As filed
with the Securities and Exchange Commission on June 29, 2010


UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549


FORM
20-F




 ̈ REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OF


THE
SECURITIES EXCHANGE ACT OF 1934


OR


x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For
the fiscal year ended December 31, 2009


OR


 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


OR


 ̈ SHELL COMPANY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





Commission
File Number: 1-14728




Lan
Airlines S.A.


(Exact
name of registrant as specified in its charter)


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


Presidente
Riesco 5711, 20th
Floor


Las
Condes


Santiago,
Chile


(Address
of principal executive offices)


Gisela
Escobar Koch


Tel.:
56-2-565-3944 ● E-mail: gisela.escobar@lan.com


Presidente
Riesco 5711, 20th
Floor


Las
Condes


Santiago,
Chile


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


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


Title
      of each class:
                Name
      of each exchange on which registered:American
      Depositary Shares (as evidenced by
                  American
      Depositary Receipts), each representing
                  one
      share of Common Stock, without par value
                New
      York Stock Exchange




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


None


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


None


Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report:
338,790,909.


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes x No
 ̈


If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.


Yes  ̈ No
x


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No
 ̈


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of 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 and post such files).


Yes  ̈ No
 ̈


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):


Large
      Accelerated filer x
            Accelerated
      filer  ̈
            Non-Accelerated
      filer  ̈


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:


U.S. GAAP
 ̈International
Financial Reporting Standards as issued by the International Accounting
Standards Board x 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  ̈ No
x








Table of Contents




TABLE OF CONTENTS




PRESENTATION OF INFORMATION
                                          1FORWARD-LOOKING STATEMENTS
                                          2GLOSSARY OF TERMS
                                          3PART
      IITEM 1.
                                          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
      ADVISERS
                                          4ITEM 2.
                                          OFFER STATISTICS AND EXPECTED TIMETABLE
                                          4ITEM 3.
                                          KEY INFORMATION
                                          4ITEM 4A.
                                          UNRESOLVED STAFF COMMENTS
                                          63ITEM 5.
                                          OPERATING AND FINANCIAL REVIEW AND
    PROSPECTS
                                          63ITEM 7.
                                          CONTROLLING SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS
                                          89ITEM 8.
                                          FINANCIAL INFORMATION
                                          90ITEM 9.
                                          THE OFFER AND LISTING
                                          92ITEM 10.
                                          ADDITIONAL INFORMATION
                                          94ITEM 11.
                                          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                                          113ITEM 12.
                                          DESCRIPTION OF SECURITIES OTHER THAN EQUITY
      SECURITIES
                                          118PART
      IIITEM 13.
                                          DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES
                                          120ITEM 14.
                                          MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
      AND USE OF PROCEEDS
                                          120ITEM 15.
                                          CONTROLS AND PROCEDURES
                                          120ITEM 16.
                                          RESERVED
                                          121ITEM 16A.
                                          AUDIT COMMITTEE FINANCIAL EXPERT
                                          121ITEM 16B.
                                          CODE OF ETHICS
                                          121ITEM 16C.
                                          PRINCIPAL ACCOUNTANT FEES AND SERVICES
                                          121ITEM 16D.
                                          EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES
                                          122ITEM 16E.
                                          PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
      AFFILIATED PURCHASERS
                                          122ITEM 16F.
                                          CHANGE IN REGISTRANT’S CERTIFYING
      ACCOUNTANT
                                          122ITEM 16G.
                                          CORPORATE GOVERNANCE
                                          122PART
      IIIITEM 17.
                                          FINANCIAL STATEMENTS
                                          125ITEM 18.
                                          FINANCIAL STATEMENTS
                                          125ITEM 19.
                                          EXHIBITS
                                          126NOTE 3 - TRANSITION TO IFRS
                                          F-25




i
 Table of Contents


PRESENTATION OF INFORMATION




In this
annual report on Form 20-F, unless the context otherwise requires, references to
“Lan Airlines” are to Lan Airlines S.A., the unconsolidated operating entity,
and references to “LAN,” “we,” “us” or the “Company” are to Lan Airlines S.A.
and its consolidated subsidiaries. All references to “Chile” are references to
the Republic of Chile.




This
annual report contains conversions of certain Chilean peso 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
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 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 is based on the “dólar observado” or
“observed” exchange rate published by Banco Central de Chile (which
we refer to as the Central Bank of Chile) on December 31, 2009, which was
Ch$506.43=US$1.00. The observed exchange rate on June 25, 2010, was
Ch$539.68=US$1.00. The Federal Reserve Bank of New York does not report a noon
buying rate for Chilean pesos. See “Key Information—Exchange Rates” under Item
3.




Lan
Airlines and the majority of our subsidiaries (including our main cargo
subsidiary Lan Cargo S.A., or Lan Cargo) maintain their accounting records and
prepare their financial statements in U.S. dollars. Some of our other
subsidiaries, however, maintain their accounting records and prepare their
financial statements in Chilean pesos or Argentinean pesos. Our audited
consolidated financial statements include the results of these subsidiaries
translated into U.S. dollars. International Financial Reporting Standards as
issued by the International Accounting Standards Board (“IFRS”), require assets
and liabilities to be translated at period-end exchange rates, revenue and
expense accounts at monthly average rates.




Our
audited consolidated financial statements for the period ended December 31, 2009
were prepared in accordance with IFRS.  These audited consolidated
financial statements constitute the first annual financial statement prepared in
accordance with IFRS which have been adopted in Chile under the name of Chilean
Financial Reporting Standards (“CHFRS”), and represent the integral, explicit
and unreserved adoption of IFRS. Prior to December 31, 2009 our consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in Chile (“Chilean GAAP”).  IFRS differs in certain
significant respects from Chilean GAAP. As a result, our financial information
presented under IFRS is not directly comparable to our financial information
presented with respect to previous years under Chilean GAAP. Accordingly,
readers should avoid such comparison. For a description of the transition to
IFRS, including the quantification of the impact of the transition to IFRS, see
Note 3 to our audited consolidated financial statements




We have
rounded percentages and certain U.S. dollar and Chilean peso 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.




This
annual report contains certain terms that may be unfamiliar to some readers. You
can find a glossary of these terms on page 3 of this annual
report.


1
 Table of Contents


FORWARD-LOOKING STATEMENTS




This
annual report contains forward-looking statements. Such statements may include
words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”
“believe” or other similar expressions. Forward-looking statements, 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:




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




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




·
            the
      maintenance of relationships with
customers;




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




·
            the
      effects on us from competition;




·
            future
      terrorist incidents or related activities affecting the airline
      industry;




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




·
            natural
      disasters affecting traveling behavior and/or
  exports;




·
            the
      relative value of the Chilean, Peruvian, Ecuadorian, Colombian, Brazilian,
      Mexican and Argentine currencies compared to other
    currencies;




·
            inflation;




·
            competitive
      pressures on pricing;




·
            our
      capital expenditure plans;




·
            changes
      in labor costs, maintenance costs, and insurance
  premiums;




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




·
            cyclical
      and seasonal fluctuations in our operating
  results;




·
            defects
      or mechanical problems with our
aircraft;




·
            our
      ability to successfully implement our growth
  strategy;




·
            increases
      in interest rates; and




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




Forward-looking
statements speak only as of the date they are made, and we undertake no
obligation to update publicly any of them, whether in light of new information,
future events or otherwise. You should also read carefully the risk factors
described in “Key Information—Risk Factors” under Item 3.




2
 Table of Contents


GLOSSARY OF TERMS




The
following terms, as used in this annual report, have the meanings set forth
below.




Capacity
      Measurements:“available
      seat kilometers” or “ASKs”
                                                            
                                                            The
      number of seats made available for sale multiplied by the kilometers
      flown.“available
      ton kilometers” or “ATKs”
                                                            
                                                            The
      number of tons available for the transportation of revenue load (cargo)
      multiplied by the kilometers flown.“systems
      available ton kilometers” or “systems ATKs”
                                                            
                                                            The
      number of total tons capacity for the transportation of revenue load
      (passenger and cargo) multiplied by the kilometers
  flown.Traffic
      Measurements:“revenue
      passenger kilometers” or “RPKs”
                                                            
                                                            The
      number of passengers multiplied by the number of kilometers
      flown.“revenue
      ton kilometers” or “RTKs”
                                                            
                                                            The
      load (cargo) in tons multiplied by the kilometers
flown.“systems
      revenue ton kilometers” or “systems RTKs”
                                                            
                                                            The
      load (passenger and/or cargo) in tons multiplied by the kilometers
      flown.“traffic
      revenue”
                                                            
                                                            Revenue
      from passenger and cargo operations.Yield
      Measurements:“cargo
      yield”
                                                            
                                                            Revenue
      from cargo operations divided by RTKs.“overall
      yield”
                                                            
                                                            Revenue
      from airline operations (passenger and cargo) divided by system RTKs
      (passenger and cargo).“passenger
      yield”
                                                            
                                                            Revenue
      from passenger operations divided by RPKs.Load
      Factors:“cargo
      load factor”
                                                            
                                                            RTKs
      (cargo) expressed as a percentage of ATKs (cargo).“overall
      break-even load factor”
                                                            
                                                            Total
      costs (operating expenses plus net interest expense less other revenue)
      per system ATK divided by overall yield.“overall
      load factor”
                                                            
                                                            RTKs
      (passenger and cargo) expressed as a percentage of ATKs (passenger and
      cargo).“passenger
      break-even load factor”
                                                            
                                                            Total
      costs attributable to passenger operations per ASK divided by passenger
      yield.“passenger
      load factor”
                                                            
                                                            RPKs
      expressed as a percentage of ASKs.Other:“ACMI
      leases”
                                                            
                                                            A
      type of aircraft leasing contract, under which the lessor provides the
      aircraft, crew, maintenance and insurance on a per hour basis. Also
      referred to as a “wet lease.”“Airbus
      A320-Family Aircraft”
                                                            
                                                            The
      Airbus A318, Airbus A319 and Airbus A320 models of
    aircraft.“block
      hours”
                                                            
                                                            The
      elapsed time between an aircraft leaving an airport gate and arriving at
      an airport gate.“ton”
                                                            
                                                            A
      metric ton, equivalent to 2,204.6 pounds.“utilization
      rates”
                                                            
                                                            The
      actual number of flight hours per aircraft per operating
    day.


3
 Table of Contents


PART
I




ITEM 1.
            IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS




Not
applicable.




ITEM 2.
            OFFER
      STATISTICS AND EXPECTED TIMETABLE




Not
applicable.




ITEM 3.
            KEY
      INFORMATION




Selected
Financial Data




The
following table presents our summary financial data.  Our audited
consolidated financial statements relate to the period ended December 31, 2009,
and constitute the first annual audited financial statements prepared in
accordance with IFRS. Prior to December 31, 2009 our consolidated financial
statements were prepared in accordance with Chilean GAAP.




Our date
of transition to IFRS was January 1, 2008. Consequently, we have prepared our
opening consolidated statements of financial position under IFRS as of that
date. Our date of adoption of IFRS was January 1, 2009. For a description of the
transition to IFRS, including the quantification of the impact of the transition
to IFRS, see Note 3 to our audited consolidated financial
statements.




The
summary consolidated annual financial information as of December 31, 2009 and
for the year ended December 31, 2009, has been prepared in accordance with IFRS
and has been derived from our audited consolidated annual financial statements
included in this annual report. The summary consolidated annual financial
information as of December 31, 2008 and for the year ended December 31, 2008
presented in this annual report, were previously presented in accordance with
Chilean GAAP, and have been restated under IFRS only for comparative
purposes.




You
should read the information below in conjunction with our audited consolidated
financial statements and the notes thereto, as well as “Presentation of
Information” and “Operating and Financial Review and
Prospects.”


4
 Table of Contents





Annual
      Financial InformationYear
      ended December 31,2009
                
                
                2008(in
      US$ millions, except per share andcapital
      stock data)The
      Company(1)(3)Statement
      of Income Data:Operating
      revenuesPassenger
                
                
                2,623.6
                
                
                
                2,820.8Cargo
                
                
                895.6
                
                
                
                1,319.4Total
      operating revenues
                
                
                3,519.2
                
                
                
                4,140.2Cost
      of sales
                
                
                (2,522.8
                )
                
                
                (2,893.9
                )Gross
      margin
                
                
                996.4
                
                
                
                1,246.3Other
      operating income (2)
                
                
                154.5
                
                
                
                161.4Marketing
      costs
                
                
                (114.5
                )
                
                
                (107.3
                )Distribution
      costs
                
                
                (327.0
                )
                
                
                (366.7
                )Administrative
      expenses
                
                
                (155.1
                )
                
                
                (167.6
                )Other
      operating expenses
                
                
                (100.5
                )
                
                
                (127.9
                )Financial
      costs (from non-financial activities)
                
                
                (153.1
                )
                
                
                (125.5
                )Earning
      on investments (equity method)
                
                
                0.3
                
                
                
                0.7Exchange
      rate differences
                
                
                (11.2
                )
                
                
                23.4Result
      of indexation units
                
                
                (0.6
                )
                
                
                1.2Negative
      goodwill
                
                
                -
                
                
                
                0.6Other
      net earnings (losses)(4)
                
                
                (11.7
                )
                
                
                (135.3
                )Income
      before income taxes
                
                
                277.5
                
                
                
                403.4Income
      tax
                
                
                (44.5
                )
                
                
                (65.1
                )Net
      income for the period
                
                
                233.0
                
                
                
                338.3Income
      for the period attributable to the parent company’s equity holders(4)
                
                
                231.1
                
                
                
                336.5Income
      for the period attributable to minority interests
                
                
                1.9
                
                
                
                1.8Net
      income for the period
                
                
                233.0
                
                
                
                338.3Earnings
      per shareBasic
      and diluted earnings per share (US$)(5)
                
                
                0.68
                
                
                
                0.99




(table
and footnotes continue on next page)


5
 Table of Contents




Annual
Financial Information


At
      December 31,2009
                
                
                2008(in
      US$ millions, except per share andcapital
      stock data)Balance
      Sheet Data:Cash,
      and cash equivalents
                
                
                731.5
                
                
                
                401.0Other
      current assets in operation
                
                
                666.6
                
                
                
                665.8Non-
      current assets and disposal groups held for sale
                
                
                10.9
                
                
                
                10.4Total
      current assets
                
                
                1,409.0
                
                
                
                1,077.2Property
      and equipment
                
                
                4,196.6
                
                
                
                3,966.1Other
      non- current assets
                
                
                166.4
                
                
                
                153.6Total
      non- current assets
                
                
                4,363.0
                
                
                
                4,119.7Total
      assets
                
                
                5,772.0
                
                
                
                5,196.9Total
      current liabilities
                
                
                1,523.3
                
                
                
                1,551.5Total
      non-current liabilities
                
                
                3,142.7
                
                
                
                2,876.8Total
      liabilities
                
                
                4,666.0
                
                
                
                4,428.3Net
      equity attributable to the parent company’s equity holders
                
                
                1,098.8
                
                
                
                761.8Minority
      interest
                
                
                7.1
                
                
                
                6.8Total
      net equity
                
                
                1,105.9
                
                
                
                768.6





At
      December 31,Operational
      Data:
              
              2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005ASKs
      (million)
              
              
              38,777.1
              
              
              
              35,176.2
              
              
              
              31,556.1
              
              
              
              26,400.0
              
              
              
              23,687.3RPKs
      (million)
              
              
              29,830.1
              
              
              
              26,951.6
              
              
              
              24,001.2
              
              
              
              19,495.5
              
              
              
              17,490.8ATKs
      (million)(6)
              
              
              3,835.0
              
              
              
              4,080.3
              
              
              
              3,632.8
              
              
              
              3,399.1
              
              
              
              3,213.8RTKs
      (million)
              
              
              2,623.3
              
              
              
              2,906.7
              
              
              
              2,702.3
              
              
              
              2,579.2
              
              
              
              2,392.3System
      ATKs (million)
              
              
              7,811.4
              
              
              
              7,652.2
              
              
              
              7,023.1
              
              
              
              6,349.8
              
              
              
              5,810.8





(1)
            For
      more information on the subsidiaries included in this consolidated
      account, see Note 1 to our audited consolidated financial
      statements.


