As filed with the Securities and Exchange Commission on March 9, 2023
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended
Commission File Number:
(Exact name of registrant as specified in its charter)
LATAM Airlines Group S.A.
|Republic of |
|(Translation of registrant’s name into English)||(Jurisdiction of incorporation or organization)|
(Address of principal executive offices)
(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:
Securities registered or to be registered pursuant to Section 12(g) 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||Over The Counter (OTC) Markets|
|Common Stock, without par value||Santiago Stock Exchange|
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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 ☐
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| ||Accelerated filer ☐||Non-Accelerated filer ☐|
|Emerging Growth Company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
|†||The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.|
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|U.S. GAAP ☐||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 Rule 12b-2 of the Exchange Act). Yes ☐
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
TABLE OF CONTENTS
|PRESENTATION OF INFORMATION||vii|
|FORWARD LOOKING STATEMENTS||viii|
|GLOSSARY OF TERMS||ix|
|ITEM 1||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||1|
|ITEM 2||OFFER STATISTICS AND EXPECTED TIMETABLE||1|
|ITEM 3||KEY INFORMATION||1|
|B.||Capitalization and Indebtedness||1|
|C.||Reasons for the Offer and Use of Proceeds||1|
|ITEM 4||INFORMATION ON THE COMPANY||21|
|A.||History and Development of the Company||21|
|D.||Property, Plant and Equipment||58|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS||59|
|ITEM 5||OPERATING AND FINANCIAL REVIEW AND PROSPECTS||59|
|B.||Liquidity and Capital Resources||71|
|C.||Research and Development, Patents and Licenses, etc.||75|
|E.||Critical Accounting Estimates||76|
|ITEM 6||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||76|
|A.||Directors and Senior Management||76|
|F.||Disclosure of a registrant’s action to recover erroneously awarded compensation||85|
|ITEM 7||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||85|
|B.||Related Party Transactions||87|
|C.||Interests of experts and counsel||88|
|ITEM 8||FINANCIAL INFORMATION||88|
|A.||Consolidated Financial Statements and Other Financial Information||88|
|ITEM 9||THE OFFER AND LISTING||96|
|A.||Offer and Listing Details||96|
|B.||Plan of Distribution||96|
|F.||Expenses of the Issue||97|
|ITEM 10||ADDITIONAL INFORMATION||97|
|B.||Memorandum and Articles of Association||97|
|F.||Dividends and Paying Agents||133|
|G.||Statement by Experts||134|
|H.||Documents on Display||134|
|J.||Annual Report to Security Holders||134|
|ITEM 11||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS||134|
|ITEM 12||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||139|
|B.||Warrants and Rights||139|
|D.||American Depositary Shares||139|
|ITEM 13||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||141|
|ITEM 14||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||141|
|ITEM 15||CONTROLS AND PROCEDURES||141|
|A.||Disclosure Controls and Procedures||141|
|B.||Management’s Annual Report on Internal Control Over Financial Reporting||141|
|C.||Attestation report of the registered public accounting firm.||142|
|D.||Changes in internal controls over financial reporting.||142|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT||142|
|ITEM 16B.||CODE OF ETHICS||142|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES||142|
|ITEM 16D.||EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||143|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||143|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||144|
|ITEM 16G.||CORPORATE GOVERNANCE||144|
|ITEM 16H.||MINE SAFETY DISCLOSURE||144|
|ITEM 16I.||DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS||144|
|ITEM 17||FINANCIAL STATEMENTS||144|
|ITEM 18||FINANCIAL STATEMENTS||144|
On March 11, 2020, the World Health Organization (the “WHO”) declared COVID-19 a pandemic and, that same month, governments around the world, including those of the United States, Chile and most Latin American countries, declared states of emergency in their respective jurisdictions and implemented measures to halt the spread of the virus, including enhanced screenings, quarantine requirements and severe travel restrictions. The government-imposed travel restrictions (both domestic and international), flight cancellations, and a dramatic decline in worldwide air travel, resulted in a significant reduction in the group’s passenger service, which comprises the vast majority of LATAM’s operating revenues. By April of 2020, the group had reduced its operations to a mere 5.7% of the capacity (measured in ASKs) as compared to the same month of the prior year.
In 2022, the group saw a notable recovery of its passenger operations in line with the easing of travel restrictions both in the domestic markets and in the regions where the Company operates internationally. As a result, the recovery during the year was mainly driven by the ramp up of operations that had been lagging in the previous years, especially internationally. LATAM’s consolidated operations in December 2022, reached 85.2% of December 2019 capacity levels (measured in ASKs).
In response to the pandemic, the Company has implemented numerous changes to its operations related to health safety, as well as modifications to commercial policies and customer relations. For more information regarding these changes and the economic impact of the pandemic on our operations, see “Item 4. Information of the Company-B. Business Overview-Passenger Operations-Passenger Marketing and Sales” and “Item 3. Key Information-D. Risk Factors-Risks Relating to our Company-The continuing effects of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on the group’s business and results of operations.”
Chapter 11 Proceedings
On May 26, 2020 (the “Initial Petition Date”), LATAM Airlines Group S.A. and 28 affiliates (collectively, the “Initial Debtors”) filed their petitions for relief under Chapter 11 (“Chapter 11”) of title 11 of the United States Code, 11 U.S.C. §§ 101-1532, (as amended, the “Bankruptcy Code”), with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On July 7, 2020 and July 9, 2020 (as applicable, the “Subsequent Petition Date”), nine additional affiliates of LATAM (the “Subsequent Debtors” and together with the Initial Debtors, the “Debtors”) filed their petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. We refer to these proceedings in this annual report as our “Chapter 11 proceedings.” As of November 3, 2022 (the “Effective Date”), the Plan (as defined below) was substantially consummated and the Debtors have each emerged from the Chapter 11 proceedings as the “Reorganized Debtors.” The Bankruptcy Court continues to administer the Chapter 11 proceedings for the Reorganized Debtors on a consolidated basis in order to resolve the few remaining matters therein, including reconciling remaining claims. The information in this annual report is presented as of December 31, 2022, unless expressly stated otherwise, and is subject to and qualified in its entirety by our Chapter 11 proceedings and developments related thereto.
The following is a series of relevant milestones and chronological summary of LATAM’s Chapter 11 proceedings:
As part of their overall reorganization process, the Reorganized Debtors have sought and received relief in certain non-U.S. jurisdictions. Parallel and ancillary proceedings were filed in the Cayman Islands, Chile and Colombia. On May 27, 2020, the Grand Court of the Cayman Islands granted the applications of certain of the Reorganized Debtors for the appointment of provisional liquidators pursuant to section 104(3) of the Companies Law (2020 Revision). On June 4, 2020, the 2nd Civil Court of Santiago, Chile issued an order recognizing the Chapter 11 proceedings with respect to the LATAM Airlines Group S.A., Lan Cargo S.A., Fast Air Almacenes de Carga S.A., Latam Travel Chile II S.A., Lan Cargo Inversiones S.A., Transporte Aéreo S.A., Inversiones Lan S.A., Lan Pax Group S.A. and Technical Training LATAM S.A. All remedies filed against the order have been rejected and the decision is, therefore, final. In addition, on June 12, 2020, the Superintendence of Companies of Colombia granted recognition to the Chapter 11 proceedings. On July 10, 2020, the Grand Court of the Cayman Islands granted the Reorganized Debtors’ application for the appointment of JPLs to Piquero Leasing Limited.
On November 26, 2021, the Reorganized Debtors filed an initial proposed plan of reorganization under our Chapter 11 proceedings (as it has been and may be subsequently supplemented, revised or amended, or otherwise modified in accordance with its terms, the “Plan of Reorganization” or “Plan”) resulting from the negotiation of a restructuring support agreement (as amended, restated, amended and restated, supplemented or otherwise modified, the “Restructuring Support Agreement” or “RSA”), also dated as of November 26, 2021, with an ad hoc group of LATAM Airlines Group S.A. general unsecured creditors, certain of the Reorganized Debtors’ large existing equity holders, and Andes Aerea SpA, Inversiones Pia SpA and Comercial Las Vertientes (the “Eblen Group”). The Reorganized Debtors filed the solicitation version of the Plan of Reorganization on March 25, 2022.
In accordance with the RSA, on January 12, 2022 LATAM entered into a backstop commitment agreement with certain shareholders, which the group refers to as the “Shareholder Backstop Agreement” and the “Backstop Shareholders”, respectively and certain of our creditors, which the group refers to as the “Creditor Backstop Agreement” and the “Backstop Creditors”, respectively. The group refers to the Shareholder Backstop Agreement and the Creditor Backstop Agreement collectively as the “Backstop Agreements.” On March 15, 2022, the Bankruptcy Court issued a memorandum decision approving the Reorganized Debtors’ entry into the Backstop Agreements, and issued a corresponding order on March 22, 2022. On March 24, 2022, the Unsecured Creditors Committee (“UCC”) and certain other creditors filed a notice to appeal this ruling to the United States District Court for the Southern District of New York.
Pursuant to the Backstop Agreements, the Backstop Shareholders agreed to backstop up to US$400 million of an issuance of new common stock by the Company and the placement of approximately US$1,373 million of New Convertible Notes Class B to be issued by the Company. The Backstop Creditors agreed to backstop the remaining US$400 million of the common stock issuance and up to approximately US$6,816 million of the New Convertible Notes Class C to be issued by the Company; which reflects a total cash commitment of approximately US$3,269 million, considering that a portion of the New Convertible Notes Class C was designed to be delivered as payment of claims held by the Backstop Creditors. According to the Plan, the Backstop Creditors agreed to receive a fee of 20% of the committed cash amount of their investment pursuant to the Creditor Backstop Agreement, whereas the Backstop Shareholders agreed not to receive a fee for the Shareholder Backstop Agreement. All new common stock and all new convertible notes were preemptively offered to LATAM’s shareholders as required by applicable law. New Convertible Notes Class B and New Convertible Notes Class C, together with New Convertible Notes Class A (whose issuance was also contemplated by the Plan), are convertible into shares of the Company that, together with the new common stock issued by the Company according to the Plan, substantially diluted the equity interests of existing shareholders.
Furthermore, following execution of the RSA, we continued to engage in discussions with members of a separate ad hoc group of certain of the Reorganized Debtors’ creditors, each of whom executed a joinder agreement to the RSA, effective as of February 10, 2022.
The Reorganized Debtors received objections to the Plan from certain parties, including the United States Trustee, the Official Committee of Unsecured Creditors (the “Committee”), Banco del Estado de Chile in its capacity as indenture trustee under certain Chilean local bonds issued by LATAM (“BancoEstado”), an ad hoc group of unsecured claimants and a group of holders of claims against LATAM affiliate TAM Linhas Aéreas S.A. Following the Plan objection deadline, the Reorganized Debtors participated in mediation with BancoEstado, the Committee and the parties to the RSA in an effort to resolve their objections to the Plan and related disputes, which proved successful. On May 11, 2022, the Reorganized Debtors filed a revised version of the Plan reflecting the terms of a settlement with the parties.
At a hearing held on May 17, 18 and 20, 2022, the Bankruptcy Court considered the remaining objections that had not been resolved pursuant to the settlement. On June 18, 2022, the Bankruptcy Court issued a memorandum decision approving the Plan and overruling all remaining objections (the “Memorandum Decision”), and entered an order confirming the Plan (the “Confirmation Order”).
Certain parties in interest appealed the Bankruptcy Court’s decisions. On June 21, 2022, the Ad Hoc Group of Unsecured Claimants filed a notice of appeal of the memorandum decision and order approving entry into the Backstop Agreements, as well as the Memorandum Decision approving the Plan and the Confirmation Order.
On June 27, 2022, the Ad Hoc Group of Unsecured Claimants filed a motion seeking to stay the Confirmation Order pending appeal. On July 16, 2022, the motion to stay was denied by the Bankruptcy Court. On June 23, 2022, the TLA Claimholders Group also filed a motion seeking to stay the Confirmation Order pending appeal or, in the alternative, an affirmative injunction requiring the Reorganized Debtors to fund an escrow account in the amount of the outstanding post-petition interest. On July 8, 2022, the Bankruptcy Court issued a bench memorandum and order denying the TLA Claimholders Group’s motion to stay. On June 28, 2022, Columbus Hill Capital Management (“Columbus Hill”) filed a notice of appeal of the Memorandum Decision and the Confirmation Order, which it later withdrew on July 5, 2022. On July 13, 2022, the Reorganized Debtors filed a motion to approve a settlement agreement with Columbus Hill, which was granted by the Bankruptcy Court on July 21, 2022, bringing full and final resolution to the Columbus Hill appeal and any other potential objections from this claimant.
On August 31, 2022, after briefing and oral argument by the parties, the District Court issued an opinion denying the appeals of both the Ad Hoc Group of Unsecured Claimants and the TLA Claimholders Group. The District Court rejected the Ad Hoc Group of Unsecured Claimants’ arguments that the Plan and Backstop Agreement violated the Bankruptcy Code and held that the Backstop Agreement did not constitute impermissible vote buying. The Ad Hoc Group of Unsecured Claimants did not further appeal the District Court’s decision.
With respect to the TLA Claimholders Group’s appeal, the District Court denied its request for payment of post-petition interest on its claims and found that the Bankruptcy Court did not err with respect to its factual finding that TLA was insolvent. The District Court also denied the TLA Claimholders Group’s motion to stay the Confirmation Order. On September 2, 2022 the TLA Claimholders Group filed a notice of appeal in the District Court (the “Second Circuit Appeal”) further appealing the Confirmation Order to the United States Court of Appeals for the Second Circuit (the “Second Circuit”). Both parties filed briefs regarding the merits of the Second Circuit Appeal, oral argument occurred on October 12, 2022, and on December 14, 2022, the Second Circuit unanimously affirmed the District Court’s decision rejecting the Second Circuit Appeal.
As of the Effective Date, the Plan was substantially consummated and became binding on all parties in interest. Pursuant to the Plan, the Company received an infusion of approximately US$ 8.19 billion through a mix of new equity, convertible notes, and debt, which enabled the Company to exit Chapter 11 with appropriate capitalization to effectuate its business plan. Upon emergence, the Company had total debt of approximately US$ 6.8 billion, cash and cash equivalents of approximately US$1.1 billion and revolving facilities fully undrawn in the amount of US$1.1 billion..
Pursuant to the Plan and Backstop Agreements, LATAM raised up to US$ 500 million through a new revolving credit facility and approximately US$ 2.25 billion in total new money debt financing, consisting of a new term loan and new notes.
As a result of our Chapter 11 proceedings, the New York Stock Exchange (the “NYSE”) filed with the SEC a notice on June 10, 2020 in order to delist our American Depositary Shares (ADSs). The delisting became effective on June 22, 2020. Our ADSs continue to trade in the over-the-counter market under the ticker “LTMAY.”
For more information regarding the Chapter 11 filings and proceedings, see “Item 3. Key Information-D. Risk Factors-Risks Relating to Our Emergence from Chapter 11 Bankruptcy” and “Item 4. Information on the Company - B. Business Overview - Chapter 11 Proceedings through 2022.”
PRESENTATION OF INFORMATION
Throughout this annual report on Form 20-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,” “our,” the “group” or the “Company” are to LATAM Airlines Group S.A. and its consolidated affiliates including: Transporte Aéreo S.A. (“LATAM Airlines Chile”), LATAM Airlines Perú S.A. (f/k/a LAN Perú S.A, “LATAM Airlines Peru”), LATAM-Airlines Ecuador S.A. (f/k/a 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 S.A. (“LATAM Airlines Colombia”), TAM S.A. (“TAM”), TAM Linhas Aéreas S.A. (“LATAM Airlines Brazil”), Transporte Aéreos del Mercosur S.A. (“LATAM Paraguay”), LAN Cargo S.A. (“LATAM Cargo”) and its two regional affiliates: Linea Aerea Carguera de Colombia S.A. (“LANCO” or “LATAM Cargo Colombia”) in Colombia and Aerolinhas Brasileiras S.A. (“ABSA” or LATAM Cargo Brazil”) in Brazil. Other references to “LATAM”, as the context requires, 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 S.A. and LATAM Airlines Brazil.
LATAM Airlines Argentina continues to be a consolidated affiliate, however, on June 17, 2020, it announced the indefinite cessation of its passenger and cargo operations.
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.”
In this annual report on Form 20-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”, 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 accounting records and prepare financial statements in U.S. dollars. Some of our affiliates, however, maintain their accounting records and prepare their financial statements in Chilean pesos, Argentinean pesos, Colombian pesos or Brazilian real. In particular, TAM maintains its accounting records and prepares its financial statements in Brazilian real. Our audited consolidated financial statements include the results of these affiliates translated into U.S. dollars. The International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), require assets and liabilities to be translated at period-end exchange rates, while revenue and expense accounts are translated at each transaction date, although a monthly rate may also be used if exchange rates do not vary widely.
In this annual report on Form 20-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$” are to Chilean pesos. References to “real,” “Brazilian real” or “R$” are to Brazilian real, and references to “UF” are to Unidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate. Unless we indicate otherwise, the U.S. dollar equivalent for information in Chilean pesos used in this annual report and in our audited consolidated financial statements is based on the “dólar observado” or “observed” exchange rate published by Banco Central de Chile (the “Central Bank of Chile”) on December 31, 2022, which was Ch$859.51 = US$1.00. The observed exchange rate on February 28, 2023, was Ch$831.24 = US$1.00. Unless we indicate otherwise, the U.S. dollar equivalent for information in Brazilian real 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 (the “Central Bank of Brazil”) on December 31, 2022, which was R$5.22= US$1.00. The observed exchange rate on February 28, 2023, was R$5.21 = US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos or Brazilian real. Unless we indicate otherwise, the Chilean peso equivalent for information in UF used in this annual report and in our audited consolidated financial statements is based on the UF rate published by Central Bank of Chile on December 31, 2022, which was Ch$35,110.98 = UF1.00.
LATAM has a single series of shares of Common Stock, without par value, listed on Chilean Stock Exchange and American Depositary Shares (evidenced by American Depositary Receipts), each representing one share of Common Stock, that were listed on the New York Stock Exchange until June 22, 2020, and currently trade in the over-the-counter market.
We have rounded percentages and certain U.S. dollar, Chilean peso and Brazilian real 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, 2020, 2021 and 2022 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 ix of this annual report.
This annual report contains forward-looking statements. Such statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe”, “forecast” or other similar expressions. Forward-looking statements, including statements about our beliefs and expectations, are not statements of historical facts. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to:
|●||the impact of our recent emergence from Chapter 11 on our business and relationships;|
|●||conflicting interests among our major shareholders;|
|●||developments relating to the COVID-19 pandemic or any other pandemic and measures to address them;|
|●||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 services in Chile, Brazil, other countries in Latin America and the rest of the world;|
|●||the determination of relationships with customers;|
|●||our ability to attract and retain key personnel following our emergence from bankruptcy;|
|●||the state of the Chilean, Brazilian, other Latin American and world economies and their impact on the airline industry;|
|●||the effects of competition in the airline industry;|
|●||future terrorist incidents, cyberattacks or related activities affecting the airline industry;|
|●||future outbreak of diseases, or the spread of already existing diseases, affecting travel behavior and/or exports;|
|●||natural disasters affecting travel behavior and/or exports;|
|●||the relative value of the Chilean peso and other Latin American currencies compared to other world currencies;|
|●||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 the group operates and environmental regulations.|
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update 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.
|Consolidated Affiliates of LATAM:|
|“ABSA or LATAM Cargo Brazil”||Aerolinhas Brasileiras S.A., incorporated in Brazil.|
|“LANCO” or LATAM Cargo Colombia||Línea Aérea Carguera de Colombia S.A., incorporated in Colombia.|
|“LATAM Airlines Argentina”||LAN Argentina S.A., incorporated in Argentina.|
|“LATAM Airlines Brazil”||TAM Linhas Aéreas S.A., incorporated in Brazil.|
|“LATAM Airlines Chile”||Transporte Aéreo S.A., incorporated in Chile.|
|“LATAM Airlines Paraguay”||Transporte Aéreos del Mercosur S.A., incorporated in Paraguay.|
|“LATAM Airlines Colombia”||Aerovías de Integración Regional S.A., incorporated in Colombia.|
|“LATAM Airlines Ecuador”||LATAM-Airlines Ecuador S.A. (f/k/a Aerolane Líneas Aéreas Nacionales del Ecuador S.A.), incorporated in Ecuador.|
|“LATAM Airlines Peru”||LATAM Airlines Perú S.A. (f/k/a LAN Perú S.A.), incorporated in Perú.|
|“LATAM Cargo”||LAN Cargo S.A., incorporated in Chile.|
|“TAM”||TAM S.A., incorporated in Brazil.|
|“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.|
|“revenue passenger kilometers” or “RPKs”||The sum, across our network, of the number of revenue 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.|
|“cargo yield”||Revenue from cargo operations divided by RTKs.|
|“passenger yield”||Revenue from passenger operations divided by RPKs.|
|“cargo load factor”||RTKs expressed as a percentage of ATKs.|
|“passenger load factor”||RPKs expressed as a percentage of ASKs.|
|“Airbus A320-Family Aircraft”||The Airbus A319, Airbus A320, and Airbus A321 models of aircraft, including both ceo and neo variants.|
|“ton”||A metric ton, equivalent to 2,204.6 pounds.|
|“utilization rates”||The actual number of service 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|
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3 KEY INFORMATION
|B.||Capitalization and Indebtedness|
|C.||Reasons for the Offer and Use of Proceeds|
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 a non-U.S. company, there are risks associated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this document, including the following risk factors.
Risks Relating to our Emergence from Chapter 11 Bankruptcy
We recently emerged from bankruptcy, which could adversely affect our business and relationships.
Our having filed for bankruptcy, notwithstanding our recent emergence from the Chapter 11 bankruptcy proceedings, could adversely affect our business and relationships with customers, suppliers, vendors, contractors or employees. Many risks exist due to uncertainties around our recent emergence from bankruptcy, including the following:
|●||Key suppliers, vendors or other contract counterparties could, among other things, renegotiate the terms of our agreements, attempt to terminate their relationships with us or require financial assurances from us;|
|●||Our ability to renew existing contracts and obtain new contracts on reasonably acceptable terms and conditions may be adversely affected;|
|●||Our ability to attract, motivate and retain executives and employees may be adversely affected; and|
|●||Competitors may take business away from us, and our ability to compete for new business and attract and retain customers may be negatively impacted.|
The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation and we cannot assure you that having been subject to bankruptcy proceedings will not adversely affect our operations in the future.
Upon emergence from bankruptcy, the composition of our board of directors changed significantly.
The composition of our board of directors changed significantly upon emergence from bankruptcy. Our new board is comprised of the following members: Ignacio Cueto Plaza, Sonia J.S. Villalobos, Bouk van Geloven, Antonio Gil Nievas, Alexander D. Wilcox, Bornah Moghbel, Enrique Cueto Plaza, Michael Neruda and Frederico Curado (as independent director). While there has been an orderly transition process as we integrate newly appointed board members, our new board of directors may change views on strategic initiatives and a range of issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.
The ability to attract and retain key personnel is critical to the success of our business and may be affected by our emergence from bankruptcy.
The success of our business depends on key personnel. The ability to attract and retain these key personnel may be affected by our emergence from bankruptcy, the uncertainties currently facing the business and the changes we may make to the organizational structure to adjust to changing circumstances. We may need to enter into retention or other arrangements that could be costly to maintain. If executives, managers or other key personnel resign, retire or are terminated or their service is otherwise interrupted, we may not be able to replace them in a timely manner and we could experience significant declines in productivity.
Risks Relating to our Company
The continuing effects of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on the group’s business and results of operations.
The COVID-19 pandemic and accompanying fear of widespread outbreaks of contagious illnesses that may occur in the future have materially reduced, and may continue to further reduce, demand for, and availability of, worldwide air travel. As a result, our business, operations and financial performance have been, and may continue to be, materially adversely affected by COVID-19.
The COVID-19 pandemic and its variants has negatively affected global economic conditions, disrupted supply chains and otherwise negatively impacted aircraft manufacturing operations and may reduce the availability of aircraft spare parts. The effect on our results may be material and adverse if supply chain disruptions persist and preclude our ability to adequately maintain our fleet.
Although vaccines have generally proved to be effective and certain of the government-imposed travel restrictions associated with the COVID-19 pandemic have been eased, the ongoing pandemic, including large outbreaks, resurgences of COVID-19 in various regions and appearances of new variants of the virus, has resulted and may continue to result in significantly reduced demand for travel. During 2022 many countries lifted travel restrictions but the spread of new variants of COVID-19 led some of them to return with some measures. As a result of these or other conditions beyond our control, our results of operations could continue to be volatile and subject to rapid and unexpected change. In addition, our operations have been, and could in the future be, negatively affected further if our employees are quarantined as the result of exposure to COVID-19. Health safety and sanitation measures that we have implemented as a group also may not be sufficient to prevent the spread or contagion of COVID-19 or other infectious diseases to our passengers or employees on our aircraft or the airports in which we operate, which could result in adverse reputational and financial impacts for the group. These issues have had and could continue to have a material adverse effect on the group’s business and results of operations. For further information on the health safety and sanitation measures implemented by the group, see “Explanatory Note-COVID-19 Pandemic,” above. However, it is possible that these measures could prove insufficient and COVID-19 or other diseases could be transmitted to passengers or employees in an airport or on an aircraft.
As a result of the COVID-19 pandemic and its variants, the airline industry may experience consumer behavior changes, regarding corporate travel, long-haul travel, and travel demand.
The potential for mid- to long-term changes to consumer behavior resulting from the COVID-19 pandemic and its variants exists and could lead to adverse financial impacts for the Company. Corporate travel increased during 2022, thanks to the lift of travel restrictions, but has not yet fully recovered to prior COVID-19 levels. It is not possible to predict the potential consequences of the increased use of technology as a substitute for travel and whether or when corporate travel, long-haul travel and travel demand could return to the levels existing prior to the COVID-19 pandemic. Furthermore, travelers may be less prone to travel or be more price conscious and may choose low-cost alternatives as a result of the COVID-19 pandemic.
A failure to successfully implement the group’s strategy or a failure to adjust such strategy to the current economic situation would harm the group’s 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 most admired 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 continuing adoption of a new travel model for domestic and international services 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 who wish to fly more frequently. This model requires continued cost reduction efforts and increasing revenues from ancillary activities. In connection with these efforts, the Company continues to implement a series of initiatives to reduce cost per ASK in all its operations as well as developing new ancillary revenue initiatives.
Difficulties in implementing our strategy may adversely affect the group’s business, results of operation and the market value of our ADSs and common shares.
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 the group operates could adversely affect the 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.
Changes in Chilean, Brazilian and other governmental economic policies affecting foreign exchange rates could also adversely affect the business, financial condition, results of operations and the return to our shareholders on their common shares or ADSs. For further information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk-Risk of Variation in Foreign Exchange Rates.”
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 47.9% of our total costs of sales in 2022. For additional information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk-Risk of Fluctuations in Fuel Prices.” Both the cost and availability of fuel are subject to many economic and political factors and events that we can neither control nor predict, including international political and economic circumstances such as the political instability in major oil-exporting countries. Any future fuel supply shortage (for example, as a result of production curtailments by the Organization of the Petroleum Exporting Countries, or “OPEC”), a disruption of oil imports, supply disruptions resulting from severe weather or natural disasters, labor actions such as the 2018 trucking strike in Brazil, the continued unrest in the Middle East, the conflict in Ukraine or other events could result in higher fuel prices or reductions in scheduled airline services. We cannot ensure that we would be able to offset any increases in the price of fuel. In addition, lower fuel prices may result in lower fares through the reduction or elimination of fuel surcharges. 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. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk-Risk of Fluctuations in Fuel Prices.”
The group depends on strategic alliances or commercial relationships in many different countries, and the 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 deteriorate, or any of these agreements are terminated, the group’s business, financial condition and results of operations could be adversely affected.
The group’s business and results of operations may suffer if we fail to obtain and maintain routes, suitable airport access, slots and other operating permits. Also, technical and operational problems with the airport infrastructure of cities in which we have a focus may have a material adverse effect on us.
LATAM’s 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. The group’s operations could be constrained by any delay or inability to gain access to key routes or airports, including:
|●||limitations on our ability to transport 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.|
The group operates numerous international routes subject to bilateral agreements, as well as domestic flights within Chile, Peru, Brazil, Ecuador and Colombia, 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 the group’s companies are based and permits from foreign governments will continue to be in effect. 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 at 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 the group operates that restrict our routes, airports or other access may have a material adverse effect on our business, financial condition and results of operations.
Moreover, our operations and growth strategy are dependent on the facilities and infrastructure of key airports, including Santiago’s International Airport, São Paulo’s Guarulhos International and Congonhas Airports, Brasilia’s International Airport and Lima’s Jorge Chavez International Airport. Airports may face challenges to meet their capex programs, after suffering significant financial deterioration stemming from the COVID-19 pandemic. Delays or cancellations of capex programs could impact our operations or ability to grow in the future.
Santiago’s Comodoro Arturo Merino Benítez International Airport is undergoing an important expansion, which was expected to be completed by 2021, but opened in February 2022. There is currently a dispute between the airport operator and the government arising from the impact of the COVID-19 pandemic and deceleration of airport operations on revenues, which placed additional stress on the operator’s liquidity in light of ongoing investments required for the expansion project. In order to mitigate the impact of the financial loss, the current operator is requesting to extend the concession period, which expires in 2035, or to renegotiate the current income percentage of participation that they must share with the government. This dispute implies a risk to future OPEX and CAPEX investments and adverse effects to the airport’s operations.
Santiago’s International Airport opened its new International Terminal, called Terminal 2, at the end of February 2022. One of the most challenging issues with the new terminal is that the check-in process considers a 50% reduction in assisted check-in counters, which obligates airlines to implement self-service models, where the success depends on the companies but is also associated with the government restrictions of the destination country. Additionally, Terminal 1 is currently undergoing remodeling to adapt its infrastructure into a national operations dedicated terminal. These works are scheduled to be completed by 2025.
