasing revenues were partially offset by increased handling and maintenance revenues and higher on-board sales.
    Total operating expenses increased 28.5% during the quarter as capacity, measured in system ATKs, increased 16.2%. As a consequence, unit (ATK) costs increased 12.3%. Excluding the impact of higher fuel prices, unit costs increased 4.4%. Changes in operating expenses were driven by:

    -- Wages and benefits increased 27.6% mainly due to increases in
    headcount and a stronger Chilean peso.

    -- Fuel costs increased 61.2% due to a 38.6% increase in prices
    and a 16.2% increase in consumption.

    -- Commissions to agents rose 26.8% driven primarily by a 25.8%
    increase in traffic (passenger and cargo) revenues. As a
    percentage of traffic revenues, commissions remained almost
    flat, increasing from 14.3% to 14.4% as lower average
    passenger commissions offset higher cargo commissions.

    -- Depreciation and amortization decreased 2.7%.

    -- Other rental and landing fees increased 15.6% as the impact of
    increased operations on landing fees and ground-handling
    expenses was partially offset by efficiency gains, lower
    insurance expenses and reductions in ACMI-lease expenses.

    -- Passenger service expenses increased 18.4%, mainly due to the
    19.4% increase in passenger traffic.

    -- Aircraft rentals increased 12.2% mainly because of the
    incorporation of additional Boeing 767 and Airbus A320
    aircraft.

    -- Maintenance expenses rose 25.3%. Excluding a one-time US$1.3
    million reduction in provisions recorded during the first
    quarter of 2004, maintenance expenses rose 19.8%, primarily
    because of capacity growth.

    -- Other operating expenses grew 22.3% due to increases in
    booking expenses, sales related costs and taxes, and expanded
    marketing activities.

    Non-operating results for the first quarter of 2005 amounted to a US$1.6 million loss compared to a US$4.4 million loss in 2004. While interest income increased 54.6% due to higher cash balances and higher interest rates, interest expense decreased 1.8% due to a reduction in average debt. In the miscellaneous-net item, the Company recorded a US$4.2 million gain compared to a US$2.8 million gain in 2004. In 2005 this included a US$9.0 million fuel hedging gain (compared to a US$7.3 million gain in 2004) as well as a US$3.3 million foreign-exchange loss (compared to a US$3.4 million loss in 2004).

    (1) Cost per ATK = (Operating Cost + Net Financial Expenses -
    Other Operating Revenues) / System ATK

    About LAN

    LAN is one of the leading airlines in Latin America. "LAN" refers to the consolidated entity which includes several passenger and cargo companies in Latin America. Through its own operations and code-share arrangements, LAN serves 15 destinations in Chile, eleven destinations in Peru, two in Ecuador, 27 destinations in Latin America, 25 in North America, ten destinations in Europe and four in the South Pacific. Currently, LAN operates 56 passenger aircraft and seven dedicated freighters.
    LAN Airlines is a member of oneworld (TM), the most international of the global airline alliances. It has bilateral commercial agreements with oneworld partners American Airlines, British Airways, Iberia and Qantas and also with Alaska Airlines, AeroMexico, Mexicana, TAM and Lufthansa Cargo. For more information visit www.lan.com or www.oneworldalliance.com.

    Note on Forward Looking Statements

    This report contains forward-looking statements. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or other similar expressions. Forward-looking statements are statements that are not historical facts, including statements about our beliefs and expectations. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include. 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.

--30--MW/ny*

CONTACT: (Chile) LAN Airlines Alejandro de la Fuente/Andres Bianchi (56-2) 565-3944/3947 abianchiu@lanchile.cl or (New York) i-advize Corporate Communications, Inc. Maria Barona/Melanie Carpenter 212/406-3690 lan@i-advize.com

KEYWORD: CHILE INTERNATIONAL LATIN AMERICA INDUSTRY KEYWORD: AIRLINES TRANSPORTATION EARNINGS SOURCE: LAN Airlines

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