(2)
            Other
      operating income included in this Statement of Income Data is equivalent
      to the sum of income derived from duty free operations, aircraft leasing,
      logistics and courier operations, customs and warehousing operations,
      tours, interest income and other miscellaneous income. For more
      information, see Note 33 to our audited consolidated financial
      statements.


(3)
            The
      addition of the items may differ from the total amount due to
      rounding.


(4)
            In
      2008, the Company recorded a provision of US$109.0 million in other net
      earnings in connection with a plea agreement entered into with the DOJ (as
      defined below) regarding an antitrust investigation related to our cargo
      business (see “Item 4. Information on the Company – Business of the
      Company – Cargo Operations – Cargo Related
    Investigations”).


(5)
            As
      of December 31, 2008 and 2009, we had 338,790,909 common shares
      outstanding, which was equivalent to 338,790,909 American Depositary
      Shares (“ADSs”) and American Depositary Receipts
  (“ADRs”).


(6)
            In
      August 2007, the Company implemented a change in its methodology used for
      calculating cargo ATKs in order to better represent the available capacity
      in the bellies of passenger aircraft. Cargo RTKs were not affected by this
      change. Historical data has been modified accordingly for comparison
      purposes.




Although
most of our revenues and expenses are denominated in U.S. dollars, some are
denominated in different currencies, such as the Chilean peso. Fluctuations in
foreign exchange rates could lead to changes in the value of these items in U.S.
dollars. Nevertheless, the impact on our results stemming from any such
fluctuations is significantly mitigated by the fact that 80% of our revenues and
65% of our operating expenses are denominated in U.S. dollars.


6
 Table of Contents


In
accordance with the Chilean Corporation Act and Regulation thereof, Ley sobre Sociedades Anónimas No.
18,046 and the Reglamento de Sociedades
Anónimas, collectively known as the Chilean Corporation Law, we must pay
annual cash dividends equal to at least 30% of our annual consolidated
distributable net income each year (calculated in accordance with IFRS), subject
to limited exceptions. As ofMay 31, 2010 we have not
yet declared the payment of aggregate dividends for 2010. Dividends for 2009
include two interim dividends paid in August 2009 and January 2010 and a final
dividend paid in May 2010, as approved at the annual general shareholders
meeting held in April 2010. The table below sets forth the cash dividends per
common share and per ADS, as well as the number of common shares entitled to
such dividends, for the years indicated. Dividends per common share amounts have
not been adjusted for inflation and reflect common share amounts outstanding
immediately prior to the distribution of such dividend. On August 2007, LAN
modified its ADR to common share ratio from 5:1 to 1:1.




Dividend
      for
                  year:
              
              Payment
      date(s)
              
              Total
                  dividend
                  payment
              
              
              Number
      of
                  common
                  shares
                  entitled
      to
                  dividend
              
              
              Cash
                  dividend
                  per
      common
                  share
              
              
              Cash
                  dividend
                  per
      ADS(U.S.
      dollars)
              
              
              (in
      millions)
              
              
              (U.S.
      dollars)
              
              
              (U.S.
      dollars)2005
              
              September
      2, 2005
              
              
              36,452,425
              
              
              
              318.91
              
              
              
              0.11430
              
              
              
              0.57150March
      1, 2006
              
              
              35,000,000
              
              
              
              318.91
              
              
              
              0.10975
              
              
              
              0.54875May
      17, 2006
              
              
              1,849,186
              
              
              
              318.91
              
              
              
              0.00578
              
              
              
              0.028902006
              
              August
      24, 2006
              
              
              48,061,644
              
              
              
              318.91
              
              
              
              0.15071
              
              
              
              0.75355January
      18, 2007
              
              
              67,787,211
              
              
              
              318.91
              
              
              
              0.21256
              
              
              
              1.06280April
      25, 2007
              
              
              53,059,893
              
              
              
              318.91
              
              
              
              0.16638
              
              
              
              0.831902007
              
              August
      23, 2007
              
              
              90,104,830
              
              
              
              338.79
              
              
              
              0.26596
              
              
              
              0.26596January
      17, 2008
              
              
              119,894,715
              
              
              
              338.79
              
              
              
              0.35389
              
              
              
              0.35389May
      8, 2008
              
              
              5,827,204
              
              
              
              338.79
              
              
              
              0.01720
              
              
              
              0.017202008
              
              August
      21, 2008
              
              
              96,785,787
              
              
              
              338.79
              
              
              
              0.28568
              
              
              
              0.28568January
      15, 2009
              
              
              105,001,466
              
              
              
              338.79
              
              
              
              0.30993
              
              
              
              0.309932009
              
              August
      20, 2009
              
              
              34,621,043
              
              
              
              338.79
              
              
              
              0.10219
              
              
              
              0.10219January
      21, 2010
              
              
              70,000,978
              
              
              
              338.79
              
              
              
              0.20662
              
              
              
              0.20662May
      20, 2010
              
              
              10,939,558
              
              
              
              338.79
              
              
              
              0.03229
              
              
              
              0.03229




Our board
of directors has the authority to declare interim dividends. Year-end dividends,
if any, are declared by our shareholders at our annual meeting. For a
description of our dividend policy, see “Financial Information—Other Financial
Information—Dividend Policy” under Item 8.




We
declare cash dividends in U.S. dollars, but make dividend payments in Chilean
pesos, converted from U.S. dollars at the observed exchange rate two days prior
to the day we first make payment to shareholders. Payments of cash dividends to
holders of American Depositary Receipts, or ADRs, if any, are made in Chilean
pesos to the custodian, which converts those Chilean pesos into U.S. dollars and
delivers U.S. dollars to the depositary for distribution to holders. In the
event that the custodian is unable to convert immediately the Chilean currency
received as dividends into U.S. dollars, the amount of U.S. dollars payable to
holders of ADRs may be adversely affected by a devaluation of the Chilean
currency that may occur before such dividends are converted and
remitted.




7
 Table of Contents


Exchange
Rates




The
following table sets forth, for the periods indicated, the high, low, average
and period-end observed exchange rate for the purchase of U.S. dollars,
expressed in Chilean pesos per U.S. dollar. The rates have not been restated in
constant currency units.




Daily
      Observed Exchange RateYear
      Ended December 31,
              
              High
              
              
              Low
              
              
              Average(1)
              
              
              Period-EndCh$
      per US$2005
              
              
              592.75
              
              
              
              509.70
              
              
              
              559.27
              
              
              
              514.212006
              
              
              549.63
              
              
              
              511.44
              
              
              
              531.03
              
              
              
              534.432007
              
              
              548.67
              
              
              
              493.14
              
              
              
              521.95
              
              
              
              495.822008
              
              
              676.75
              
              
              
              431.22
              
              
              
              528.88
              
              
              
              629.112009
              
              
              643.87
              
              
              
              491.09
              
              
              
              553.77
              
              
              
              506.43December
              
              
              508.75
              
              
              
              494.82
              
              
              
              501.45
              
              
              
              506.432010January
              
              
              531.75
              
              
              
              489.47
              
              
              
              500.66
              
              
              
              531.75February
              
              
              546.18
              
              
              
              523.10
              
              
              
              532.56
              
              
              
              529.69March
              
              
              533.87
              
              
              
              508.66
              
              
              
              523.16
              
              
              
              526.29April
              
              
              527.38
              
              
              
              514.91
              
              
              
              520.62
              
              
              
              520.99May
              
              
              549.17
              
              
              
              517.23
              
              
              
              533.21
              
              
              
              529.23





Source:
Central Bank of Chile


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




On June
25, 2010, the observed exchange rate was Ch$539.68=US$1.00.




8
 Table of Contents




Risk
Factors




We
wish to caution readers that the following important factors, and those
important factors described in other reports submitted to, or filed with, the
Securities and Exchange Commission, among other factors, 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 American Depositary Shares, or ADS, 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
Related to our Operations and the Airline Industry




Our
performance is heavily dependent on economic conditions in the countries in
which we do business and negative economic conditions in those countries could
have an adverse impact on our business.




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 negatively affected by
global economic recessionary conditions, weak economic growth in Chile,
recession in Argentina and poor economic performance in certain emerging market
countries in which we operate. The occurrence of similar events in the future
could adversely affect our business. In fact, starting as of late 2008, and
during 2009, many of the countries we serve, including Chile, experienced
economic slowdowns or recessions, which translated into a substantial weakening
of demand. We plan to continue to expand our operations based in Latin America
and our performance will, therefore, continue to depend heavily on economic
conditions in the region. Any of the following factors could adversely affect
our business, financial condition and results of operations in the countries in
which we operate:




·
            changes
      in economic or other governmental
policies;




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




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




Driven by
the severe downturn in the global economy, including in the economies of many of
the countries we serve, we began to experience weakening demand in cargo late in
2008, and this weak demand continued into 2009. However, we began to experience
a recovery in cargo traffic in late 2009, which continued during the first
months of 2010. If the global economic environment continues its recovery,
demand in cargo may continue to improve during the current year. No assurance
can be given that capacity reductions or other steps we may take will be
adequate to offset any future reduction in our cargo and/or air travel
demand.




The
success of our business depends upon key regulatory issues and these issues may
adversely affect our business and results of operations.




Our
business is highly regulated and depends substantially upon the regulatory
environment in the countries in which we operate or intend to operate. For
example, price controls on fares may limit our ability to effectively apply
customer segmentation profit maximization techniques (“passenger revenue
management”) (management techniques utilizing passenger demand forecasting and
fare mix optimization techniques to maximize profit for an airline) and adjust
prices to reflect cost pressures. High levels of government regulation may limit
the scope of our operations and our growth plans, especially in the event of
deterioration of the relations between the countries in which we operate or the
public perception of foreign companies in local markets. Accordingly, regulatory
issues could adversely affect our business and results of
operations.




Our
business, financial condition and results of operations could be adversely
affected if we or certain aviation authorities (among them, those from
Argentina, Brazil, Chile, Ecuador, Mexico, Peru, Colombia and the United States)
fail to maintain the required foreign and domestic governmental authorizations.
In order to maintain the necessary authorizations issued by the Chilean Junta Aeronáutica Civil,
which we refer to as the “JAC,” and technical operative authorizations issued by
the Chilean Dirección General
de Aeronáutica Civil, which we refer to as the “DGAC,” and other
corresponding local authorities of the countries in which we operate, we must
continue to comply with applicable statutes, rules and regulations pertaining to
the airline industry, including any rules and regulations that may be adopted in
the future.




9
 Table of Contents


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




In many
of the jurisdictions in which we operate, we have found it in our interest, to
maintain a number of alliances and other commercial relationships. 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 and, in
particular, with American Airlines, Iberia, Qantas or oneworld®
deteriorates, or any of these agreements are terminated, our business, financial
condition and results of operations could be negatively affected.




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




Our
business depends upon our access to key routes and airports. Our operations
could be constrained by any delay or inability to gain access to key routes or
airports, including:




·
            limitations
      on our ability to process more
passengers;




·
            the
      imposition of flight capacity
restrictions;




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




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




We
operate numerous international routes, subject to bilateral agreements and also
internal flights within Chile, Argentina, Peru and other countries, subject to
local route and airport access approvals. Bilateral aviation agreements as well
as local aviation approvals frequently involve political and other
considerations outside of our control. See “Information on the Company— Business
of the Company—Regulation—Route Rights” under Item 4.




There can
be no assurance that existing bilateral agreements between the countries in
which our companies are based and permits from foreign governments will
continue. A modification, suspension or revocation of one or more bilateral
agreements could have a material adverse effect on our business, financial
condition and results of operations. The suspension of our permission to operate
in certain airports or destinations or the imposition of other sanctions could
also have a material adverse effect. We cannot assure that a change in a foreign
government’s administration of current laws and regulations or that the adoption
of new laws and regulations will not have a material adverse effect on our
business, financial condition and results of operations.




If we are
unable to obtain favorable take-off and landing authorizations at certain
high-density airports, our business, financial condition and results of
operations could be adversely affected. There can be no assurance that we will
be able to obtain all requested authorizations and slots in the future because,
among other factors, government policies regulating the distribution of the
authorizations and slots are subject to change.




A
failure to successfully implement our growth strategy would harm our business
and the market value of the ADSs and our common shares.




Our
growth strategy involves increasing the frequency of flights to the markets we
currently serve and expanding our service to new markets. In order to carry out
this strategy, we must be able to identify the appropriate geographic markets
upon which to focus and to gain suitable airport access and route approval in
these markets. There can be no assurance that the new markets we enter or in
which we are seeking to expand our operations will provide passenger and cargo
traffic that is sufficient to make our operations in those new markets
profitable.




The
expansion of our business will also require additional skilled personnel,
equipment and facilities. An inability to hire and retain skilled personnel or
secure the required equipment and facilities efficiently and cost-effectively
may adversely affect our ability to execute our growth strategy. Expansion of
our markets and flight frequencies may also strain our existing management
resources and operational, financial and management information systems to the
point that they may no longer be adequate to support our operations, requiring
us to make significant expenditures in these areas.