Due to the previous airport concessions provided by the Chilean government in 2019, there are two airports currently undergoing construction in Chile: Iquique’s Diego Aracena International Airport and Arica’s Chacalluta International Airport, which are both undergoing terminal and platform expansions. These works are expected to be completed by 2023 and they imply a risk of adverse effects to the airports’ operations. In addition, there are three other new concessions in Chile planning to start terminal work during the years 2023 and 2024: Balmaceda Airport, La Florida International Airport and Presidente Carlos Ibáñez del Campo International Airport.
In Peru, one of the major operational risks that we currently face at the Jorge Chávez International Airport in Lima is the limitation of growth capacity on the airside (including with respect to runway and apron, as well as parking spaces), and challenges relating to the interior infrastructure of the airport, which has collapsed in most of its processes (AVSEC, boarding & migrations). Jorge Chávez International Airport in Lima is currently in the process of building a second runway in 2024 and a new terminal in early 2025. Any delay or limitation due to ongoing works could negatively affect our operations, limit our ability to grow and affect our competitiveness in the country and region.
Brazilian airports, such as the Brasilia and São Paulo (Guarulhos) International Airports, have limited the number of takeoff and landing slots per day due to infrastructural limitations. Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our ability to maintain our existing slots and obtain additional slots, could materially adversely affect our operations.
In 2023, after two years of delay due to the COVID-19 pandemic, GRU Airport, concessionaire of Guarulhos Airport, will start the last phase of infrastructure expansion works, including the construction of a new fast exit on the main runway and a new taxiway. In addition, the construction of a new pier and the expansion of the apron are planned, which will operate until 2025 and will allow an increase in operations at the busiest airport in the country.
In 2022, continuing the state government airport concession program in Brazil (the “Concession Program”), 15 Airports in Brazil were granted concessions in 3 blocks, 8 of which are operated by LATAM, including Congonhas Airport, which is located in downtown São Paulo. The acceleration of the Concession Program makes possible important investments in infrastructure, but it implies a high volume of work to be undertaken simultaneously. Over the next 5 years, 29 of the 55 Airports operated by LATAM in Brazil will undergo infrastructure improvement works, which may generate temporary restrictions, especially in terms of paid cargo.
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.
The group’s 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, asparagus from Peru and 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 are transported and may have a significant impact on the results of operations. Future trade protection measures by or against the countries for which we provide cargo services may have an impact on cargo traffic volumes and adversely affect our financial results. Some of the cargo products are sensitive to foreign exchange rates and, therefore, traffic volumes could be impacted by the appreciation or depreciation of local currencies.
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.
Generally, a key element of our strategy is to maintain a high daily aircraft utilization rate, which measures the number of 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 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, catering and ground handling. If aircraft fall behind schedule, the resulting delays could cause a disruption in our operating performance and have a financial impact on our results.
LATAM flies and depends upon Airbus and Boeing aircraft, and our business could suffer if we do not receive timely deliveries of aircraft, if aircraft from these companies become unavailable or if the public negatively perceives our aircraft.
As of December 31, 2022, LATAM Airlines Group has a total fleet of 237 Airbus and 73 Boeing aircraft (34 of these aircraft were classified as non-current assets available for sale). 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, aircraft delivery backlog 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 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 safety concerns, negative publicity or other problems, whether real or perceived, in the event of an accident;|
|●||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; or|
|●||the delay, for any reason, to conclude cabin upgrade projects that could result in aircraft unavailability for a certain period of time.|
During 2022, Airbus and Boeing announced delays in some of their models due to several reasons including supply chain problems and the rapid increase in demand due to the recovery of the airline industry. 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. For further information related to current contractual obligations, see “Item 5. Operating and Financial Review and Prospects-E. Contractual Obligations-Long Term Indebtedness.”
If we are unable to incorporate leased aircraft into the fleet at acceptable rates and terms in the future, our business could be adversely affected.
A large portion of the aircraft fleet is subject to long-term leases. The leases typically run from three to 12 years from the date of execution. We may face more competition for, or a limited supply of, leased aircraft, making it difficult to negotiate on competitive terms upon expiration of the current leases or to lease additional capacity required for the 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 the fleet, our profitability could be adversely affected.
We face reputational risks related to the use of social media.
LATAM frequently uses social media platforms as marketing tools. These platforms provide LATAM, as well as individuals, with access to a broad audience of consumers and other interested persons. Negative commentary regarding LATAM or the products it sells may be posted on social media platforms and similar devices at any time and may be adverse to LATAM’s reputation or business. Further, as laws, regulations, and different platforms’ terms of service rapidly evolve to govern the use of social media, the failure by LATAM, its employees or third parties acting at LATAM’s direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact the LATAM’s business, financial condition, and results of operations or subject it to fines or other penalties.
We have substantial liquidity needs and continue to pursue various financing options. 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 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. Higher financing costs could affect our ability to expand or renew our fleet, which in turn could adversely affect our business.
In addition, a substantial portion of our property and equipment is subject to liens securing our indebtedness, including our secured bonds and loans. In the event that we fail to make payments on our bonds and loans, 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. For further information, related to current contractual obligations, see “Item 5. Operating and Financial Review and Prospects-E. Contractual Obligations-Long Term Indebtedness.”
Moreover, external conditions in the financial and credit markets may limit the availability of funding 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, reductions in our credit rating or in that of our issuances, and other potential market disruptions.
Upon exiting Chapter 11, we restructured our debt decreasing it by approximately 35% as of emergence to a total gross debt of approximately US$6.8 billion, and improved our liquidity conditions, comprised of cash and cash equivalents of approximately US$1.1 billion and revolving facilities fully undrawn in the amount of US$1.1 billion. For further information related to our debt restructuring, see “Item 4B. Chapter 11 Proceedings through 2022.”
We have significant exposure to SOFR and other floating interest rates; increases in interest rates will increase our financing cost and may have adverse effects on our financial condition and results of operations.
On July 27, 2017, the head of the United Kingdom Financial Conduct Authority (“FCA”) (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021 the FCA announced in a public statement that LIBOR for certain tenors would cease to be published on June 30, 2023. The Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC), a group of private-market participants, to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR). Although the adoption of SOFR is voluntary, the impending discontinuation of LIBOR makes it essential that market participants consider moving to alternative rates such as SOFR and that they have appropriate fallback language in existing contracts referencing LIBOR. In this regard, our derivative and debt contracts may be affected by the change in the relevant rate.
Because the publication of LIBOR will cease for June 2023, we have migrated to the adoption of SOFR as an alternative rate. The impact of such a transition away from LIBOR could be significant for us because of our substantial indebtedness. SOFR will fluctuate with changing market conditions and, as SOFR increases, our interest expense will mechanically increase, which could 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 results of operations. In addition, there is no guarantee that SOFR or other replacement rates for LIBOR will maintain market acceptance. See also the discussion of interest rate risk in “Item 11. Quantitative and Qualitative Disclosures About Market Risks-Risk of Fluctuations in Interest Rates.”
Increases in insurance costs and/or significant reductions in coverage could harm our financial condition and results of operations.
Significant events affecting the aviation insurance industry (such as terrorist attacks, airline crashes or accidents and health epidemics and the related widespread government-imposed travel restrictions) may result in significant increases of airlines’ insurance premiums and/or relevant decreases of insurance coverage. Further increases in insurance costs and/or reductions in available insurance coverage could have a material impact on our financial results, change the insurance strategy, and also increase the risk of 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.
The operations, including the ability to deliver customer service, are dependent on the effective operation of the equipment, including aircraft, maintenance systems and reservation systems. The 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 the group operates. Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our 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 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 unscheduled maintenance requirements, in customer avoidance or in actions by the aviation authorities resulting in an inability to operate our aircraft. During the year 2022, LATAM Airline Group’s main suppliers were aircraft manufacturers Airbus and Boeing.
In addition to Airbus and Boeing, LATAM Airlines has a number of other suppliers, primarily related to aircraft accessories, spare parts, and components, including Pratt & Whitney Canada, MTU Maintenance, Rolls-Royce, General Electric Commercial Aviation Services Ltd., General Electric Celma, General Electric Engines Service, CMF International and Honeywell, among others.
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 in 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 technology infrastructure and services, performance of business processes, including purchasing and cash management, 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 or by issues in the GDS’s operations. 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 the operations, compromise passenger or employee information, and expose us to liability, possibly causing our business and reputation to suffer.
A serious internal technology error, failure, or cybersecurity incident impacting systems hosted internally at our data centers, externally at third-party locations or cloud providers, or large-scale interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network with potential impact on 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, cyber-attacks, security breaches in the supply chain (suppliers) and other security issues. These systems include our computerized airline reservation system, flight operations system, telecommunications systems, website, customer, self-service applications (“apps”), maintenance systems, check-in kiosks, in-flight entertainment systems and data centers.
In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our customers 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, deception, or cybersecurity incidents. Hardware or software we develop or acquire may contain defects that could unexpectedly compromise information security. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers’, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business.
Rapid technological advancements and digitalization could generate risks in implementation and regulatory control.
Globally, there have been large advances in processes of digitization and technological innovation, some of them as a result of the COVID-19 pandemic. These new technologies could generate new risks in their implementation that could impact us directly or indirectly. As an example, at the beginning of 2022, the implementation of 5G in the United States had a temporary impact on operations at certain airports and generated a review by the FAA on the specific requirements for its implementation. All processes of digitization and technological innovation may be exposed to this risk.
Similarly, the rapidly increasing technological transformation may advance faster than the review and control capacity of the authorities and the knowledge about the effects of their possible impacts, which could affect us directly or indirectly in ways we cannot foresee.
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 cost of sales (12% in 2022) 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.
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 operations and adversely impact our operating and financial performance, as well as our image.
A strike, work interruption or stoppage or any prolonged dispute with employees who are represented by any of these unions could have an adverse impact on operations. These risks are typically exacerbated during periods of renegotiation with the unions, which typically occurs every two to four years depending on the jurisdiction and the union. Any renegotiated collective bargaining agreement could feature significant wage increases and a consequent increase in our operating expenses. Any failure to reach an agreement during negotiations with unions may require us to enter into arbitration proceedings, use financial and management resources, and potentially agree to terms that are less favorable to us than our existing agreements. Employees who are not currently members of unions may also form new unions that may seek further wage increases or benefits.
In November 2022, a union representing the majority of our pilots in Chile voted to begin a strike, initiating a mediation process mandated by Chilean law. On November 9, 2022, we announced that we had reached an agreement averting a strike. There is no guarantee, however, that we will be able to reach a mutually beneficial agreement in the event of future disagreements with our employees.
Our business may experience adverse consequences if we are unable to reach satisfactory collective bargaining agreements with unionized employees.
As of December 31, 2022, approximately 49% of the group’s 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. The 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 expectations or that prevent the group from competing effectively with other airlines. For further information regarding the unions representing employees in each country in which the group operates and with which there are established collective bargaining agreements, see “Item 6. Directors, Senior Management and Employees-D. Employees-Labor Relations.”
LATAM may experience difficulty finding, training and retaining employees.
The business is labor intensive. The group employs 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, which has somewhat intensified during the recovery phase of air traffic following the peak of the pandemic. Such shortage of qualified personnel is further exacerbated by our recent emergence from bankruptcy and the resulting uncertainties facing the business. In addition, as is common with most of our competitors, the group may, from time to time, face considerable turnover of our employees. Should turnover of employees, particularly pilots and maintenance technicians, sharply increase, our training costs will be significantly higher. LATAM cannot assure that it will be able to recruit, train and retain the managers, pilots, technicians and other qualified employees that are needed to continue the current operations or replace departing employees. An increase in turnover or failure to recruit, train and retain qualified employees at a reasonable cost could materially adversely affect the business, financial condition, and results of operations. The group may also experience increased levels of employee attrition associated with the recent emergence from Chapter 11 proceedings. A loss of key personnel or material erosion of employee morale could impair the ability to execute strategy and implement operational initiatives, thereby adversely affecting the group.
Risks Relating to the Airline Industry and the Countries in Which the Group Operates
Our performance is heavily dependent on economic conditions in the countries in which the group does business. Negative economic conditions in those countries could adversely impact the group’s 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, recessions in Brazil and Argentina, and poor economic performance in certain emerging market countries in which the group operates. The occurrence of similar events in the future could adversely affect our business. The group plans to continue to expand operations based in Latin America, which means that performance will continue to depend heavily on economic conditions in the region.
Any of the following factors could adversely affect the business, financial condition and results of operations in the countries in which the group operates:
|●||changes in economic or other governmental policies;|
|●||changes in regulatory, legal or administrative practices;|
|●||weak economic performance, including, but not limited to, a slowdown in the Brazilian economy, political instability, 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 the group may take in response to weakened demand will be adequate to offset any future reduction in cargo and/or air travel demand in markets in which the group operates. Sustained weak demand may adversely impact our revenues, results of operations or financial condition.
An adverse economic environment, whether global, regional or in a particular country, could result in a reduction in passenger traffic, as well as a reduction in the cargo business, and could also impact the ability to set fares, which in turn would materially and negatively affect our financial condition and results of operations.
We are exposed to increases in landing fees and other airport service charges that could adversely affect our margin and competitive position. Also, it cannot be assured that in the future we will have access to adequate facilities and landing rights necessary to achieve our expansion plans.
The group must pay fees to airport operators for the use of their facilities. Any substantial increase in airport charges, including at Guarulhos International Airport in São Paulo, Jorge Chavez International Airport in Lima or Comodoro Arturo Merino Benitez International Airport in Santiago, could have a material adverse impact on our results of operations. Passenger taxes and airport charges have increased substantially in recent years. We cannot assure that the airports in which the group operates will not increase or maintain high passenger taxes and service charges in the future. Any such increases could have an adverse effect on our financial condition and results of operations.
Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose various restrictions, including takeoff and landing slot restrictions during certain periods of the day and limits on aircraft noise levels. We cannot be certain that the group will be able to obtain a sufficient number of slots, gates and other facilities at airports to expand services in line with our growth strategy. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots re-allocated to others. Where slots or other airport resources are not available or their availability is restricted in some way, the group may have to amend schedules, change routes or reduce aircraft utilization. It is also possible that aviation authorities in the countries in which the group operates, change the rules for the assignment of takeoff and landing slots, as was the case with the São Paulo airport (Congonhas) where the slots previously operated by Avianca Brazil were reassigned mostly to Azul, and where Agência Nacional de Aviação Civil in Brazil (“ANAC”) has approved new rules to the distribution of new slots. Any of these alternatives could have an adverse financial impact on operations. We cannot ensure that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports.
The business is highly regulated and changes in the regulatory environment in the different countries 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 the group operates or intends 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.
Our business, financial condition, results of operations and the price of common shares and ADSs may be adversely affected by changes in policy or regulations at the federal, state or municipal level in the countries in which the group operates, involving or affecting factors such as:
|●||liquidity of capital and lending markets;|
|●||tax and social security policies;|
|●||energy and water shortages and rationing; and|
|●||other political, social and economic developments in or affecting Brazil, Chile, Peru, and the United States, among others.|
For example, the Brazilian federal government has frequently intervened in the domestic economy and made drastic changes in policy and regulations to control inflation and affect other policies and regulations. This has required the federal government to increase interest rates, change taxes and social security policies, implement price controls, currency exchange and remittance controls, devaluations, capital controls and limits on imports.
Uncertainty over whether the Brazilian federal government will implement changes in policy or regulation affecting these or other factors may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. These and other developments in the Brazilian economy and governmental policies may adversely affect us and our business and results of operations and may adversely affect the trading price of our common shares and ADSs.
We are also subject to international bilateral air transport agreements that provide for the exchange of air traffic rights between the countries where the group operates, and we must obtain permission from the applicable foreign governments to provide service to foreign destinations. There can be no assurance that such existing bilateral agreements will continue, or that we will be able to obtain more route rights under those agreements to accommodate our future expansion plans. Certain bilateral agreements also include provisions that require substantial ownership or effective control. Any 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 permits to operate to certain airports or destinations, the inability for us to obtain favorable take-off and landing authorizations at certain high-density airports or the imposition of other sanctions could also have a negative impact on our business. We cannot be certain that a change in ownership or effective control or in a foreign government’s administration of current laws and regulations or the adoption of new laws and regulations will not have a material adverse effect on our business, financial condition 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 liabilities; 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 operations or aircraft are less safe or reliable than those operated by other airlines, or by other flight operators, 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 that affected our Peruvian affiliate. On November 18, 2022, LATAM Airlines Peru reported that during the take-off of flight LA 2213 at Lima’s Jorge Chávez International Airport a fire engine entered the runway and collided with its aircraft. Authorities subsequently confirmed fatalities of two firefighters who were in the fire engine that struck the aircraft. There were no fatalities among the 102 passengers and 6 crew members. The investigation of the cause of the accident is still in progress. LATAM Airlines Peru is cooperating with the relevant investigations. The aircraft damage is covered by insurance. We are not yet able to make a final conclusion as to the financial impact of this incident.
High levels of competition in the airline industry, such as the increase of low-cost carriers and the consolidation or mergers of competitors in the markets in which the group operates, may adversely affect the 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 the group operates. 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. For more information regarding our main competitors, see “Item 4. Information of the Company-B. Business Overview-Passenger Operations-International Passenger Operations” and “Item 4. Information of the Company-B. Business Overview-Passenger Operations-Business Model for Domestic Operations.”
Low-cost carriers have an important impact on the industry’s revenues given their low unit costs. Lower costs allow low-cost carriers to offer inexpensive fares which, in turn, allow price sensitive customers to fly or to shift from large to low cost carriers. In past years we have seen more interest in the development of the low-cost model throughout Latin America. For example, in the Chilean market, Sky Airline, our main competitor, has been migrating to a low-cost model since 2015, while in July 2017, JetSmart, a new low-cost airline, started operations. In the Peruvian domestic market, VivaAir Peru, a new low-cost airline, started operations in May 2017, and in April 2019, another low-cost airline, Sky Airline Peru, started operations, followed by the entrance of JetSmart in June 2022. In Colombia, low-cost competitor VivaColombia has been operating in the domestic market since May 2012. Due to the impacts associated to the COVID-19 pandemic, some of these airlines have adopted strategies to consolidate in alliances or mergers with legacy airlines, such as Avianca and Gol (Abra Group), Avianca and Viva in Colombia, or JetSmart where American Airlines had been approved by authorities without any conditions to acquire minor participation. In the Cargo business, and also due to some effects of COVID-19 pandemic and the scarcity of containers, companies such as Maersk, CMA CGM and MSC have begun to compete in air transportation; CMA CGM and Air France-KLM airlines agreed to share cargo space in their airplanes; and American Airlines Cargo and Web Cargo have partnered to increase their destinations. These consolidations, mergers or new alliances might continue to appear, increasing the concentration and levels of competition. Specifically, in February 2023, LATAM expressed its interest in initiating negotiations to acquire VivaColombia. Any transaction is subject to a financial analysis, an agreement between the parties, and the corresponding regulatory approvals.
International strategic growth plans rely, in part, upon receipt of regulatory approvals of the countries in which we plan to expand our operations with joint business agreements (JBA). The group may not be able to obtain those approvals, while other competitors might be approved. Accordingly, we might not be able to compete for the same routes as our competitors, which could diminish our market share and adversely impact our financial results. No assurances can be given as to any benefits, if any, that we may derive from such agreements.
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 the group at a competitive disadvantage and adversely affect operations and financial performance. For example, Aerolineas Argentinas has historically been government subsidized. Additionally, during the COVID-19 pandemic, some of our competitors on long-haul routes received government support.
Moreover, as a result of the competitive environment, there may be further consolidation in the Latin American and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry. Furthermore, consolidation in the airline industry and changes in international alliances will continue to affect the competitive landscape in the industry and may result in the development of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures.
Some of the countries where the group operates may not comply with international agreements previously established, which could increase the risk perception of doing business in that specific market and as a consequence impact the business and financial results.
Rulings by a bankruptcy court in Brazil and a Chapter 15 ruling by the Bankruptcy Court related to the bankruptcy proceedings of Avianca Brazil may appear to be inconsistent with the timeline set out for a debtor to cure a default or to return an aircraft in the Cape Town Convention (CTC) treaty that Brazil has signed, thus raising concerns about timings for remedies by creditors in respect of financings secured by aircraft. Accordingly, creditors may perceive that an increased business risk is created by these rulings for leasing or other financing transactions involving aircraft in Brazil and there is a possibility that rating agencies may issue lower credit ratings in respect of financings that are secured by aircraft in Brazil. As a result, business and financial results may be adversely affected if our financing activities in Brazil are impacted by such events.
LATAM’s 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.
LATAM’s operations are affected 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 the 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 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 the group’s reputation.
In 2016, the International Civil Aviation Organization (“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). 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. In order to comply with this strategy, we have developed sustainability strategies focused on climate change and we have taken different measures, such as the alliance with the Cataruben foundation in Colombia, with the objectives of offsetting CO2 through reducing deforestation and switching to sustainable agriculture practices, amongst others, thus contributing to improve the communities’ life quality and the protection of biodiversity. In addition, we have other initiatives in place such as the promotion of SAF (green fuel produced with vegetable bases and mixed with conventional fossil fuels) with local governments and the lean fuel program. Nevertheless, to the extent most of the countries in which the group operates continue to be ICAO member states, in the future we may be affected by regulations adopted pursuant to the CORSIA framework. In addition, frameworks such as the Emissions Trading System, both in the EU and UK (“EU-ETS” and “UK-ETS”), are regulations related to the European market, where airlines have a pre-established amount of CO2 emissions for each year, which are then reduced over time, similar to a “cap and trade” system. Airlines must report and verify emissions related to this scheme and surrender the allocated allowances in time in order to comply. Should operations exceed the maximum allocated emissions, airlines must either acquire more from the market or pay the corresponding fee to the authority.
The proliferation of national regulations and taxes on CO2 emissions in the countries that we have domestic operations, including environmental regulations that the airline industry is facing in Colombia, where limits on offsetting programs were included in the new Tax Reform of 2022, may also affect the cost of operations and the 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 epidemics (such as Ebola and Zika) and pandemics (such as the COVID-19 pandemic), terrorist attacks, war or political and social instability. Increasing geopolitical tensions and hostilities in connection with the conflict in Ukraine, and the trade and monetary sanctions that have been imposed in connection with those developments, have affected, and could significantly affect, worldwide oil prices and demand, cause turmoil in the global financial system and negatively impact air travel. Situations such as these could have a material impact on the business, financial condition and results of operations. Furthermore, the COVID-19 pandemic and its variants and other adverse public health developments could have a prolonged effect on air transportation demand and any prolonged or widespread effects could significantly impact operations.
Any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations or otherwise and any related economic impact could result in decreased passenger traffic and materially and negatively affect the business, financial condition and results of operations.
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 or natural disasters outside of our control, some or all of our flights may be canceled or significantly delayed, affecting and disrupting our operations and reducing profitability. For example, in 2011, a volcanic eruption in Chile had a prolonged adverse effect on air travel, halting flights in Argentina, Chile, Uruguay and the southern part of Brazil for several days. As a result, our operations to and from these regions were temporarily disrupted, including certain aircraft being grounded in the affected regions. In 2012, an incident with an aircraft from a cargo airline caused the closing of a runway at Viracopos airport for 45 hours, which negatively impacted our operations and forced us to re-accommodate our passengers to new flights. In 2022, a LATAM aircraft was severely damaged after flying through stormy weather on approach to Asuncion Airport in Paraguay, having to make an emergency landing. Increases in the frequency, severity or duration of thunderstorms, hurricanes, typhoons, floods or other severe weather events, including from changes in the global climate and rising global temperatures, could result in increases in delays and cancellations, turbulence-related injuries and fuel consumption to avoid such weather, any of which could result in loss of revenue and higher costs. In addition, fuel prices and supplies, which constitute a significant cost for us, may increase as a result of any future terrorist attacks, a general increase in hostilities or a reduction in output of fuel, voluntary or otherwise, by oil-producing countries. Such increases may result in both higher airline ticket prices and decreased demand for air travel generally, which could have an adverse effect on revenues and results of operations.
Our business may be adversely affected by the consequences of climate change.
There are regulatory risks associated with the management of climate change in the short and medium term, due to the fact that, in an effort of different countries to contribute to the fight against climate change, there is a tendency to impose economic instruments such as carbon taxes or emissions trading systems that seek to regulate emissions from different industries, including the aviation industry. These mechanisms seek to discourage the consumption of fossil fuels, through imposing an additional cost. However, in the case of the airline industry, especially in the South American region, there is no viable substitute fuel that would allow the industry to migrate to other types of fuels. The related risks present an opportunity to work hand in hand with the relevant governments to implement public policies allowing for progress in the production of sustainable aviation fuels in the region, thus promoting the migration away from fossil fuels and creating policies and instruments relevant to industries such as aviation, which currently has no substitute fuel available in South America. In the long term, there are physical risks associated with climate change, including the risk for greater intensity of meteorological phenomena, such as storms, tornados, hurricanes, floods and others, which in turn may pose a risk to infrastructure (destinations, airports) and communities. As a consequence, it may be necessary to modify routes and destinations.
An accumulation of ticket refunds could have an adverse effect on our financial results.
The COVID-19 pandemic and the corresponding widespread government-imposed travel restrictions that were outside of LATAM’s control resulted in an unprecedented number of requests for ticket refunds from customers due to changed or canceled flights. Although at this time the issue has been managed, we cannot assure that the COVID-19 pandemic or other outbreak of contagious illness will not result in additional changed or canceled flights, and we cannot predict the total amount of refunds that customers might request as a result thereof. If the group is required to pay out a substantial amount of ticket refunds in cash, this could have an adverse effect on our financial results or liquidity position. Furthermore, the Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. Under certain of the Company’s credit card processing agreements, the financial institutions in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales that have been processed by that financial institution, but for which the Company has not yet provided the air transportation. Such financial institutions may require cash or other collateral reserves to be established or withholding of payments related to receivables to be collected, including if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short-term investments. Refunds lower our liquidity and put us at risk of triggering liquidity covenants in these processing agreements and, in doing so, could force us to post cash collateral with the credit card companies for advance ticket sales.
LATAM is subject to risks relating to litigation and administrative proceedings that could adversely affect the business and financial performance in the event of an unfavorable ruling.
The nature of the 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 accounting provisions as we deem necessary, the amounts that we reserve could vary significantly from any amounts we actually have to pay due to the inherent uncertainties in the estimation process. We cannot assure you that these or other legal proceedings will not materially affect the business. For further information, see “Item 8. Financial Information-Legal and Arbitration Proceedings” and Note 30 to our audited consolidated financial statements included in this report.
The group is subject to anti-corruption, anti-bribery, anti-money laundering and antitrust laws and regulations in Chile, Brazil, Peru, the United States and in the various other countries in which it operates. 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 all jurisdictions where the group operates. In addition, we are subject to economic sanctions regulations that restrict dealings with certain sanctioned countries, individuals and entities. There can be no assurance that internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by 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 laws or regulations could have a material adverse effect on the business, reputation, results of operations and financial condition.
Latin American governments have exercised and continue to exercise significant influence over their economies.
Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions have often involved, among other measures, nationalizations and expropriations, price controls, currency devaluations, mandatory increases on wages and employee benefits, capital controls and limits on imports. Our business, financial condition and results of operations may be adversely affected by changes in government policies or regulations, including such factors as exchange rates and exchange control policies, inflation control policies, price control policies, consumer protection policies, import duties and restrictions, liquidity of domestic capital and lending markets, electricity rationing, tax policies, including tax increases and retroactive tax claims, and other political, diplomatic, social and economic developments in or affecting the countries where the group operates.
For example, 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. In the future, the level of intervention by Latin American governments may continue or increase. We cannot assure that these or other measures will not have a material adverse effect on the economy of each respective country and, consequently, will not adversely affect our business, financial condition and results of operations.
Political instability and social unrest in Latin America may adversely affect the business.
LATAM operates primarily within Latin America and is thus subject to a full range of risks associated with our operations in this region. These risks may include unstable political or social conditions, lack of well-established or reliable legal systems, exchange controls and other limits on our ability to repatriate earnings and changeable legal and regulatory requirements.
Although political and social conditions in one country may differ significantly from another country, events in any of our key markets could adversely affect the business, financial conditions or results of operations.
For example, in Brazil, in the last couple of years, as a result of the ongoing Lava Jato investigation (“Operation Car Wash”), a number of senior politicians have resigned or been arrested and other senior elected officials and public officials are being investigated for allegations of corruption. One of the most significant events that elapsed from this operation was the impeachment of the former President Rousseff by the Brazilian Senate on August, 2016, for violations of fiscal responsibility laws and the governing of its Vice-President, Michel Temer, during the last two years of the presidential mandate, which, due to the development of the investigations conducted by the Federal Police Department and the General Federal Prosecutor’s Office, indicted President Temer on corruption charges. Along with the political and economic uncertainty period the country was facing, in July 2017, former and recently re-elected President Luiz Inácio Lula da Silva was convicted of corruption and money laundering by a lower federal court in the State of Paraná in connection with Operation Car Wash. Operation Car Wash is still in progress by Brazilian authorities and additional relevant information may come to light affecting the Brazilian economy.
Furthermore, former President Jair Bolsonaro is being investigated by the Brazilian Supreme Court for alleged misconduct. Several impeachment procedures have been filed in relation to the management of the response to the COVID-19 pandemic by the president.
In addition, after having his criminal convictions related to Operation Car Wash overturned and his political rights restored by the Brazilian Supreme Court, former President Luiz Inácio Lula da Silva ran for office in the presidential election of October 2022 and narrowly defeated President Bolsonaro. Former President Bolsonaro questioned the results of the elections, resulting in demonstrations across the country. Luiz Inácio Lula da Silva was sworn in as president in January 2023. We cannot predict which policies the incoming president Luiz Inácio Lula da Silva may adopt or change during his term in office, or the effect that any such policies might have on our business and on the Brazilian economy.
In Peru, on December 7, 2022, President Pedro Castillo announced the dissolution of the congress and called for new elections as soon as possible, provoking an attempted coup d’état. Subsequently, he was removed from office and arrested. On the same day, Vice President Dina Boluarte assumed the presidency of Peru, to serve the remaining presidential term until 2026. However, on December 11, 2022, President Boluarte announced she would introduce a bill to move the general elections up to April 2024, which proposal is under discussion and may be subject to change. Since then, there has been considerable political unrest in Peru, and demonstrations related to the political situation have led to multiple clashes between protestors and security forces, resulting in casualties and deaths. The political unrest has also given rise to many roadblocks across the country. In addition, some smaller airports such as Andahuaylas, Cusco, Juliaca and Arequipa across Peru have seen their operations interrupted.