10
 Table of Contents


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, natural disasters, war or terrorist attacks.




Demand
for air transportation may be adversely impacted by exogenous events, such as
natural disasters, epidemics, terrorist attacks, war or political and social
instability. Situations such as these in one or more of the markets in which we
operate could have a material impact on our business, financial condition and
results of operations. Furthermore, these types of situations could have a
prolonged effect on air transportation demand and on certain cost
items.




During
January 2010, bad weather affected the city of Cuzco in Peru causing important
human and material damages and severely affecting this tourist destination. This
affected our operations, which led us to decrease our capacity in order to
improve load factors. We estimate the net impact of decreased passenger
operations to have been approximately US$15.0 million.




In
addition, on February 27, 2010, an earthquake struck Chile causing major damages
mainly in the southern regions of the country. This earthquake damaged the
terminal building at the Santiago International Airport causing the suspension
of LAN’s passenger services to and from Chile until March 1, 2010. Lan Cargo’s
operations suffered no impact since Lan Cargo has flexibility to redesign
itineraries if and when needed.  As of March 28, 2010, operations were
restored to normal levels and the airport started to operate
normally.  We estimate the net impact of decreased passenger
operations due to the earthquake to have been approximately US$25.0 million
during the first quarter of 2010.




Terrorist
attacks may also have a severe adverse impact on the airline industry. For
example, the terrorist attacks in the United States on September 11, 2001
substantially affected the airline industry, particularly foreign air carriers
operating international service to and from the United States. Throughout South
America, passenger traffic also decreased substantially, although the decrease
was less severe than that in the United States. The airline industry experienced
increased costs following the September 11, 2001 terrorist attacks. Airlines
have been required to adopt additional security measures and may be required to
comply with more rigorous security guidelines in the future.




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 our revenues and results of operations.




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




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




As from
mid 2007, there was an outbreak of infectious salmon anemia virus (“ISA Virus”)
in Chile, which was temporarily contained during 2008 but continued affecting
exports during 2009. The outbreak of ISA Virus has caused, and may continue to
cause, a significant decline in salmon exports and has had, and may continue to
have, an adverse impact on our cargo operations as approximately 4% of our cargo
business revenue during 2009 was related to salmon exports.




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




Higher
jet fuel prices or a shortage in the supply of fuel could cause a reduction in
our scheduled service and could have a materially negative 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 29.8% of our operating expenses in 2009. Both the cost and
availability of fuel are subject to many economic and political factors and
events that we can neither control nor predict. We have entered into fuel
hedging arrangements, but there can be no assurance that such arrangements will
be adequate to protect us from a significant increase in fuel prices in the near
future or in the long term. Also, while these hedging arrangements are designed
to limit the effect of an increase in fuel prices, some of our hedging methods
may also limit our ability to take advantage of any decrease in fuel prices.
Although we have implemented measures to pass a portion of incremental fuel
costs to our customers, our ability to lessen the impact of any increase using
this type of mechanisms may also be limited.




11
 Table of Contents


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




One of
the key elements of our business strategy is to maintain a high daily aircraft
utilization rate, which measures the number of flight hours we use our aircraft
per day. High daily aircraft utilization allows us to maximize the amount of
revenue we generate from our aircraft and 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 and
delays by third-party service providers relating to matters such as fueling and
ground handling.




Furthermore,
high aircraft utilization rates increase the risk that, if an aircraft falls
behind schedule, it could remain behind schedule for up to two days. Such delays
could result in a disruption in our operating performance, leading to customer
dissatisfaction due to any resulting delays or missed connections.




We
fly and depend upon Airbus and Boeing aircraft, and our business is at risk if
we do not receive timely deliveries of aircraft, if aircraft from these
companies becomes unavailable or if the public negatively perceives our
aircraft.




As our
fleet has grown, our reliance on Airbus and Boeing has also grown. As of
February 28, 2010, we operated a fleet of 58 Airbus and 38 Boeing aircraft.
These risks include:




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




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




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




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




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




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




We
are often affected by certain factors beyond our control, including weather
conditions, which can affect our 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, some or all of our flights may be cancelled or significantly
delayed, reducing our revenues.




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;




12
 Table of Contents


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




·
            we
      will not be forced to bear substantial
losses.




Substantial
claims resulting from an accident or significant incident in excess of our
related insurance coverage could have a material adverse effect on our business,
financial condition and results of operations. Moreover, any aircraft accident,
even if fully insured, could cause the negative public perception that our
aircraft are less safe or reliable than those operated by other airlines, which
could have a material adverse effect on our business, financial condition and
results of operations.




Insurance
premiums may also increase due to an accident or incident affecting one of our
airline affiliates or alliance partners or affecting other
airlines.




High
levels of competition in the airline industry may adversely affect our level of
operations.




Our
business, financial condition and results of operations could be adversely
affected by high levels of competition within the industry, particularly the
entrance of new competitors into the markets in which we operate. Airlines
compete primarily over fare levels, frequency and dependability of service,
brand recognition, passenger amenities (such as frequent flyer programs) and the
availability and convenience of other passenger or cargo services. New and
existing airlines could enter our markets and compete with us on any of these
bases. Several of our competitors are larger than us and have greater brand
recognition and greater resources than we do. Competing carriers include
investor-owned, government-subsidized and national flag carriers of foreign
countries as well as low-cost carriers offering discounted fares. The U.S.-Chile
and other open skies agreements may subject us to further competition from
international carriers. In addition to traditional competition among airline
companies, we face competition from companies that provide ground
transportation, especially in our domestic cargo and passenger businesses, as
well as sea transportation for our cargo business. Competition could reduce our
passenger traffic and cargo demand, forcing us to reduce our fare levels, which
could have a material adverse effect on our revenues and level of
operations.




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




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




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




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




We
are incorporating various new technologies and equipment and their phase-in may
have a negative impact on our service and operating standards.




In recent
years we have decided to incorporate a number of new aircraft, equipment and
systems. The decision to incorporate these new elements has been based on their
potential to enhance customer satisfaction, increase efficiency and/or
streamline processes. However, the phase-in of these elements may temporarily
result in lower service and operating standards, which could affect how our
customers perceive us and have a negative impact on our results of
operations.




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




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. If we are unable to obtain financing
for a significant portion of our capital requirements, our ability to acquire
new aircraft or to expand operations could be impaired and our business
negatively affected.




13
 Table of Contents


Our
business may be adversely affected by our high degree of debt and aircraft lease
obligations compared to our equity capital.




We have a
high degree of debt and payment obligations under our aircraft operating leases
compared to equity capital. In order to finance our debt, we depend in part on
our cash flow from operations. We cannot assure you that in the future we will
be able to meet our payment obligations. In addition, the majority of our
property and equipment is subject to liens securing our indebtedness. In the
event that we fail to make payments on the secured indebtedness, creditors’
enforcement of liens could limit or end our ability to use the affected property
and equipment to fulfill our operational needs and thus generate
revenue.




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




Following
the 9/11 terrorist attacks, insurance companies dramatically increased airline
insurance premiums and significantly reduced the maximum amount of insurance
coverage available to airlines for liability to persons (other than passengers)
for claims resulting from acts of terrorism, war or similar events. In 2008 and
2009 we had an increase in insurance expenses. We cannot assure that these costs
will not continue to increase.




In the
event of additional terrorist attacks, hijackings, airline crashes or other
events adversely affecting the airline industry in the markets in which we
operate, airline insurers could reduce their coverage or increase their
premiums. Increases in insurance costs and/or significant reductions in coverage
could harm our financial condition and results of operations.




Problems
with air traffic control systems or other technical failures could interrupt our
operations and have a material adverse effect on our business.




Our
operations, including our ability to deliver customer service, are dependent on
the effective operation of our equipment, including our aircraft, maintenance
systems and reservation systems. Our operations are also dependent on the
effective operation of domestic and international air traffic control systems
and the air traffic control infrastructure in the markets in which we operate.
Equipment failures, personnel shortages, air traffic control problems and other
factors that could interrupt operations could adversely affect our operations
and financial results as well as our reputation.




Our
financial success depends on the availability and performance of key personnel,
who are not subject to non-competition restrictions.




Our
success depends to a significant extent on the ability of our senior management
team and key personnel to operate and manage our business effectively. Our
employment agreements with key personnel do not contain any non-competition
provisions applicable upon termination. Competition for highly qualified
personnel is intense. If we lose any executive officer, senior manager or other
key employee and are not able to obtain an adequate replacement, or if we are
unable to attract and retain new qualified personnel, our business, financial
condition and results of operations could be materially adversely
affected.




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




Approximately
44% of our employees, including administrative personnel, cabin crews, flight
attendants, pilots and maintenance technicians are members of unions and have
contracts and collective bargaining agreements which expire on a regular basis.
Our business, financial condition and results of operations could be materially
adversely affected by a failure to reach agreement with any labor union
representing such employees or by an agreement with a labor union that contains
terms that are not in line with our expectations or that prevent us from
competing effectively with other airlines.




Pressure
by employees could cause operating disruptions and negatively impact our
business.




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


14
 Table of Contents


For
example, during the third quarter of 2001, members of one of our pilot unions
implemented a series of actions that disrupted our services prior to the
negotiation of their collective bargaining agreement, which had a negative
impact on our operations and our profitability.




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




Labor
costs constitute a significant percentage of our total operating costs, 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 above
the assumed costs could result in a material reduction in our
earnings.




We
may experience difficulty finding, training and retaining
employees.




Our
business is labor intensive. We employ a large number of pilots, flight
attendants, maintenance technicians and other operating and administrative
personnel. The airline industry has, from time to time, experienced a shortage
of qualified personnel, specifically pilots and maintenance technicians. In
addition, as is common with most of our competitors, we may, from time to time,
face considerable turnover of our employees. Should the turnover of employees,
particularly pilots and maintenance technicians, sharply increase, our training
costs will be significantly higher. We cannot assure you that we will be able to
recruit, train and retain the qualified employees that we need to continue our
current operations or replace departing employees. A failure to hire and retain
qualified employees at a reasonable cost could materially adversely affect our
business, financial condition and results of operations.




Failure
to comply with applicable environmental regulations could adversely affect our
business and reputation.




Our
operations are covered by environmental regulations at local, national and
international levels. These regulations cover, among other things, emissions to
the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise
and other activities incident to our business. Future operations and financial
results may vary as a result of such regulations. Compliance with these
regulations and new or existing regulations that may be applicable to us in the
future could increase our cost base and adversely affect our operations and
financial results. In addition, failure to comply with these regulations could
adversely affect us in a variety of ways, including adverse effects on our
reputation.




Risks
Related to Chile and Other Emerging Market Countries




Developments
in Latin American countries and other emerging market countries may adversely
affect the Chilean economy, negatively impact our business and results of
operations and cause the market price of our common shares and ADSs to
decrease.




We
conduct a significant portion of our operations in emerging market countries,
particularly in Latin America. As a result, economic and political developments
in these countries, including future economic crises and political instability,
could impact the Chilean economy or the market value of our securities and have
a material adverse effect on our business, financial condition and results of
operations. Starting as of late 2008, and continuing during 2009, many of the
countries we serve, including Chile, experienced economic slowdowns or
recessions, which translated in a substantial weakening of
demand.  Although economic conditions in other emerging market
countries may differ significantly from economic conditions in Chile, we cannot
assure that events in other countries, particularly other emerging market
countries, will not adversely affect the market value of, or market for, our
common shares or ADSs.




Fluctuations
in the value of the Chilean peso and other currencies in the countries in which
we operate may adversely affect our revenues and profitability.




Changes
in the exchange rate between the Chilean peso and the U.S. dollar or other
currencies in the countries in which we operate could adversely affect our
business, financial condition and results of operations. We 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. A
significant part of our indebtedness is denominated in U.S. dollars, while 20%
of our revenues and 35% of our operating expenses in 2009 are denominated in
currencies other than the U.S. dollar, mainly the Chilean peso. If the value of
the peso, or of other currencies in which revenues are denominated, declines
against the U.S. dollar, we will need more pesos or other local currency to
repay the same amount of U.S. dollars. The Chilean peso has experienced
volatility in recent years, including an average nominal depreciation of 1.3%
against the U.S. dollar in 2008 and an average nominal depreciation of 4.7%
against the U.S. dollar in 2009. The exchange rate of the Chilean peso and other
currencies against the U.S. dollar may fluctuate significantly in the future.
Changes in Chilean and other governmental economic policies affecting foreign
exchange rates could also adversely affect our business, financial condition,
results of operations and the return to our shareholders on their common shares
or ADSs.




15
 Table of Contents


Exchange
controls in Venezuela delay our ability to repatriate cash generated from
operations in Venezuela and increase our exposure to exchange rate losses due to
potential devaluations of the Venezuelan bolivar vis-à-vis the U.S. dollar
during the period of time between the time we are paid in Venezuelan bolivares
and the time we are able to repatriate such revenues in U.S.
dollars.




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




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




Risks
Related to our Common Shares and ADSs




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




As of
March 31, 2010 our controlling shareholders, beneficially owned 34.06% of our
voting common shares. Controlling shareholders are in a position to elect four
of the nine members of our board of directors and are in a position to direct
our management. In addition, under the terms of the deposit agreement governing
the ADSs, if holders of ADSs do not provide The Bank of New York Mellon, 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 right
to vote those common shares.




Trading
of our ADSs and common shares in the securities markets is limited and could
experience further illiquidity and price volatility.




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 that you wish to do so may be substantially
limited. This limited trading market may also increase the price volatility of
the ADSs or the common shares underlying the ADSs.




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




If the
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.




16
 Table of Contents


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 required, and could again require, foreign
investors acquiring securities in the secondary market in Chile to maintain a
cash reserve or to pay a fee upon conversion of foreign currency to purchase
such securities. Further, future changes in withholding taxes could negatively
affect non-Chilean residents that invest in our shares.




When we
established our ADS facility as part of our initial public offering in 1997,
there were foreign exchange controls in Chile. At that time, in order to allow
the depositary and investors to be able to enter into foreign exchange
transactions to repatriate from Chile amounts they received in connection with
the deposited shares of common stock (including dividends and proceeds from the
sale in Chile of the underlying shares of common stock and any rights with
respect thereto), we entered into a foreign investment contract (the “Foreign
Investment Contract”) with the Central Bank and the depositary. The Foreign
Investment Contract guaranteed ADS investors and the depositary access to the
Formal Exchange Market to convert amounts from Chilean pesos into U.S. dollars
and to repatriate such amounts.




In 2001,
a new Compendium of Foreign Exchange Regulations (the “New Compendium”) removed
exchange controls and many other barriers to investment. However, even though
there are no longer foreign exchange controls in Chile, all foreign investment
contracts (including the Foreign Investment Contract), continue to remain in
full force.




We cannot
assure 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— Foreign Investment and
Exchange Controls in Chile.”




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




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




ITEM
4.           INFORMATION
ON THE COMPANY




BUSINESS




Overview




We are
one of the leading passenger airlines in Latin America and the main air cargo
operator in the region. We currently provide domestic and international
passenger services in Chile, Peru, Ecuador and Argentina. We carry out our cargo
operations through the use of belly space on our passenger flights and dedicated
cargo operations using freighter aircraft through our cargo airlines in Chile,
Brazil, Colombia and Mexico. In 2007, we initiated a strategy for stimulating
demand for air travel in our domestic markets by offering lower-fare options to
travelers, lowering our costs and increasing the aircraft utilization rates and
efficiency of operations. For more information about our short-haul operations
see “—Business of the Company— Passenger Operations—Business Model for Domestic
Operations” below.




17
 Table of Contents


As of
February 28, 2010, we serviced 15 destinations in Chile, 14 destinations in
Peru, 13 destinations in Argentina, three destinations in Ecuador, 17
destinations in other Latin American countries and the Caribbean, 3 destinations
in the United States, one destination in Canada, two destinations in Europe and
four destinations in the South Pacific. In addition, as of February 28, 2010,
through our various code-share agreements, we offer service to 25 additional
destinations in North America, 17 additional destinations in Europe, 27
additional destinations in Latin America and the Caribbean (including Mexico),
and 1 destination in Asia. We provide cargo service to all our passenger
destinations and to approximately 16 additional destinations served only by
freighter aircraft. We also offer other services, such as ground handling,
courier, logistics, and maintenance.




Lan
Airlines S.A. is a publicly-held stock corporation (sociedad anónima abierta)
incorporated under the laws of Chile. 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) 565-2525.




History
of the Company




The
Chilean government founded Lan Airlines (formerly Lan Chile S.A.) in 1929. Lan
Airlines was a government-owned company from 1929 until its incorporation in
1983. Lan Airlines began international service to Buenos Aires, Argentina in
1946, to the United States in 1958 and to Europe in 1970. In 1989, the Chilean
government sold 51% of Lan Airlines’ capital stock to Chilean investors and to
Scandinavian Airlines System. In 1994, our controlling shareholders together
with other major shareholders acquired 98.7% of Lan Airlines’ stock, including
the remaining stock held by the Chilean government, in a series of transactions.
As of March 31, 2010, the controlling shareholders held 34.06% of our capital
stock. For more information about our controlling shareholders, see “Controlling
Shareholders” and “Related Party Transactions” under Item 7.




In 1997
LAN was listed on the New York Stock Exchange, becoming the first Latin American
airline to trade its ADRs on this financial market.




Since
this acquisition of our capital stock in 1994 and the appointment of our current
management, we have grown our revenue base and maintained our profitability
every year despite significant challenges. Additionally, we have created a
comprehensive network across the region by forming, together with local
partners, or acquiring, passenger affiliates in Peru, Ecuador, and Argentina and
cargo affiliates in Brazil, Mexico and Colombia. In early 2004, we changed our
corporate image and started using the “LAN” brand in order to better reflect the
common values and attributes present in all the companies forming our network.
We have complemented our own network with a set of bilateral alliances with
carriers such as American Airlines, Iberia and Qantas, and have been a member of
the oneworld®
alliance since 2000.




Organizational
Structure




LAN is a
company primarily involved in the transportation of passengers and cargo. Our
operations are carried out principally by Lan Airlines and also by a number of
different subsidiaries. As of February 28, 2010, in the passenger business we
operated through five main airlines: Lan Airlines, Transporte Aéreo S.A. (which
does business under the name “Lan Express”), Lan Perú S.A. (“Lan Peru”),
Aerolane Líneas Aéreas Nacionales del Ecuador S.A. (“Lan Ecuador”), and Lan
Argentina S.A. (“Lan Argentina,” previously Aero 2000 S.A.).




In the
passenger business we market our sales primarily under the “LAN” brand. As of
February 28, 2010 we held a 99.9% stake in Lan Express through direct and
indirect interests, a 70.0% stake in Lan Peru through direct and indirect
interests, a 71.9% indirect stake in Lan Ecuador and a 99.0% indirect stake in
Lan Argentina.




Our cargo
operations are carried out by a number of companies, including Lan Airlines and
Lan Cargo, and are complemented by the operations of certain related companies,
such as Aero Transportes Mas de Carga S.A. de C.V. (“MasAir”), in Mexico,
Aerolinhas Brasileiras S.A. (“ABSA”), in Brazil and Linea Aérea Carguera de
Colombia S.A. (“LANCO”), in Colombia. As of March 31, 2010, we held direct and
indirect participations in MasAir (69.2%), ABSA (73.3%), and LANCO (90%). In the
cargo business, we market ourselves primarily under the Lan Cargo
brand.




In
addition to our air transportation activities, we provide a series of ancillary
services. We offer handling services, courier services and logistics, small
package and express door-to-door services through Lan Airlines and various
subsidiaries.




18
 Table of Contents


Competitive
Strengths




Our
strategy is to maximize shareholder value by increasing revenues and
profitability through leveraging the operational efficiencies between our cargo
and passenger divisions, thoroughly planning for our expansion efforts and
carefully controlling costs. We plan to accomplish these goals by both focusing
on our existing competitive strengths and implementing new strategies to fuel
our future growth. We believe our most important competitive strengths
are:




Leading
Presence in Key South American Markets




We are
one of the main international and domestic passenger airlines in Latin America,
as well as the largest cargo operator in Chile and most of the South American
markets that we serve. We hold the largest market share of passenger traffic to
and from Chile, Peru and Ecuador, as well as the largest market share of
domestic passenger traffic in both Chile and Peru. More recently, we have also
achieved a solid and growing position in the Argentine domestic market through
Lan Argentina and in the Argentine international market through Lan Argentina
and our other passenger airlines. We are also strengthening our presence in the
Ecuadorian market, where we began domestic passenger operations on April 6,
2009. We are also the leading air cargo operator within, to and from South
America, and we are consolidating our leadership through new cargo operations in
Colombia and in the Brazilian domestic market, as well as through an increased
presence in routes between South America and Europe. Our international and
domestic passenger and cargo operations have increased substantially over the
past four years in terms of capacity, traffic and revenue. Since 2005, passenger
and cargo capacity have grown 63.7% and 19.3% respectively.




Diversified
Revenue Base from both Passenger and Cargo Operations




We
believe that one of our distinct competitive advantages is our ability to
profitably integrate our scheduled passenger and cargo operations. We take into
account potential cargo services when planning passenger routes, and also serve
certain dedicated cargo routes using our freight aircraft, when needed. By
adding cargo revenues to our existing passenger service, we are able to increase
the productivity of our assets and maximize revenue, which has historically
covered fixed operating expenses per flight, lowered break-even load factors and
enhanced per flight profitability. Additionally, this revenue diversification
helps offset seasonal revenue fluctuations and reduces the volatility of our
business over time. As of December 2009, passenger revenues accounted for 71.4%
of total revenues and cargo revenues accounted for 24.4% of total
revenues.




Attractive
Cost Structure with High Utilization of our Assets and Productive
Personnel




We
believe that we have a highly competitive cost structure with a cost per ATK of
41.2 cents in 2009. Our cost advantage arises mainly from our productive and
committed employees, high aircraft utilization, modern and fuel-efficient fleet
and cost-conscious culture. Our wages and labor costs accounted for
approximately 19.8% of total costs in 2009, which we believe is a lower
percentage than that of many other U.S. and European carriers. Our itineraries
and aircraft rotations are designed to maximize aircraft utilization. During
2009, our long-haul aircraft (Boeing 767-300 passenger and Airbus A340-300s)
operated an average of approximately fourteen hours per day. As a result of the
implementation of our new business model for short-haul operations, which began
operating in 2007, we have increased the utilization of our narrow body aircraft
to reach more than ten hours by the end of 2009. In May 2008, we completed the
phase out of the Boeing B737-200 from our fleet. Our short haul fleet is now
entirely composed of Airbus A320-Family Aircraft. In addition, during 2009 we
implemented LEAN, a system for achieving excellence and continuous improvement
in our processes, which seeks to eliminate activities that do not add value to
processes, (thus increasing the value of each activity and suppressing those
that are superfluous), thereby allowing companies to reduce costs, improve
processes and increase customer satisfaction. The adoption of this system
constituted a redesigning of processes that permits solving problems that may
occur during aircraft maintenance. The foregoing renders the daily tasks and
processes carried out within the Company more efficient. Due to its
implementation, during 2009 we achieved a 37% reduction in the time an aircraft
remains in the hangar and a 37% reduction in the man-hours used in the process.
Furthermore, we were able to reduce the period for the installation of winglets
from 58 to 18 days, positioning us as the company with the best indicators for
this process. The benefits of the implementation of LEAN also included a
reduction of approximately 50% in the time that planes are on the ground, a
reduction of approximately 80% in errors and a gain of approximately 60% in
productivity. In addition, by establishing clear roles, challenges and
achievements, the implementation of LEAN has had an important benefit in terms
of employee motivation. See Item 4. “Information on the Company—Business of the
Company—Maintenance.”




19
 Table of Contents


Strong
Brand Teamed with Key Global Strategic Alliances




In March
2004 we launched the “LAN” brand, under which we operate all of our
international passenger airlines. This brand commonality enables our customers
to better identify with the high standards of service and safety that are common
to all of our airlines. This Corporate image also has improved the visibility of
our brand, and the cost effectiveness and efficiency of our marketing efforts as
we continue to expand in our existing and new markets. Additionally, we are a
member of the oneworld®
alliance, and have also entered into bilateral agreements with strategic
partners such as American Airlines, Iberia and Qantas, among others, whose
leading presence in the markets that they serve creates a truly global reach for
our passengers. Our passenger alliances and commercial agreements provide our
customers with approximately 750 travel destinations, a combined reservations
system, itinerary flexibility and various other benefits, which substantially
enhance our competitive position within the Latin American market. On April 1,
2007, Lan Ecuador and Lan Argentina became members of the oneworld®
alliance. With these new memberships, LAN and our entire passenger affiliates
are now members of this alliance.




Optimized
Fleet Strategy




We make
optimal use of our fleet structure through a combination of fewer aircraft
types, modern aircraft and staggered lease maturities. We carefully select our
aircraft based on their ability to effectively and efficiently serve our short-
and long-haul flight needs, while still striving to minimize the number of
aircraft types we operate. For short-haul flights we operate Airbus A320-Family
Aircraft. As of May 18, 2008, we stopped using Boeing 737-200 aircraft in our
Chilean domestic operations. For long-haul passenger and cargo flights we
operate Boeing 767-300 passenger aircraft and Boeing 767-300 Freighters,
respectively. For ultra long haul service, such as between Santiago and Madrid
and between Santiago and Auckland, we use Airbus A340-300 aircraft. Having a
fleet with minimal aircraft types reduces inventory costs, as fewer spare parts
are required, and reduces the need to train our pilots to operate different
types of aircraft.  LAN’s strategic fleet renewal plan involves the
sale of five Airbus A318 aircraft in 2011.




The
average age of our fleet as of February 28, 2010 was 5.7 years, making our fleet
one of the most modern in Latin America. The phasing out of our Boeing 737-200s,
our oldest aircraft, which was completed in May 2008, contributed to reducing
the average age of our fleet. Additionally, we expect that our purchase orders
of additional aircraft for delivery between 2010 and 2018 will further reduce
the average age of our fleet. We believe that having a younger fleet makes us
more cost competitive through reduced fuel consumption and maintenance costs,
and enables us to enjoy a high degree of performance reliability. In addition, a
modern and fuel efficient fleet reflects our strong commitment to the
environment as new aircraft incorporate the industry’s latest technology,
allowing for a substantial reduction in emissions, while also decreasing noise
levels.




Additionally,
our leased fleet is structured with staggered lease maturities over time to
create the strategic flexibility to expand or reduce capacity according to
market conditions. We believe that our aircraft and the flexibility of our fleet
allow us to maximize aircraft utilization by adapting rapidly to changes in
passenger and cargo demand in the markets that we serve.




Strong
Financial Position with Track Record of Growth and Profitability




We have
historically managed our business to maintain financial flexibility and a strong
balance sheet in order to accommodate our growth objectives while being able to
respond to changing market conditions. We are one of the few investment-grade
rated airlines in the world and we maintained this status during 2009, a year in
which the industry suffered significant downgrades in credit quality as a result
of the global financial crisis. We have built our strong financial position by
preserving our financial liquidity and continuing to structure long-term
financing for newly acquired aircraft. Our financial flexibility has allowed us
to secure large aircraft orders, including an important part of our current
re-fleeting program at attractive financing rates.  In 2007, we
completed a US$320 million equity offering in the domestic and international
financial markets. This equity offering further strengthened our balance sheet,
reduced our leverage ratio and improved our cash position, all of which better
enable us to continue financing our fleet expansion and renewal plans. We also
monitor and seek opportunities to reduce financial risks associated with
currency, interest rate and jet fuel price fluctuations. Over the last four
years, while much of the airline industry has faced significant competitive and
liquidity crises, we have remained consistently profitable.




Business
Strategy




The
principal areas in which we plan to focus our efforts going forward are as
follows:


20
 Table of Contents


Continue
to Grow Both our Passenger and Cargo Networks




We
currently intend to continue to expand our capacity over the next several years
to accommodate robust long-term growth in both passenger and cargo demand in the
markets we target. We plan on expanding our operations not only in the markets
we currently serve but also into new South American markets where we believe
demand exists for our combination of passenger and cargo services. To meet this
growth,




·
            as
      of May 10, 2010, we had an order book of 45 latest generation Airbus
      320-Family Aircraft to be delivered between 2010 and 2014 and three Boeing
      767-300 wide body passenger aircraft to be delivered in
    2011;




·
            as
      of May 10, 2010, our orders for freighter aircraft included one Boeing 777
      Freighter to be delivered in 2012, as well as three Boeing 767 Freighters
      to be delivered between 2013 and 2014;
and




·
            we
      also ordered thirty-two Boeing 787 Dreamliner passenger aircraft,
      currently expected to be delivered between 2011 and
  2018.