On December 14, 2022, the Peruvian government declared a national state of emergency for 30 days. No assurance can be given as to how long the unrest and blockades will continue. The effect of any such disruption or interference cannot accurately be predicted and could have a significant adverse effect on our business, financial conditions or results of operations.
In October 2019, Chile saw significant protests associated with economic conditions resulting in the declaration of a state of emergency in several major cities. The protests in Chile began over criticisms about social inequality, lack of quality education, weak pensions, increasing prices and low minimum wage. If social unrest in Chile were to continue or intensify, it could lead to operational delays or adversely impact our ability to operate in Chile.
Furthermore, current initiatives to address the concerns of the protesters are under discussion in the Chilean Congress. These initiatives include labor reforms, tax reforms and pension reforms, among others. On October 25, 2020 (postponed from April 26, 2020 due to the impact of the COVID-19 pandemic), Chile widely approved a referendum to redraft the constitution via constitutional convention. The election for selecting the 155-member constitutional convention took place on May 15 and 16, 2021. On July 4, 2021, the constitutional convention was installed, having 9 months, with the possibility of a one-time, three-month extension, to present a new constitution. The proposed constitution was finalized on July 4, 2022. On September 4, 2022, a referendum was held, in which the proposed constitution was rejected by a margin of 62% to 38% of voters. On December 12, 2022, Chilean lawmakers announced that they had agreed to a document entitled “Acuerdo por Chile” (Agreement for Chile). This document constitutes a new consensus and a starting point to begin drafting a new constitution. On December 26, 2022, the Constitutional Commission of the Senate started working on this document. In addition, Chile held presidential elections in December 2021, with leftist Gabriel Boric winning by a wide margin. Mr. Boric was sworn in as president in March 2022. There can be no assurance that the recent changes in the Chilean administration, its constitution or any future civil unrest will not adversely affect our business, operating results and financial condition in Chile.
Presidential elections were held in Colombia in 2022, and Gustavo Petro was narrowly elected president in Colombia, becoming the country’s first elected leftist president. Such elections recorded the lowest abstention percentages ever in Colombia. On August 7, 2022, Gustavo Petro was sworn in as the new president of Colombia.
In Ecuador, during June of 2022, people took to the streets of Guayaquil. There was a mixture of claims ranging from high prices, lack of medicines, insecurity and even voices calling for the resignation of the current president, Guillermo Lasso.
Although conditions throughout Latin America vary from country to country, our customers’ reactions to developments in Latin America generally may result in a reduction in passenger traffic, which could materially and negatively affect our financial condition and results of operations.
Latin American countries have experienced periods of adverse macroeconomic conditions.
The business is dependent upon economic conditions prevalent in Latin America. Latin American countries have historically experienced economic instability, including uneven periods of economic growth as well as significant downturns. High interest, inflation (in some cases substantial and prolonged), and unemployment rates generally characterize each economy. Because commodities such as agricultural products, minerals, and metals represent a significant percentage of exports of many Latin American countries, the economies of those countries are particularly sensitive to fluctuations in commodity prices. Investments in the region may also be subject to currency risks, such as restrictions on the flow of money in and out of the country, extreme volatility relative to the U.S. dollar, and devaluation.
For example, in the past, Peru has experienced periods of severe economic recession, currency devaluation, high inflation, and political instability, which have led to adverse economic consequences. LATAM cannot ensure that Peru will not experience similar adverse developments in the future even though for some years now, several democratic procedures have been completed without any violence. LATAM cannot ensure that the current or any future administration will maintain business-friendly and open market economic policies or policies that stimulate economic growth and social stability. In Brazil, the Brazil Real gross domestic product increased 1.2% in 2019, decreased 3.9% in 2020, and increased 4.6% in 2021, according to the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estadística, or “IGBE”). In addition, the credit rating of Perú was downgraded in 2021 and in 2022 is rated as BBB with a negative outlook. Ecuador and Chile were also downgraded in 2020, and Colombia in 2021, but keep a stable outlook. Brazil has a stable outlook but in monitoring due to recent events and protests related to the transition of government.
Accordingly, any changes in the economies of the Latin American countries in which LATAM and its affiliates operate or the governments’ economic policies may have a negative effect on the business, financial condition and results of operations.
Risks Relating to our Common Shares and ADSs
Holders of ADRs may be adversely affected by the substantial dilution of the shares represented by ADRs.
On June 18, 2022, the United States Bankruptcy Court for the Southern District of New York entered an order confirming the joint plan of reorganization (as amended, restated, modified, revised or supplemented from time to time, the “Plan”) filed by the Reorganized Debtors and dated as of May 25, 2022 [ECF No. 5753]. Pursuant to the Plan, on September 13, 2022, the Reorganized Debtors commenced the preemptive rights offerings for the New Convertible Notes Class A, New Convertible Notes Class B, New Convertible Notes Class C (collectively, “New Convertible Notes”) and ERO New Common Stock (each as defined in the Plan), which offerings concluded on October 12, 2022. On November 3, 2022, the Plan became effective pursuant to its terms and we emerged from bankruptcy. In connection with our emergence and the conversion of the New Convertible Notes into shares of the Company, the equity interests of existing shareholders were substantially diluted. The shares represented by ADRs currently amount to a small portion of our capital. The market prices of the shares represented by ADRs may be adversely affected by such dilution and may experience significant fluctuation and volatility.
Our major shareholders may have interests that differ from those of our other shareholders.
As of February 28, 2023, Sixth Street Partners beneficially owned 27.9% of our common shares; Strategic Value Partners beneficially owned 16.0% of our common shares, Delta Air Lines owned 10.0% of our common shares; Qatar Airways Investments (UK) Ltd. owned 10.0% of our common shares (9.999999992% over LATAM’s statutory capital), Sculptor Capital beneficially owned 6.5% of our common shares; and the Cueto Group (the “Cueto Group”) owned 5.0% of our common shares. These shareholders could have interests that may differ from those of our other shareholders. See “Item 7. Major 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 major shareholders, which may differ from those of our other shareholders. Historically, our board of directors has designated its chairman to exercise this right, which is however no guarantee that it will do so in the future. The members of the board of directors elected by the shareholders in 2022 designated Mr. Ignacio Cueto, 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.
As a result of our Chapter 11 proceedings, on June 10, 2020, the NYSE notified the SEC of its intention to remove the ADSs from listing and registration on the NYSE, effective at the opening of business on June 22, 2020. As of the date of this annual report, the ADSs are traded in the over-the-counter market, which is a less liquid market, and our ADR program, with JP Morgan Chase Bank, N.A. as depositary, is not open for issuances. There is no defined timeline for re-opening the ADR program or for returning to the U.S. public markets. In addition, there can be no assurance that the ADSs will continue to trade in the over-the-counter market or that any public market for the ADSs will exist in the future, whether broker-dealers will continue to provide public quotes of the ADSs, whether the trading volume of the ADSs will be sufficient to provide for an efficient trading market, whether quotes for the ADSs may be blocked in the future or that we will be able to relist the ADSs on a securities exchange.
Our common shares are listed on the Santiago Stock Exchange. 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, which could also result in price disparity between the trading prices of the two.
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 affect non-Chilean residents that invest in our shares.
Equity investments in Chile by non-Chilean residents have been subject in the past to various exchange control regulations that govern investment repatriation and earnings thereon. Although not currently in effect, regulations of the Central Bank of Chile have in the past imposed such exchange controls. Nevertheless, foreign investors still have to provide the Central Bank with information related to equity investments and must conduct such operations within the formal exchange market. Furthermore, any changes in withholding taxes could negatively affect non-Chilean residents that invest in our shares.
We cannot assure you that additional Chilean restrictions applicable to the holders of ADRs, the disposition of the common shares underlying ADSs or the repatriation of the proceeds from an acquisition, a disposition or a dividend payment, will not be 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.”
Our ADS holders may not be able to exercise preemptive rights in certain circumstances.
As described further in “Item 10. Additional Information-Preemptive Rights and Increases in Share Capital,” to the extent that a holder of our ADSs is unable to exercise its preemptive rights because a registration statement has not been filed, the depositary may attempt to sell the holder’s preemptive rights and distribute the net proceeds of the sale, net of the depositary’s fees and expenses, to the holder, provided that a secondary market for those rights exists and a premium can be recognized over the cost of the sale. A secondary market for the sale of preemptive rights can be expected to develop if the subscription price of the shares of our common stock upon exercise of the rights is below the prevailing market price of the shares of our common stock. However, we cannot assure you that a secondary market in preemptive rights will develop in connection with any future issuance of shares of our common stock or that if a market develops, a premium can be recognized on their sale. Amounts received in exchange for the sale or assignment of preemptive rights relating to shares of our common stock will be taxable in Chile and in the United States. See “Item 10. Additional Information-E. Taxation-Chilean Tax-Capital Gains.” As described further in “Item 10. Additional Information-B. Memorandum and Articles of Association-Preemptive Rights and Increases in Share Capital,” 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. If a secondary market for the sale of preemptive rights does not develop and such rights cannot be sold, they will expire and a holder of our ADSs will not realize any value from the grant of the preemptive rights. In either case, the equity interest of a holder of our ADSs in us will be diluted proportionately. Pursuant to the Registration Rights Agreement, we have entered into with the Backstop Creditors and the Backstop Shareholders, we have reached an agreement to amend the terms of the deposit agreement governing our ADSs, to provide for (a) full flexibility (subject to applicable fees and procedures contained in the deposit agreement) to deposit and withdraw, at the election of the respective holders of ADS, any ordinary shares from time to time held by the backstop parties or their transferees into or out of the ADS program; (b) participation in dividends and distributions subject to the procedures of the depositary as set forth in the deposit agreement and subject to compliance with applicable law (including, without limitation, Chilean law); (c) participation in voting at the instruction of the respective holders of ADS, subject to the procedures of the depositary as set forth in the deposit agreement and subject to compliance with applicable law (including, without limitation, Chilean law); and (d) participation in preemptive rights offerings in the form of additional ADS subject to compliance with applicable law (including, without limitation, Chilean law) and the procedures of the Depositary set forth in the deposit agreement; provided that such offerings are for ordinary shares constituting at least two percent (2%) of the outstanding ordinary shares (excluding any Ordinary Shares subject to lock-up).
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 (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. For further information, see “Item 16. G. Corporate Governance.”
ITEM 4 INFORMATION ON THE COMPANY
|A.||History and Development of the Company|
LATAM Airlines Group S.A. is a Chilean-based airline and holding company that changed its name from LAN Airlines S.A. after its combination with TAM of Brazil in 2012. TAM S.A. continues to exist as 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 unifying LAN and TAM into a single brand: LATAM.
LATAM’s airline holdings include LATAM and its affiliates in Chile, Peru, Argentina, Colombia and Ecuador, and LATAM Cargo and its affiliate LANCO (in Colombia), as well as TAM S.A. and its affiliates LATAM Airlines Brazil, LATAM Airlines Paraguay, ABSA and Multiplus S.A. (“Multiplus”). LATAM Airlines Group is a publicly traded corporation listed on the Santiago Stock Exchange (“SSE”), the Chilean Electronic Exchange, and its ADSs currently trade in the over-the-counter market. LATAM Airlines Group has a market capitalization of US$ 4,565 million as of February 28, 2023.
LATAM’s history goes back to 1929, when the Chilean government founded LAN. In 1989, the Chilean government sold 51.0% of LAN’s capital stock to Chilean investors and to the Scandinavian Airlines System. In 1994, the Cueto Group, one of LATAM’s current 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 ADSs) on the New York Stock Exchange.
Over the past decade, the LATAM group has significantly expanded its passenger operations in Latin America, initiating services in Peru in 1999, Ecuador in 2003, Argentina in 2005, and Colombia in 2010. Moreover, since June 2012 the Brazilian affiliate, TAM Linhas Aéreas S.A. (“TLA” or “LATAM Airlines Brazil”), has been a leading domestic and international airline offering flights throughout Brazil with a strong domestic market share, international passenger services and significant cargo operations.
As a result of the COVID-19 pandemic and its profound impact on worldwide travel and our operations, on May 26, 2020, LATAM Airlines Group S.A. and 28 affiliates filed their petitions for relief under Chapter 11 of the Bankruptcy Code, with the Bankruptcy Court. On July 7, 2020 and July 9, 2020 nine additional affiliates of LATAM Airlines Group S.A. filed their petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. Additional parallel and ancillary proceedings were filed in the Cayman Islands, Colombia, Perú and Chile. In June 2020, LATAM Airlines Argentina announced its indefinite cessation of passenger and cargo operations.
Throughout the Chapter 11 proceedings, the Reorganized Debtors worked on different fronts, among other things, right-sizing our fleet and executing our fleet strategy, reducing our total headcount, reviewing claims filed against the Reorganized Debtors and refining the total claims pool, and streamlining the Reorganized Debtors’ prepetition agreements by rejecting executory contracts and leases and negotiating favorable post-petition and post-emergence agreements with key vendors across our business. The Reorganized Debtors also worked steadily to develop a long-term business plan, obtaining new sources of financing to support their exit financing as part of their emergence from Chapter 11 and building a new capital structure according to the terms of their plan of reorganization.
Following a series of relevant milestones with respect to LATAM’s Chapter 11 proceedings, the Company emerged from its reorganization process on November 3, 2022 (the “Effective Date”). For more information on the Chapter 11 proceedings see “Item 3. Key Information-D. Risk Factors-Risks Relating to Our Emergence from Chapter 11 Bankruptcy Proceedings” and “Item 4. Information on the Company - B. Business Overview - Chapter 11 Proceedings through 2022.” As of the Effective Date, the Plan was substantially consummated and became binding on all parties in interest. Pursuant to the Plan, the Company received an infusion of approximately US$ 8.19 billion through a mix of new equity, convertible notes, and debt, which enabled the Company to exit Chapter 11 with appropriate capitalization to effectuate its business plan. Upon emergence, the Company had total debt of approximately US$ 6.8 billion, cash and cash equivalents of approximately US$1.1 billion and revolving facilities fully undrawn in the amount of US$1.1 billion.
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) 2565-3844. We have designated LATAM Airlines Group as our agent in the United States, located at 6500 NW 22nd Street, Miami, Florida 33122. Our Investor Relations 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 Andrés del Valle, Senior Vice President of Corporate Finance and Investor Relations, at InvestorRelations@latam.com.
The SEC maintains an internet site at http://www.sec.gov that contains reports, information statements, and other information regarding issuers that file electronically with the SEC.
For a description of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects-B. Liquidity and Capital Resources-Capital Expenditures.”
LATAM is the largest passenger airline group in South America as measured by ASKs for the year ended December 31, 2022. We are also one of the largest airline groups in the world in terms of network connections, as of December 31, 2022, providing passenger transport services to 144 destinations in 22 countries and cargo services to approximately 154 destinations in 25 countries, with an operating fleet of 310 aircraft and a set of bilateral alliances. In total, LATAM Airlines Group has approximately 32,500 employees.
For the year 2022, LATAM transported approximately 62 million passengers. LATAM Airlines Group and its affiliates currently provide domestic services in Brazil, Chile, Peru, Colombia and Ecuador; and also provide intra-regional and long-haul operations. The cargo affiliate carriers of LATAM in Chile, Brazil, and Colombia carry out cargo operations through the use of belly space on the passenger flights and dedicated cargo operations using freighter aircraft. The group also offers other services, such as ground handling, courier, logistics and maintenance.
As of December 31, 2022, the group provided scheduled passenger service to 17 destinations in Chile, 19 destinations in Peru, 8 destinations in Ecuador, 17 destinations in Colombia, 54 destinations in Brazil, 14 destinations in other Latin American countries and the Caribbean, 5 destinations in North America, 8 destinations in Europe, and 2 destinations in Oceania, an increase from last year as the COVID-19 restrictions both within the region and in the international markets where we operate continued to ease during the year, accompanied by strong levels of demand for air travel.
In addition, as of December 31, 2022, through various code-sharing agreements, the group offers service to 105 destinations in North America, 32 destinations in South America, 86 destinations in Europe, 17 destinations in Australasia, 38 destinations in Asia and 11 destinations in Africa.
Our strategy is to maintain LATAM as the leading airline group in South America by leveraging our unique position in the airline industry. LATAM is the only airline group in the region with a domestic presence in five markets, as well as intra-regional and long-haul operations to three continents. As a result, the LATAM group has geographical diversity and operational flexibility, as well as a proven track record of acting quickly to adapt its business to economic challenges. Moreover, LATAM’s unique network and market share in a region with growth potential and the focus on our existing competitive strengths, will allow us to continue building our business model and fuel our future growth. We believe our most important competitive strengths are:
|●||Leader in the South America Airlines Space, with a Unique Network and Market Share among Global Airlines|
Through a successful regional expansion strategy, LATAM has become the leading international and domestic passenger airline group in South America as measured by ASKs in 2022 full year. LATAM and its affiliates have domestic passenger operations in Chile, Brazil, Peru, Colombia and Ecuador. We are also the largest group of operators of intra-regional routes as measured by ASKs in 2022, connecting the main cities and also some secondary cities in South America. Furthermore, through our significant presence in the largest hubs in South America-Santiago, Lima and São Paulo-we believe that we are able to offer the best connectivity options between South America and the rest of the world.
|●||Geographically Diversified Revenue Base, including both Passenger and Cargo Operations|
LATAM group’s operations are highly geographically diversified, including domestic operations in five countries, as well as operations within South America and connecting South America with various international destinations. As measured by ASKs, 43.5% of the group’s operations are international, 20.5% domestic Spanish speaking countries and 35.9% domestic Brazil. 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 the ability to profitably integrate scheduled passenger and cargo operations. We take into account potential cargo services when planning passenger routes, and also serve certain dedicated cargo routes using freighter aircraft when needed. By adding cargo revenues to existing passenger service, there is an increase in the productivity of assets and we are able to maximize revenue, reducing the break-even load factors and enhancing the per flight profitability. Additionally, we believe that this revenue diversification helps offset seasonal revenue fluctuations and reduces the volatility of the business over time. For the year ended December 31, 2022, passenger, cargo and other revenues accounted for 80.2%, 18.1% and 1.6% of total revenues respectively.
|●||Modern Fleet and Optimized Fleet Strategy|
The average age of our passenger fleet was approximately 11.2 years as of December 31, 2022, a reflection of the fleet restructuring performed during Chapter 11, which includes an ambitious fleet renewal plan based entirely on new technology aircraft (including 83 new Airbus A-320neo family aircraft and 2 Boeing 787-9 to be delivered until 2029) and existing fleet lease re-negotiations under improved terms.
LATAM selects aircraft based on their ability to effectively and efficiently serve the short- and long-haul flight needs, while still striving to reduce operational complexity by minimizing the number of different aircraft types that the group operates.
The fleet plan as of December 31, 2022, includes a short-haul fleet formed exclusively by aircraft from the A320 family, with a focus on the A321 and A320neo (Neo: New Engine Option), a more efficient version of the A320; which we introduced into our fleet in 2016, becoming then the first airline in Latin America to fly this model. For long-haul passenger flights, we operate the Boeing 787-8, the Boeing 787-9, the Boeing 767-300ER, and the Boeing 777-300ER. The Boeing 787 model allows LATAM to achieve important savings in fuel consumption, while incorporating modern technology to deliver the best travel experience for LATAM’s passengers. For cargo flights, we operate Boeing 767-300F aircraft.
|●||Strong Brand Teamed with Key Global Strategic Alliances|
In 2022, despite the continued challenging global conditions, LATAM was recognized as South America’s Leading Airline Brand and South America’s Leading Airline in the World Travel Awards 2022. In addition, LATAM Airlines Group was recognized as the ‘Best Airline in South America’ in Skytrax World Airline Awards in 2022 for the third year in a row. Furthermore, in the 2022 edition of the APEX Passenger Choice Awards LATAM was recognized as “Best Seat Comfort in South America” and “Best Food & Beverage in South America.”
Our strategic global alliances and existing commercial agreements provide our customers with access to more destinations worldwide, a combined reservations system, itinerary flexibility and various other benefits, which substantially enhance our competitive position within the Latin American market.
In 2020, LATAM entered into a Trans-American Joint Venture Agreement with Delta Air Lines Inc, following the framework agreement signed in 2019, which we expect to unlock new growth opportunities, building upon Delta’s and LATAM’s global footprint. During 2022, LATAM and Delta Air Lines obtained the regulatory approvals for their Joint Venture Agreement from the respective authorities in all South American countries involved and the U.S. Department of Transportation (“DOT”). As of the date of publication, both companies find themselves working together on the full implementation of the Joint Venture Agreement. For more information on the framework agreement see “Item 4. Information on the Company-B. Business Overview-Passenger Alliances and Commercial Agreements.”
|●||Recognized Loyalty Program|
Our frequent flyer program, LATAM Pass, is the leading frequent flyer program in South America as measured by total number of members as of the end of 2022, with strong participation rates and brand recognition by our customers. Customers in the program earn miles and points based on the price paid for the ticket, class of ticket purchased, and elite level, as well as by using the services of outside partners in the program. We believe that our program is attractive to customers because it does not impose restrictions on those flights for which points can be redeemed, or limit the number of seats available on any particular flight to members using the loyalty program. LATAM Pass members can also accrue and redeem points for flights on other airlines with whom we have bilateral commercial agreements.
Our mission is to connect people safely, with operational excellence and a personal touch, seeking to become one of the most admired 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|
LATAM intends to continue to strengthen its route network in South America, offering the best connectivity within the region at competitive prices and ensuring that LATAM is the most convenient option for passengers. LATAM is the only airline group in South America with a local presence in five home markets and an international and intra-regional operation. This is bolstered by LATAM’s enhanced infrastructure in several key hubs, allowing LATAM to further strengthen its network. LATAM intends to leverage its extensive network to create a leading portfolio of services and destinations, providing more options for its 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 the evolution of LATAM’s E-business 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 efficiency, simplify our organization and increase flexibility and speed in decision-making. We look to implement cost savings, including reductions in fuel and fees, procurement, operations, overhead and distribution costs, among others, as well as the implementation of a customized service offering in domestic and international markets. In 2022 and 2021, and in the context of our Chapter 11 proceedings, we worked to reduce our fixed costs and to convert them to variable costs, specifically fleet costs and wages and benefits.
We aspire to be a group of passionate people, working in a simple and aligned manner, with inspiring leaders that make agile decisions, while addressing security policies to ensure the health of our employees and customers, and sustainability practices that reflect our responsibility towards the communities and countries where we operate. This will allow us to deliver a distinctive value proposition to our customers and operate sustainably over the long term.
As government-imposed travel restrictions and requirements continued to loosen throughout 2022, LATAM group continued gradually restarting its operations. During 2022, LATAM group operated 68.3% more ASKs than in 2021, though compared to 2019 and a pre-pandemic context recovered 76.3% of ASKs. LATAM Cargo continued to play a key role during 2022 in terms of supporting the communities in which LATAM group operates by transporting medical supplies and vaccines to the region from all over the world. Notably, as part of the Solidary Plane program, by December 2022, LATAM group had transported more than 300 million vaccines within the region free of charge since the beginning of the COVID-19 pandemic.
Since the LATAM group cargo operation transports the majority of goods in the bellies of the group’s passenger aircraft, complementing the 16 dedicated cargo freighters, the worldwide decline in air travel, especially during 2020 and 2021, led to a drastic decline in cargo capacity. Therefore, cargo operated many passenger planes adapted for cargo in order to compensate for the capacity reduction and continue to support companies and industries that depend on the network to sustain their own business operations, including, for example, the Chilean salmon industry. In 2019, cargo revenues represented 10.2% of LATAM’s revenues. During 2020 this figure increased to 27.9% of our total revenues, in 2021 to 30.2%, and in 2022 it decreased to 18.1%, following the relative increase in our passenger operations.
In response to the COVID-19 pandemic, LATAM also implemented a series of changes to the operations related to aircraft sanitation, changes in boarding and disembarking procedures, installation of HEPA filters in cabin ventilation systems in all of the group’s aircraft, among others, all of the foregoing in accordance with the recommendations of international organizations such as the International Air Transport Association (IATA), the WHO, and local governments.
For more information regarding the economic impact of the pandemic on LATAM’s operations, see “Item 4. Information of the Company-B. Business Overview-Passenger Operations-Passenger Marketing and Sales” and “Item 3. Key Information-D. Risk Factors-Risks Relating to our Company-The continuing effects of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on the group’s business and results of operations.”
Chapter 11 Proceedings through 2022
As a result of the COVID-19 pandemic and its profound impact on worldwide travel and LATAM group’s operations, the Reorganized Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court on May 26, 2020.
The Bankruptcy Filing initiated Chapter 11 proceedings in the United States for each of the Debtors, which are being jointly administered under the caption “In re LATAM Airlines Group S.A., et al.” Case Number 20-11254. Prior to November 3, 2022, the Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Bankruptcy Filing is intended to permit the Company to reorganize and improve liquidity, wind down unprofitable contracts and amend its capacity purchase agreements to enable sustainable profitability. As of November 3, 2022, the Plan was substantially consummated and the Debtors have each emerged from the Chapter 11 proceedings as the “Reorganized Debtors.” The Bankruptcy Court continues to administer the Chapter 11 proceedings for the Reorganized Debtors on a consolidated basis in order to resolve the few remaining matters therein, including reconciling remaining claims.
As part of their overall reorganization process, the Reorganized Debtors also have sought and received relief in certain non-U.S. jurisdictions. On May 27, 2020, the Grand Court of the Cayman Islands granted the applications of certain of the Reorganized Debtors for the appointment of JPLs pursuant to section 104(3) of the Companies Law (2020 Revision). On June 4, 2020, the 2nd Civil Court of Santiago, Chile issued an order recognizing the Chapter 11 proceedings with respect to the LATAM Airlines Group S.A., Lan Cargo S.A., Fast Air Almacenes de Carga S.A., Latam Travel Chile II S.A., Lan Cargo Inversiones S.A., Transporte Aéreo S.A., Inversiones Lan S.A., Lan Pax Group S.A. and Technical Training LATAM S.A. All remedies filed against the order have been rejected and the decision has become final. Finally, on June 12, 2020, the Superintendence of Companies of Colombia granted recognition to the Chapter 11 proceedings. On July 10, 2020, the Grand Court of the Cayman Islands granted the Reorganized Debtors’ application for the appointment of JPLs to Piquero Leasing Limited.
|●||Operation and Implication of the Bankruptcy Filing|
As of the Effective Date, the Plan was substantially consummated. Pursuant to the Plan, the Reorganized Debtors are permitted to operate their businesses and manage their properties without supervision of the Bankruptcy Court and free of the restrictions of the Bankruptcy Code.
|●||Plan of Reorganization|
On November 26, 2021, the Reorganized Debtors filed the Plan and the related Disclosure Statement with the Bankruptcy Court. As detailed in the Disclosure Statement, the Plan was supported by the Restructuring Support Agreement executed among the Reorganized Debtors, creditors holding more than 70% of the general unsecured claims asserted against LATAM Airlines Group S.A., and holders of more than 50% of LATAM Airlines Group S.A.’s existing equity. From time to time in the Chapter 11 Cases, the Reorganized Debtors filed revised versions of the Plan and associated Disclosure Statement. On February 10, 2022 the Reorganized Debtors executed a joinder Agreement to the RSA, effective as of February 10, 2022 under which certain creditors agreed to commitments made by the Commitment Parties under the RSA.
On March 21, 2022, the Bankruptcy Court entered an order approving the adequacy of the Disclosure Statement and procedures for the solicitation with respect to the Plan. Pursuant to the Disclosure Statement Order, the Reorganized Debtors distributed the solicitation version of the Plan, the Disclosure Statement (as approved), voting ballots and certain other solicitation materials to creditors.
In accordance with the Restructuring Support Agreement, on January 12, 2022 the Reorganized Debtors filed a motion seeking approval to enter into the Backstop Agreements. On March 15, 2022, the Bankruptcy Court issued a memorandum decision approving the Reorganized Debtors’ entry into the Backstop Agreements, and issued a corresponding order on March 22, 2022.
The Reorganized Debtors received objections to the Plan from certain parties, including the United States Trustee, the Committee, BancoEstado, an ad hoc group of unsecured claimants and a group of holders of claims against LATAM affiliate TAM Linhas Aéreas S.A. Following the Plan objection deadline, the Reorganized Debtors participated in mediation with BancoEstado, the Committee and the parties to the RSA in an effort to resolve their objections to the Plan and related disputes, which proved successful. On May 11, 2022, the Reorganized Debtors filed a revised version of the Plan reflecting the terms of a settlement with the parties.
At a hearing held on May 17, 18 and 20, 2022, the Bankruptcy Court considered the remaining objections that had not been resolved pursuant to the settlement. On June 18, 2022, the Bankruptcy Court issued a memorandum decision approving the Plan and overruling all remaining objections, and entered an order confirming the Plan.
Certain parties in interest appealed the Bankruptcy Court’s decisions. On June 21, 2022, the Ad Hoc Group of Unsecured Claimants filed a notice of appeal of the memorandum decision and order approving entry into the Backstop Agreements, as well as the Memorandum Decision approving the Plan and the Confirmation Order.
On June 27, 2022, the Ad Hoc Group of Unsecured Claimants filed a motion seeking to stay the Confirmation Order pending appeal. On July 16, 2022, the motion to stay was denied by the Bankruptcy Court. On June 23, 2022, the TLA Claimholders Group also filed a motion seeking to stay the Confirmation Order pending appeal or, in the alternative, an affirmative injunction requiring the Reorganized Debtors to fund an escrow account in the amount of the outstanding post-petition interest. On July 8, 2022, the Bankruptcy Court issued a bench memorandum and order denying the TLA Claimholders Group’s motion to stay. On June 28, 2022, Columbus Hill filed a notice of appeal of the Memorandum Decision and the Confirmation Order, which it later withdrew on July 5, 2022. On July 13, 2022, the Reorganized Debtors filed a motion to approve a settlement agreement with Columbus Hill, which was granted by the Bankruptcy Court on July 21, 2022, bringing full and final resolution to the Columbus Hill appeal and any other potential objections from this claimant.