We will
continue to leverage the benefits of combining our passenger and cargo
operations. Our passenger and cargo operations are equally important aspects of
our business, and we dedicate the necessary resources, employees, facilities,
management and fleet to enable both operations to provide high-quality service
and to compete effectively in their respective markets.




Enhance
the Profitability of our Short-Haul Operations through Our New Business
Model




We plan
to continue with the implementation of the initiatives launched in 2007 to
redesign our short-haul business model, specifically in the domestic markets in
Chile and Peru. This model is also being applied in the domestic markets in
Ecuador and Argentina. In the latter, the implementation of the model is subject
to certain regulatory restrictions as a result of the fare bands in place in the
Argentinean domestic market. In addition, we are evaluating the application of
these initiatives on certain regional routes within Latin America. A key
objective of this program has been to increase the utilization of our fleet
through modified itineraries that include more point-to-point and overnight
flights and faster turnaround times. Our Boeing 737-200 fleet was completely
phased out in May 2008 in favor of the new Airbus 320-Family Aircraft. These
initiatives have increased efficiency and improved the margins of our short-haul
operations. In addition, the new fleet allows for lower unscheduled maintenance
costs, lower fuel consumption, and operational and cost efficiencies achieved
through operating fewer fleet types. Other key objectives of our new business
model include a reduction in sales and distribution costs through increased
Internet penetration, reduced agency commissions, and increased self check-in
service through web check-in and airport kiosks. We expect that these
initiatives, together with simplifications in back-office and support functions,
will continue to allow us to expand operations while controlling fixed costs,
spurring a reduction in overhead costs per ASK by year-end 2010. We have begun
to pass on a portion of these operating efficiencies to consumers through fare
reductions, which has stimulated additional demand and enhanced our overall
profitability.




Maintain
Excellent Customer Satisfaction




In both
our passenger and cargo businesses, we focus on delivering high quality services
that are valued by our customers. In our passenger businesses we strive to
achieve high on-time performance, world-class on-board service on long-haul
flights, attractive and convenient pricing and quick check-in for short-haul
flights, and the comfort afforded by a modern fleet. During the first half of
2009 we completed the reconfiguration of the cabins of all our long-haul
aircraft, including both the Boeing 767 and the Airbus A340 passenger aircraft,
in order to incorporate our new Premium Business Class including full-flat
seats, as well as improvements in economy class which include a state-of-the-art
on-board entertainment system. Our frequent flyer program, LANPASS, provides
travel benefits and rewards to almost three million loyal customers in Chile,
Argentina, Peru and Ecuador as well as in other countries where we operate. In
the cargo business, we focus on providing reliable service, taking advantage of
our ability to handle different types of cargo as well as significant cargo
volumes, and leveraging our facilities in key gateways, such as Miami, to ensure
optimal handling of our customers’ needs. We continually assess opportunities to
incorporate service improvements in order to respond effectively to our
customers’ needs.


21
 Table of Contents


Continued
Emphasis on Safety




Our top
priority is safety, and we have structured our operations and maintenance to
focus on safe flying. Our main maintenance facilities are certified by the
Federal Aviation Administration (“FAA”), DGAC and other civil aviation
authorities. Our flight and maintenance safety procedures are certified under
ISO 9001-2000 standards. We have programs in place to train our crews and
mechanics to world-class standards both at facilities abroad or at our training
centers, which we have developed in association with high-quality
partners.




Focus
on Efficiency and Sustainability




We are
increasingly concerned with improving efficiency through a series of fleet
initiatives that seek to reduce fuel consumption. The most significant is our
ongoing fleet renewal and growth plan, through which we will incorporate 85 new
aircraft between 2010 and 2018. As an example, we estimate that the Boeing 787
Dreamliner operates with costs per ASK that are approximately 12% lower than
other long haul passenger aircraft, while the new Boeing 777 freighter is
approximately 17% lower in terms of costs per ASK than the Boeing 767 freighter.
In addition, during the second half of 2010 we will finalize the installation of
winglets on our 36 Boeing 767 aircraft, achieving fuel efficiencies of
approximately 5% per aircraft. In order to mitigate the environmental impact of
our operations we seek to operate in a sustainable manner by reducing our fuel
consumption and related emissions. We also continue to focus on adjusting the
configuration of our aircraft to market demand by, for example, adjusting the
configuration of four Boeing 767s that operate on long haul routes from Ecuador
by reducing the number of Premium Business seats and increasing the number of
Economy class seats. Other long-term projects that aim at improving our cost
structure include implementing the LEAN operating processes in our maintenance
operations, as well as investing in new inventory and reservations systems
provided by Sabre.




22
 Table of Contents


BUSINESS
OF THE COMPANY




Airline
Operations and Route Network




We are
one of the main air transport operators in Latin America. As of February 28,
2010, we operated passenger airlines in Chile, Peru, Ecuador and Argentina. We
are also the largest air cargo operator in the region. Our international and
domestic passenger and cargo operations and services have increased
substantially over the past two years in terms of capacity, traffic and
revenue.




The
following table sets forth our operating revenues by activity for the periods
indicated:




Year ended
      December 31,2009
                
                
                2008(in
      US$ millions)The
      Company(1)Total
      passenger revenues
                
                
                2,623.6
                
                
                
                2,820.8Total
      cargo revenues
                
                
                895.6
                
                
                
                1,319.4Total
      traffic revenues
                
                
                3,519.2
                
                
                
                4,140.2





(1)
            Consolidated
      information provided by the
Company.




Passenger
Operations




General




As of
February 28, 2010, our passenger operations were performed through airlines in
Chile, Peru, Ecuador and Argentina where we operate both domestic and
international services.




As of
February 28, 2010, our network consisted of 15 destinations in Chile, 14
destinations in Peru, 3 destinations in Ecuador, 13 destinations in Argentina,
17 destinations in other Latin American countries and the Caribbean, 3
destinations in the United States, 1 destination in Canada, 2 destinations in
Europe and 4 destinations in the South Pacific. Within Latin America, we have
routes to and from Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, the
Dominican Republic, Ecuador, Mexico, Peru, Uruguay and Venezuela. We also fly to
a variety of international destinations outside Latin America, including
Auckland, Frankfurt, Los Angeles, Madrid, Miami, New York, Toronto, Papeete
(Tahiti) and Sydney.  In addition, as of February 28, 2010, through
our various code-share agreements, we offer service to 25 additional
destinations in North America, 17 additional destinations in Europe, 27
additional destinations in Latin America and the Caribbean (including Mexico),
and 1 destination in Asia.




23
 Table of Contents


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




Year
      ended December 31,2009
                  
                  
                  2008The
      Company(1)
      (2)ASKs
      (million)International
                  
                  
                  26,798.0
                  
                  
                  
                  25,378.3Domestic
                  
                  
                  11,979.1
                  
                  
                  
                  9,797.8Total
                  
                  
                  38,777.1
                  
                  
                  
                  35,176.2RPKs
      (million)International
                  
                  
                  20,861.8
                  
                  
                  
                  19,507.4Domestic
                  
                  
                  8,974.3
                  
                  
                  
                  7,444.5Total
                  
                  
                  29,830.1
                  
                  
                  
                  26,951.6Passengers
      (thousands)International
                  
                  
                  5,674.9
                  
                  
                  
                  8,046.4Domestic
                  
                  
                  9,731.3
                  
                  
                  
                  5,193.5Total
                  
                  
                  15,404.3
                  
                  
                  
                  13,239.9Passenger
      yield (passenger revenues/RPKs, in US cents)International
                  
                  US¢
                  8.01
                  
                  
                  
                  9.64Domestic
                  
                  US¢
                  10.39
                  
                  
                  
                  12.24Combined
      yield(3)
                  
                  US¢
                  8.80
                  
                  
                  
                  10.47Passenger
      load factor (%)International
                  
                  
                  77.8
                  %
                  
                  
                  76.9
                  %Domestic
                  
                  
                  74.9
                  %
                  
                  
                  76.0
                  %Combined
      load factor(4)
                  
                  
                  76.9
                  %
                  
                  
                  76.6
                  %





(1)
            Information
      provided for the Company consolidates Lan Ecuador and Lan
      Argentina.


(2)
            Domestic
      passenger operations include domestic operations in Chile, Peru, Argentina
      and Ecuador.


(3)
            Aggregate
      international and domestic passenger
yield.


(4)
            Aggregate
      international and domestic passenger load
  factor.




International
Passenger Operations




As of
February 28, 2010, we operated scheduled international services from Chile,
Peru, Ecuador and Argentina through Lan Airlines and Lan Express in Chile, Lan
Peru in Peru, Lan Ecuador in Ecuador and Lan Argentina in Argentina.
International passenger traffic has grown significantly in the past couple of
years due to demand growth, market share gains, increased connecting traffic to
and from other Latin American countries, the launch of new routes and additional
frequencies on existing routes, and expansion into new markets.


24
 Table of Contents




Our
international network combines our Chilean, Peruvian, Ecuadorian and Argentinean
affiliates. We have operated international services out of Chile since 1946, and
we greatly expanded our flights out of Peru and Ecuador with the creation of Lan
Peru and Lan Ecuador in 1999 and 2003, respectively. In August 2006, we expanded
our international operations through Lan Argentina, which until then had only
been offering domestic flights. This strategy is aimed at enhancing our value
proposition by offering customers more destinations and routing alternatives,
maximizing aircraft utilization, increasing load factors, leveraging
complementary seasonal patterns, and optimizing our commercial efforts. We
provide long-haul services out of our four main hubs in Santiago, Lima,
Guayaquil and Buenos Aires. We also provide regional services from Chile, Peru,
Ecuador and Argentina. Since 2004, we have grown our intra-Latin American
operations out of Lima to position it as our main regional hub. The following
table sets forth the destinations served from each of the aforementioned
countries as of February 28, 2010:




Country
      of
                  Origin
              
              Destination
              
              Number
      of
                  DestinationsChile
              
              Argentina
              
              7Bolivia
              
              2Brazil
              
              3Colombia
              
              1Cuba
              
              1Ecuador
              
              1Peru
              
              1Uruguay
              
              2Venezuela
              
              1Dominican
      Republic
              
              1Mexico
              
              2United
      States
              
              3Canada
              
              1Spain
              
              1Germany
              
              1New
      Zealand
              
              1Falkland
      Islands
              
              1French
      Polynesia
              
              1Australia
              
              1Peru
              
              Argentina
              
              2Bolivia
              
              2Brazil
              
              1Chile
              
              1Colombia
              
              4Ecuador
              
              2Venezuela
              
              1Mexico
              
              1United
      States
              
              3Dominican
      Republic
              
              1Spain
              
              1Ecuador
              
              Argentina
              
              1Chile
              
              1United
      States
              
              2Spain
              
              1Argentina
              
              United
      States
              
              1Brazil
              
              1Chile
              
              1Dominican
      Republic
              
              1Peru
              
              1




25
 Table of Contents


In line
with its orientation to service and permanent commitment to provide its
customers with the best products on the market, in 2009 LAN completed the
retrofit of all its long-haul fleet (including its Boeing 767 and Airbus A340
passenger aircraft) with the new Premium Business class and improved Economy
class. Combining the best features of the traditional First and Business
classes, the new Premium Business includes 180 degrees recline full-flat seats
which allow passengers to sleep with the maximum comfort and privacy. Premium
Business also includes top-level personalized in-flight service. Changes in
Economy class include new seats with a greater recline angle, a cushion that
slides forward for increased comfort and convenience, and larger individual
video monitors for each seat.




LAN’s
sustained development of its coverage has been a crucial factor in its growth
and 2009 was no exception. New routes were added along with flight increases in
some key existing routes in order to offer more and better alternatives to both
business and tourist travelers. In 2009, the LAN continued to consolidate its
hub in Lima, which serves as the center of its Latin American network and also
complements its intercontinental network, by opening new routes and increasing
flights on existing routes.




As part
of its mission, LAN seeks to promote tourism to South America. Due to its large
network of services, visitors from around the world can access world-renowned
destinations such as Cusco, Easter Island or Patagonia in Chile and Argentina,
including the cities of Punta Arenas, Ushuaia, El Calafate and Bariloche. In the
future, LAN plans to include the Galapagos Islands to its destinations, in order
to serve the region’s main tourist attractions.




During
the first quarter of 2010, in line with the expansion of LAN’s passenger
operations, the Company announced various new passenger destinations. For
long-haul operations, in July2010, Lan Peru will launch four weekly frequencies
between Lima and San Francisco, with connections in Sao Paulo, Santiago and
Buenos Aires. In addition, in September 2010, LAN will begin operations between
Santiago and Paris via Madrid, with three weekly flights. Regarding regional
operations, on May 10, 2010, LAN Argentina will launch three daily flights
between Santiago and Aeroparque Metropolitano Airport (“Aeroparque”) in central
Buenos Aires and during July it will begin operations between Aeroparque and Sao
Paulo.




According
to JAC data, Chilean international air passenger traffic decreased 5.8% in 2009
as compared to 2008, to approximately 4.7 million passengers. We had a 51.5%
market share in 2009, based on RPKs, compared to 50.8% in 2008. Our
international operations out of Chile can be divided into four main segments: to
North America, to Europe, to the rest of Latin America, and to the Pacific. As
of February 28, 2010, the other principal carriers that transport passengers
between Chile and North America with direct flights included American Airlines,
Delta Airlines, and Air Canada. Grupo TACA (“TACA”) and Copa Airlines (“COPA”)
also participate in the Chile-North American markets with stopovers in their
respective Central American hubs. Our main competitors on routes between Chile
and Europe were Air France-KLM and Iberia. On regional routes, our main
competitors were Aerolíneas Argentinas, Air Canada, Avianca, GOL, TACA and TAM.
We were the only airline operating between Chile and the South
Pacific.




Based on
the information provided by the Peruvian DGAC, international traffic to and from
Peru grew 4.3% between 2008 and 2009 to approximately 4.8 million passengers in
2009. In 2008 we had 36.0% of the international market share and in 2009 we had
41.7%. Our Peruvian international operations can be divided into three main
segments: to North America, Europe and to the rest of Latin America. As of
February 28, 2010, our main competitors on direct routes to North America
included American Airlines, Continental Airlines, Delta Airlines and Spirit
Airlines. TACA and COPA also participate in the Peru-North American markets with
stopovers in their respective Central American hubs. On routes to Europe, our
main competitors were Iberia, Air Comet and Air France-KLM. The other principal
carriers operating between Peru and the rest of Latin America as of that date
included Aerolíneas Argentinas, TACA Peru, Spirit, Avianca and GOL.




The
Ecuadorian international market decreased 6.4% to approximately 2.6 million
passengers between 2008 and 2009. According to travel agency statistics (“BSP”)
and our estimates, we had a 29.0% market share of the Ecuadorian international
market in 2009 compared to 26.5% in 2008. Our Ecuadorian international
operations can be divided into three main segments: to North America, to Europe
and to the rest of Latin America. As of February 28, 2010, on direct routes to
North America, our main competitors were American Airlines, Continental
Airlines, Delta Airlines and Aerolíneas Galápagos S.A. (“Aerogal”). TACA and
COPA also participate in the Ecuador-North American markets with stopovers in
their respective Central American hubs. On routes to Europe, our main
competitors were Air Comet, Iberia, and Air France-KLM. On regional routes, our
main competitors were TACA, COPA and Avianca.




26
 Table of Contents


Based on
our internal estimates, the Argentinean international market decreased 2.2% to
approximately 7.7 million passengers between 2008 and 2009. Our estimated market
share of the Argentinean international market was 17.3% in 2009 compared to
16.4% in 2008. Our Argentinean international operation consists of operations
between Buenos Aires and Miami, the Dominican Republic, Sao Paulo, Lima, Bogotá
and Santiago. As of February 28, 2010, on the Miami route, our main competitors
were American Airlines and Aerolíneas Argentinas. TAM, TACA and COPA also
participate in the Argentina-North American markets with stopovers in their
respective hubs. On the Dominican Republic route, our main competitors were COPA
and Aerolíneas Argentinas. On the Sao Paulo route, our main competitors were
TAM, GOL and Aerolíneas Argentinas. On the Lima route, our main competitor was
TACA. On the Bogotá route, our main competitor was Avianca. On the Santiago
route, our main competitors were Aerolíneas Argentinas and Air
Canada.




Business
Model for Domestic Operations




In 2007
we initiated an important project to redesign our domestic business operations
with the goal of increasing efficiency and improving the margins of LAN’s
short-haul operations, specifically with respect to our domestic operations in
Chile and Peru.  The new business model was first tested in the last
quarter of 2006. A key element of this project has been to significantly
increase the utilization of our narrow body fleet, which we have been achieving
through modified itineraries including more point-to-point and overnight
flights. We removed Boeing 737-200 aircraft from our fleet in favor of the new
more efficient Airbus A320-Family Aircraft. The Airbus A320-Family Aircraft
fleet utilization increased to over ten block hours per day in 2009. The
transition to a newer fleet allows for lower unscheduled maintenance costs as
well as cost efficiencies achieved through operating fewer fleet types and
operational efficiencies, including lower fuel consumption.




Other key
elements of our new business model are the reduction in sales and distribution
costs through higher Internet penetration and reduced agency commissions, a
faster turnaround time, and increased self-check-in service through web check-in
and kiosks at airports. These initiatives, together with simplifications in
back-office and support functions, will continue to allow us to expand
operations while controlling fixed costs, spurring a reduction in overhead
costs. We have begun to pass on these operating efficiencies to consumers
through significant fare reductions, which we expect will have a strong effect
of stimulating new demand.




In 2007,
we implemented all aspects of this new business model in the Chilean and
Peruvian domestic markets. We launched our new short-haul business model on all
domestic routes in Chile in April 2007, after a marketing campaign, which began
in March 2007. We launched the new model in all domestic Peruvian routes in
January 2007.




As a
result of the implementation of this model, we increased the number of
passengers transported in all domestic markets. Between 2006 and 2009, the
number of passengers transported increased 60% (from 2.5 million to 4.2 million)
in Chile, 99% (from 1.7 million to 3.4 million) in Peru and 224% (from 0.6
million to 1.9 million) in Argentina.




We plan
to continue with the implementation of this business model during 2010 and we
are evaluating its implementation in some regional routes, as we look for ways
to increase operational efficiency, encourage direct sales and self check-in,
and implement new sales strategies aimed at stimulating demand. Efficiency and
productivity improvements are especially important in light of the current
global economic crisis.




Operations
within Chile




Through
Lan Airlines and Lan Express we are the leading domestic passenger airline in
Chile. We have operated domestic flights in Chile since the Company’s creation
in 1929. As of February 28, 2010, we flew to fifteen destinations within Chile
(not including Easter Island, which we consider an international destination
even though it is a part of Chile, because we serve it with long-haul aircraft)
as well as some seasonal destinations. Lan Airlines and Lan Express have
integrated passenger operations, including operations under the same two-letter
“designator reservation code,” and have coordinated fare structures, scheduling
and other commercial matters in order to maximize cooperative benefits and
revenues for the two carriers. Our strategy is based on providing frequent
service to Chile’s main destinations, offering a reliable and high quality
service, and leveraging our strong brand position in Chile and abroad. We
evaluate our network of domestic routes on an ongoing basis in order to achieve
optimal operational efficiency and profitability. Our strategic objective is to
maintain our leadership position in our domestic routes.




27
 Table of Contents


During
2009 we operated an average fleet of 18 Airbus A320-Family Aircraft in the
Chilean domestic market, and we plan to operate an average fleet of 19 Airbus
A320-Family Aircraft in 2010. Domestic operations in Chile were positively
affected by the greater utilization of the latest-generation Airbus fleet and
the retirement of the Boeing 737-200s, which were completely phased-out as of
May 2008. The new business model was launched nationwide within Chile in April
2007. As a result, demand and capacity continued expanding significantly in 2009
by 16.3% and 13.4%, respectively, leading to an increase in load factor of two
percentage points, which averaged 78.5% in 2009.  We reduced sales
costs by increasing direct sales from 72% in 2008 to 78% in 2009 (with 58% of
our 2009 sales done through the Internet) and by reducing agency commissions
from 6% to 1% in February 2007. We also increased fleet utilization, crew
productivity and the average flight leg through schedule changes. Additionally,
we simplified our processes, which helped to increase the self check-in rate
from 76% in 2008 to 79% in 2009. Finally, we utilized the greater efficiency of
the Airbus aircraft to reach operational efficiencies such as reducing the
turn-around time, increasing our punctuality (which reached 91.5% in 2009) and
lowering fuel consumption. As of February 28, 2010, we operated 100% of our ASKs
with our Airbus A320-Family Aircraft fleet




According
to JAC data, the Chilean domestic market as a whole transported approximately
5.1 million passengers in 2009 and it had an increase of 9.4% in terms of RPK.
Our domestic market share in Chile was 81% for 2009 and 82% as of February 28,
2010. During 2009, our main competitors in the domestic market were Sky Airlines
and Principal Airlines, which began operations in June 2009. Sky Airlines
currently operates a fleet of 11 Boeing 737-200 and flies to13 destinations.
Principal Airlines currently operates a fleet of three Boeing 737-200 and flies
to three destinations.




There are
currently no foreign airlines participating in the Chilean domestic market.
Chile permits foreign airlines to operate in Chile if the airline’s home country
gives similar treatment to Chilean airlines. Additionally, there are no
regulatory barriers that prevent a foreign airline from creating a Chilean
subsidiary and entering the Chilean domestic market using that
subsidiary.




Operations within
Peru




Lan Peru
started operations in 1999 with domestic and international flights from
Lima.   During the past ten years, Lan Peru has expanded
consistently, consolidating its domestic operations and coverage of relevant
markets.




Regarding
the domestic market, Peru has a tremendous potential in comparison to other
Latin American markets based on per capita travel ratios.  In 2009 the
domestic market reached 3.9 million passengers and 4.4 million passengers are
expected for 2010. Compared to 2008, Lan Peru’s domestic operations in Peru
showed an expansion of 16.2% during 2009, due to an increase in the number of
flights to existing destinations. According to data provided by the Corporación Peruana de Aeropuertos y
Aviación Comercial S.A. (the Peruvian Airport and Commercial Aviation
Corporation, or “CORPAC”), our domestic market share in Peru was 68% for 2007,
71% for 2008 and 80% for 2009. A total of 3,395,707 passengers traveled on Lan
Peru’s domestic Peruvian routes in 2009, which represented an increase of 12.2%
compared to 2008. As of March 31, 2010, competitors included Star Peru, TACA, LC
Busre and Peruvian Airlines.




Lan Peru
expects to increase the connections between cities in the interior of the
country.  Cusco, the country’s most important tourist destination,
accounts for most of Lan Peru’s domestic operations and is served by 13 (and
even 18 during certain periods) flights each day. In 2010, Lan Peru expects to
start nighttime flights on this route, taking advantage of the implementation of
a new satellite air navigation system, known as RNP. Using the latest
technology, this allows planes to land, even during adverse weather conditions,
largely preventing flight cancellations.




Regarding
airport services, Lan Peru has over 100 domestic daily arrivals and departures,
with self-check levels growing steadily in the past years and reaching 75% (80%
in domestic routes) by the end of 2009.




Lan Peru
has one of the most modern fleets in Latin America, operating 16 Airbus A319
(twelve for domestic and four for regional operations).  This fleet is
ideal for the characteristics of Peruvian routes, as it maximizes available
payload in high altitude airports with tail wind conditions. Regarding
efficiency, a uniform fleet allows for low maintenance costs, high crew
productivity and operational flexibility.




28
 Table of Contents


In 2009,
Lan Peru received important awards including the “Preferred Business Executives
Airline” award by the Lima Chamber of Commerce and the Anda and Amauta de Plata
prizes for excellence in endomarketing.





Operations
within Argentina




Lan
Argentina initiated services in June 2005, covering two Argentine domestic
destinations from Buenos Aires, Cordoba and Mendoza. Between 2005 and 2007, Lan
Argentina increased the number of Argentine domestic destinations to nine adding
Bariloche, Iguazu, Comodoro Rivadavia, Rio Gallegos, Ushuaia, Calafate and
Salta. In June 2008, Lan Argentina initiated services to Neuquen and in
September 2008 to San Juan. In April 2009, Lan Argentina initiated services to
Tucuman.




From June
to November 2006, Lan Argentina replaced all its Boeing B737-200 fleet, which
consisted of five aircraft, with four Airbus A320 aircraft. We use these
aircraft in both domestic and regional operations. The replacement of these
aircraft enabled Lan Argentina to increase the scope, size and efficiency of its
operations. By the end of December 2008, we operated a fleet of eight Airbus
A320 in our domestic operations.




In the
domestic Argentine market, Lan Argentina operates in a regulated environment in
which fares sold to Argentine passengers are subject to minimum and maximum
prices that vary per route. In August 2006, by presidential decree, both the
floor and ceiling of the regulated price range were increased by 20%. The decree
delegated to the Transportation Secretary the authority to change prices, which
up to then could only be done by presidential decree, and liberalized foreign
ownership of Argentinean airlines, previously capped at 49%. In April 2008, a
new presidential decree increased both the floor and ceiling of the regulated
price range by 18%. In May 2008, a presidential decree further lifted the floor
and the ceiling of the domestic price range by an additional 18%.  In
2009, the floor and ceiling of the domestic prices were increased by an
additional 20%.




Our
domestic market share in Argentina, based on our internal estimates for December
2009 amounted to 30%. Our competitors in the Argentinean market during 2009 were
Aerolíneas Argentinas and its affiliate Austral Líneas Aéreas. Together, these
two companies held substantially the entire remaining share of the domestic
Argentine market.




Operations
within Ecuador




At the
end of 2008, Ecuador’s National Civil Aviation Council (“NCAC”) granted us
authorization to operate domestic flights in Ecuador.  In April 2009,
we started operations between Quito and Guayaquil.




As of
December 2009, LAN Ecuador operated 49 flights a week between Guayaquil and
Quito, one of the heaviest routes in Latin America, as well as four flights a
week to Cuenca from Quito and seven from Guayaquil. In September 2010, the
company also expects to incorporate flights to the Galapagos
Islands.




In its
first nine months of operations in the domestic passenger market, LAN Ecuador
carried 367,000 people, achieving a load factor of 71.1% and as of December
2009, held a 15% market share of all domestic routes. On domestic routes within
Ecuador, the company’s main competitors are Tame Línea Aérea del Ecuador
(“Tame”), Aerogal and ICARO.




Agreement
with Colombian Airline




On May 6,
2010, LAN announced an agreement to provide technical support and service
consultancy to Colombian airline Aeroasis S.A. (“Aeroasis”) while Aeroasis
completes the process of obtaining an operating permit from the Colombian civil
aviation authority (Unidad
Administrativa Especial de Aeronáutica Civil), within the established
deadline of February 2011. This process includes the hiring of personnel and
development of technical materials, as well as the selection and acquisition of
equipment, all in compliance with the applicable legal and regulatory
frameworks.




LAN’s
firm interest is that once Aeroasis obtains its operating permit, the Colombian
airline may become part of the LAN group of airline operators, through
association and integration agreements, which shall, as applicable, be submitted
for review to the corresponding regulatory authorities.




Aeroasis
was incorporated in 2006 in the Republic of Colombia for the purpose of
providing air transport for passengers, cargo and mail. Aeroasis is part of the
CORSO y Cia. S.C. group.




29
 Table of Contents


Passenger
Alliances and Commercial Agreements




The
following are our passenger alliances and partnerships as of March
2010:




·
            oneworld®.In June 2000, Lan
      Airlines and Lan Peru were officially incorporated into the oneworld®
      alliance along with Aer Lingus. oneworld®is
      a global marketing alliance consisting at that time of American Airlines,
      British Airways, Cathay Pacific Airlines, Qantas, Iberia and Finnair,
      which, among other benefits, offers improved service to its customers. In
      April 2007, JAL from Japan, Royal Jordanian from Jordan and Malev from
      Hungary, together with Lan Ecuador and Lan Argentina, joined the alliance,
      while AerLingus withdrew from the alliance. In November 2009, Mexicana
      joined the alliance. Together, these airlines are able to offer customers
      travel advantages, such as approximately 750 worldwide destinations,
      schedule flexibility and reciprocal frequent flyer program benefits.
      Additionally, oneworld® is
      the first alliance to deploy full interline e-ticketing between its
      partners.