On August 31, 2022, after briefing and oral argument by the parties, the District Court issued an opinion denying the appeals of both the Ad Hoc Group of Unsecured Claimants and the TLA Claimholders Group. The District Court rejected the Ad Hoc Group of Unsecured Claimants’ arguments that the Plan and Backstop Agreement violated the Bankruptcy Code and held that the Backstop Agreement did not constitute impermissible vote buying. The Ad Hoc Group of Unsecured Claimants did not further appeal the District Court’s decision.
With respect to the TLA Claimholders Group’s appeal, the District Court denied its request for payment of post-petition interest on its claims and found that the Bankruptcy Court did not with respect to its factual finding that TLA was insolvent. The District Court also denied the TLA Claimholders Group’s motion to stay the Confirmation Order. On September 2, 2022 the TLA Claimholders Group filed a notice of appeal in the District Court further appealing the Confirmation Order to the United States Court of Appeals for the Second Circuit. Both parties filed briefs regarding the merits of the Second Circuit Appeal, oral argument occurred on October 12, 2022, and on December 14, 2022, the Second Circuit unanimously affirmed the District Court’s decision rejecting the Second Circuit Appeal.
As of the Effective Date, the Plan was substantially consummated and became binding on all parties in interest. Pursuant to the Plan, the Company received an infusion of approximately US$ 8.19 billion through a mix of new equity, convertible notes, and debt, which enabled the Company to exit Chapter 11 with appropriate capitalization to effectuate its business plan. Upon emergence, the Company had total debt of approximately US$ 6.8 billion, cash and cash equivalents of approximately US$1.1 billion and revolving facilities fully undrawn in the amount of US$1.1 billion. Specifically, the Plan provided that:
|●||The Company conducted a US$ 800 million common equity rights offering, open to all shareholders in accordance with their preemptive rights under applicable Chilean law, and fully backstopped by the parties participating in the RSA;|
|●||Three distinct classes of convertible notes were issued by the Company, all of which were preemptively offered to shareholders. The preemptive rights offering period closed on October 12, 2022. For those securities not subscribed by the Company’s shareholders during the respective preemptive rights period:|
|o||New Convertible Notes Class A were provided to certain general unsecured creditors of the Company in settlement of their allowed claims under the Plan;|
|o||New Convertible Notes Class B were subscribed and purchased by the Backstop Shareholders; and|
|o||New Convertible Notes Class C were provided to certain general unsecured creditors in exchange for a combination of a new money contribution to the Company and the settlement of their allowed claims under the Plan, subject to certain limitations and holdbacks by backstopping parties.|
|●||The election period for the New Convertible Notes Class A and New Convertible Notes Class C ended on October 6, 2022.|
|●||General unsecured creditors that elected to receive New Convertible Notes Class A or New Convertible Notes Class C were entitled to receive a one-time cash distribution in an aggregate amount of approximately US$175 million, distributed among the general unsecured creditors that opted to receive New Convertible Notes Class A and C.|
|●||The convertible notes belonging to the New Convertible Notes Classes B and C are provided, totally or partially, in consideration of a new money contribution for the aggregate amount of approximately US$ 4.64 billion fully backstopped by the parties to the RSA.|
|●||In lieu of receiving New Convertible Notes Class A or New Convertible Notes Class C (and the aforementioned one-time cash distribution), general unsecured creditors were provided with the alternative of opting to receive New Local Notes issued by LATAM. As set forth in the Plan, and based on the elections made by general unsecured creditors, such notes were issued in the amount of UF 3,818,042 (equal to approximately US$ 130 million as of the date of their issuance).|
Pursuant to the Plan and Backstop Agreements, LATAM raised up to US$ 500 million through a new revolving credit facility and US$ 2.25 billion in total new money debt exit financing, consisting of a new term loan and new notes.
On September 2, 2022 the CMF approved the registration of the New Convertible Notes Classes A, B and C and of the shares contemplated in the Plan. The CMF approved the New Local Notes on September 5, 2022. The Reorganized Debtors established September 12, 2022 as the record date to claimholders for the New Convertible Notes Class A and New Convertible Notes Class C, and commenced the offering of the New Convertible Notes to claimholders on the same day.
As of December 31, 2022, almost the entirety of the convertible notes had been converted into shares; a total of 18,820,511,197 shares underlying New Convertible Notes Class A (94.14% of the total), 126,657,203,849 shares underlying New Convertible Notes Class B (99.997% of the total) and 385,337,856,192 shares underlying New Convertible Notes Class C (99.999% of the total) had been delivered as a result of the exercise of the applicable conversion option. As a result, and as of the same date, LATAM had a total of 605,231,854,725 shares subscribed and paid, representing more than 99.8% of the group’s statutory capital, represented by 606,407,693,000 shares.
On November 17, 2022 the Reorganized Debtors filed a motion to consolidate the administration of certain remaining matters, including the reconciliation of claims that have not yet been allowed or disallowed, in the lead Chapter 11 case of LATAM and for entry of a final decree closing the Chapter 11 cases of LATAM’s debtor-affiliates. The Bankruptcy Court entered an Order on December 14, 2022 granting the motion to consolidate the administration of remaining matters in the lead Chapter 11 case of LATAM. As a result, the dockets for all 37 debtor-affiliates of LATAM were marked “closed” on December 23, 2022.
In connection with our Chapter 11 proceedings, the Bankruptcy Court approved our initial debtor-in-possession (“DIP”) financing agreement on September 19, 2020 (the “Initial DIP Credit Agreement”), providing the group with access to US$2.45 billion for working capital and other purposes approved by the Bankruptcy Court.
The terms of the initial DIP financing included three tranches: Tranche A for a principal amount of up to US$1.3 billion, a potential Tranche B for up to an additional amount of US$750 million, which would be subject to further authorization of the Bankruptcy Court and other conditions customary for this type of transactions, and a Tranche C for a principal amount of up to US$1.15 billion. Only Tranches A and C were initially committed.
On October 18, 2021, the Bankruptcy Court approved a Tranche B facility of up to US$750 million. On November 10, 2021, we entered into an amendment to the Initial DIP Credit Agreement implementing, among other things, certain amendments to the maturity date definition and effectuating the terms and conditions of the Tranche B facility.
In January and February of 2022, we initiated the process of seeking financing proposals from financial institutions, funds, and other entities for certain amendments, extensions to the Initial DIP Credit Agreement and certain increases to the DIP financing thereunder.
On February 18, 2022, we filed a motion requesting Bankruptcy Court approval for certain amendments to the Initial DIP Credit Agreement, providing for, among other things, a new replacement Tranche C facility in an aggregate principal amount of up to $1,245,436,360.42 (including pursuant to a cashless roll of a partition of the existing Tranche C loans held by certain Tranche C Lenders), the proceeds of which were applied, among other things, to repay in full the existing Tranche C facility, an extension of the existing maturity date, and certain modifications and reductions to the existing fees and interest rates applicable to the Tranche A and Tranche B facilities, with such terms reflected in an amended and restated DIP credit agreement (the “A&R DIP Credit Agreement”). On March 7, 2022, we filed a supplement to the motion reflecting new terms agreed with the prospective DIP lenders with respect to the A&R DIP Credit Agreement.
Notwithstanding the foregoing, we continued to engage in a marketing process for an amendment and restatement of the Initial DIP Credit Agreement with the expectation of obtaining improved terms and conditions than those included in the A&R DIP Credit Agreement as supplemented. In this regard, we agreed to an alternative proposal provided by a different group of prospective lenders with such proposal reflected in an amendment and restatement of the Initial DIP Credit Agreement (the “New A&R DIP Credit Agreement”). On March 15, 2022, we filed a motion requesting Bankruptcy Court approval of the New A&R DIP Credit Agreement. The New A&R DIP Credit Agreement (i) repaid in full the existing Tranche A, Tranche B and Tranche C facilities under the Initial DIP Credit Agreement from the proceeds of a new Tranche A facility and new Tranche C facility; (ii) provided an extended maturity date to align with the prospective timeline for our emergence from our Chapter 11 proceeding; and (iii) provided for certain reductions in fees and interest as compared to the Initial DIP Credit Agreement and the A&R DIP Credit Agreement. On March 18, 2022 the Bankruptcy Court entered an order approving our entry into the A&R DIP Credit Agreement.
The A&R DIP Credit Agreement closed on April 8, 2022 and its proceeds were used to repay the obligations under the Initial DIP Credit Agreement in full.
On June 10, 2022, we entered into debt commitment letters (the “Exit Financing Commitment Letters”) providing commitments from various lenders for (i) an approximately US$1.17 billion junior debtor-in-possession term loan facility (the “Junior DIP Facility”); (ii) a $500,000,000 debtor-in-possession and exit revolving credit facility (the “Revolving Facility”), (iii) a $750,000,000 debtor-in-possession and exit term loan B credit facility (the “Exit Term Loan B Facility”; together with the Revolving Facility, the “Credit Facilities”), (iv) a five year $750,000,000 debtor-in-possession and exit bridge loan facility (the “Bridge to 5Y Notes Facility”) and (v) a seven year $750,000,000 debtor-in-possession and exit bridge loan facility (the “Bridge to 7Y Notes Facility” together with the Bridge to 5Y Notes Facility, the “Bridge Facilities”; together with the Credit Facilities, the “Debt Facilities”). The principal amounts of certain Debt Facilities could be increased so long as any such increase was offset by a corresponding decrease in other Debt Facilities, subject to certain requirements under the documentation governing such Debt Facilities. On June 24, 2022, the Bankruptcy Court entered an order authorizing us to enter into the commitment letters for the Junior DIP Facility and the Debt Facilities and on September 12, 2022 the Bankruptcy Court entered an agreed amended order authorizing us to enter into the commitment letters with respect to the Junior DIP Facility and the Debt Facilities. The Debt Facilities were structured as debtor-in possession facilities which closed during the pendency of the Chapter 11 Cases and converted to exit financing on our emergence from bankruptcy. The Reorganized Debtors executed the loan agreement with respect to the Junior DIP Facility in an aggregate amount of approximately $1.14 billion on October 3, 2022. On October 3, LATAM executed the Junior DIP facility, but did not close or fund the Junior DIP facility. On October 12, LATAM (a) closed and funded the Exit Term Loan B Facility, (b) closed the Revolving Facility, (c) closed and funded the Bridge to 5Y Notes Facility, (d) closed and funded the Bridge to 7Y Notes Facility and (e) closed and funded the Junior DIP Facility. LATAM used the proceeds of the foregoing to repay the A&R DIP Credit Agreement in full. On October 18, LATAM (a) issued the 5Y Notes under the corresponding indenture, (b) issued the 7Y Notes under the corresponding indenture and (c) used the proceeds of these notes issuances to partially repay $450,000,000 of the Bridge to 5Y Notes Facility and $700,000,000 of the Bridge to 7Y Notes Facility. On November 3, the effective date of the plan (i.e., the day the company emerged from bankruptcy), LATAM (a) converted the DIP Revolving Facility into an exit Revolving Facility, (b) converted the DIP Term Loan B Facility into an Exit Term Loan B Facility, (c) executed an incremental amendment to the Exit Term Loan B Facility which increased the principal amount of the Exit Term Loan B Facility by $350,000,000, (d) converted the 5Y Notes and the 7Y Notes from “DIP” to “Exit” notes, (e) repaid the remaining Bridge to 5Y Notes Facility, (e) repaid the remaining Bridge to 7Y Notes Facility, and (f) repaid the Junior DIP Facility.
Airline Operations and Route Network
The following tables set forth our operating revenues by activity and point of sale for the periods indicated:
|Year ended December 31,|
|(in US$ millions)|
|Total passenger revenues||7,636.4||3,342.4||2,713.8|
|Total cargo revenues||1,726.1||1,541.6||1,209.9|
|Total traffic revenues||9,362.5||4,884.0||3,923.6|
|Year ended December 31,|
|(in US$ millions)|
|Asia Pacific and rest of Latin America||441.8||360.0||378.4|
|Total Operating Revenues||9,362.5||4,884.0||3,923.6|
As of December 31, 2022, LATAM passenger operations were performed by airline affiliates in Chile, Brazil, Peru, Colombia and Ecuador, where the group operates both domestic and international services. LATAM collects and reports operating data for its passenger operations in three categories: international (connecting more than one country), Domestic operations in Spanish-speaking countries or “SSC” (including Chile, Peru, Colombia, and Ecuador), and Domestic Brazil (entirely within Brazil).
The following table sets forth certain of our passenger operating data for international and domestic routes for the periods indicated:
|Year ended December 31,|
|ASKs (million) (at period end)|
|Passenger RASK (passenger revenues/ASK, in US cents)|
|Combined Passenger RASK(2)||US¢6.8||US¢4.9||n.a|
|Passenger load factor (%)|
|Combined load factor||81.3||74.4||76.5|
|(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
LATAM group’s international network includes the international operations of our Chilean, Peruvian, Ecuadorian, Colombian and Brazilian affiliates. LATAM Airlines Group and its affiliates have operated international services out of Chile since 1946 and have since greatly expanded international services, offering flights out of Peru, Ecuador, Colombia and Brazil. As of December 31, 2022, LATAM offers 46 international destinations in 22 countries, in addition to the domestic destinations and international flights and connections between the domestic destinations.
The general strategy to expand the international network is aimed at enhancing LATAM’s value proposition by offering customers more destinations and routing alternatives. Sustained development of LATAM’s international network is a crucial factor in the long-term strategy. The group provides long-haul services out of Santiago, Lima, Bogota, São Paulo and Fortaleza. The group also provides regional services from Chile, Peru, Ecuador, Colombia and Brazil.
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 Machu Picchu and Cusco in Peru, the Galapagos Islands, Iguazu Falls in Brazil, and the Atacama Desert and Patagonia in Chile, including the cities of Punta Arenas and Puerto Natales.
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 the group operates:
figures % variation
|LATAM’s Market Share|
|(1)||Source: ANAC Brazil’s website. Passenger figures considers passengers carried, measured in RPKs, in 2022 vs 2021. Market share considers passengers carried, measured in RPKs, as of December 2022.|
|(2)||Source: JAC Chile’s website. Passenger figures considers passengers carried, measured in RPKs, in 2022 vs 2021. Market share considers passenger carried, measured in RPKs, as of December 2022.|
|(3)||Source: DGAC Peru’s website. Passenger figures considers passengers carried in 2022 vs 2021. Market share considers the number of passengers carried as of December 2022.|
|(4)||Source: Diio.net. Passenger figures considers ASK changes in 2022 vs 2021. Market share considers ASKs as of December 2022.|
|(5)||Source: Diio.net. Passenger figures considers ASK changes in 2022 vs 2021. Market share considers ASKs as of December 2022.|
Competitors in international routes
The following table shows LATAM’s main competitors during 2022 in each geographic market in which it operates:
|Brazil||North America||American Airlines, United Airlines, Azul Linhas Aereas, Delta Air Lines, Air Canada, Aeromexico and GOL.|
|Latin America||Copa, GOL, Avianca, Aerolineas Argentinas, Aeromexico and Azul Linhas Aereas.|
|Europe||TAP Portugal, Air France-KLM, IAG, Lufthansa, Swiss International Airlines and Turkish Airlines.|
|Chile||North America||American Airlines, Air Canada, Delta Air Lines, United Airlines and Aeromexico.|
|Latin America||Copa, Sky Airline, Avianca, JetSmart, Aeromexico and Aerolineas Argentinas.|
|Europe||IAG and Air France-KLM.|
|South Pacific||Qantas Airways|
|Argentina||North America||American Airlines, Aerolíneas Argentinas, Aeromexico, United Airlines and Delta Air Lines.|
|Latin America||Aerolineas Argentinas, Copa, GOL, Avianca and Azul Linhas Aereas.|
|Peru||North America||American Airlines, Avianca, United Airlines, Delta Air Lines, JetBlue Airways and Spirit Airlines.|
|Latin America||Avianca, Copa, Viva Airlines, Aerovías de México, Volaris, Aerolíneas Argentinas, JetSmart and Sky Airline.|
|Europe||Air France-KLM and IAG.|
|Colombia||North America||Avianca, American Airlines, Spirit Airlines, Aeromexico, JetBlue Airways, United Airlines, Air Canada and Delta Air Lines.|
|Latin America||Avianca, Aeromexico, JetSmart, Viva Air, Volaris, VivaAerobus and Copa.|
|Ecuador||North America||American Airlines, JetBlue Airways, Delta Air Lines, United Airlines and Spirit Airlines.|
|Latin America||Avianca, Copa and Aeromexico|
|Europe||Air France-KLM and IAG.|
Source: Diio.net considering ASKs.
Domestic Passenger Operations
As of December 31, 2022, domestic passenger services within Chile, Brazil, Peru, Ecuador and Colombia were operated by LATAM Airlines Chile, LATAM Airlines Brazil, LATAM Airlines Peru, LATAM Airlines Ecuador and LATAM Airlines Colombia, respectively.
Business Model for Domestic Operations
In 2016, LATAM group implemented a new business model in all of its domestic operations, allowing them to provide more competitive fares and contributing to the development of tourism and the growth of air travel per capita in the region. The domestic service model requires continuous cost reduction efforts, and the group continues to implement 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 the LATAM group to expand operations while controlling fixed costs.
Another key elements of this business model are the initiatives to increase ancillary revenues and others that allow passengers to customize their journey. Customers on domestic flights are now able to access a simpler sales platform, which allows 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.
In March 2020, LATAM group introduced its superior cabin class, Premium Economy, in all domestic and international flights within Latin America operated by the Airbus A320 family (A319, A320, A320neo and A321; “short-/medium-haul”) aircraft. This cabin class offers premium services both at the airport and in-flight, including priority check-in and boarding, VIP lounge access in airports where available, a differentiated onboard service including complimentary snacks and drinks, an exclusive overhead bin for carry-on luggage and a blocked middle seat, providing greater space and privacy.
LATAM group continues to develop digital initiatives to empower passengers providing them with an enhanced digital experience with end-to-end control of their reservation. LATAM customers will increasingly be able to buy, check-in and manage the after sale service in a simpler and faster manner through their smartphones.
The following table shows LATAM’s number of destinations, passengers transported, market share and main competitors in each domestic market in which we operate:
|Passengers Transported (million)||28.6||7.7||7.9||8.4||1.3|
|Market share ||36.1||%(1)||57.1||%(2)||61.3||%(3)||23.0||%(4)||41.0||%(4)|
|Main competitors||Gol, Azul||Sky Airlines, JetSmart||Sky Airlines|
Peru, Star Peru, JetSmart Peru, Viva
Colombia, EasyFly, Utra Air, Copa
|(1)||Source: ANAC Brazil’s website. Market share considers RPKs as of December 2022.|
|(2)||Source: JAC Chile’s website. Market share considers RPK as of December 2022.|
|(3)||Source: DGAC Peru’s website. Market share considers the number of passengers carried as of December 2022.|
|(4)||Source: Diio.net. Market share considers ASKs as of December 2022.|
Passenger Alliances and Commercial Agreements
Strategic Alliance with Delta
On September 30, 2022, LATAM and Delta Air Lines obtained the final regulatory approvals from the US Department of Transportation, allowing them to implement their Joint Venture Agreement (JVA). The approval enables Delta and LATAM to work together, coordinating capacity and pricing strategies and sharing corporate accounts in the United States/Canada and South America (Brazil, Chile, Colombia, Paraguay, Peru, and Uruguay) markets within the scope of the JVA.
This agreement allows the airlines to develop an unparalleled network with expanded route offerings and to connect the Americas to the world like never before with access to more than 300 destinations. Also, the airlines will deepen their level of cooperation in these markets strengthening their codeshare routes and the reciprocal loyalty benefits.
It is in this context that, in November 2022, LATAM and Delta made their first operational announcement after the approval of the JVA, launching a new non-stop flight between São Paulo (Brazil) and Los Angeles (United States) starting on July 1, 2023. LATAM will be the only airline in Brazil with a direct flight to Los Angeles, where customers will be able to connect to several popular Delta West Coast destinations in the United States, including San Francisco, Las Vegas and Seattle. Additionally, in January 2023, LATAM and Delta announced the launch of a second route under the JVA, connecting Bogota (Colombia) with Orlando (United States) starting on July 1, 2023, helping Delta and LATAM to further strengthen their presence between North America and South America.
Termination of previous arrangements and alliances, and subscription of new codeshare agreements
In January 2022, LATAM Airlines Group and LATAM Airlines Colombia signed and implemented codeshare agreements with Virgin Atlantic. This new agreement seeks to increase the offerings and connectivity of both networks.
On June 23, 2022, LATAM Airlines Group, LATAM Airlines Brazil and Siberia Airlines terminated the frequent flyer agreement subscribed in 2010 and 2014 respectively.
Other alliances and material commercial agreements
In addition, LATAM and its affiliates have ongoing passenger commercial agreements with several airlines, including Qatar Airways, Air France/KLM, Lufthansa, Ethiopian Airlines, 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, and increased potential for developing new routes and adding direct flights to new destinations and to destinations already served by LATAM.
Passenger Marketing and Sales
Given the current global situation resulting from the COVID-19 pandemic, the group has made several adjustments to its services, implementing additional hygiene and safety measures in all of the customer’s touchpoints and adjusting commercial policies as needed.
With regard to hygiene and safety measures, various implementations were made to comply with authorities’ requirements and to maximize hygiene and safety for customers and crews when flying. Some of those measures include social distancing while checking in, contactless boarding, deplaning by row, improvements to cabin hygiene, hand sanitizer availability, and other onboard procedure adjustments to limit physical interactions. Because the pandemic has changed customers’ behavior and increased their desire to avoid or minimize contact with others, the group intends to use technology to change the passenger experience when traveling and meet these expectations. LATAM had the opportunity to implement and test some of these technologies in its main airports, such as automatic check-in, self-bag tag and drop, digital signage and biometrics (testing only), with promising results that encourage us to accelerate the digital transformation in the upcoming year.
In 2022, LATAM group continued transforming the travel experience of its passengers through cabin retrofits. As of December 31, 2022, we have 10 B777, 9 B767, 2 B787-9, and 177 A319/A320/A321 aircraft with renovated interiors. (during the year 2022, LATAM retrofitted 81 aircraft). Additionally, the group continued equipping aircraft with Wi-Fi connectivity in Brazil, reaching 98 aircraft in total. In addition, 33 B787 are currently in development to be retrofitted with the new cabin interior between 2023 and 2025.
Although the COVID-19 pandemic impacted services, customer experience continues to be a key driver of success for the group. In recent years the group implemented the “Net Promoter System” in an effort to create a culture focused on earning the passionate loyalty of customers while inspiring the energy, enthusiasm and creativity of employees and ultimately accelerate profitable and sustainable organic growth. This system’s primary key performance indicator is the Net Promoter Score (“NPS”). To calculate NPS, we have a customer survey, where we ask “How likely are you to recommend us to a friend or colleague?” Customers score answers on a zero-to-ten scale and we then calculate the NPS as the percentage of customers who are promoters (those who scored 9 or 10) minus the percentage of customers who are detractors (those who scored 0 to 6).
LATAM’s Net Promoter Score for 2022 showed a decrease of 5 points over the previous year (46 NPS points in 2022 versus 51 points in 2021). For the first time we achieved a higher NPS for our high value customers than for the overall LATAM score (+4 points), thereby reaching the highest level for HVCs since we started measuring NPS. This result was mainly driven by the differentiated services offered by our premium cabins, the targeted offering of upgrades and enhanced services to our elite members and the resumption of services previously affected by the Covid restrictions. According to NPS survey customer comments, customer satisfaction is primarily driven by the on-time performance of our operations, the care and service offered by our crew and the COVID-19 prevention measures implemented by the airline.
Working on the evolution of the customer’s digital experience was the main focus of the E-business area this year and the result was 50 points of Digital NPS for 2022. With the objective of improving the online experience of our customers, we launched LATAM Airlines’ new website for the Ecuadorian market in May 2020, Chile and Colombia in the second half of 2020, Brazil and Peru in the first half of 2021, and Multipos during the second half of 2021. The new experience includes, among other features, a notifications system that allows customers to choose how they want to receive their flight information, a more seamless booking process, automatic check-in (boarding passes are automatically sent to customers before arriving at the airport) and LATAM Wallet, our virtual payment method. We intend to keep working in 2023 to incorporate additional markets and features such as increase digital services coverage, automation of financial processes, and boost LATAM.com as the marketplace that attends all travel needs such as flight, insurance, lodging and flight ancillaries.
In 2022, LATAM was recognized as “South America’s Leading Airline Brand” and “South America’s Leading Airline” in the World Travel Awards 2022. LATAM Airlines Group was also recognized as the “Best Airline in South America” in Skytrax World Airline Awards in 2022 for the third year in a row and “Best Seat Comfort in South America” and “Best Food & Beverage in South America” in the 2022 edition of the APEX Passenger Choice Awards. Additionally, in early 2023, LATAM was ranked second place in Latin America on the “Punctuality League 2023” compiled by the Official Airline Guide (OAG).
The challenging context of 2020 to 2022 meant that as a brand we had a leading role in the development of communications that kept our employees, customers and all the Company’s stakeholders informed. We established a three-phase strategy to build our communications that focused first on communicating our commitment to safety, the flexibilization of commercial policies, and our support channels.
As part of the strategy of working to achieve closeness and recover our engagement with our customers, we worked on developing partnerships with important entities for the community. During 2022, for example, LATAM held partnerships with the Chilean, Peruvian, Ecuadorian and Paraguayan National Soccer Teams.
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 city ticket offices, contact-centers and e-Business (including website, mobile and smart business), and accounted for approximately 45% of total sales in 2022 (including award passengers). These direct channels support sales and service, both before and after the flight.
Our city ticket offices include additional services in order to complement the experience of our customers. Our contact centers are a multi-service channel providing support in 6 languages (Spanish, English, Portuguese, French, German and Italian).
We are committed to constantly improving the way we offer our products via our distribution channels, including the adoption of new technology. LATAM intends to continue to improve its e-Business platforms to support expected future growth and simplify our customers’ online experience.
Our digital strategy includes mobile applications that provide trip information to our passengers. These applications improve management of contingencies, enable us to provide information and solutions to our customers in a timely and transparent manner and serve as a new direct sales channel.
Indirect channels currently include travel agencies, general sales agencies, direct channels from other airlines and online agencies, and accounted for 55% of total sales in 2022. LATAM offers travel agencies different options to connect to our systems and provide their customers our best product offering. These options include Global Distribution Systems as well as our direct connection “eLATAM,” which we are continuously expanding and improving.
LATAM is strongly committed to the digital transformation of distribution in agencies during 2023, through the IATA’s New Distribution Capability (“NDC”) standard.
Frequent Flyer Program
Our frequent flyer program, LATAM Pass, is a key element of our marketing and loyalty strategy. The program rewards customer loyalty, and, as a result, we believe it generates incremental revenue and promotes customer retention.
In 2019, LATAM established a new way to qualify for “Elite” status in our frequent flyer program based on the price paid for the ticket, which is aligned with a simpler methodology for mileage accrual, generating simplicity and efficiency to our frequent flyer program. LATAM Pass members can access superior categories and enjoy better benefits by earning Qualifying Points on all their flights. Qualifying Points are different from LATAM Pass Points, which members can use to redeem for tickets and on-board benefits. The number of Qualifying Points that members earn depends on the dollars spent on purchasing the ticket (discounting charges, taxes and additional services) and the multiplier of the destination (domestic or international).
During 2020 LATAM also introduced another rule to access superior categories, the “Segment rule,” under which a passenger can qualify for “Elite Status” by earning Qualifying Points (the existing rule, where they accumulate points depending on the dollars spent on purchasing the ticket), or by reaching a goal of number of segments flown. Introducing this new rule makes it possible for more customers to qualify for our categories, especially for those domestic passengers who fly many segments a year that generally have lower rates.
The frequent flyer program is a strategic asset for the airline group, and a core source of value that differentiates LATAM from other carriers. The acquisition of the Multiplus loyalty program in 2019 and its full integration into LATAM’s network, together with LATAM Pass, created what LATAM estimates to be one of the top frequent flyer and loyalty programs in the world (measured by the number of members). This acquisition was consistent with recent transactions in the industry, and with the strategy of in-house frequent flyer business models of the largest global airlines.
In addition, a new tier category, Gold Plus, was launched in its market with focus on recovering Brazilian’s domestic corporate market share delivering to a specific type of customer a better experience at the airport, and also a better mileage accrual. Improvements to the Gold category include priority check-in in all flights (for Gold category only in international flights) and free same day changes for Brazilian domestic flights. In February 2020, this new category was also launched in all Spanish-speaking countries, improving the value proposition of all our domestic corporate passengers, and also introducing new benefits for all of our high-value customers such as seat selection, preferred check-in and boarding in all markets.
As of December 31, 2022, LATAM Pass had approximately 42 million members, representing an increase of 5.5% compared to 2021. Members of the LATAM Pass program receive benefits and accrue miles for ticket purchases in accordance with their elite level status, as well as by purchasing the services of other partners in the LATAM Pass program. Customers of the program can redeem miles or points for free tickets as well as for other products. LATAM Pass members are classified in five elite levels: Gold, Gold Plus, Platinum, Black and Black Signature. These different groups determine which benefits customers are eligible to receive, including mile earning bonuses, free upgrades, VIP lounge access and preferred boarding and check-in privileges. Also, this year LATAM Pass announced new benefits: priority contact center for all elite members, eliminate redemption fee, roll over for 2023 and improvement in upgrade priority for elite members that have the cobrand credit card.
The Cargo business is operated internationally and domestically by affiliate airlines under the unified LATAM Cargo brand, which has acquired significant market recognition. The Cargo operations are made under four of the LATAM group affiliates: LATAM Cargo Colombia, LATAM Cargo and LATAM Cargo Brazil, dedicated exclusively to cargo transport, and LATAM Airlines Ecuador, which, in addition to its passenger operations, as of 2022 was certified as a cargo operator and incorporated dedicated cargo freighters to its operations.
The cargo business generally operates on the same route network used by the passenger airline business. It includes 154 destinations, of which 144 are served by passenger and/or freighter aircraft and 10 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:
|For the year ended and as of December 31,|
|Weight of cargo carried (thousands of tons)||900.6||801.5||784.6|
|Total cargo yield (cargo revenues/RTKs, in U.S. cents)||48.9||50.8||39.3|
|Total cargo load factor (%)||56.5||%||63.4||%||65.4||%|
We derive our revenues from the transport of cargo through our dedicated freighter fleet and in the bellies of our passenger aircraft.
LATAM considers its passenger network to be a key competitive advantage due to the synergies between passenger and cargo operations and, accordingly, we have developed a strategy aimed at increasing competitiveness by enhancing the belly offering. LATAM primarily uses the belly of the passenger aircraft for cargo operations. During the first quarter of 2022 LATAM also flew passenger freighter flights where the main deck was also utilized for cargo transportation.
As of December 31, 2022, the cargo affiliates’ freighter fleet consisted of 9 Boeing 767-300 freighters and 7 Boeing 767-300BCF, each with a capacity for 58 structural chargeable tons of freight. The group expects to continue to grow its freighter fleet to a total of 20 aircraft by 2024 through the conversion of passenger Boeing 767-300 aircraft to freighters. The freighter fleet program has two main focus areas: first, to support the group’s belly business, improving its load factor by feeding cargo into passenger routes, and second, to enhance our product offering by providing our customers flexibility in scheduling, origins, destinations and types of cargo.
The United States is the main market for cargo traffic to and from Latin America. Besides being the main market for Latin American exports by air, cargo consolidated in the United States accounts for the majority of the goods transported by air to Latin American countries. Accordingly, we have headquartered our international cargo operations in Miami. This geographical location is a natural gateway between Latin America and the United States. We also utilize passenger flights to and from New York, Los Angeles and Orlando and our seasonal dedicated freighter service to Chicago. Additionally, using different trucking companies LATAM offers a road-feeder network, connecting our hub in Miami and other online destinations with the main gateways in the United States (Los Angeles, New York, Chicago, Houston and Atlanta), in between the cities in which we operate and to secondary origins and destinations.The LATAM group also transports cargo to and from 10 destinations in Europe: Barcelona, Lisbon, London, Milan, Paris, Rome, Frankfurt, Madrid, Amsterdam and Zaragoza. The first six points are served only via passenger aircraft. Frankfurt and Madrid are served by both passenger and freighter aircraft, while Amsterdam and Zaragoza are only served through freighter operations. The group offers a road-feeder service within Europe to expand our footprint and balance traffic between our different origins.
Chile, Colombia, Peru, Ecuador, and Brazil represent a large part of the 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 and fruits from Peru, and fresh flowers from Ecuador and Colombia.
The main destinations for southbound traffic are Brazil, Chile, Colombia and Peru. Southbound demand is mainly concentrated on a small number of product categories including high-tech equipment, mining equipment, electronics, auto parts and pharmaceuticals.
The largest domestic cargo operations are in Brazil, where LATAM Cargo Brazil is the only wide body freighter operator, carrying cargo for a variety of customers, including freight-forwarding companies, logistics operators, e-commerce companies and individual consumers.
During 2022, cargo revenues increased by 12%. Total cargo capacity increased 30.7% with a 20.8% increase in freighter capacity. Cargo traffic increased 16.4%, resulting in a 6.9 percentage point decrease of the cargo load factor. This capacity increase was mainly driven by the recovery of industry capacity returning to pre-pandemic levels. Cargo yield fell 3.8% year-over-year. As a result, revenues per ATK decreased 14.3% in comparison to the previous year. Over 235 passenger freighter flights were operated; resulting in over 901 cargo tons transported on passenger freighters during this year. As part of our solidarity plane program, in 2022 we flew over 117 million doses in our domestic markets free of charge, amounting to a total of more than 300 million since the start of the pandemic.
The cargo business in the region is highly competitive, as international and regional carriers often have spare capacity in their cargo operations. In the region, LATAM group has been able to maintain solid market shares through efficient utilization of the fleet and network. The main competitors can be divided into three categories. Hybrid carriers, operating mixed fleets of belly and freighters such as AirFrance-KLM, Lufthansa, Qatar, Ethiopian, Korean Airlines and Avianca; pure freighters such as Atlas, Cargolux and Centurion; and, full belly such as IAG, American Airlines and United Airlines. Carriers operating freighters have greater flexibility and mixed routings that allows them to serve a wider variety of markets, diversifying their portfolio while pure belly carriers tend to have more stable service and are usually limited to their countries of origin.
See “Item 8. Financial Information-A. Consolidated Financial Statements and Other Financial Information-Legal and Arbitration Proceedings.”
Following the emergence from our Chapter 11 proceedings and from the Initial Petition Date to December 31, 2022, the group rejected a total of 42 aircraft, agreed on stipulations with its lessors for more favorable rent terms, negotiated lease amendments and new lease agreements and reincorporated 16 aircraft with new leases. As of December 31, 2022, LATAM had a total fleet of 310 aircraft, comprised of 294 passenger aircraft and 16 cargo aircraft, (this includes 34 aircraft that are classified as non-current assets available for sale; see Note 13 of our audited consolidated financial statements). The group’s fleet may continue to change after the date hereof. For further information, see “Item 4. Information on the Company-B. Business Overview-Chapter 11 Proceedings through 2022” and “Item 4. Information on the Company-B. Business Overview-Recent Developments After January 1, 2023.”
|Number of aircraft in operation|
|Airbus A320-Family Aircraft|
|Total passenger aircraft||294||177||117||7.19||11.22|
|Boeing 767-300 Freighter||16||(2)||15||(2)||1||8.04||17.52|
|Total cargo aircraft||16||15||1||8.04||17.52|
|(1)||All passenger aircraft bellies are available for cargo.|
|(2)||This includes 2 Boeing 767-300 Freighter aircraft that are classified as non-current assets available for sale. For more information, see Note 13 of our audited consolidated financial statements.|
|(3)||This includes 28 Airbus A319-100 aircraft that are classified as non-current assets available for sale. For more information, see Note 13 of our audited consolidated financial statements.|
|(4)||This includes 3 Airbus A320-200 aircraft that are classified as non-current assets available for sale. For more information, see Note 13 of our audited consolidated financial statements.|
|(5)||This includes 1 Boeing B767-300ER aircraft that is classified as non-current assets available for sale. For more information, see Note 13 of our audited consolidated financial statements.|
LATAM Airlines Group and its affiliates operate various different aircraft types that are suited for our different services, which include short-haul domestic and intracontinental trips as well as long-haul intercontinental flights. The aircraft have been selected based on their ability to effectively and efficiently serve all of these routes while trying to minimize the number of aircraft families that we operate.
For short-haul domestic and continental flights, LATAM Airlines Group and its affiliates operate Airbus A320-Family aircraft. The Airbus A320-Family has been incorporated into our fleet pursuant to leases and has been acquired directly from Airbus pursuant to various purchase agreements since 1999. For long-haul passengers LATAM Airlines Group and its affiliates operate Boeing 767-300ER, Boeing 787-8 and 787-9, Boeing 777-200ER and 777-300ER.For cargo flights, we operate Boeing 767-300F aircraft.
The average utilization rates of LATAM’s aircraft for each of the periods indicated are set forth below, in hours per day(1).
|Passenger aircraft (2)|
|Airbus A350-900 (3)||0.0||0.1||3.5|
|Total passenger aircraft||8.7||5.4||4.0|
|Boeing 767-300 Freighter||12.5||13.3||12.9|
|Total cargo aircraft||12.5||13.3||12.9|
|Total passenger and cargo||8.9||5.7||4.3|
|(1)||Utilization rates are calculated by dividing total block hours by total aircraft, excluding subleased aircraft.|
|(2)||Passenger Utilization excluded Flights in passenger aircraft with only cargo.|
|(3)||LATAM retired its A350s in 2021 and they are no longer currently part of the fleet.|
|(4)||The value for Total passenger and cargo utilization rate for 2020 was corrected to 4.3 in this filing.|
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 leases. As of December 31, 2022, LATAM had a total fleet of 310 aircraft, of which 1 B767 aircraft, 2 B767 Freighter aircraft, 28 Airbus A319 aircraft, and 3 A320 aircraft are classified as non-current assets available for sale, resulting in 276 aircraft in operation.
As of December 31, 2022, LATAM’s fleet comprised 74 financial leases, 3 tax leases, 134 operational leases, 31 aircraft provided as loan collateral, 27 aircraft reserved as collateral for the RCF and 41 unencumbered aircraft. Most of LATAM’s financial and tax leases are structured with a 12-year initial term. LATAM has 24 financial aircraft leases supported by the U.S. Export-Import Bank (“EXIM Bank”) and 37 supported by the European Export Credit Agencies (the “ECAs”). LATAM’s lease maturities initially range from seven to twelve years. Moreover, as of December 31, 2022, LATAM had a total of 153 spare engines, comprising 36 operational leases, 44 engines provided as loan collateral, 18 engines reserved as collateral for the RCF and 55 unencumbered engines.
LATAM’s aircraft debt, which consists 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 a group of banks) as counterparty; however, the tax leases also include third parties. 47% of our aircraft debt has a fixed interest rate and the remaining portion has a floating rate based on USD LIBOR.
In order to reduce LATAM Airlines Brazil’s balance sheet currency exchange exposure to the Brazilian real, as part of the integration plan following the combination with TAM, LATAM Airlines Brazil sought to transfer the majority of its aircraft under financial leases to LATAM Airlines Group SA. As of December 31, 2022, only 1 aircraft is subject to financial lease by LATAM Airlines Brazil. 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.
The 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 aircraft lease obligation as of December 31, 2022 for all remaining periods through maturity (the latest of which expires in December 2033) was US$1,904 million. See “Item 5. Operating and Financial Review and Prospects-E. Contractual Obligations-Long Term Indebtedness.”
Under the aforementioned 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.
See Note 31 to our audited consolidated financial statements for a more detailed discussion of these commitments.
The heavy maintenance, line maintenance and component shops are equipped and certified to service the group’s fleet of Airbus and Boeing aircraft. LATAM’s maintenance capabilities allow the group flexibility in scheduling airframe maintenance, offering an alternative to third-party maintenance providers. More than 3,900 LATAM Maintenance professionals ensure the fleet operates safely and in compliance with all local and international regulations. LATAM group strives to provide the best experience to its passengers through the highest standards of safety, on-time performance and cabin image and functionality.
The heavy maintenance and component repair shop facilities are located in São Carlos (Brazil) and Santiago (Chile), adding up to a total of eleven heavy maintenance production lines, including painting capabilities, and component repair shops, including landing gear, hydraulics, pneumatics, avionics, electroplating, composites, wheels and brakes, emergency equipment, galleys and structures.
In 2022, LATAM Maintenance’s continuous improvement efforts were focused on reducing costs and cash outflows. Therefore, our Digital and LEAN-Six Sigma projects were aimed to raise technician productivity, optimize inventory, diminish repair TATs and develop new internal repair capabilities.
LATAM Line Maintenance
The Line Maintenance Network serves over 160 locations and carried out over 2.2 million man hours of preventive and corrective maintenance tasks on the LATAM fleet during 2022. We also rely on certified third party services in many of our international destinations where it is economically convenient, such as in Frankfurt, (where we are served by Nayak), and London (served by KLM) among others.
LATAM group’s Line Maintenance Network has hangar facilities in Santiago, São Paulo (CGH and GRU), Lima, Miami and Bogota, among others. These multiple locations improve the flexibility of the Line Maintenance Network by allowing the execution of tasks that might be restricted because of adverse weather conditions and environmental authority restrictions.
In 2022, the GRU station further expanded its capabilities to perform heavy maintenance in its hangar. These capabilities included the landing gear’s replacement for the B777 fleet, in addition to the B777’s C Checks and A320´s landing gear’s replacement performed in 2021. Given the success of this initiative, an additional line was developed at LIM to carry out special 24MO stops for the A320 fleet, taking advantage of the experience and available infrastructure at this hangar.
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 Dirección General de Aeronáutica Civil in Chile (“DGAC”), Agência Nacional de Aviação Civil in Brazil (“ANAC”), the Federal Aviation Administration in the United States (“FAA”), the International Air Transport Association Operational Safety Audit (“IOSA”) (by 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 FAA Part-145 certifications under these approvals.
In addition, to ensure the most qualified personnel as needed for safe, accurate and on-time Line Maintenance, LATAM group seeks to improve technicians’ skills through extensive training programs at our LATAM group Technical Training Centers in Chile and Brazil, and through specific training programs designed and conducted by our partnerships.
The two main MRO (“Maintenance, Repair and Overhaul”) 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 provided 88.8% of all heavy maintenance services that LATAM demanded in 2022, effectively executed 1.60 million man-hours. LATAM MRO is also responsible for the planning and execution of aircraft redeliveries. The services not executed internally are contracted to our extensive network of MRO partners around the globe. LATAM occasionally performs certain heavy maintenance and component services for other airlines or OEMs.
The MRO São Carlos (LATAM Airlines Brazil MRO), is prepared to service up to nine aircraft (narrow and wide body) simultaneously with a dedicated hangar for stripping and painting. In this facility we also have 23 technical component shops, including a full landing gear repair & overhaul shop, hydraulics, pneumatics, electronics, electrical components, electroplating, composites, wheels & brakes, interiors and emergency equipment shops. 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 Argentinean Administración Nacional de Aviación Civil (“ANAC Argentina”), the Ecuadorian Dirección General de Aviación Civil (“DGAC”), the Paraguayan Dirección Nacional de Aeronautica Civil (“DINAC”), and Transport Canada (“TC”), among others, for Heavy Maintenance and Components Repair and Overhaul for the Airbus A-320 family and Boeing 767. 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 DGAC Ecuador, among others, for Heavy Maintenance for the Airbus A320-Family (A318, A319, A320 and A321) and Boeing B767 - B787. MRO Santiago has 11 shops prepared to support hangar activities such as cabin shops, galleys, structures, composite materials, avionic, wheels & brakes.
During 2022, LATAM MRO executed 479 services, including C checks (105) and Special Checks (374) for the LATAM fleet.
LATAM Safety and Security
In terms of Safety and Security, LATAM has faced an unprecedented scenario during the COVID-19 pandemic and industry recovery. Given this situation, and in order to ensure the health of our employees and customers, LATAM has integrated standards and guidelines set out by world authorities, as well as those established by the different countries where we currently operate. At present, LATAM group exercises constant communication with all of our collaborators and clients in regards to health and safety measures resulting from the COVID-19 pandemic. The safety of our passengers and employees remains LATAM’s highest priority. It is for this reason that we constantly strive to further develop and improve standards in order to mitigate everyday risks, and to guarantee an acceptable level of safety and security in our operations.
Organizational Structure of LATAM Safety and Security Vice-Presidency
The Safety Management Departments ensure that providing safe and reliable air service remains LATAM’s highest priority. Given the operational complexity, as well as the multicultural challenges that we face, LATAM group concentrates its safety management activities under the umbrella of a coordinated structure, which is responsible for the implementation and oversight of unified policies and procedures throughout the group.
The core foundation of this department lies within its robust Safety Management System (“SMS”), which is built upon four main components (Policies and Objectives, Risk Management, Safety Assurance, and Safety Promotion). These components give the SMS a proper structure and provide management with the necessary tools to oversee the safety of our operations. For example, through Flight Data Monitoring (“FDM”), also known as Flight Operations Quality Assurance (“FOQA”), we are able to capture, analyze and even visualize the data recorded during revenue flights and compare it with the company’s Standard Operating Procedures (“SOPs”). In parallel, the Line Operations Monitoring Program (LOMP) permits us to monitor Flight Crew performance and detect errors ahead of time. As a result of these proactive activities, we intend to improve overall safety, increase maintenance effectiveness, and reduce operational costs. The company’s SMS is documented, available internally to all employees, and it provides the guidelines and responsibilities that each employee must meet, regardless of function or hierarchy, which in turn assures our commitment towards safety as a whole. Furthermore, IOSA certification ensures the proper qualification of our employees, including the provision of a Senior Safety Manager responsible for each system implementation within the Safety Department, as well as defining standardized procedures for measuring the quality of services provided by third party companies and contractors.
In 2020, Safety Management has implemented a new approach: Safety II is a new model that seeks to learn from good practices of daily operations, rather than focusing merely on operational mistakes and pitfalls. This type of system requires the integration of LATAM’s operational and SMS data, which must be analyzed thoroughly (advanced analytics) in order to predict a safety occurrence. In summary, it is a proactive and predictive method that continuously anticipates potential catastrophic events.
In 2021, several milestones were reached in the Safety II project, including the development of the entire Monitoring, Advanced Qualification Program (Flight Operations Training program), Weather Information, Maintenance reports, Flight Crew Alertness levels and other. This database currently includes more than 660 thousand flights and has the capacity to process and run analysis of approximately 600 thousand flights in just one hour. In September 2021, the project’s Minimum Value Product was successfully presented, as well as operational safety analyzes correlating different variables and more than 10 dashboards for data analysis.
In 2022, LATAM has sought to further strengthen the data collection and processing of data from different databases, as well as to strengthen the development of its tools to improve its analysis capacity within the large volume of information.
The Security Management Departments are responsible for coordinating the security of LATAM’s passengers, employees, aircraft, equipment and facilities. This department secures LATAM’s infrastructure and patrimony while protecting people against any threat or unlawful action.
Corporate Security Policies and a Security Management System have been implemented to enhance LATAM’s security culture, resource utilization as well as regulatory collaboration and compliance, in order to detect any vulnerabilities within the operation and to prevent unlawful acts. These policies, as well as all the critical aspects of the Management System, are constantly reviewed and analyzed by qualified Corporate Security Managers, who are responsible for risk assessment and the creation of new security protocols or modification of current ones, which are controlled through security personnel, field audits, inspections, technological development (camera circuits, access control, among others) and key performance indicators.
Health Safety Environmental Management (HSE)
Occupational health, safety and environmental management is responsible for defining guidelines to assess and mitigate labor, environmental and employees health risks. It is responsible for setting HSE standards, supporting and implementing procedures defined, and monitoring effective compliance. It also ensures compliance with applicable HSE regulations and promotes the well-being and safety of employees through training and awareness programs, as well as always seeking initiatives focused on mitigating critical risks and new proactive monitoring and control methodologies. Moreover the area supports the implementation of LATAM’s sustainability strategy through a technical expert team.
The biggest milestone of last year was the implementation of a new environmental management system (IEnvA Stage 2) which is currently in process of certification by IATA.
Emergency Response Management
LATAM Emergency Response Management is responsible for overall corporate Emergency Response Plan (“ERP”) implementation. It has been designed to comply with airline responsibilities (as defined by ICAO) and for overall management, command and control of the crisis response. LATAM ERP sets procedures to deal with different scenarios, such as aircraft accidents, serious incidents, natural disasters, union strikes and pandemics. ERP establishes specific teams, procedures, and resources to mitigate the impact of these emergencies on our passengers, their families and for caring about others affected, besides ensuring the continuity of our operations. The ERP is an essential tool to meet the needs for those who need most, and we have different levels of teams prepared to be activated (but is not limited to): Emergency Process and Procedures, Emergency Control Centers, a Relatives & Passengers Assistance Team, a Notification Team, Aircraft Recovery, and a dedicated “Go Team” that can be activated and address an emergency situation.
Fuel costs comprise one of the single largest categories of our operating expenses. In 2022, total fuel costs represented 40.3% of our total operating expenses. As of December 31, 2022, crude oil prices increased significantly compared both to December 31, 2021, and December 31, 2019. Our average into-wing price for 2022 (fuel price plus taxes and transportation costs, including hedging and gains/losses) was US$3.81 per gallon, representing an increase of 73% from the 2021 into-wing average fuel price. We can neither control nor accurately predict the volatility of fuel prices. Despite the foregoing, we believe it is possible to partially offset the price volatility risk through our hedging and fuel surcharge programs, which is in place in both our passenger and cargo business. For more information, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk-Risk of Fluctuations in Fuel Prices.”
The following table details our consolidated fuel consumption and operating expenses, after related hedging gains and losses (which exclude fuel costs related to charter operations because fuel expenses are covered by the entity that charters the flight) for the last three years.
|Year ended December 31, 2022 (1)|
|Fuel consumption (thousands of gallons)||1,017,158.6||677,110.0||586,191.5|
|Fuel gallons consumed per 1,000 ASK||8.9||10.0||10.5|
|Total fuel costs (US$ thousands)||3,882,505||1,487,776||1,045,343|
|Cost per gallon (US$)||3.8||2.2||1.8|
|Total fuel costs as a percentage of total operating expenses||40.3||%||23.9||%||17.4||%|
In our fuel supply agreements, we manage different price structures and price update calculations. The main price structure is Jet Fuel plus fixed fees and taxes, and the main fuel price updates are on a weekly, bi-weekly and monthly basis. Brazil, our largest market, bases its price on a refinery posting updated every month, which is set in Brazilian real per liter, plus fees and taxes. Refinery prices in Brazil have stabilized and matched a more transparent import parity model, creating a more competitive and predictable market for the region.
The fuel supply agreements vary by airport and are distributed among 23 suppliers. Our fuel consumption volume is mainly concentrated in Brazil (43%), Chile (16%), the United States (10%), Peru (11%) and Colombia (7%). In 2021, as part of the Chapter 11 proceedings and due to the expiration of some Fuel Supply contracts, we negotiated fuel supply in Chile, Perú, USA, Brazil, Argentina and certain major European airports. This negotiation strengthened our relations with global fuel suppliers with long term agreements and generally favorable commercial conditions that are expected to contribute to LATAM´s business plan. In 2022, the fuel supply contracts that were part of long term agreements negotiated in Chapter 11 continued to be in effect, some of them without inflation escalation, putting LATAM in a favorable competitive position. Finally, at the end of 2022, fuel supply in Chile, Peru, Argentina and major European airports was negotiated for 2023’s operation.
In Chile and Peru, a fuel import model is used in addition to the traditional local refinery supply, creating a more competitive market and ensuring our supply with different sources. During 2018 we implemented the fuel import model in Brazil, by creating a jet fuel import project that will allow imported jet fuel to reach the Terminal of San Sebastian in São Paulo and move from there to Guarulhos, São Paulo’s International Airport. LATAM was awarded pipeline capacity to move product from the Terminal into Guarulhos and became the first airline to do so. In 2019, refinery prices in Brazil stabilized as a result of the fuel import project from LATAM. During 2019 LATAM also worked along with the Latin American and Caribbean Air Transport Association (“ALTA”) to ensure a more competitive refinery price in Uruguay and reached an agreement that lowered its price by approximately 50 cents per gallon and which achieved competitive parity with the rest of the region. During 2020, LATAM worked along with IATA and ALTA in initiatives and financial incentives to help the industry during the crisis, and managed to accomplish a significant price reduction for international prices in Bolivia and a VAT reduction for domestic flights in Colombia. During 2022, the political environment in Europe resulted in a decrease of jet fuel refining and lack of product, and although the region did not suffer any disruption, it saw an increase in international freight prices and therefore resulted in higher import parity costs for the countries that have that pricing model (Chile, Peru, Brazil, for example).
As part of a comprehensive energy efficiency initiative, LATAM group worked with a team of stakeholders to generate a streamlined fuel efficiency program (the “LATAM Fuel Efficiency Program”), which encompasses a wide range of different innovations and technologies for fuel efficiency:
|●||Investments in more modern and efficient aircraft, such as the Boeing 787 and the Airbus A320neo. Investment has been carried out to perform retrofits to a portion of our Airbus A320 fleet, allowing more efficient standard operational procedures. In 2022, LATAM committed the acquisition of 17 A321Neo to the company’s operations, which will be added to the 70 A320Neo previously acquired, reducing fuel consumption, CO2 and NO emissions for each flight.|
|●||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). During late 2019 and early 2020, the in-flight magazine was removed from all aircraft, reducing nearly 50 kg from each flight. In addition, work with local authorities in Brazil have allowed for changes in fuel policy regulations, reducing unnecessary route reserve fuel and standardizing said fuel policy with the rest of the region.|
|●||As of 2019, LATAM deployed LATAM Pilot Tools, an in-house developed mobile app. This app allows personalized feedback to flight crews, focusing on captain fuel requests and usage, and ground fuel consumption, among other efficiency and safety indicators. As of December 2019, fuel efficiency initiatives were added to the pilot app, giving more visibility to their KPIs and adding significant savings.|
|●||Standardized operational procedures on every stage of the flight (taxiing, climb, cruise, approach and landing); for example, changes in climb profiles that generate savings with minimum changes in the workload of the flight crew, or minimizing the use of the auxiliary power unit when aircraft is on the ground.|
|●||Monitoring maintenance and performance of the fleet, including frequent engine washes, which allow more efficient combustion of fuel and reduce emissions in airport areas.|
|●||Various aircraft retrofits have taken place, among them, engine wiring that allows the reduction of fuel consumption during taxi operations, Auxiliary Power Units replacements for more efficient models, and software updates on them that improve fuel consumption.|
|●||Improvements of the flight plan management, including continuous feedback using a post flight analysis tool called Full Tracks developed by the Fuel Team with the support and collaboration of Operations and Safety. This tool allows us to better program and optimize our flight plans. During 2019, we implemented policy changes, optimizing fuel planning according to destination, standardizing policies for all dispatch centers, allowing for centralized performance tracking and unified criteria.|
|●||During 2020, in the context of the COVID-19 pandemic, operational parameters flight speed/fuel cost relations (Cost Index) were revised to take into account the new variable cost structure, thus generating optimal Cost Indices for each aircraft to assure the most efficient operation. Regarding flight planning, route optimization was introduced, given the overflight cost reduction presented by some governments, hence allowing for shorter trajectories to be flown between long haul city pairs.|
|●||Since 2020, the work together with the Advanced Analytics department has begun in order to generate Machine Learning models, allowing more accurate weight and extra fuel forecasts, as well as the flight route optimization. The department will continue working in this line in order to generate more tools for flight dispatch planning and even for pilots that give them critical recommendations both in flight plan and during flight that directly influence fuel consumption.|
|●||During 2022 LATAM implemented the new software from Airbus DPO (Descent Profile Optimization), optimizing the landing trajectory in 200 A320 airplanes. For each year, each airplane is expected to reduce 300 tons of CO2 emissions and 100 tons of fuel consumption.|
|●||As a consequence of the COVID-19 pandemic, some operational restrictions related to the efficient Auxiliary Power Unit (also known as “APU”) and air packs usage during on ground, taxiing and in flight operations were established by governments. Between 2020 and the first months of 2022, the fuel consumption of these units increased considerably, still LATAM started conversations with the governments to remove the restrictions, getting back to the pre-pandemic conditions.|
As a direct result of this program, LATAM Airlines Group was recognized between 2014 and 2019 by the Dow Jones Sustainability Index as one of the world’s leading companies in eco-efficiency (due to LATAM Airlines Group and several of its affiliates filing for Chapter 11 and the LATAM ADRs delisting from the New York Stock Exchange, the group was not eligible to be considered for the Dow Jones Sustainability Index between 2020 and 2022). The magnitude of this program has allowed us to reduce operational costs along with the improvement of environmental performance, and to enhance environmental awareness both within the Company and externally.
Ground Facilities and Services
The main operations are based at the Guarulhos Airport in São Paulo, Brazil. The Brazilian affiliate also operates significant ground facilities and services at its headquarters located at Congonhas International Airport in São Paulo, Brazil.
LATAM also has significant operations 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 and other outsourced concessions. We also maintain a customs warehouse at the Comodoro Arturo Merino Benítez International Airport, additional customs warehouses in Chile 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 incur certain airport usage fees and other charges for services performed by the various airports where we operate, such as air traffic control charges, take-off and landing fees, aircraft parking fees and fees payable in connection with the use of passenger waiting rooms and check-in counter space.
Ancillary Airline Activities
In recent years, LATAM group has been developing different initiatives to increase its ancillary revenues generated by its airline operations. The implementation of these initiatives aims to offer a better on-board experience, while allowing passengers to customize their journey. LATAM’s customers are able to purchase additional services such as extra luggage, preferred seating options, upgrades to our Premium cabins, among others.
In addition to airline operations, LATAM generates 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, maintenance services for third parties, handling, storage, customs services, income from other non-airline products (LATAM Pass) and other miscellaneous income. In 2022, LATAM generated other revenues of US$154.3 million from these activities.
LATAM maintains aviation insurance policies as required by law, aircraft financing, and leasing agreements, for its entire fleet (aircraft that LATAM and its affiliates own, operate, and are responsible for).
These policies provide all-risk coverage for aircraft hulls (including war risks and spares), third-party legal liability for passengers, cargo, baggage, injuries, property damage, and loss of cargo. LATAM’s policies are in full force and are renewed annually along with IAG Group (British Airways, Iberia, and their affiliates), which allows LATAM to obtain better premiums and improved coverage at the best level of the aviation industry.
LATAM also insures its physical properties and equipment from theft, fire, flood, earthquake, hurricane, and other damages. In general, LATAM’s vehicles are insured against the risk of robbery, damages, fire, and civil and general liabilities. Additionally, LATAM maintains a casualty insurance policy that provides coverage worldwide.
Information and Digital Technologies
During 2020 and 2021, LATAM launched a new website and mobile app in selected regions to help customers complete their purchases in less time than it took before, and manage payments, refunds and compensations through a digital wallet, all while seeking to strengthen its ancillary offering.
The group is also working on a new airport experience, with automatic check-in, new layouts, and a new kiosk experience. During 2022, we kept expanding airport digitization with several projects that positively impacted our customers’ experience, such as automatic check-in (used by more than 86% of customers at the end of 2022), self-bag tag (74% of customers in December) and advancing with self-bag drop implementation (37% of customers in December). Besides that, the flexibility and opening of borders allowed the re-opening and expansion of several international routes, after more than 12 months of impact. Following this trend, our customers can now send their documents digitally prior to boarding to be validated through the Ready to Fly (Pre-Flight check documentation). During 2023 we expect to have an advanced implementation of digital products on customer experience for all the journey, and will face some innovations such as self-boarding (biometric). For more information on other measures, see “Item 4. Information of the Company-B. Business Overview-Passenger Operations-Passenger Marketing and Sales.”
LATAM has also incorporated a dedicated analytics and AI taskforce, focused on network optimization and flight offer personalization, fuel consumption and predictive maintenance.