·
            American Airlines.
      Since 1997, Lan Airlines has had an agreement with American Airlines,
      which enables Lan Airlines and American Airlines to share carrier codes
      for certain flights on global reservations systems, thereby enabling
      American Airlines passengers to purchase seats on Lan Airlines flights and
      vice-versa. The Department of Transportation, or DOT, granted antitrust
      immunity to our arrangement with American Airlines in October 1999. The
      antitrust immunity encompasses cooperation in commercial and operational
      areas such as pricing, scheduling, joint marketing efforts and reductions
      of airport and purchasing costs, as well as further implementation of
      cargo synergies in areas such as handling and other airport services. For
      more information see “—Regulation—U.S. Aeronautical Regulation—Regulatory
      Authorizations in Connection With Strategic Alliances” below. Through this
      alliance, we currently offer service to thirty additional destinations in
      the United States and Canada. In 2005, the DOT granted antitrust immunity
      to a similar agreement between Lan Peru and American Airlines. This
      antitrust immunity allows enhanced coordination between Lan Peru and
      American Airlines, and both companies established in 2007 code-share
      operations between Peru and the U.S. with additional destinations in both
      countries.




·
            Iberia. In January
      2001, Lan Airlines initiated a code-share agreement with Iberia, pursuant
      to which we offer passengers between ten and fourteen non-stop frequencies
      per week between Santiago and Madrid. In subsequent years, other
      destinations were added to the agreement, such as Alicante, Amsterdam,
      Barcelona, Bilbao, Brussels, London (Heathrow), Malaga, Milan, Paris, Rome
      and Zurich. In 2007, Lan Ecuador and Lan Peru set up code-share agreements
      with Iberia for routes between Ecuador, Peru and Spain; as well as four
      additional European destinations with Lan Peru and seven destinations with
      Lan Ecuador.




·
            Qantas. In July 2002,
      Lan Airlines initiated a code-share agreement with Qantas to operate
      between Santiago, Chile and Sydney, Australia with a stopover in Auckland,
      New Zealand. As of March 31, 2009, this code-share agreement included
      daily flights operated by Lan
Airlines.




·
            British Airways. In
      2007, Lan Airlines initiated a code-share agreement with British Airways
      on Lan Airlines flights between Sao Paulo and Santiago to provide service
      for British Airways passengers traveling from London to Santiago through a
      connection in Sao Paulo. This code-share agreement also includes British
      Airways’ flights between Madrid and
London.




·
            Aeromexico. In 2004, we
      expanded our previous alliance with Aeromexico. The new agreement includes
      all of our passenger airlines. Under this alliance, we code-share in
      flights to Mexico from Chile and Peru, as well as to eighteen domestic
      destinations in Mexico. Additionally, it provides our passengers with
      benefits such as easier connections and reciprocal accrual and redemption
      of frequent flyer program rewards.




·
            TAM: In 2007, Lan
      Airlines and Lan Peru, established regional code-share agreements with TAM
      Linhas Aéreas. Through this agreement, LAN offers twelve additional
      destinations in Brazil. LAN also code shares with Transportes Aéreos del
      Mercosur S.A. (“TAM Mercosur”) with respect to flights from Santiago to
      Asunción, Paraguay, that are operated by TAM Mercosur. These arrangements
      provide our passengers with reciprocal accrual and redemption of frequent
      flyer program rewards. In 2008, Lan Argentina established a code-share
      agreement with TAM from Buenos Aires to Sao Paulo and vice versa, which
      includes eight domestic destinations in Argentina and twelve domestic
      destinations in Brazil.




30
 Table of Contents


·
            Cathay Pacific: In May
      2010, Lan Airlines initiated a code-share agreement with Cathay Pacific to
      operate between Santiago, Chile and Hong Kong, China, through connections
      in Los Angeles, New York and
Auckland.




·
            Other alliances and
      partnerships: Since 2005, we have had a code-share agreement with
      Korean Air. Under this agreement we place our code on Korean Air flights
      between Los Angeles and Seoul, while Korean Air places its code on our
      flights from Los Angeles to Santiago. In 2004, LAN and Mexicana signed a
      frequent flyer program that allows for reciprocal accrual and allowance of
      frequent flyer benefits. Since 1999, Lan Airlines has been in an alliance
      with Alaska Airlines, which permits us to provide customers with service
      between Chile and three destinations in the west coast of the U.S. and
      Canada. Reciprocal accrual and redemption of frequent flyer program
      rewards is also available for LAN customers flying on Alaska Airlines
      flights and vice versa.




Passenger Marketing and
Sales




Even
though we market our services under the common “LAN” brand, we differentiate our
marketing strategies between our long-haul and short-haul services.




Our
long-haul marketing strategy emphasizes attributes valued by our international
customers, including reliability, high quality on-board and ground service,
comfort, comprehensive coverage of key South American markets and frequent
service to major overseas gateways such as New York, Los Angeles, Miami, Madrid
and Sydney. In order to strengthen our market position, we have continued
improving our passenger cabins and service and constantly monitor our corporate
image. As such, in 2006 we launched a retrofit program for all of our Boeing
B767-300 and Airbus A340-300 passenger aircraft, which merges our Business and
First Classes into a Premium Business Class featuring full-flat seats, new
entertainment units for both Premium Business and Economy cabins, together with
a new on-board service. In 2008, LAN received awards for “Best Business Class in
Latin America” from Business Traveler and América Economía, confirming the
positioning achieved by the Company.  Our aim is to give our long-haul
passengers a sense of a “shorter” and more pleasant flight. For our Business
passengers, our cabin features and on-board service aimed at providing the
passenger with more time to rest, and for our Economy Class passengers, our
upgraded entertainment units aim to make the flight a more enjoyable one. The
retrofit program for our Boeing 767-300 for the new configuration was completed
in December 2008, and for our Airbus A340-300 fleet, the program was completed
in May 2009, merging the Business and First Classes cabins into a Premium
Business Class. We invested US$126million in this retrofit program for all our
long haul passenger aircraft.




Our
long-haul fleet plan includes the incorporation of the new Boeing 787 as from
the first semester of 2011. LAN will be the first airline in the Western
Hemisphere, and the fifth in the world, to receive this model whose
latest-generation technology and cabin innovations represent a revolution in the
airline industry. Passengers will experience the 787’s advantages in the form of
higher cabin humidity and increased comfort. These acquisitions will allow us to
reach new destinations and boost LAN’s existing services while also continuing
to increase the efficiency of our operations.




Our
short-haul operations are designed to better match the customers’ needs in those
routes, which are punctuality, reliability, higher frequencies, modern aircraft
and efficient operations. As such, these routes now feature modern planes, most
with all-leather seats, increased frequencies with more point-to-point flights,
improved punctuality and streamlined processes including Internet sales, web
check-in and airport self-check-in. We completed the phase-out of our Boeing
B737-200 fleet in 2008 and replaced it with modern Airbus Family Aircraft such
as A320, A319 and A318.




We are
constantly focused on delivering the services and flight items valued by
customers in order to maintain high levels of customer satisfaction and we
continuously monitor our customers’ preferences through surveys and perception
studies. As a result, we created the new Premium Economy class on some regional
routes in response to comments made by our business travelers. The Premium
Economy program grants our customers preferential check-in and boarding, access
to our VIP lounges, priority baggage claim, exclusive cabins with only twelve
passengers, and personalized attention by our cabin attendants, among other
benefits.




31
 Table of Contents


As
mentioned above, we have been implementing a new business model in all our
domestic operations (Argentina, Chile, Peru and Ecuador) that seeks to make air
travel accessible to more people through low fares supported by a low-cost
operation based on the efficient use of our resources. During 2009 and the first
quarter of 2010, LAN received several awards solidifying the Company’s market
position. These awards included Best Airline Based in Central/South America
& Caribbean (Official Airline Guide) and Best Airline in South America
(Skytrax).




Branding




In March
2004, we launched our new “LAN” brand to bring together, under one strong
international name, all our local brands such as “LAN Chile,” “LAN Peru” and
“LAN Ecuador.” We developed our new brand and corporate image after an extensive
process supported by a leading global branding agency.




Our
corporate image is based on two core concepts: reliability and warmth, which
support our promise of the best travel experience to, from and within South
America.




During
2005 and 2006, we focused on advancing the transition to our new brand image.
This included the gradual repainting of our fleet, which was completed in the
second quarter of 2006. Our commercial strategy, centered on exploiting the LAN
alliance concept, has been widely recognized, as exemplified by Airline Business
magazine’s recognition of us in 2004 with its “Airline Strategy Award,
Marketing.”




Using a
single brand enabled our customers to better understand the common service and
operating standards among our airlines, and our new image improved our
visibility, which enhanced flexibility and increased the efficiency of our
marketing efforts.  It also provided a platform for the strategic use
in mature markets of the following three powerful sub-brands, all related to the
LAN root:




·
            the
      www.lan.com website for the convenience of our web booking engine and
      services platform;




·
            LANPASS
      for our frequent flyer program; and




·
            LANTOURS,
      a sub-brand that we use for the sale of travel packages, hotels and other
      ancillary products, as well as to promote tourism activities to and from
      the regions in which we operate.  LANTOURS took hold first in
      Chile and was gradually introduced into other key
  markets.




Our
regular brand tracking and marketing effectiveness measurements show outstanding
results in brand consistency and recognition, improving year after year, with
marketing investments managed at healthily stable rates. As the corporate values
behind our umbrella brand encompass attributes applicable to both operations,
long haul and short haul, a single brand strategy has resulted in significant
savings, as we only have to promote one master brand, thereby increasing the
efficiency of our marketing efforts.




Distribution
Channels




We use
direct and indirect distribution channels. In the past few years, we have
focused on streamlining our distribution strategy in order to reduce costs and
enhance the effectiveness of our commercial efforts. This effort has resulted in
efficiency gains, and we believe it should lead to further benefits in the
future.




Travel
agents conduct indirect sales that accounted for approximately 48% of passengers
during 2009. We paid these travel agents standard commissions ranging from 0% to
9% depending on the market. Consistent with our efforts to reduce commission
costs, and in line with current market practices, in recent years we have
reduced standard commissions in several markets. However, we are now charging a
fee to customers for sales done through our own ticket offices or call centers
in most countries, leaving the Internet as the only free-of-charge distribution
channel.




Travel
agents obtain airline travel information and issue airline tickets through
Global Distribution Systems, or GDSs, that enable them to make reservations on
flights from a large number of airlines. We participate actively in all major
international GDSs, including Sabre, Amadeus, Galileo and Worldspan. In return
for access to these systems, we pay transaction fees that are generally based on
the number of reservations booked through each system. As part of its continued
commitment to its passengers, in late 2009, LAN signed a series of agreements
with Sabre, one of the major suppliers of IT solutions in the global airline
industry. Through these agreements, Sabre will provide the Company with the most
advanced technology in reservation and distribution systems, optimization of
routes and operational planning. The process of implementing the new system
platforms comprises a period of adjustment and migration that will last between
two and three years until its full implementation. These agreements represent a
major step in terms of innovation by implementing the industry’s most advanced
technology to streamline business and operational processes involved in the
service the Company provides to its customers. These agreements will serve to
provide itineraries that best fit the needs of passengers and simpler, agile and
efficient attention in airports and in the sales and distribution channels,
improving LAN’s services in each of the stages of the travel
experience.




32
 Table of Contents


Direct
channels refer to sales by our own ticket offices, contact-centers and website.
In 2008, direct bookings accounted for approximately 52% of all of our
passengers.




We have
an extensive sales and marketing network in over thirty countries consisting of
more than 150 domestic and international points-of-sale owned by us and
approximately 20 general sales agents.




Our
contact-centers support the growth of our operations constituting a sales and a
multi-service channel. During 2009, we continued to grow and develop new
services to match the increasing expectations of our clients and the growth of
our direct sales channels, in particular the www.lan.com website. Our main
contact-center located in Santiago accounts for 700 agents (of which
300 are home-based) and 130 agents in Lima. We complement our contact-center’s
operations with third-party service providers that add approximately 300 agents
who are located in Santiago, Lima and Buenos Aires. In total, all the centers
handle more than 22,000 calls/contacts per day, which mainly originate from the
regions where we fly (South America, North America, Europe and Australasia) and
cover four languages (Spanish, English, Portuguese and German). We have
continually upgraded our systems by incorporating technological advances to
enhance efficiency and customer service.




Our
website, www.lan.com, is an integral part of our commercial, marketing and
service efforts. Together with other direct sales initiatives, our website
provides us with an important tool to reduce our distribution costs. Our
Internet-related sales have increased significantly in recent years, by 89% in
2008 compared to 2007, and 26% in 2009 compared to 2008, which amounted to
US$535.8 million in 2009. We are continually improving our website, a key
element of our new short-haul model, so that the technological platform can
support the expected future growth.




Besides
serving as a sales channel, we have utilized our website as a tool to provide
value-added services and enhance communications. We send weekly promotional
e-mails to more than 2.1 million subscribers. Members of our frequent flyer
program receive their monthly balances and other information by e-mail and can
access the data and redeem awards through our website. We have an active online
marketing program which brings visitors to the website from search engines and
travel-related websites.




During
2009 we improved several services on the website. We introduced the flexible
award redemption service, which enables LANPASS members to obtain flights with
their kilometers at any time of year. We also updated our Flight Information
System to ensure accurate, real time information.  In addition, we
continued to promote our web-based check-in service for domestic and
international flights. This system allows those passengers who are not
checking-in bags, to go directly to the gate, and the remaining checked-in
passengers, to leave their bags at a special bag drop counter and proceed to the
gate. In addition to web-based check-in, we have self-check kiosks in 11
airports in Chile, six airports in Peru and two airports in Argentina. As of
March 31, 2010, the kiosk and web check-in utilization rate increased to 78% for
domestic routes in Chile, 79% for domestic routes in Peru and 52% for domestic
routes in Argentina.




During
the last two years, 75% of the LAN Pass awards have been redeemed online,
because it is easier for our customers to find available seats and no service
fees are charged.




Electronic
Ticketing




In 1997,
we introduced electronic tickets, commonly referred to as e-tickets, and have
since worked to increase their use. E-tickets are a key element of our sales
efforts through the Internet and our call centers and they also produce
important simplifications in our back-office, enabling us to significantly
reduce distribution costs. Since 2008, the Company has reached a 100%
penetration of e-ticketing on all LAN routes.




Although
in mid-2005 we completed the implementation of this feature with all of our
oneworld®
partners, in 2008 there were still some exceptions for interline
e-ticketing.  Most of these exceptions were solved during 2009 and the
remaining are expected to be resolved during 2010.




33
 Table of Contents


Advertising
and Promotional Activities




Our
advertisement and promotional efforts are aimed at enhancing our brand
positioning and supporting specific aspects of our commercial efforts. Our
advertising and promotional activities include the use of television, print,
outdoors and radio advertisements as well as direct and online marketing. The
utilization of a single brand among our airlines has enabled us to launch
regional campaigns focused on highlighting key attributes such as network
reliability and warmth.