Regarding compliance, LATAM has periodic reviews by internal and external advisors, alignment with best international practices and approved industry standards such as SOx (Sarbanes-Oxley Law), PCI-DSS (Payment Card Industry Data Security Standard), ISO/IEC 27001 Information Security Management, GDPR (General Data Protection Regulation - Europe) and LGPD (General Data Protection Law - Brazil), Data Protection - Colombia (Law No. 1581, 2012, and Decree No. 1377, 2013), and any other local data privacy laws of each country where LATAM group operates.
LATAM has been preparing itself for cybersecurity challenges, committing resources to tools and capabilities. We have also made progress on improving our systems reliability, by adopting industry practices. Finally, we have reduced our technology vendor footprint, and re-negotiated key contracts to ensure flexibility and cost efficiency.
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 maintained 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 in the jurisdictions in which we operate 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 must comply with certain noise restrictions. LATAM’s aircraft substantially comply 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, is being implemented in various phases by ICAO member states starting in 2021 (with the voluntary member states).
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 Transportation 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 round-trip cap; however, airlines are responsible for costs in excess of this fee. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, the United States 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.
Both the 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.
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 in 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 operates them on a permanent basis. If an airline fails to operate a route for a period of six months or more, the JAC may terminate its rights to that route. International route frequencies are freely transferable. In the past, we have generally paid only nominal amounts for international route frequencies obtained in uncontested auctions.
Airfare Pricing Policy
Chilean airlines are permitted to establish their own domestic and international fares without government regulation. For more information, see “-Antitrust Regulation” below. In 1997, the Antitrust Commission approved and imposed a specific self-regulatory fare plan for our domestic operations in Chile consistent with the Antitrust Commission’s directive to maintain a competitive environment. According to this plan, we must file notice with the JAC of any increase or decrease in standard fares on routes deemed “non-competitive” by the JAC and any decrease in fares on “competitive” routes at least 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 on non-competitive routes. We must also ensure that our average yields on a non-competitive route are not higher than those on competitive routes of similar distance.
The Peruvian Dirección General de Aeronáutica Civil (the “PDGAC”) oversees and regulates the Peruvian aviation industry. The PDGAC reports directly to the Ministry of Transportation and Communications and is responsible for supervising compliance with Peruvian laws and regulations relating to air navigation. In addition, the PDGAC regulates the assignment of national and international routes, and the compliance with certain insurance requirements, and it regulates flight operations, including personnel, aircraft and security standards, air traffic control and airport management. We have obtained and maintain the necessary authorizations from the Peruvian government to conduct flight operations, including authorization and technical operative certificates, the continuation of which is subject to the ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
Peru is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Peruvian authorities have incorporated into Peruvian laws and regulations. In the absence of an applicable Peruvian regulation concerning safety or maintenance, the PDGAC has incorporated by reference the majority of the ICAO’s technical standards. We believe that we are in material compliance with all relevant technical standards.
Domestic Routes: Peruvian airlines are required to obtain permits in connection with carrying passengers or cargo on any domestic routes and to comply with the technical requirements established by the PDGAC. Non-Peruvian airlines are not permitted to provide domestic air service between destinations in Peru.
International Routes: As an airline providing services on international routes, LATAM Airlines 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 operates 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. In recent years the PDGAC has revoked the unused route frequencies of several Peruvian operators.
There are two institutions that control commercial aviation on behalf of the State: (i) The Consejo Nacional de Aviación Civil (the “CNAC”), which directs aviation policy; and (ii) ( the “DGAC”), 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 DGAC 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 DGAC also must comply with the standards and recommended methods of ICAO since Ecuador is a signatory of the 1944 Chicago Convention.
Domestic Routes: Airlines must obtain authorization from CNAC (an operating permit or concession) to provide air transportation. For domestic operations, only companies incorporated in Ecuador can operate locally, and only Ecuadorian-licensed aircraft and dry leases are authorized to operate domestically.
International Routes: Permits for international operations are based on air transportation treaties signed by Ecuador or, otherwise, the principle of reciprocity is applied. All airlines doing business in Latin America that are incorporated in countries that are members of the Comunidad Andina de Naciones (the Andean Community, or “CAN”) obtain their traffic rights on the basis of decisions currently in force under that regime, in particular decision N°582 of 2004, which guarantee free access to markets, with no type of restriction except technical considerations.
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.
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, the 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 the Departamento de Controle do Espaço Aéreo (Department of Airspace Control or “DECEA”), which is a public secretary also subordinated to the Brazilian Defense Ministry, and airport management, in this last case sharing responsibilities with the Empresa Brasileira de Infra-Estrutura Aeroportuária (the Brazilian Airport Infrastructure Company, or “INFRAERO”), a public company that was created by Law No. 5862/72, and is responsible for administrating, operating and exploring Brazilian airports industrially and commercially (with the exception of airports granted to private initiative).
LATAM group has obtained and maintains the necessary authority from the Brazilian government to conduct flight operations, including authorization and technical operative certificates from ANAC, the continuation of which is subject to ongoing compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future.
ANAC is the Brazilian civil aviation authority and it is responsible for supervising compliance with Brazilian laws and regulations relating to air navigation. Brazil is a contracting state and a permanent member of the ICAO. The ICAO establishes technical standards for the international aviation industry, which Brazilian authorities, represented by the Brazilian Defense Ministry, have incorporated into Brazilian laws and regulations. In the absence of an applicable Brazilian regulation concerning safety or maintenance, ANAC has incorporated by reference the majority of the ICAO’s technical standards.
Domestic Routes: Brazilian airlines operate under a public services concession, and for that reason Brazilian airlines are required to obtain a concession to provide passenger and cargo air transportation services from the Brazilian authorities. In addition, an Air Operator Certificate (“AOC”) is also required for Brazilian Airlines to provide regular domestic passenger or cargo transportation services. Brazilian Airlines also need to comply with all technical requirements established by the Brazilian Aviation Authority (ANAC). Based on the Brazilian Aeronautical Code (“CBA”) established by Brazilian Federal Law No. 7,565/86, there are no limitations to ownership of Brazilian airlines by foreign investors. The CBA also states that non-Brazilian airlines are not authorized to provide domestic air transportation services in Brazil
International Routes: Brazilian and non-Brazilian airlines providing services on international routes are also subject to a variety of bilateral civil air transport agreements that provide for the exchange of air traffic rights between Brazil and various other countries. International route rights, as well as the corresponding landing rights, are derived from a variety of air transport agreements negotiated between Brazil and foreign governments. Under such agreements, the government of one country grants the government of another country the right to designate one or more of its domestic airlines to operate scheduled services to certain destinations of the former and, in certain cases, to further connect to third-country destinations. In Brazil, when additional route frequencies to and from foreign cities become available, any eligible airline may apply to obtain them. If there is more than one applicant for a route frequency ANAC must carry out a public bid and award it to the elected airline. ANAC grants route frequencies subject to the condition that the recipient airline operates them on a permanent basis. ANAC’s resolution 491/18 indicates the requirements to establish the underuse of a frequency, and how it could be revoked and reassigned. This provision of the resolution came into force in September 2019.
Airfare Pricing Policy
Brazilian and non-Brazilian airlines are permitted to establish their own international and domestic fares, in this last case only for Brazilian airlines, without government regulation, as long as they do not abuse any dominant market position they may enjoy. Airlines may file complaints before the Antitrust Court with respect to monopolistic or other pricing practices by other airlines that violate Brazil’s antitrust laws.
The governmental entity in charge of regulating, directing and supervising civil aviation in Colombia is the Aeronáutica Civil (the “AC”), a technical agency ascribed to the Ministry of Transportation. The AC is the aeronautical authority for the entire domestic territory, in charge of regulating and supervising the Colombian air space. The AC may interpret, apply and complement all civil aviation and air transportation regulation to ensure compliance with the Colombian Aeronautical Regulations (“RAC”). The AC also grants the necessary permits for air transportation.
The AC grants operation permits to domestic and foreign carriers that intend to operate in, from and to Colombia. In the case of Colombian airlines, in order to obtain the operational permit, the company must comply with the RAC and fulfill legal, economic and technical requirements, in order 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. The only exception for not complying with the public hearing procedure is that the application comes from a country member of the CAN, or that the route or permit being applied for is part of a deregulated regime. Even if it does not go through the public hearing process, the airline must submit a complete study to the AC and the request is made public on the website of the authority. 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 to charge a fuel surcharge. In the case that a fuel surcharge is 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.
The Chilean antitrust authority, which we refer to as the National Economic Prosecutor Office (“FNE” by its Spanish name), oversees and investigates antitrust matters, which are governed by Decree Law No. 211 of 1973, as amended, or the “Antitrust Law.” The Antitrust Law states as anticompetitive, any conduct that prevents, restricts or hinders competition, or sets out to produce said effects.
The Antitrust Law continues by giving examples of the following anticompetitive conducts: (i) cartels; (ii) abuse of dominance; and (iii) interlocking. The Antitrust Law defines abusive practices as “The abusive exploitation on the part of an economic agent, or a group thereof, of a dominant position in the market, fixing sale or purchase prices, imposing on a sale the acquisition of another product, allocating territories or market quotas or imposing similar abuses on others; as well as predatory practices, or unfair competition, carried out with the purpose of reaching, maintaining or increasing a dominant position.”
An aggrieved person may sue for damages arising from a breach of Antitrust Law by suing in the Chilean Competition Court (the “TDLC” by its Spanish name). The TDLC has the authority to impose a variety of sanctions for violations of the Antitrust Law, including: (i) the amendment or termination of acts and contracts; (ii) the amendment or dissolution of legal entities involved in the punished conducts; and/or (iii) the imposition of a fine up to 30% of the sales of the infringing entity corresponding to the line of products and/or services associated to the infraction, during the entire term for which the infringement lasted; alternatively, a fine equal to the double of the economic benefit obtained by the infringing company; and when none of these alternatives can be applied, a fine up to USD 50,000,000 approximately (60,000 UTA).
As described above under “-Route Rights-Airfare Pricing Policy,” in the Resolution N°445 of August 1995, the TDLC approved a merger control transaction between LAN Chile and LADECO, but imposed a specific self-regulatory fare plan for domestic air passenger market consistent with the TDLC’s directive to maintain a competitive environment within the domestic market. This Airfare Pricing Policy Plan was updated by the TDLC particularly to maintain its objective which consists of a tariff regulation, through which maximum rates are established on non-competitive routes under a monthly compliance scheme.
Since October 1997, LATAM and LATAM Chile follow a self-regulatory plan, which was modified and approved by the TDLC in July 2005, and further in September 2011. In February 2010, the FNE closed the investigation initiated in 2007 regarding our compliance with this self-regulatory plan and no further observations were made.
In June 2012, the antitrust authorities in Chile and Brazil each imposed certain mitigation measures as part of their approval of LAN - TAM transaction. Furthermore, the association was also submitted to the antitrust authorities in Germany, Italy, Spain and Argentina. All these jurisdictions granted unconditional clearances for this transaction. For more information regarding these mitigation measures please see below:
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 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 São Paulo, Brazil;
2. extension of the frequent flyer program to airlines operating or willing to operate the Santiago-São 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 the Santiago-São Paulo, Santiago-Río de Janeiro and Santiago-Asunción routes;
4. certain capacity and other transitory restrictions applicable to the Santiago-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 Peru 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 trip non-stop flights per week between Chile and Europe;
13. certain transitory restrictions on increasing fares in the Santiago-São Paulo and Santiago-Río de Janeiro routes for the passenger business and for the Chile-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.
Around 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 to the claim accordingly, a settlement agreement was reached between the FNE and LATAM (the “Settlement Agreement”). 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 Settlement 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 Settlement Agreement.
On October 31, 2018, the TDLC approved the joint business agreements between LATAM and American Airlines, and between LATAM and IAG, subject to nine mitigation measures. On May 23, 2019 the Supreme Court of Chile revoked the TDLC decision, and both agreements were rejected. On September 26, 2019, LATAM announced that the JBA with American Airlines would be terminated and, on December 6, 2019, LATAM announced that the JBA with IAG would not be implemented.
As of October 15, 2019, LATAM Airlines Group S.A. was notified that Fiscalía Nacional Económica (“FNE”) begun the investigation Rol N° 2585-19, regarding the Agreement between LATAM Airlines Group S.A. and Delta Airlines Inc. On August 13, 2021, FNE, Delta and LATAM reached an out-of-court-agreement by which the investigation was closed.
On January 31, 2022, LATAM Airlines Group S.A. received a resolution issued by TDLC regarding a LATAM request for clarification about the Seventh Condition of the Decision. This resolution says that paragraphs VII.1 and VII.3 of the mentioned Condition apply to LATAM even if it does not belong to a global airline alliance.
LATAM Airlines Group S.A. and Delta Air Lines successfully reached an agreement on the implementation, along with certain mitigation measures for their Joint Venture Agreement (JVA) with FNE and on October 28, 2021 received approval of the agreement from Chile’s Tribunal de la Libre Competencia (“TDLC”).
The CADE approved the LAN/TAM association by unanimous decision during its hearing on December 14, 2011, subject to the following conditions: (1) the new combined group (LATAM) should leave one of the two global alliances to which it was part (Star Alliance or oneworld); and (2) the new combined group (LATAM) should offer to swap two pairs of slots in Guarulhos International Airport, to be used by an occasional third party interested in offering direct non-stop flights between São Paulo and Santiago, Chile. These impositions are in line with the mitigation measures adopted by the TDLC, in Chile.
On February 24, 2021 the CADE approved without remedies the joint venture between Delta Air Lines and LATAM Airline Group. Previously, in a separate case, the CADE approved without remedies the acquisition by Delta of up to 20% of LATAM common shares on March 18, 2020.
On December 14, 2020 the antitrust authority of Uruguay (Comisión de Promoción y Defensa de la Competencia) approved the joint venture between LATAM and Delta Air Lines. The same agreement was filed before the aeronautical authority of Uruguay (the Dirección Nacional de Aviación Civil e Infraestructura Aeronáutica) on September 21, 2020 and approved by default on December 20, 2020, as the timeframe provided by the Aeronautical Code Law to the authority in order to resolve on the matter expired (90 days after filing).
On July 8, 2020 LATAM and Delta Air Lines filed their joint venture before the DOT applying for approval of and antitrust clearance for all the alliance agreements.
On September 30, 2022, the U.S. Department of Transportation (“DOT”) approved the joint venture between Delta Air Lines and LATAM Airline Group.
On September 4, 2020 LATAM and Delta filed the joint venture before Aerocivil, applying for an approval of the agreement, which was finally received on May 10, 2021.
LATAM Airlines Group and LATAM Airlines Brazil ownership structure as of February 28, 2023 is as follows:
(*) Qatar owns 9.999999992% of shares over LATAM’s statutory capital, represented by 606,407,693,000 shares.
The LATAM group is composed of LATAM Airlines Group S.A., incorporated in Chile, and ten main affiliates: Transporte Aéreo S.A. (“LATAM Airlines Chile”), a Chilean subsidiary; LATAM Airlines Peru S.A. ( “LATAM Airlines Peru”), a Peruvian subsidiary; LATAM-Airlines Ecuador S.A. (“LATAM Airlines Ecuador,” previously Aerolane, Líneas Aéreas Nacionales del Ecuador S.A.), an Ecuadorian subsidiary; LAN Argentina S.A. (“LATAM Airlines Argentina,” previously Aero 2000 S.A.), an Argentine subsidiary; Aerovías de Integración Regional S.A. (“LATAM Airlines Colombia”), a Colombian subsidiary; TAM Linhas Aereas S.A. (“LATAM Airlines Brazil”) incorporated in Brazil; Transporte Aéreos del Mercosur S.A. (“LATAM Paraguay”), incorporated in Paraguay; LAN Cargo S.A. (“LATAM Cargo”); Linea Aerea Carguera de Colombia S.A. (“LANCO” or “LATAM Cargo Colombia”) in Colombia and Aerolinhas Brasileiras S.A. (“ABSA” or LATAM Cargo Brazil”) in Brazil.
As of December 31, 2022 we held a 100% stake in Transporte Aéreo S.A. through direct and indirect interests, a 23.62% stake in LATAM Airlines Peru through direct interests, a 55.00% stake of the voting shares of LATAM-Airlines Ecuador and a 100% of the non-voting shares of Holdco Ecuador S.A., who has 45.00% of the voting shares of LATAM-Airlines Ecuador, a 99.20% indirect stake in LATAM Airlines Colombia and a 100% stake of the non-voting shares of TAM, and 51.04% of the voting shares and 100% of the non-voting shares of Holdco I S.A., which has 100% of the voting shares of TAM. Following changes in Brazilian law, which now permits foreign persons to own up to 100% of the voting capital of Brazilian airlines, in February 2019, we increased our ownership of the voting shares of Holdco I S.A. to 51.04%.
The cargo operations are carried out by LATAM Cargo, LATAM Cargo Brazil and LATAM Cargo Colombia. As of December 31, 2022, we held 100% of the non-voting shares and 20% (preferred) of TAM S.A. (a total of 63.09% of TAM S.A.) which is the sole shareholder of LATAM Cargo Brazil and a 90% stake in LATAM Cargo Colombia through direct and indirect participation. TAM S.A. has 100% of the non-voting shares and 100% of the voting shares of LATAM Cargo Brazil. The cargo business is marketed internationally primarily under the LATAM Cargo brand.
|D.||Property, Plant and Equipment|
Our main corporate facility is located in Las Condes, where we rent 8,100 m2 for our executive offices in a central location of Santiago, Chile. This space is distributed in nine floors along two buildings.
Our 82,000 m2 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 52,000 m2 aircraft parking area capable of accommodating up to seventeen short-haul aircraft. We have a 5,000 m2 office building plus a 1,000 m2 office and workshop space. We also lease from the Sociedad Concesionaria Nuevo Pudahuel S.A. approximately 10,700 m2 of space inside the Comodoro Arturo Merino Benítez International Airport for operational and service purposes. The lease has a duration of 30 days and is renewed monthly.
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 (which are not property of LATAM), one for Boeing 787 and two for Airbus A320 aircraft.
Fast Air Almacenes de Carga S.A., one of our affiliates that operates import customs warehouses, utilizes a 10.500 m² warehouse located at Comodoro Arturo Merino Benítez International Airport.
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 an area of approximately 38,807 m².
Headquarters of the Presidency
The Headquarters of the Presidency and 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.
At Hangars II and V in Congonhas Airport, which LATAM Airlines Brazil leases from INFRAERO, LATAM Airlines Brazil has 23,886 m² of offices and hangars with about 1,300 workstations. This site also houses the aircraft maintenance, procurement, aeronautical materials logistics and retrofitting departments.
In São Paulo, LATAM Airlines Brazil has other facilities, including: a Call Center Building with 3,199 m2, distributed over five floors (plus a ground floor and a basement) that currently holds about 272 workstations and support rooms (meetings / training / dining room / coordination) of the operations of Call Center Reservations, Talk to People and ABSA back office.
In Guarulhos, LATAM has a total area of approximately 12,649 m2 distributed within the Passenger Terminal, including areas such as Check-in, Ticket Sales, Check Out, Operations Areas, a VIP Lounge and Aircraft Maintenance spaces. The Hangar Complex adds an area of 65,080 m². The cargo terminal has 252 m² of office and 17,215 m² of open area. Our Distribution Center Supplies area occupies 3,030 m².
LATAM Airlines Brazil completed several infrastructure projects in Brazil during 2022, including:
1. Opening of 6 new bases: Montes Claros (MG), Juiz de Fora (MG), Presidente Prudente (SP), Caxias do Sul (RS), Cascavel (PR) and Sinop (MT).
2. Optimization of spaces in 34 Airports.
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 13,609 m² corporate building, a 115,824 m² cargo warehouse (including 35,561 m² refrigerated area) and a 238,658 m² aircraft-parking platform. These facilities were constructed and are now leased to us under a long-term contract by Aeroterm, a division of Realterm. For the year ended 2022, we paid US$10.5 million in rent under the foregoing leases.
In February 2014, the Company entered into a lease agreement with Miami-Dade County covering approximately 1.81 acres of land located on the grounds of the Miami International Airport. The lease has a term of 30 years with a total annual land cost of US$172,080.
Under the lease, we retained the right to construct a hangar facility on the leased premises. The Company completed construction in November 2015 and the hangar has been operational since June 2016. The property has a 15,479 m² aircraft maintenance space, sufficient to house a Boeing B777 aircraft, in addition to a 9,888 m² area designated for office space. Total investment in this hangar in construction and related expenditures by LATAM was US$16.5 million.
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and the accompanying notes beginning on page F-1 of this annual report.
The summary consolidated annual financial information as of December 31, 2022, 2021 and for the years ended December 31, 2022, 2021 and 2020, has been prepared in accordance with IFRS and has been derived from our audited consolidated annual financial statements included in this annual report. The items included in the financial statements of each of the entities of LATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.
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 2022, 80.2% of our total revenues (including in the total for this purpose other income from operating activities) came from passenger revenues and 18.1% came from our cargo business. The remaining 1.6% was classified as other operating income, which consists primarily of subleases of aircraft to third parties and other miscellaneous income.
Our operating environment in 2022 continued to be affected by volatility in the region resulting from the COVID-19 pandemic, however, our operations showed a clear recovery trend along the year, mostly following the recovery of the international capacity, which had been notably lagging behind the domestic segments during 2020 and 2021.
In general, LATAM’s passenger revenues are driven by international and country-specific political and economic conditions, competitive activity, and the attractiveness of the destinations that are served. Passenger revenues are also affected by our capacity, traffic, load factors, yield and unit revenue. The capacity is measured in terms of available seat kilometers (“ASKs”), which represents the sum, across the network, of the number of seats made available for sale on each flight, multiplied by the kilometers flown by the respective flight. Traffic in RPKs is measured, as the sum, across the network, of the number of revenue 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. Yield, revenue from passenger operations divided by RPKs, is used 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.
|Year ended December 31,|
|ASKs (million) (at period end)|
|Passenger load factor (%)|
|Combined load factor||81.3||74.4||6.9||p.p.|
In terms of passengers transported by LATAM, during 2022 we carried 22.3 million more passengers than in 2021, totaling 62.5 million passengers. For the full year 2022, passenger traffic increased 84.0% and total passenger capacity increased 68.3%
During 2022, ASKs for domestic operations in Brazil increased by 39.4% compared to the previous year. Passenger traffic as measured by RPKs increased by 38.6% in 2022 with regard to 2021, resulting in a stable passenger load factor, remaining at 79.5%
The domestic operations of our affiliate carriers based in SSC, which accounted for 20.5% of total passenger capacity (measured by ASKs) in 2022, showed an increase of 41.8% in passenger traffic (measured by RPKs) in the year while capacity increased 31.0% as compared to 2021. As a result, the passenger load factor increased by 6.2 percentage points to 81.0%.
The group’s international operations were still affected by the pandemic’s resulting government-imposed requirements, travel restrictions, and the willingness to travel from passengers. Despite the above, the ease of restrictions in the different markets where we operate has allowed our international segment to recover notably during 2022. Compared to the previous year, capacity in international operations increased by 142.3% and traffic by 204.7% compared to 2022, resulting in a notable increase of 17.0 percentage points in passenger load factors, which reached 83.0%.
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 the capacity, traffic, cargo load factors and yield. The capacity is measured in terms of available ton kilometers (“ATKs”) which represents the number of tons available across the network for the transportation of cargo on each flight, multiplied by the kilometers flown by the respective flights. Traffic in revenue ton kilometers (“RTKs”) is measured 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 the cargo capacity that is actually used to transport cargo for the customers. Finally, cargo yield, or revenue from cargo operations divided by RTKs, is used to measure the average amount that the customers pay to transport one ton of cargo per kilometer.
During 2022, cargo traffic increased by 16.4% compared to 2021, while cargo capacity increased 30.7% year-over-year, which led to a drop of 6.9 percentage points in cargo load factors to 56.5%. Cargo yield decreased 3.8% year-over-year. As a result, revenues per ATK decreased 14.3% in comparison to the previous year.
LATAM’s costs are largely driven by the size of its operations, fuel prices, fleet costs and exchange rates. 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 gains/(losses)” plus “restructuring activities” 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. Restructuring activities expenses are those costs related to the Initial and Subsequent debtors’ filing for Chapter 11 voluntary protection and associated restructuring. The following is a discussion of the drivers of the most important costs.
As an airline group, we are subject to fluctuations in costs that are outside of our control, particularly fuel prices. During 2022, average jet fuel prices increased 73.4%. LATAM has a hedging policy to protect medium term liquidity risk from fuel price increases, while participating in the benefits of fuel price reductions. Upon filing for Chapter 11, counterparties terminated all of our hedging contracts. Subsequently, LATAM has entered into new fuel hedging contracts in accordance with orders from the Bankruptcy Court. 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 are denominated in Chilean pesos and in Brazilian Reals, appreciation of these currencies against the U.S. dollar as well as increases in local inflation rates can result in increased costs in U.S. 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 LATAM. LATAM group competes with other airlines over the amount of commission paid 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, aircraft maintenance and depreciation, are another significant cost, and mainly depend on the number and type of aircraft that are owned and that are under leases. Generally, these costs are largely fixed and can be reduced on a per unit basis by achieving higher aircraft utilization rates. In 2023, only a fraction of LATAM’s wide-body fleet will continue to operate on a payment-by-use basis (known as Power-by-the-Hour, “PBH”), resulting from the company’s Chapter 11 proceedings and negotiations with financiers and lessors by then.
The Aircraft Rentals expense line is used to account for the expenses associated with the group’s variable payments related to aircraft with operating leases whose long-term agreements have been signed and approved by the US Court. Starting in 2021, the Company amended its Aircraft Lease Contracts which included lease payment based on Power by the Hour (PBH) at the beginning of the contract and then switches to fixed-rent payments. A right of use asset and a lease liability was recognized as result of those amendments at the date of modification of the contract, even if they initially have a variable payment period. As a result of the application of the lease accounting policy, the right of use assets continues to be amortized on a straight-line basis over the term of the lease from the contract modification date. The expenses for the year include both: the lease expense for variable payments (Aircraft Rentals) as well as the expenses resulting from the amortization of the right of use assets from the beginning of the contract (included in the Depreciation line) and interest from the lease liability (included in Lease Liabilities).
Restructuring activities refer to the gains/losses in connection with the Chapter 11 proceedings, including costs related with the rejection of aircraft lease contracts, rejection of IT contracts, renegotiation of fleet contracts and legal advice fees, among others; as well as gains on the settlement of Chapter 11 claims for accounts payable. For more information on the restructuring activities gains/losses, please see Note 2, 16 and 26 of our audited consolidated financial statements.
Results of Operations
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2022 compared to year ended December 31, 2021.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2022, and December 31, 2021.
|Year Ended December 31,|
|(in US$ millions, except|
per share data)
|As a percentage of total|
|Consolidated Results of Income by Function|
|Total operating revenues||9,362.5||4,884.0||100.0||%||100.0||%||91.7||%|
|Cost of sales||(8,103.5||)||(4,963.5||)||(86.6||)%||(101.6||)%||63.3||%|
|Other operating income||154.3||227.3||1.6||%||4.7||%||(32.1||)%|
|Other operating expenses||(531.6||)||(535.8||)||(5.7||)%||(11.0||)%||(0.8||)%|
|Restructuring activities gains/(losses)||1,679.9||(2,337.2||)||17.9||%||(47.9||)%||(171.9||)%|
|Foreign exchange gains/(losses)||26.0||131.4||0.3||%||2.7||%||(80.2||)%|
|Result of indexation units||(1.4||)||(5.4||)||0.0||%||(0.1||)%||(73.8||)%|
|Income (loss) before income taxes||1,346.0||(4,084.2||)||14.4||%||(83.6||)%||(133.0||)%|
|Income (loss) tax expense||(8.9||)||(568.9||)||(0.1||)%||(11.6||)%||(98.4||)%|
|Net income (loss) for the period||1,337.1||(4,653.1||)||14.3||%||(95.2||)%||(128.7||)%|
|Income (loss) for the period attributable to the parent company’s equity holders||1,339.2||(4,647.5||)||14.3||%||(95.2||)%||(128.8||)%|
|Income (loss) for the period attributable to non-controlling interests||(2.1||)||(5.7||)||0.0||%||(0.1||)%||(63.3||)%|
|Net income (loss) for the period||1,337.1||(4,653.1||)||14.3||%||(95.2||)%||(128.7||)%|
|Earnings per share|
|Basic earnings per share (US$)||0.01386||(7.66397||)||n.a||n.a||(100.2||)%|
|Diluted earnings per share (US$)||0.01359||(7.66397||)||n.a||n.a||(100.2||)%|
|*||The abbreviation “n.a.” means not available.|
Our total operating revenues increased by 91.7% to US$9,362.5 million for the year ended December 31, 2022 compared to revenues of US$4,884.0 million in 2021. The 2022 increase in operating revenues was mainly attributable to the recovery in air travel and its direct impact on passenger revenues. Passenger and cargo revenues accounted for 81.6% and 18.4% of total operating revenues in 2022, respectively.
Our consolidated passenger revenues increased by 128.5% to US$7,636.4 million in 2022 from US$3,342.4 million in 2021, as a result of the easing of travel restrictions both in the region and worldwide, and its subsequent impact on passenger operations. This was driven by the increase in passenger traffic, which increased 84% (measured in RPKs) with respect to 2021.
Cargo revenues increased by 12.0%, to US$1,726.1 million in 2022 from US$1,541.6 million in 2021, mainly driven by the increase in cargo dedicated capacity also accompanied by the healthy trend in yields as compared with the pre-pandemic context. Cargo capacity increased by 30.7% and traffic increased by 16.4%, resulting in a 6.9 p.p. load factor decrease. Cargo yields fell 3.8% year over year and as a result, revenues per ATK decreased by 14.3%.
Cost of Sales
Cost of sales increased by 63.3% to US$8,103.5 million for the year ended December 31, 2022 (from US$4,963.5 million in 2021), mainly due to the increase in fuel price during the year in addition to overall increasing costs due to the annual recovery in passenger operations.
The table below presents cost of sales information for the fiscal year ended December 31, 2022 and 2021.
|Year Ended December 31,|
|(in US$ millions, except|
per share data)
|As a percentage of total|
|Cost of sales||(8,103.5||)||(4,963.5||)||(86.6||)%||(101.6||)%||63.3||%|
|Wages and Benefits||(973.7||)||(766.2||)||(10.4||)%||(15.7||)%||27.1||%|
|Other Rental and Landing Fees||(1,031.5||)||(749.8||)||(11.0||)%||(15.4||)%||37.6||%|
|Depreciation and Amortization||(1,083.0||)||(1,073.0||)||(11.6||)%||(22.0||)%||0.9||%|
|Other Costs of Sales||(162.8||)||(154.8||)||(1.7||)%||(3.2||)%||5.2||%|
Fuel costs increased by 161%, mainly as a result of a 73.4% increase in average fuel price during the year plus a 50.2% increase in fuel consumption compared to 2021 attributed to the recovery of passenger operations throughout the year.
Wages and benefits increased by 27.1%, explained by an 8% increase in the average number of employees, driven by incorporations in areas directly linked with the operations such as crew members and airport staff, in addition to the inflationary pressures in the region.
Other rental and landing fees increased 37.6%, mainly due to the increase in the level of passenger operations.
Depreciation and amortization slightly increased by 0.9%, as the total operating fleet did not vary significantly between 2022 and 2021.
Aircraft maintenance increased by 9.1% mainly attributed to higher unit costs in maintenance tasks due to global inflationary pressures, plus a catch up on task deferrals associated with the return of aircraft into service after extended downtime and following the increase in projected future operations.
Passenger services increased by 138.2% mainly explained by the increased level of passenger operations in addition to the recovery in international flights, which normally offer more intensive catering and onboard services.
The Aircraft Rentals line includes costs associated with lease payments based on power by the hour (PBH) for contracts that were modified to that structure. The Aircraft Rentals expense line is used to account for the expenses associated with the group’s variable payments related to aircraft with operating leases whose long-term agreements have been signed and approved by the US Court. During 2021, the Company amended its Aircraft Lease Contracts which included lease payment based on Power by the Hour (PBH) at the beginning of the contract that then switches back to fixed-rent payments. A right of use asset and a lease liability was recognized as result of those amendments at the date of modification of the contract, even if they initially had a variable payment period. As a result of the application of the lease accounting policy, the right of use assets continues to be amortized on a straight-line basis over the term of the lease from the contract modification date. The expenses for the year include both: the lease expense for variable payments (Aircraft Rentals) as well as the expenses resulting from the amortization of the right of use assets from the beginning of the contract (included in the Depreciation line) and interest from the lease liability (included in Lease Liabilities). In 2022, aircraft rental expenses totaled US$202.8 million.
As a result of the above, gross margin (defined as operating revenue minus cost of sales) totaled a gain of US$1,259 million, compared to a loss of US$79.5 million in 2021.
Other Consolidated Results
Other operating income decreased in 2022 by 32.1%, from US$227.3 million in 2021 to US$154.3 million in 2022, mainly due to the cessation of certain compensation payments from Delta Air Lines as agreed upon in the signing of the Joint Venture Agreement in 2019.
Distribution costs increased 46.2%, totaling US$426.6 million, due to an increase in sales commissions plus an increase in fixed costs related with the commercial areas.
Administrative expenses increased 31.2% from US$439.5 million in 2021 to US$576.4 million, due to the increase in headcount, plus an increase in marketing expenses and administration expenses related to commissions of payment methods. In 2021, LATAM group had an average of 28,429 employees, while in 2022 this was increased to an average of 30,877 employees.
Other operating expenses decreased slightly by 0.8% from US$535.8 million in 2021 to US$531.6 million.
Gain from Restructuring activities totaled US$1,679.9 million in 2022, in connection with our Chapter 11 proceedings, and included an earnings effect attributable to the exit from Chapter 11, partially offset by costs related with the renegotiation of fleet contracts and legal advice fees. For more information on gain (losses) restructuring expenses, please see Note 2, 24 and 26 of our audited consolidated financial statements.
Financial income increased from US$21.1 million in 2021 to US$1,052.3 million in 2022, mainly explained by gains on the settlement of certain financial claims as well as a reversal of previously recognized accrued interest for financial liabilities that were restructured, both attributable to the exit from Chapter 11. For more information, please see Note 26 of our audited consolidated financial statements.
Financial costs increased by 17.0% to US$942.4 million in 2022 from US$805.5 million in 2021, mainly explained by the DIP financing and DIP-to-Exit financing that were in place until the Company’s emergence from Chapter 11, in addition to a progressive increase throughout the year in base interest rates.
The foreign exchange gain of US$26.0 million in 2022, compared to a gain of US$131.4 million in 2021, was driven mainly by the appreciation of the Brazilian Real during 2022.
Other gains (losses) registered a loss of US$347.1 million, compared to a gain of US$30.7 million in 2021, principally due to the recognition at net realizable value of A319 family aircraft classified as held for sale during 2022.
The income tax expense for 2022 amounted to US$(8.9) million as compared to an income tax expense of US$(568.9) million in 2021. This difference is mainly explained by a derecognition of deferred tax assets registered in 2021. In 2022, the annual result was mainly attributed to current tax owed by LATAM and certain affiliates of the group. For more information, see Note 17 to our audited consolidated financial statements.
Net profit for the year ended December 31, 2022 totaled US$1,337.1 million, which compares with a net loss of US$4,653.1 million in 2021. Net profit attributable to the parent company’s shareholders was US$1,339.2 million in 2022. As a result of the Company’s accumulated losses as of the year end, this net profit will not be eligible for a profit distribution through dividends.
Results of Operations
LATAM Airlines Group Financial Results Discussion: Year ended December 31, 2021 compared to year ended December 31, 2020.
The following table sets forth certain income statement data for LATAM Airlines Group, for the year ended December 31, 2021, and December 31, 2020.
|Year Ended December 31,|
|(in US$ millions, |
except per share data)
|As a percentage of |
total operating revenues
|Consolidated Results of Income by Function|
|Total operating revenues||4,884.0||3,923.7||100.0||%||100.0||%||24.5||%|
|Cost of sales||(4,963.5||)||(4,513.2||)||(101.6||)%||(115.0||)%||10.0||%|
|Other operating income||227.3||411.0||4.7||%||10.5||%||(44.7||)%|
|Other operating expenses||(535.8||)||(692.9||)||(11.0||)%||(17.7||)%||(22.7||)%|
|Restructuring activities expenses||(2,337.2||)||(990.0||)||(47.9||)%||(25.2||)%||136.1||%|
|Foreign exchange gains/(losses)||131.4||(48.4||)||2.7||%||(1.2||)%||(371.5||)%|
|Result of indexation units||(5.4||)||9.3||(0.1||)%||0.2||%||(157.7||)%|
|Income (loss) before income taxes||(4,084.2||)||(5,105.8||)||(83.6||)%||(130.1||)%||(20.0||)%|
|Income (loss) tax expense||(568.9||)||550.2||(11.6||)%||14.0||%||(203.4||)%|
|Net income (loss) for the period||(4,653.1||)||(4,555.5||)||(95.2||)%||(116.1||)%||2.0||%|
|Income (loss) for the period attributable to the parent company’s equity holders||(4,647.5||)||(4,545.9||)||(95.2||)%||(115.9||)%||2.2||%|
|Income (loss) for the period attributable to non-controlling interests||(5.7||)||(9.6||)||(0.1||)%||(0.2||)%||(41.4||)%|
|Net income (loss) for the period||(4,653.1||)||(4555.5||)||(95.2||)%||(116.1||)%||2.0||%|
|Earnings per share|
|Basic earnings per share (US$)||(7.66397||)||(7.49642||)||n.a||n.a||2.1||%|
|Diluted earnings per share (US$)||(7.66397||)||(7.49642||)||n.a||n.a||2.1||%|
The abbreviation “n.a.” means not available.
Our total operating revenues increased by 24.5% to US$4,884.0 million for the year ended December 31, 2021 compared to revenues of US$3,923.7 million in 2020. The 2021 increase in operating revenues was mainly attributable to the recovery in air travel and its impact on passenger revenues. Passenger and cargo revenues accounted for 68.4% and 31.6% of total operating revenues in 2021, respectively.
Our consolidated passenger revenues increased by 23.2% to US$3,342.4 million in 2021 from US$2,713.8 million in 2020, as a result of the easing of travel restrictions both in the region and worldwide, and its subsequent impact on passenger operations. Consequently, load factor increased to 74.4% in 2021, a decrease of 2.1 percentage points with respect to 2020.
Cargo revenues increased by 27.4%, to US$1,541.6 million in 2021 from US$1,209.9 million in 2020, mainly driven by the cargo freighters’ strong performance and the increasing trend in yields during the year. Cargo capacity increased by 1.7% and traffic decreased by 1.4%, resulting in a 2.0 p.p. load factor decreased. Cargo yields grew 29.2% year over year and as a result, revenues per ATK increased by 25.3%.
Cost of Sales
Cost of sales increased by 10.0% to US$4,963.5 million for the year ended December 31, 2021 (from US$4,513.2 million in 2020), mainly due to the operational recovery and its direct impact on variable costs.
The table below presents cost of sales information for the fiscal year ended December 31, 2021 and 2020.
|Year Ended December 31,|
|(in US$ millions,|
except as otherwise
|As a percentage of total operating revenues||2021/2020|
|Cost of sales||(4,963.5||)||(4,513.2||)||(101.6||)%||(115.0||)%||10.0|
|Wages and Benefits||(766.2||)||(779.7||)||(15.7||)%||(19.9||)%||(1.7||)|
|Other Rental and Landing Fees||(749.8||)||(717.0||)||(15.4||)%||(18.3||)%||4.6|
|Depreciation and Amortization||(1,073.0||)||(1,168.5||)||(22.0||)%||(29.8||)%||(8.2||)|
|Other Costs of Sales||(154.8||)||(232.8||)||(3.2||)%||(5.9||)%||(33.5||)|
Fuel costs increased by 42.3%, mainly as a result of a 15.5% increase in fuel consumption compared to 2020 attributed to the easing of travel and sanitary restrictions followed by the recovering trend in passenger operations.
Wages and benefits decreased slightly by 1.7%, explained by the decline in average headcount and outsourcing of certain airport operations in order to improve efficiency in 2021, which both compensate for the return to normal salary levels for the majority of employees after the voluntary salary reductions adopted in 2020.
Other rental and landing fees increased 4.6%, mainly due to the recovery in passenger operations during the year.
Depreciation and amortization decreased by 8.2%, primarily following LATAM’s reduction in fleet size, an effect that has been accentuated with the wide body fleet rejections, though partially offset increasing catch-up maintenance tasks associated with the return of aircraft into service and engine and components repairs.
Aircraft maintenance increased by 13.0% mainly due to the increased level of operations and to catch up on task deferrals and costs associated with the return of aircraft into service after extended downtime.
Passenger service declined by 20.6% mainly explained by the renegotiation of contracts with suppliers and restrictions to onboard catering services from certain countries due to the pandemic.
The Aircraft Rentals line includes costs associated with lease payments based on power by the hour (PBH) for contracts that have been modified to that structure. The Aircraft Rentals expense line is used to account for the expenses associated with the group’s variable payments related to aircraft with operating leases whose long-term agreements have been signed and approved by the US Court. During 2021, the Company amended its Aircraft Lease Contracts which included lease payment based on Power by the Hour (PBH) at the beginning of the contract and then switches to fixed-rent payments. A right of use asset and a lease liability was recognized as result of those amendments at the date of modification of the contract, even if they initially have a variable payment period. As a result of the application of the lease accounting policy, the right of use assets continues to be amortized on a straight-line basis over the term of the lease from the contract modification date. The expenses for the year include both: the lease expense for variable payments (Aircraft Rentals) as well as the expenses resulting from the amortization of the right of use assets from the beginning of the contract (included in the Depreciation line) and interest from the lease liability (included in Lease Liabilities). In 2021, aircraft rental expenses totaled US$120.6 million.
As a result of the above, gross margin (defined as operating revenue minus cost of sales) totaled a loss of US$79.5 million, compared to a loss of US$589.5 in 2020.
Other Consolidated Results
Other operating income decreased in 2021 by 44.7%, from US$411.0 million in 2020 to US$227.3 million in 2021, as a result of the reduction in aircraft rental revenue due to the reduction of subleased aircraft to third parties, and a reduction in LATAM Travel tours and revenues for approximately US$60 million and a compensatory payment of US$62 million from Delta received in 2020 for the cancelation of four A350 purchase agreements. Additionally, in 2020 LATAM received compensation payments for the early return of certain subleased aircraft, which is not present in the 2021 comparison.
Distribution costs maintained stable, totaling US$291.8 million, compared to US$294.3 million in 2020.
Administrative expenses decreased by 12.0% from US$499.5 million in 2020 to US$439.5 million, due to the reduction in headcount which started to take place by the end of the second quarter of 2020. In 2020, LATAM group had an average of 35,281 employees, while in 2021 this was reduced to an average of 28,429 employees.
Other operating expenses decreased by 22.7% from US$692.9 million in 2020 to US$535.8 million as a result of bad debt provisions and various labor, civil and legal processes.
Restructuring activities expenses totaled US$2,337.2 million in 2021, in connection with our Chapter 11 proceedings, and included costs related with the renegotiation of fleet contracts and legal advice fees. For more information on the restructuring expenses, please see Note 2, 17 and 27 of our audited consolidated financial statements.
Financial income decreased by 58.1% to US$21.1 million in 2021 from US$50.4 million in 2020, due to cash investment restrictions arising from the Chapter 11 process under which, part of the company’s cash balance must be allocated in authorized banks, subject to lower investment rates, in spite of the overall higher cash balance during the year.
Financial costs increased by 37.2% to US$805.5 million in 2021 from US$587.0 million in 2020, resulting from the draws from the DIP financing that the company has made, increasing the debt by US$1.95 billion, with a higher interest rate, in addition to debt that has not been repaid that continues to generate additional interest.
The foreign exchange gain of US$131.4 million in 2021, compared to a loss of US$48.4 million in 2020 was driven mainly by the Exchange rate gains in updating the value in dollars of the debt denominated in UF, mainly as a result of the 15.7% devaluation of the Chilean Peso during the year.
Other gains (losses) registered a gain of US$30.7 million, compared to a loss of US$1,874.8 million in 2020, principally due to the goodwill impairment recognized in 2020.
The income tax expense for 2021 amounted to US$(568.9) million as compared to an income tax benefit of US$550.2 million in 2020. This variation is mainly explained by a derecognition of deferred tax assets, related to accumulated tax losses that the Company does not expect to utilize in the foreseeable future of US$1.25 billion. For more information, see Note 18 to our audited consolidated financial statements.
Net loss for the year ended December 31, 2021 totaled US$4,653.1 million. Net loss attributable to the parent company’s shareholders was US$4,647.5 million in 2021.
U.S. Dollar Presentation and Price-Level Adjustments
Foreign currency transactions
(a) Presentation and functional currencies
The items included in the financial statements of LATAM Airlines Group S.A. and each of the subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.
(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 by function except when deferred in Other comprehensive income as qualifying cash flow hedges.
(c) Adjustment due to hyperinflation
After July 1, 2018, the Argentine economy was considered, for purposes of IFRS, hyperinflationary. The financial statements of the subsidiaries whose functional currency is the Argentine Peso have been restated.
The non-monetary items of the statement of financial position as well as the income statement, comprehensive incomes and cash flows of the group’s Argentina entities, whose functional currency corresponds to a hyperinflationary economy, adjusted for inflation and re-expressed in accordance with the variation of the consumer price index (“CPI”), at each presentation date of its financial statements. The re-expression of non-monetary items is made from the date of initial recognition in the statements of financial position and considering that, the financial statements are prepared under the historical cost criterion.
Net losses or gains arising from the re-expression of non-monetary items and income and costs, recognized in the consolidated income statement under “Result of indexation units.”
Net gains and losses on the re-expression of opening balances due to the initial application of IAS 29 are recognized in the consolidated retained earnings.
Re-expression due to hyperinflation will be recorded until the period or exercise in which the economy of the entity ceases to be considered as a hyperinflationary economy, at that time, the adjustments made by hyperinflation will be part of the cost of non-monetary assets and liabilities.
The comparative amounts in the consolidated financial statements of the Company are presented in a stable currency and are not adjusted for subsequent changes in the price level or exchange rates.
(d) Group entities
The results and the financial situation of the Group’s entities, whose functional currency is different from the presentation currency of the consolidated financial statements, of LATAM Airlines Group S.A., which does not correspond to the currency of a hyperinflationary economy, are converted into the currency of presentation as follows:
(i) Assets and liabilities of each consolidated statement of financial position presented are translated at the closing exchange rate on the consolidated statement of financial position date;
(ii) The revenues and expenses of each income statement account are translated at the exchange rates prevailing on the transaction dates, and
(iii) All the resultant exchange differences by conversion are shown as a separate component in other comprehensive income, within “Gain (losses) on currency translation, before tax.”
For those subsidiaries of the group whose functional currency is different from the presentation currency and, moreover, corresponds to the currency of a hyperinflationary economy; its restated results, cash flow and financial situation are converted to the presentation currency at the closing exchange rate on the date of the consolidated financial statements.
The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar.
Effects of Exchange Rate Fluctuations
Our functional currency is the U.S. dollar for the pricing of our products, composition of our balance sheet and effects on our results of operations. In 2022, approximately 44% of our revenues were in U.S. dollars or in currencies pegged to the U.S. dollar and approximately 70% of our expenses were 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 (60.0% as of December 31, 2022), including bank loans, certain air traffic liabilities, and certain amounts payable to our suppliers. As of December 31, 2022, 75.9% 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 a net foreign exchange gain of US$131.4 million in 2021 and net foreign exchange gain of US$26.0 million in 2022, which are set forth in our consolidated statement of income under “Foreign Exchange gains/(losses).” For more information, see Notes 2.3 and 28 to our audited consolidated financial statements.
Critical Accounting Policies
The Company has used estimates to value and record some of the assets, liabilities, income, expenses and commitments. Basically, these estimates refer to:
|(a)||Evaluation of possible losses due to impairment of intangible assets with indefinite useful life|
|(b)||Useful life, residual value, and impairment of property, plant, and equipment|
|(c)||Recoverability of deferred tax assets|
|(d)||Air tickets sold that will not be finally used.|
|(e)||Valuation of miles and points awarded to holders of loyalty programs, pending use.|
|(f)||Provisions needs, and their valuation when required|
See Note 4 (Accounting estimates and judgments) to our audited consolidated financial statements for a full description of our critical accounting policies.
We use “Cost per ASK” and “Cost per ASK 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 across our network. To obtain our unit costs, which are used by our management in the analysis of our results, we divide our total Operating Expenses by our total ASKs. The cost component is further adjusted to obtain “costs per ASK excluding fuel price variations,” in order to remove the impact of changes in fuel prices for the year. “Cost per ASK” and “Cost per ASK 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.
|Cost per ASK|
|Operating expenses (US$ thousands)||9,638,086||6,230,623||5,999,957|
|Divided by ASK (million)||113,851.9||67,635.7||55,688.0|
|= Cost per ASK (US$ cents)||8.47||9.21||10.77|
|Cost per ASK excluding fuel price variations|
|Operating expenses (US$ thousands)||9,638,086||6,230,623||5,999,957|
|- Aircraft fuel (US$ thousands)||3,882,505||1,487,776||1,045,343|
|Divided by ASK (million)||113,851.9||67,635.7||55,688.0|
|= Cost per ASK excluding fuel price variations (US$ cents)||5.06||7.01||8.90|
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.
|Passenger Revenues (US$ thousands)||7,636,429||3,342,381||2,713,774|
|Passenger Revenues/ASK (US$ cents)||6.71||4.94||4.87|
|Cargo Revenues (US$ thousands)||1,726,092||1,541,634||1,209,893|
|Cargo Revenues/ATK (US$ cents)||27.59||32.20||25.70|
Operating revenues are substantially dependent on overall passenger and cargo traffic volume, which is subject to seasonal and other changes in traffic patterns. 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 focus on business passengers (which are less sensitive to seasonality). Additionally, the expansion of the LATAM group into other countries and the cargo segment with different seasonal patterns has also moderated the overall seasonality of the passenger business. COVID-19 has also disrupted traditional seasonality patterns and introduced new factors to consider, such as the consideration of months or seasons in which the number of cases tends to be higher, traveling restrictions and requirements imposed by different countries, vaccination rates or the surge or spread of new variants of COVID-19.
The table below presents LATAM’s unaudited operating data as of and for the year ended December 31, 2020, December 31, 2021 and December 31, 2022. 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.
|For the year ended and |
as of December 31,
|B.||Liquidity and Capital Resources|
LATAM’s cash and cash equivalents amounted to US$1,216.7 million as of December 31, 2022, US$1,046.8 million as of December 31, 2021, and US$1,695.8 million as of December 31, 2020. Additionally, the Company had short-term marketable securities totaling US$0.3 million as of December 31, 2022, US$0.3 million as of December 31, 2021, US$0.3 million as of December 31, 2020. LATAM’s cash and cash equivalents and marketable securities totaled US$1,217.0 million as of December 31, 2022, US$1,047.2 million as of December 31, 2021 and US$1,696.2 million as of December 31, 2020.
The US$169.8 million increase in cash and cash equivalents and marketable securities from 2021 to 2022 can be explained mainly by the successful exit from Chapter 11 with a solid financial position and the recovery in travel demand due to the reopening of the borders as vaccine distribution ramped up, offset by the increase of capital expenditures corresponding to the same increase in the operation given to the recovery of passenger traffic.
The US$649.0 million decrease in cash and cash equivalents and marketable securities from 2020 to 2021 can be explained mainly by the continued limited operations due to the restrictions and border closures of countries during the COVID-19 outbreak and deferral of capital expenditures corresponding to the previous year compensated by partial draws of the Debtor in Possession (“DIP”) financing during the year.
Cash position and liquidity
The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2022, 2021 and 2020 and our total cash position as of December 31, 2022, 2021 and 2020.
|(in US$ million)|
|Net cash flow from operating activities||96.8||(174.2||)||(494.7||)|
|Net cash flow from (used in) investing activities||(749.0||)||(552.5||)||33.6|
|Net cash flow from (used in) financing activities||855.0||109.6||1,120.8|
|Effects of variation in the exchange rate on cash and cash equivalents||(33.0||)||(31.9||)||(36.5||)|
|Cash and cash equivalents at the beginning of the year||1,046.8||1,695.8||1,072.6|
|Cash and cash equivalents at the end of the year||1,216.7||1,046.8||1,695.8|
As of December 31, 2022 in addition to cash and marketable securities, LATAM has US$1,100 million related to two undrawn Revolving Facilities.
Net cash flows from operating activities
Cash flow from operations derives 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 2022 increased by US$271.0 million, from US$(174.2) million to US$96.8 million, mainly due to an increase in operations (a 68% increase in ASKs operated compared to 2021) thanks to the recovery of the operation and the lifting of the most severe travel restrictions across the region.
Net cash inflows from operating activities in 2021 increased by US$320.5 million, from US$(494.7) million to US$ (174.2) million, mainly due to an increase in operations (a 21% increase compared to 2020) thanks to the recovery of the operation and the lifting of the most severe travel restrictions across the region.
Net cash flow used in investing activities
Net cash used in investing activities in 2022 increased to US$749.0 million from US$552.5 million in 2021. The increase is mainly due to the increase in operations following the recovery of passenger traffic after a significant decrease in the number of travelers due to the COVID-19 period, which implied an increase in investing activities including maintenance activities and purchase of spare components.
Net cash used in investing activities in 2021 increased to US$ 552.5 million from US$33.6 million in 2020. The increase is explained mainly by deferred capital expenditures in aircraft, engines, freighter conversions, maintenance and investment projects from 2020 and by the recovery in operation.
Net cash flows used in financing activities
In 2022, net cash in financing activities amounted to US$855.0 million, an increase of US$745.3 million from the US$109.6 million in cash used in financing activities in 2021. The company paid US$9,767.9 million in loan repayments, an increase of US$9,304.8 million explained mainly by the emergence from Chapter 11 and certain increased payments related to the DIP financing. Total debt issuances in 2022 amounted to US$7,988.4 million, an increase of US$7,196.7 million compared to US$791.1 million issued in 2021. The Company also obtained equity instruments in 2022 by US$3,751.8 million related to the successful exit from Chapter 11.
In 2021, net cash in financing activities amounted to US$109.6 million, a decrease of US$1,011.2 million from the US$1,120.8 million in cash used in financing activities in 2020. In 2021, the company paid US$463.0 million in loan repayments, a reduction of US$330.7 million explained mainly by the Chapter 11 process. Total debt issuances in 2021 amounted to US$ 791.1 million, a decrease of US$ 1,006.6 million compared to US$ 1,798.3 million issued in 2020.
Sources of financing
LATAM typically finances the fleet with long-term loans covering between 80% and 100% of the net purchase price. It also finances our aircraft under sale and leaseback arrangements and operational leases in order to add flexibility to the fleet. For more information regarding fleet financing, please refer to the information below and to “-E. Contractual Obligations-Long Term Indebtedness.”
From time to time in the past, we have considered, and may consider in the future, other forms of financing such as equity or debt, either secured or unsecured, securitization of cargo or ticket receivables or the securitization of fleet and engines.
As of December 31, 2022, the Company has US$ 1,100 million fully committed and available from the undrawn Revolving Facility. The available revolver capacity consists of two lines of credit: one for US$ 600 million and another for US$ 500 million.
Capital expenditures are related to the acquisition of aircraft, maintenance CAPEX, restocking of parts, IT-related CAPEX, fleet projects such as cabin retrofits, cargo freighter conversions, and certain other strategic projects. LATAM’s capital expenditures is recorded in the Financial Statements in its cash flow statement through the following lines: Purchase of Property, Plant and Equipment, Purchases of Intangible Assets, and is part of Payments to Suppliers for the Supply of Goods and Services. Purchase of Property, Plant and Equipment totaled US$780.5 million in 2022, US$597.1 million in 2021 and US$324.3 million in 2020, and purchases of intangible assets totaled US$50.1 million in 2022, US$88.5 million in 2021 and US$75.4 million in 2020. Maintenance CAPEX associated with operating leases included in Payments to Suppliers totaled US$163.7 million in 2022, US$149.1 million in 2021 and US$66.0 million in 2020. See “-Sources of financing” above.
The following chart sets forth the Company’s estimated capital expenditures from 2023 to 2025 calendar year, which are subject to change and may differ from the actual capital expenditures. PDPs and Other expenditures, as shown in the table below, represent estimated cash out flows for the Company that will be recorded in the Net cash flow from (used in) investing activities under the Property Plant and Equipment and Purchases of Intangible Assets and in the Net cash flow from operating activities for the case of the maintenance related to the operating leases fleet. In the case of fleet commitments, in the below table they are presented as estimated Fleet CAPEX and the aircraft price of Fleet CAPEX represents the present value of the right of use aircraft (as per IFRS16) assumed to be received under operating lease agreements. However, aircraft arriving under an operating lease do not represent a cash outflow upon their arrival, but rather represent the recognition of a right-of-use asset and a lease liability, and therefore will not be recorded in the Cash Flow Statement as per IFRS accounting rules.
|Estimated capital expenditures by year, |
as of December 31, 2023
|(in US$ millions)|
|Fleet Commitments (1)||(835||)||(539||)||(1,253||)|
|Other expenditures (3)||(1,165||)||(1,301||)||(1,068||)|
|(1)||The number of aircraft included in Fleet CAPEX calculation includes all the committed deliveries (from manufacturers and lessors) with estimates regarding current scheduled delivery dates. The aircraft price of Fleet CAPEX represents the present value of the right of use aircraft under operating lease agreements, as per IFRS16.|
|(2)||Represents pre-delivery payments made by LATAM, or inflows received by LATAM after the delivery of the aircraft is made.|
|(3)||Other Expenditures include estimates of capital expenditures on spare engines and parts, maintenance of fleet, projects and others, plus purchases of intangible assets.|
For reference, LATAM group’s fleet commitments presented as the value of all committed deliveries by manufacturers and/or lessors by year are US$1,217.0 million for 2023, US$756.8 million for 2024 and US$1,520.5 million for 2025. In the table above these commitments are assumed to be received under operating leases. In general, LATAM evaluates financing alternatives to meet its fleet commitments and therefore the amounts presented are not necessarily indicative of a cash outflow and depending on the type of lease agreement (operating or financial lease), the Cash Flow Statement will record fleet delivery differently: for financial leases, cash out will be recorded in the Net cash flow from (used in) investing activities based on the purchase price of the aircraft.
Long Term Indebtedness
1. ECA/EX-IM: Bank loans & bonds guaranteed by Export-Import Bank of the United States (“EX-IM Bank”) and Export Credit Agency (“ECA”) guaranteed loan debt. As of December 31, 2022, the total outstanding amount under these facilities was US$781 million.
2. Commercial Bank Loans: As of December 31, 2022, secured commercial bank loans debt totaled US$546 million.
3. Tax Leases: LATAM has secured debt through Japanese Leases with a call option (“JOLCO”). As of December 31, 2022, the outstanding obligations under these tax leases were US$202 million.
Non Aircraft Debt
1. Term Loan B Facility: On October 18, 2022, LATAM Airlines Group S.A., together with Professional Airline Services, Inc., a Florida corporation and a wholly owned subsidiary of LATAM, issued a five-year term loan facility of US$ 1,100 million with an interest rate, at LATAM’s election, of either (i) Adjusted Term SOFR plus an applicable margin of 9.5%, or (ii) ABR, plus an applicable margin of 8.5%. As of December 31, 2022, the outstanding amount under the Term Loan B Facility was US$ 1,100 million.
2. Senior Secured Notes: On October 18, 2022, LATAM Airlines Group S.A., together with Professional Airline Services, Inc., a Florida corporation and a wholly owned subsidiary of LATAM, issued (i) senior secured notes due 2027 for an aggregate principal amount of US$450 million with a coupon of 13.375% and (ii) senior secured notes due 2029 for and aggregate principal amount of US$ 700 million with a coupon of 13.375%. As of December 31, 2022, the outstanding amount under the Senior Secured Notes was US$1,150 million.
3. Spare Engine Facility: On November 3, 2022, LATAM Airlines Group S.A., acting through its Florida branch, issued a five-year credit facility guaranteed by spare engines for a principal amount of US$275 million. As of December 31, 2022, the outstanding amount under the Spare Engine Facility was US$275 million.
4. Pre-Delivery Payments (“PDP”) financing: As of December 31, 2022, the outstanding amount under PDP financings was US$71 million.
5. Other Guaranteed Obligations: As of December 31, 2022, the outstanding amount with the U.S. Export-Import Bank (“EXIM Bank”) was US$87 million. This portion of debt is derived from the sale of old aircraft, where the sale price was less than the debt outstanding, which left a shortfall financed by EXIM Bank and now guaranteed indirectly by other EXIM aircraft.
1. Local Bonds: On September 5, 2022, LATAM Airlines Group S.A. registered with the Comisión para el Mercado Financiero, the Chilean local regulator, local bonds in the aggregate amount of UF 3,818,042 comprised of the Series F Bonds (BLATM-F), with a maturity in 2042 and a coupon of 2%. As of December 31, 2022, the outstanding amount of Local Bonds was US$157 million.
2. Commercial Bank Loans: As of December 31, 2022, unsecured Commercial Bank loans debt at LATAM Airlines Brazil stood at US$304 million.
As of December 31, 2022, the average interest rate of our debt was 9.3%. Out of the total debt, approximately 52% accrues interest at a fixed rate (through a stated fixed interest rate) or is subject to interest rate caps.
As of December 31, 2022, LATAM had US$4.7 billion in nominal financial debt liabilities. Of this amount, US$305 million are considered disputed claims.
As of December 31, 2022, we had purchase obligations with Airbus and Boeing totaling US$13.2 billion (according to manufacturer’s list price), with deliveries between 2023 and 2029, as set forth below:
|●||Narrow-body passenger aircraft deliveries (Airbus A320-Family): 83 aircraft|
|●||Wide-body passenger aircraft deliveries (Boeing 787-9): 2 aircraft|
2022 Fleet Additions
During 2022, LATAM completed the addition of the following wide-body aircraft:
|●||Four Boeing 787-9 through operating leases.|
During 2022, LATAM completed the addition of the following narrow-body aircraft:
|●||Four Airbus A320 Neo through operating leases and one Airbus A320 through a short term lease.|
2021 Fleet Additions
During 2021, LATAM completed the addition of the following wide-body aircraft:
|●||Five Boeing 787-9 through operating leases.|
During 2021, LATAM completed the addition of the following narrow-body aircraft:
|●||Two Airbus A320 through operating leases, and eleven Airbus A321 through operating leases.|
|C.||Research and Development, Patents and Licenses, etc.|
Trademark LATAM has been registered in Argentina, Australia, Bolivia, Canadá, China, Colombia, South Korea, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Hong Kong, India, Japan, Mexico, Nicaragua, New Zealand, Panama, Paraguay, Peru, Dominican Republic, Taiwan, European Union, Uruguay, the United States, and Venezuela; Trademark LATAM AIRLINES has been registered in Argentina, Bolivia, China, Colombia, South Korea, Cuba, Ecuador, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, Taiwan, European Union, Uruguay and Venezuela.
LATAM AIRLINES ARGENTINA has been registered in Argentina; LATAM AIRLINES COLOMBIA has been registered in Colombia; LATAM AIRLINES ECUADOR has been registered in Ecuador; LATAM AIRLINES PARAGUAY has been registered in Paraguay and LATAM AIRLINES PERU has been registered in Peru. LATAM CARGO has been registered and/or renewed in Argentina, Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, United Kingdom, Uruguay, the United States, and Venezuela. LATAM CARGO BRASIL has been registered in Brazil; LATAM CARGO COLOMBIA has been registered in Colombia; LATAM CARGO MEXICO has been registered in Mexico.
LATAM CORPORATE has been registered in Argentina, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, European Union, United Kingdom and Uruguay. LATAM FIDELIDADE has been registered in the following countries, Argentina, Australia, Colombia, Ecuador, Mexico, New Zealand, Paraguay, Peru, European Union, United Kingdom, Uruguay, and the United States. FIDELIDAD has been registered in Argentina; FIDELIDAD TAM has been registered in Paraguay; LATAM LINEAS AEREAS has been registered in Argentina, Colombia, Ecuador and Peru; LATAM MRO has been registered in Argentina; Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, United Kingdom, Uruguay, the United States, and Venezuela. LATAM PASS has been registered in Argentina, Bolivia, Colombia, Ecuador, Mexico, New Zealand, Paraguay, Peru, European Union, United Kingdom, Uruguay, the United States, Venezuela. LATAM PASS MILES has been registered in New Zealand and Australia. LATAM TOURS has been registered in Argentina, Colombia, Ecuador and Peru. LATAM TRADE has been registered in Argentina, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, European Union, United Kingdom and Uruguay. Trademark LATAM TRAVEL has been registered in Argentina, Bolivia, Colombia, Ecuador, Mexico, Paraguay, Peru, European Union, United Kingdom, Uruguay, the United States, and Venezuela; trademark LATAM TRAVEL SOLUTIONS has been registered in Panama; LATAM VIAGENS has been registered in Brazil; LATAM, JUNTOS MÁS LEJOS has been registered in Argentina and Ecuador. LATAM, TOGETHER, FURTHER has been registered in Australia, New Zealand, United Kingdom and the European Union.
LATAMPLAY has been registered in Argentina, Colombia and Ecuador. LATIN AIRLINE NETWORK has been registered in Mexico, Nicaragua, New Zealand, United Kingdom and the European Union. LIBREVOLADOR has been registered in Bolivia, Ecuador, Paraguay and Peru. LIBREVOLADORES has been registered in Bolivia, Ecuador, Paraguay and Peru. LIDERES DEL SERVICIO has been registered in Argentina, LINEA AEREA CARGUERA DE COLOMBIA has been registered in Colombia.
TAM has filed for trademark registration, registered or renewed the following trademarks in Brazil, LATAM; LATAM AIRLINES; LATAM AIRLINES BRASIL; LATAM CARGO, LATAM CARGO BRASIL; LATAM FIDELIDADE; LATAM MRO, LATAM PASS; LATAM TRADE; TAM LINHAS AÉREAS; LATAM TRAVEL; LATAM VIAGENS; LATAM TRADE; LATAMPLAY; MERCADO LATAM; VAMOS LATAM.
For 2023, LATAM expects total passenger ASK growth to be between 20% and 24% versus 2022. International passenger growth for the full year 2023 is expected to be between 37% and 40%. LATAM Airlines Brazil’s domestic passenger ASKs in the Brazilian market are expected to increase between 8% and 11%. LATAM group’s domestic ASKs in Spanish-speaking countries (SSC) are expected to increase by approximately 8% to 11%.
Regarding cargo operations, LATAM expects cargo ATKs to increase between 20% and 23% for full year 2023, driven by the increases in LATAM’s international passenger capacity which result in additional capacity related to the space in the belly of those aircrafts, accompanied by the addition of new cargo freighters.
During 2022, LATAM group operated in a context of significant recovery for air travel, propelled by the ease of travel restrictions in the domestic markets where the group operates and in the regions where most of the LATAM’s international operations are concentrated, such as North America and Europe. Following LATAM’s emergence from Chapter 11 on November 3, 2022, LATAM’s goal is to continue to increase the efficiency of its operations with a leaner and more efficient cost structure, allowing LATAM to keep strengthening its network by launching new routes and destinations while keeping a strong focus on profitability and cash generation.
LATAM will continue to use fuel hedging programs and fuel surcharge in our operation to help minimize the impact of short-term movements in crude oil prices. As of February 28, 2023, LATAM had hedged approximately 26%, 44%, 28% and 13% of its estimated fuel consumption for the first, second, third and fourth quarters of 2023 respectively.
|E.||Critical Accounting Estimates|
For information on the Company’s accounting estimated, see Note 4 of our audited consolidated financial statements below.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|A.||Directors and Senior Management|
The LATAM Airlines Group S.A.’s board of directors consists of nine directors who are elected every two years for two-year terms at annual regular shareholders’ meetings or, if necessary, at an extraordinary shareholders’ meeting, and may be re-elected. Pursuant to the fourth transitory article of LATAM’s by-laws, the current board of directors elected at the extraordinary shareholders’ meeting held on November 15, 2022 (the “Extraordinary Shareholders’ Meeting”), shall remain in office for two years from its election. Upon expiration of such period, the board of directors shall summon a new extraordinary shareholders’ meeting to proceed with the election of the new board of directors. The board of directors elected at such Extraordinary Shareholders’ Meeting shall exceptionally remain in office for a period longer than the two-year period established in article eight of the by-laws and shall remain in office until the first ordinary shareholders’ meeting held after the second anniversary of its appointment, at which time the board of directors shall be completely renewed in accordance with the applicable legal and regulatory provisions.
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 by the chairman of the board of directors. Extraordinary meetings can be called by the chairman, or when requested by one or more directors if the need for such a meeting is previously approved by the chairman, unless the meeting is requested by a majority of the directors or the vice-chairman, in which case the meeting must be held without the previous approval of the chairman. Board compensation is determined at the Shareholders’ Meeting and is the same for all board members, with the exception of the chairman who is entitled to double the amount received by any other director. On November 15th, 2022, the shareholders agreed on (i) a fixed annual compensation of US$80,000 for each board member part of the Board; (ii) a fixed amount of US$50,000 for each board member part of the Audit Committee and; (iii) a fixed annual compensation of US$20,000 for each one of the sub-committees in which the director participates, with a maximum of US$40,000 annually for all the sub committees, payable monthly at the rate of one-twelfth of such amount. The aforementioned remuneration is payable regardless of the number of board meetings directors attend, without limit of sessions. Mr. Neruda, Mr. van Geloven and Mr. Moghbel have waived their compensations as board members, members of the Audit Committee and members of the sub committees.
The current board of directors was elected at the extraordinary shareholders’ meeting held on November 15, 2022.
The following are LATAM Airlines Group’s directors:
|Ignacio Cueto Plaza(1)||Director / Chairman|
|Bornah Moghbel||Director / Vice-Chairman|
|Enrique Cueto Plaza(1)||Director|
|Frederico Curado||Independent Director|
|Antonio Gil Nievas||Director|
|Bouk van Geloven||Director|
|Sonia J.S. Villalobos||Director|
|Alexander D. Wilcox||Director|
|Roberto Alvo||Chief Executive Officer LATAM|
|Ramiro Alfonsín||Chief Financial Officer LATAM|
|Emilio del Real||Chief People Officer LATAM|
|Juan Carlos Menció||Chief Legal Officer|
|Paulo Miranda||Chief Customer Officer LATAM|
|Hernán Pasman||Chief Operations Officer LATAM|
|Juliana Rios||Chief Digital and IT Officer|
|Martin St. George||Chief Commercial Officer LATAM|
|Juan José Tohá||Director of Corporate Affairs and Sustainability|
|(1)||Messrs. Ignacio and Enrique Cueto are brothers. Both are members of the Cueto Group, which is defined in “Item 7” as a “Major Shareholder.”|
Set forth below are brief biographical descriptions of LATAM Airlines Group’s directors and senior management. All of LATAM’s directors are Chilean citizens, with the exception of three members.
Mr. Ignacio Cueto has served as a member of LATAM Airlines Group’s board of directors and as Chairman since April 2017 and was re-elected to the board of directors of LATAM in April 2019, April 2020 and November 2022. Mr. Cueto’s 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, a national cargo company of that time. In 1985, Mr. Cueto became 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 later served as LAN’s CEO until April 2017. 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 a member of the Cueto Group. As of December 31, 2022, Mr. Cueto shared in the beneficial ownership of 30,389,446,225 common shares of LATAM Airlines Group (5.0% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Bornah Moghbel has been the Vice-Chairman of the Board at LATAM Airlines Group since November 2022. He is a Co-Founder and Partner of Sixth Street, a leading global investment firm that offers capital solutions to companies across all stages of growth. Based in New York, Mr. Moghbel leads Sixth Street’s corporate investing in public markets as well as its global asset investing business. After co-founding Sixth Street in 2009, Mr. Moghbel established the firm’s presence in Europe before returning to the United States in 2016. Prior to joining Sixth Street, Mr. Moghbel was an investor at Silver Point Capital and he began his career in the Financial Sponsors Group at UBS Investment Bank. He earned a B.A. in Economics, with high honors, and a minor in Business Administration from the University of California, Berkeley.
Mr. Enrique Cueto has served as a member of LATAM Airlines Group’s board of directors since April 2020. Formerly, he held the position of LATAM Airlines Group’s Chief Executive Officer (“CEO”), 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 is a member of the Board of the Endeavor foundation, an organization dedicated to the promotion of entrepreneurship in Chile. Mr. Cueto holds a degree in Economic Sciences from the Catholic University of Chile and is the brother of Mr. Ignacio Cueto, Chairman of the board. Mr. Cueto is also a member of the Cueto Group. As of December 31, 2022, Mr. Cueto shared in the beneficial ownership of 30,389,446,225 common shares of LATAM Airlines Group (5.0% of LATAM Airlines Group’s outstanding shares) held by the Cueto Group. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Mr. Frederico Curado has been on the Board of LATAM Airlines Group since November 2022, as an independent director. He has also been an independent director of Transocean since 2013, is Chair of its HSE and Sustainability Committee and a member of the Corporate Governance Committee. Mr. Curado is also an independent director at ABB since 2016 and is Chair of its Compensation Committee. He was CEO of Embraer from 2007 to 2016 and CEO of Ultrapar from 2017 to 2021. Mr. Curado holds a B.Sc in Mechanical-Aeronautical Engineering from the Aeronautics Institute of Technology (ITA) and an Executive MBA from the University of São Paulo, Brazil.
Mr. Antonio Gil Nievas joined LATAM Airlines Group’s Board of Directors in November 2022. He is also a board member at SQM, a Chilean and NYSE publicly listed company. Mr. Gil Nievas has over 25 years of experience in strategic, management, financial and investment leadership roles at global, European and Latin American levels. He was CEO of Moneda Asset Management and worked at JP Morgan, serving as Managing Director, Global CFO and member of the global executive committees of several businesses, among other positions. Mr. Gil Nievas holds a MSc. and BSc. in industrial engineering with a major in electronics from ICAI (Universidad Pontificia Comillas, Spain). He obtained his MBA from Harvard Business School and also completed the Stanford Executive Program.
Mr. Michael Neruda has been a member of the Board at LATAM Airlines Group since November 2022. He is a Partner of Sixth Street, a leading global investment firm that offers capital solutions to companies across all stages of growth. Based in San Francisco, Mr. Neruda leads Sixth Street’s corporate investing in public markets. Prior to joining Sixth Street in 2015, Mr. Neruda was a Director at Watershed Asset Management, where he led investments in the consumer and energy sectors. Mr. Neruda was previously an investment analyst at MHR Fund Management, Silver Point Capital and Merrill Lynch. He received a B.S. in Management Science and Engineering from Stanford University, is a CFA Charterholder and currently serves on the Board of Governors of the Boys & Girls Clubs of San Francisco.
Mr. Bouk Van Geloven joined the Board of LATAM Airlines Group in November 2022. He is the Managing Director of the North American investment team at Strategic Value Partners LLC, which he joined in 2014, with a focus on sectors such as airlines, infrastructure, packaging and industrials. From 2011 to 2014, Mr. van Geloven was at J.P. Morgan Cazenove in their Strategic M&A Advisory team. Mr. van Geloven has two Master of Science degrees in Econometrics and Quantitative Finance from the Vrije Universiteit Amsterdam. He has served on multiple boards whilst at SVP and he is currently a member of the Boards of Klöckner Pentaplast and Southern Graphics Systems, and is part of the Advisory Committee of Mattress Firm.
Mrs. Sonia J.S. Villalobos joined the Board of LATAM Airlines in August 2018. Mrs. Villalobos is a Brazilian citizen and a regular member of the board of directors of Petrobras and Telefónica Vivo. She is a founding partner of the company Villalobos Consultoria since 2009 and a professor of post-graduate courses in finance at Insper since 2016. Between 2005 and 2009, she was the Manager of Funds in Latin America, in Chile, managing mutual and institutional funds of Larrain Vial AGF. From 1996 to 2002, Mrs. Villalobos was responsible for Private Equity investments in Brazil, Argentina and Chile for Bassini, Playfair & Associates, LLC. As of 1989 she was Head of Research of Banco Garantia. She graduated in Public Administration from EAESP / FGV in 1984 and obtained a Master in Finance from the same institution in 2004. She was the first person to receive the CFA certification in Latin America, in 1994.
Mr. Alexander Wilcox has served on LATAM Airlines Group’s board of directors since October 2020. Mr. Wilcox resides in the United States and has broad experience in the aviation industry where he has held executive positions in several airlines between 1996 and 2005. Mr. Wilcox is a cofounder and the CEO of JSX, a public charter commuter air carrier in the U.S. Mr. Wilcox attended the University of Vermont and earned a BA in Political Science and English.
Mr. Roberto Alvo has been the Chief Executive Officer (“CEO”) of LATAM since March 31, 2020. Prior to this, he worked as Chief Commercial Officer (“CCO”) of LATAM, in charge of managing the group’s passenger and cargo revenue. Previously, he was Vice-President of International and Alliances at LATAM Airlines, and Vice-President of Strategic Planning and Development. Mr. Alvo joined LAN Airlines in November 2001, where he served as Chief Financial Officer of LAN Argentina, as Manager of Development and Financial Planning at LAN Airlines, and as Deputy Chief Financial Officer of LAN Airlines. Before working for the group, Mr. Alvo held various positions at Sociedad Química y Minera de Chile S.A., a leading Chilean non-metallic mining company. He is a civil engineer, and holds an MBA from IMD in Lausanne, Switzerland.
Mr. Ramiro Alfonsín is LATAM’s Chief Financial Officer (“CFO”), a position he has held since July 2016. Formerly, he worked 16 years for Endesa, a leading utilities company, in Spain, Italy and Chile, where he served as Deputy Chief Executive Officer and Chief Financial Officer for their Latin American operations. Before joining the utilities sector, he worked for five years in Corporate and Investment Banking for several European banks. Mr. Alfonsin holds a degree in Business Administration from Pontificial Catholic University of Argentina.
Mr. Emilio del Real is the LATAM Chief People Officer, a position he took over in August 2005. Between 2003 and 2005, he was Human Resources Manager at D&S, a Chilean retail company. Between 1997 and 2003, he served in various positions at Unilever, including Human Resources Manager of Unilever Chile, and Manager of Training and Recruitment and Management Development for Latin America. Mr. Del Real has a degree in Psychology from the Gabriela Mistral University.
Mr. Juan Carlos Menció has been the Chief Legal Officer at LATAM Airlines Group since September 1, 2014. Previously, he held the position of General Counsel for North America for LATAM Airlines Group and its affiliates, as well as General Counsel for its worldwide Cargo Operations, both since 1998. Prior to joining LATAM, he was in private practice in New York and Florida, representing various international airlines. Mr. Menció 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. Paulo Miranda has been LATAM’s Chief Customer Officer since May 2019. Miranda has over 20 years of experience in the aviation industry, having held different positions, first at Delta Air Lines in the United States, and then at Gol Linhas Aéreas in Brazil. In his last role, Mr. Miranda was responsible for the Client Experience department, having previously worked in finance and alliances, as well as in the negotiation and implementation of joint ventures. Mr. Miranda holds a Bachelor of Business Administration degree from the Carlson School of Management, University of Minnesota, USA.
Mr. Hernán Pasman has been the Chief Operations Officer of LATAM Airlines Group since October, 2015. He joined LAN Airlines in 2005 as a head of strategic planning and financial analysis of the technical areas. Between 2007 and 2010, Mr. Pasman was the Chief operating officer of LAN Argentina, then, in 2011 he served as Chief Executive Officer for LAN Colombia. Prior to joining the company, between 2001 and 2005, Mr. Pasman was a consultant at McKinsey & Company in Chicago. Between 1995 and 2001, Hernan held positions at Citicorp Equity Investments, Telefonica de Argentina and Argentina Motorola. Mr. Pasman holds a Civil Engineering degree from ITBA (1995) and an MBA from Kellogg Graduate School of Management (2001).
Mrs. Juliana Rios has over 20 years of experience in services and technology in the financial and airline industries. Her career spans business transformation, mergers & acquisitions, digitization, IT, and large-scale project management, such as PSS migration. As Chief IT & Digital Officer, she leads LATAM Airlines’ digital transformation efforts. Prior to joining LATAM, Mrs. Rios was a senior executive at Banco Santander, Brazil, spearheading the retail business and customer experience strategy. She headed integration programs in Brazil, Italy and the Netherlands. Mrs. Rios holds a Bachelor’s in Business Administration and an MBA in Corporate Management from IBMEC, Brazil.
Mr. Martin St. George joined LATAM Airlines Group in 2020 as Chief Commercial Officer after a 30+ year career in the airline industry in both North America and Europe. Prior to joining LATAM, he ran a strategy consulting firm for airlines and travel industry clients in the United States, the Caribbean and Europe, and even served as Acting CCO at Norwegian Air Shuttle ASA. From 2006 to 2019, he worked for JetBlue Airways, in positions in marketing, networking, and finally, as COO at JetBlue. Mr. St. George holds a degree in civil engineering from the Massachusetts Institute of Technology.
Mr. Juan José Tohá is a journalist with a specialty in Sustainability from Oxford University, as well as a Master’s and PhD in Communication from the Autonomous University of Barcelona. He has vast experience in the design and implementation of communication strategies and the interaction of organizations with their environment. He has served in FAO’s Latin America and Caribbean regional office in Santiago, Chile, and as Communications Manager for Codelco and BHP South America, among others. In 2019, he joined LATAM group as Director of Corporate Affairs and Sustainability, reporting directly to the CEO of LATAM group, and he coordinates the corporate strategy of Public Affairs, External Communications, and Sustainability.
For information on executive compensation, see “-D. Employees” below.
C. Board Practices
Our board of directors has nine members. The terms of each of our current directors will expire in 2 years from November 15, 2022, unless previously renewed in accordance to applicable law or pursuant to the Company’s Chapter 11 proceedings. See “-Directors and Senior Management” above.
Board of Directors’ Committee and Audit Committee
Pursuant to the Ley sobre Sociedades Anónimas No. 18,046 (“Chilean Corporation Act”) and the Reglamento de Sociedades Anónimas (the “Regulation to the Chilean Corporate Law”, and together with the Chilean Corporation Act, the “Chilean Corporate 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 Board of Directors’ Committee, 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;|
|●||evaluating and proposing external auditors and rating agencies;|
|●||proposing a general policy for managing conflicts of interest and pronouncing on the company’s general policies;|
|●||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 Corporate Law we are required, to the extent possible, to appoint a majority of independent board members to the board of directors committee. Pursuant to the Chilean Corporation Act, no person shall be considered independent who, at any time during the previous eighteen months: (1) Maintained any relationship, interest or economic, professional, credit or commercial dependence, of a nature and relevant volume, with the company, other companies of the financial conglomerate to which the company belongs, its comptroller, or principal executive officer of any one of them, or was a director, manager, administrator, principal executive officer or advisor of such companies; (2) Was a close relative (i.e., parents, father/mother in law, siblings, sisters/brothers in law), to any one of the persons referred to in 1 above; (3) Was a director, manager, administrator or principal executive officer of non-profit organizations that received contributions or large donations from any individual referred to in clause 1 above; (4) Was a partner or shareholder that possessed or controlled, directly or indirectly, 10% or more of the company’s capital; a director; manager; administrator or principal executive officer of entities who had provided consulting or legal services, for relevant amounts, or of external audit, to the persons referred to in 1 above; or (5) Was a partner or shareholder who possessed or controlled, directly or indirectly, 10% or more of the company’s capital; a director; manager; administrator or principal executive officer of principal competitors, suppliers or clients of the company. Should there be more than three directors entitled to participate in the directors committee, the board of directors shall elect the members of the directors committee by unanimous vote.
Should the board of directors fail to reach an agreement, preference to be appointed to the committee shall be given to directors elected with the highest percentage of votes cast by shareholders that individually control or possess less than 10% of the company’s shares. If there is only one independent director, such director shall appoint the other members of the committee among non-independent directors. Such directors shall be entitled to exercise full powers as members of the committee. The chairman of the board of directors shall not be entitled to be appointed as a member of the committee nor any of its subcommittees, unless he is an independent director.
To be elected as independent director, the candidates must be proposed by shareholders that represent 1% or more of the shares of the company, at least 10 days prior to the date of the shareholders’ meeting called to that end. The candidate who obtains the highest number of votes shall be elected as independent director.
Pursuant to U.S. regulations, we are required to have an audit committee of at least three board members, which complies with the independence requirements set forth in Rule 10A-3 under the Exchange Act. Given the similarity in the functions that must be performed by our board of directors’ committee and the audit committee, our Board of Directors’ Committee serves as our Audit Committee for purposes of Rule 10A-3 under the Exchange Act.
As of December 31, 2022, all of the members of our Board of Directors’ Committee, which also serves as our Audit Committee, were independent under Rule 10A-3 of the Exchange Act. As of December 31, 2022, the committee members were Mr. Frederico Curado, Mr. Michael Neruda and Mrs. Sonia J.S. Villalobos. We pay each member of the committee a fixed annual remuneration of US$50,000, payable monthly at the rate of one-twelfth of such amount, regardless of the number of board meetings they attend, without limit of sessions.
Other LATAM Board Committees
LATAM’s board of directors has also established four other committees to review, discuss and make recommendations to our board of directors. These include a Strategy & Sustainability Committee, a Leadership Committee, a Finance Committee and a Customers and Businesses Committee. The Strategy & Sustainability 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, taxation strategy and the quality and reliability of financial information. Finally, the Customers and Businesses Committee is responsible for setting the competitive strategies of the Customers and Commercial Vice Presidencies with a focus on sales, marketing, network and fleet initiatives, customer experience and revenue management. We pay each member of a sub-committee a fixed annual compensation of US$20,000 for each of the sub-committees of which the Director is a member, payable monthly at the rate of one-twelfth of such amount, with a cap thereon of US$40,000 per year for all the sub-committees of which the Director may be a member, payable monthly at the rate of one-twelfth of the latter amount. The compensation is payable to the Directors as members of one or more sub-committees of the board, regardless of the number of sessions of sub-committees of the board that they attend, without limit of sessions.
In 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
The company follows strict procedures in order to comply with current legislation in the United States and in Chile on corporate governance. In this context, the Company has published a Manual for Corporate Practices which can be found on the LATAM investor relations website and incorporates the applicable legislation in its policies and decisions. Information obtained on, or accessible through, this website is not incorporated by reference herein and shall not be considered part of this annual report.
The following table sets forth the number of employees in various positions at the Company.
|As of December 31,|
|Employees ending the period||2022||2021||2020|
|(1)||As of December 31, 2022, approximately 54,6% of our employees worked in Brazil, 23,8% in Chile, 9,3% in Peru, 0,6% in Argentina, 5,3% in Colombia, 1,3% in Ecuador and 5,0% 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 to the coverage provided by the legal system. We also grant other benefits, according to local market practice (meal, transportation, maternal and paternal leave, etc.). In addition, we have a global staff travel program, which grants free and discounted tickets to our permanent employees.
Long Term Incentive Compensation Program
LP3 compensation plans (2020-2023)
The Company implemented a program for a group of executives effective between October 2020 and March 2023 (the “Compensation Plan”), which consisted of an extraordinary bonus to be paid annually or subject to accrual and based on target prices of the shares of LATAM. The program expired in March 2023 without any payments having been made.
Corporate Incentive Plan
As part of the Backstop Agreements, the parties agreed on proposed terms for a Corporate Incentive Plan, subject to the approval, allocation and implementation by the company’s board of directors. The Corporate Incentive Plan is expected to be equivalent to 2.5% of the fully-diluted, fully-converted post-reorganization shares, is intended to be implemented after the date of substantial consummation of the Plan of Reorganization (the “Effective Date”) by the board of directors to be elected post-Effective Date, and is anticipated to cover senior executives, other executives, and other employees, in the terms and conditions of, and as described in the Backstop Agreements. The terms and conditions of any subsequent incentive plans are expected to be determined and approved by the current board of directors, in its sole discretion.
LATAM has maintained and intensified its efforts to ensure that labor relations between the group, its employees and their legal representatives are carried out through dialogue and result in agreements that benefit both parties, but always with safety criteria for the operation, efficiency, sustainability and care for people. During the year, the company has had to make the necessary adjustments essential to maintaining its sustainability, as a result of which the collective agreements (Protocols) were maintained with the different unions aimed at adapting the operational conditions and costs associated especially with the personnel of air (command and cabin crew). One of the main efforts that the company had to carry out during 2022 was the implementation of the remote work models that it had to apply as a result of the pandemic, modifications to labor legislation and restrictions from health organizations. However, the company continues to be concerned with constantly evaluating possible labor conflicts, for which it is always preparing contingency plans if necessary.
In 2022, 13 collective bargaining processes were carried out with unions, all of which were initiated voluntarily and in advance of the expiration of the legal deadlines. The aforementioned collective bargaining negotiations involved: Administration Unions (5), Maintenance Unions (4) and Pilots Unions (4), having a total of 3,583 employees involved in such negotiations. Of the 13 collective bargaining processes carried out, 10 were concluded in advance of the legal deadlines, therefore, without any possibility of contingency for the operation. The remaining 3 collective bargaining processes ended in accordance with the legal deadlines, i.e. a regulated negotiation in accordance with current legislation. On the other hand, regardless of the type of collective bargaining process (early or regulated), all of them were finally approved by large majorities of the respective assemblies, i.e., with an average approval of over 80%. As a result of this intense collective bargaining process, agreements were signed involving 65% of unionized workers in Chile, and these processes will continue in 2023 with 7 new collective bargaining agreements planned: Cabin Crew Unions (4), Administration Unions (2) and Pilots Union (1).
In July 2019, the Company renewed its voluntary agreement with the pilot’s association in Ecuador, valid until July 2023. Then, this agreement was modified on June 26, 2020, with its term being extended until December 31, 2023.
In Colombia during 2022 the Company maintained the agreements signed in 2021 with the following union groups: (i) the Technicians Union (ACMA)