During
2009, our regional and domestic campaigns where focused on stimulating demand
due to the complex situation caused by the deceleration of the international
economy. Similarly, we carried out two regional campaigns.




The first
one was a new version of the traditional low season campaign targeted to our
domestic markets, which was called “Campaña Temporada
Irresistible” (Irresistible Season Campaign). The target of this
marketing campaign was to stimulate demand in off-peak months by for the first
time offering, “two tickets for one” on international routes.




The
second campaign was aimed at stimulating traffic demand in our Premium Businesscabin by
joint-venturing with third parties like the El Mercurio newspaper and Santander
Bank, which offered exclusive promotions for their customers to fly in Premium Businessat lowered
fares. The target of this campaign was to stimulate the corporate segment
passengers, who usually fly in the Premium Business cabin for business purposes,
but do not do so for vacations. The results of these initiatives where better
than expected.




The
Irresistible Season campaign was also implemented in some of the domestic
markets of the countries in which LAN operates. This campaign combined
attractive prices for flights and tourist packages on domestic routes within
those countries. In Chile, the campaign focused on domestic routes was carried
out under the slogan  “Chile por pocas lucas” (Chile
on a few thousand pesos), in Peru under “Precios Irresistibles XX”
(Irresistible Prices XX) and in Argentina under “Temporada Irresistible”
(Irresistible Season).




In
addition, on a country-specific level, we carried out a second campaign in Chile
to commemorate the second anniversary of the new model for domestic operations
in this country, launched in April 2007. The Company launched a one-day offer
under the slogan “Todo Chile
por 35 lucas” (All Chile for 35,000 pesos) during which over 20,000
tickets were sold through the Company’s different sales channels. The campaign
was supported by intense marketing efforts involving television, radio and
print.




In Peru,
we carried out a campaign to commemorate the tenth anniversary of LAN Peru’s
domestic operation in that country. The campaign focused on attributes such as
quality of service, travel experience and brand image. In addition, we
implemented a specific campaign in Argentina to increase brand awareness and
focus on reliability, quality of service and punctuality.




In April
2009, LAN Ecuador launched its domestic operations, which constituted a turning
point in Ecuador’s domestic market by broadening access to air travel, as a
result of lower prices and LAN Ecuador’s world-class service. We carried out a
campaign to promote this new operation, which focused on the Company’s low-cost
model, as well as its commitment to the country of Ecuador by helping to improve
connectivity within the country as well as by promoting tourism and the
country’s economic development.




Furthermore,
two global campaigns were carried out in all the countries in which LAN
operates.




The first
campaign commemorated the 80th
anniversary of the Company, where some aircraft of the Company’s fleet where
painted with the anniversary logo. The campaign focused on highlighting LAN’s
position as one of Latin America’s leading airlines in the transport of
passengers and cargo, its world-class service offered through one of the
industry’s most modern fleet and the advantages that its broad network of
destinations offers in terms of connectivity, making it the preferred airline
for its clients in most of the markets in which it operates.




The
second campaign promoted the tenth anniversary of the oneworld®alliance. As part of
the celebration of its tenth anniversary in 2009, its members painted some of
their aircraft with its logo and launched a series of special offers as a sign
of their renewed commitment to the alliance and in addition, made a number of
improvements to their online services in an effort to facilitate bookings of
flights with all its member airlines.




34
 Table of Contents


Finally,
in 2009, the Company implemented a series of measures to increase the value of
its LANPASS frequent flyer program, which has 3.4 million members across the
different countries in which it operates. In one of the most important
initiatives, it launched the Canje Flexible (Flexible
Exchange) system under which LANPASS holders have access to a larger number of
seats and, depending on the number of miles they are willing to exchange, can
choose the date at which they wish to fly during any season of the year.
Launched in the second half of 2009, this new system was well received, with the
number of miles exchanged between October and December increasing more than 40%
as compared to the same period of the previous year.




LAN has
built a comprehensive database that includes valuable information such as flying
preferences, demographic and other relevant customer information, which is used
for passenger revenue management (including targeted promotions to different
customer segments), thereby reducing dilution and maximizing response rates.
This type of information is also a source for customer metrics and monitoring
and provides significant management information.  During the past
years, the skills involved in profitably exploiting these resources were
strengthened with the incorporation of key teams to act locally in Peru,
Argentina and the United States, in close collaboration with the head
office.




Frequent
Flyer Program




Our
frequent flyer program is called LANPASS. The objective of LANPASS is to
generate incremental revenue and customer retention through customer loyalty and
targeted marketing. Worldwide, LANPASS has approximately 3.4 million
members.




Customers
earn kilometers in their LANPASS accounts based on distance flown and class of
ticket purchased. Based on an award schedule, customers can redeem kilometers
for free tickets, upgrades or other products. Under our current frequent flyer
program, our passengers are grouped into one standard level and three different
elite levels based on each passenger’s flying behavior. These different groups
determine which benefits customers are eligible to receive, such as free
upgrades on a space-available basis, VIP lounge access and preferred boarding
and check-in.




During
2009, one of aims of the program was to increase the amount of awards redeemed
by its members. In the second semester of 2009, LANPASS launched its new
redemption system called “Flexible Awards” resulting in an increase of more than
40% in kilometers redeemed. In 2009, we also took measures to strengthen the
LANPASS program in other countries of the region. These measures included the
launch of the Pichincha Bank Supermaxi-VISA LANPASS credit card in Ecuador and
the Helm Bank MasterCard LANPASS card in Colombia as well as co-branding
campaigns in Argentina, Peru, Uruguay and Chile.




LANPASS
has highly rated partners, including other airlines, hotels, car rental
agencies, retailers, and credit card issuers from the main financial
institutions in Chile, Peru, Ecuador and Argentina, which give additional
kilometers to customers for using their services. As an active member of the
oneworld®
alliance, we have reciprocal frequent-flyer agreements with all oneworld®
carriers. In addition, we have reciprocal agreements with other carriers, such
as Alaska Airlines, Aeromexico, Mexicana and TAM, which allow us to benefit from
the loyalty of their customers, as they can accrue miles under their frequent
flyer program when traveling on LAN’s flights.




The
LANPASS frequent flyer program aims to be the leading loyalty program in all of
LAN’s home markets. In the past couple of years, we have implemented a number of
marketing initiatives to increase the penetration of the program outside Chile.
In 2009, membership in LANPASS grew 36% in Peru, 27% in Ecuador and 42% in
Argentina.




35
 Table of Contents





Cargo
Operations




General




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




Year
      ended December 31,2009
                
                
                2008The
      CompanyATKs
      (millions)International
                
                
                3,609.3
                
                
                
                3,941.9Domestic(1)
                
                
                225.7
                
                
                
                138.4Total
                
                
                3,834.9
                
                
                
                4,080.3RTKs
      (millions)International
                
                
                2,580.9
                
                
                
                2,880.4Domestic(1)
                
                
                42.4
                
                
                
                26.3Total
                
                
                2,623.3
                
                
                
                2,906.7Weight
      of cargo carried (thousands of tons)International
                
                
                610.3
                
                
                
                641.1Domestic(1)
                
                
                38.9
                
                
                
                20.3Total
                
                
                649.2
                
                
                
                661.4Total
      cargo yield (cargo revenues/RTKs, in US cents)
                
                
                34.1
                
                
                
                45.4Total
      cargo load factor (%)
                
                
                68.4
                %
                
                
                71.2
                %





(1)
            Domestic
      cargo operations refer to cargo transported within
  Chile.





Our cargo
business generated revenues of US$1,319.4 million in 2008 and US$895.6 million
in 2009. This represented 30.8% and 34.5% of our operating revenues,
respectively. Cargo revenues declined 32.1% between 2008 and 2009 primarily due
to the global economic crisis that affected the industry and the decline in
salmon exports from Chile due to the ISA virus. Our international cargo routes
to, from and within Latin America accounted for around 94.0% of total cargo
revenues for 2009.




Our cargo
business generally operates on the same route network used by our passenger
airline business, which is supplemented by freighter-only operations. Overall,
it consists of 93 destinations (70 are operated by passenger and/or freighter
aircraft and approximately 23 operated only by freighter aircraft). We
complement our own operations through coordination with our regional affiliates,
MasAir in Mexico and ABSA in Brazil, which began its domestic operations in the
Brazilian market in March 2009. In addition, we launched a new cargo subsidiary
in Colombia, which began operations in March 2009. We carry cargo for a variety
of customers, including other international air carriers, freight-forwarding
companies, export oriented companies and individual consumers. For information
about our fleet, see “—Fleet—General” below.




We
transport cargo in four ways: (i) in the bellies of our passenger aircraft, (ii)
in our own dedicated freighter fleet, (iii) in belly space that we purchase from
other airlines and, (iv) in aircraft that we charter or lease pursuant to ACMI
contracts (Aircraft, Crew, Maintenance and Insurance), which are also known as
“wet-leases,” in which the lessor operates the aircraft and provides the
aircraft, crew, maintenance and insurance, pursuant to short- and medium-term
contracts.




Our
international cargo operations are headquartered in Miami, whose geographical
location positions it as the natural gateway for Latin American imports and
exports to and from the United States, and since 2001, are located in our
380,000 square-foot facilities within the Miami International Airport. The
United States accounts for the majority of the cargo traffic to and from Latin
America. Besides being the main market for Latin American exports by air, the
United States is also the main supplier of goods, such as high-tech equipment or
spare parts, transported by air to Latin American countries. To complement our
own cargo operations to the United States, we have negotiated commercial
agreements with American Airlines on some routes from Miami to
Brazil.




We
operate to three gateways in Europe: Madrid, which we serve via passenger
aircraft (using our flights from Santiago, Lima and Guayaquil), Frankfurt
(through both passenger flights and freighter operations since October 2002,
when we signed our partnership with Lufthansa Cargo (for more information on
this agreement see “—Cargo Agreements” below)), and Amsterdam (through freighter
operations since October 2005).


36
 Table of Contents


In Latin
America, the principal origins of our cargo are Chile, Colombia, Ecuador, Peru,
Argentina and Brazil, which represent a large part of our northbound traffic.
And for our southbound flights, Brazil is the main import market.




In
general terms, cargo flows are unidirectional. This characteristic is a key
determinant in the structure of cargo operations as well as in the commercial
conditions in the cargo business. This is especially relevant in markets
featuring structural imbalances between inbound and outbound flows or during
specific periods of such disequilibrium. Lack of demand in one particular
direction may force airlines to rely on different markets in order to maximize
loads on return flights. Furthermore, demand weakness in one direction may limit
the capacity that is profitable to allocate to some routes, therefore creating
pressure on fares in order to compensate for weaker revenues in one particular
direction. The evolution of our international cargo operations has always been
affected by the flow imbalances of the Latin American cargo markets, resulting
in a dramatic shift in the relative weight of southbound and northbound cargo
flows throughout the years. From 2002 to 2003, our international operations were
characterized by very strong export traffic out of Latin America, but gradual
increases in import demand, as well as the deceleration of export growth, led to
more balanced cargo flows during 2004. Further extension of this trend led to
excess demand on southbound routes since 2005.




We have
designed our operations, route network and commercial strategies with the
flexibility required to respond to changing conditions. As such, during 2003 we
allocated additional capacity to northbound routes and adjusted fares on
northbound routes in response to excess demand. During 2004 we gradually
adjusted our operations to leverage a more balanced demand environment by
performing an increased number of direct roundtrips between key export and
import markets. However, weakness in exports since 2005 has driven us to support
the northbound segment of certain routes with stopovers in additional export
markets, to reduce northbound fares to stimulate demand and to raise southbound
fares.




The
flexibility that this business model allows based on adaptation to changes in
market trends was key for LAN’s operations in 2009 when the business was
affected by the contraction of import and export markets in response to the
global economic crisis. In addition LAN Cargo saw a sharp drop in salmon exports
from Chile as a result of an outbreak of the ISA virus.




Our
international cargo traffic declined 9.7% between 2008 and 2009, from 2,906.7
million cargo revenue ton kilometers in 2008 to 2,623.3 million cargo revenue
ton kilometers in 2009. This decline was in line with the 10.1% contraction
experienced by cargo traffic of the international airline industry.
International cargo traffic accounted for approximately 94.0% of our total cargo
revenues during 2008 and 2009. The company reduced its capacity by approximately
6.0%, resulting in a 2.8 -point drop in its load factor to 68.4% in December
2009. The reduction in capacity was mainly driven by a decrease in wet leases to
approximately 4.0% of our cargo capacity, as well as by lower utilization of the
freighter fleet. LAN Cargo transported 649,197 tons of freight in 2009, down by
1.8%since 2008.




In 2009,
LAN’s cargo revenues fell by 32.1% to US$895.6 million, representing 24.5% of
the Company’s total annual revenues. The decline in revenues also reflected the
24.8% decline in cargo yields. Approximately half of this decline is explained
by the reduction of the fuel surcharge, which fell in line with the decline in
fuel prices during 2009.




A sharp
contraction of LAN’s traditional markets - imports into the region and exports
from the region - was partially offset by the implementation of a series of
measures that demonstrate the flexibility permitted by its business model. These
included primarily an adjustment of its capacity through a reduction in the
number of planes rented under Aircraft, Crew, Maintenance & Insurance
(“ACMI”) agreements and optimization of its own cargo fleet of nine Boeing 767F.
This process was also reinforced by our receipt in midyear of two new Boeing
777-200F, the most modern and efficient cargo aircraft of their type in the
world, with a capacity of 104tons of freight and a range of 9,045 kilometers
when carrying their maximum weight. This significant investment will allow LAN
to consolidate its regional competitiveness by positioning it as the first
airline in the region, and only the second internationally, to use these
latest-generation cargo planes.




37
 Table of Contents


The
Company also achieved a significant regional expansion in 2009. In March, LAN
Cargo launched LANCO, a subsidiary in Colombia, which began operations after
successfully obtaining the necessary operational and technical certification. It
launched its services with two latest-generation Boeing 767-300Fs, with a
capacity for 54 tons of freight, connecting the cities of Bogotá and Medellín
with Miami. It is important to note that Colombia is Latin America’s largest
market for exports by air to the United States reaching an estimated 200,000
tons annually.




In
addition, in March 2009, the Company’s cargo subsidiary in Brazil, ABSA, began
operations in that country’s domestic market, with one flight daily, from Monday
through Friday, between the cities of Sao Paulo and Manaos. On this route, ABSA
operates an advanced-technology Boeing 767-300F with a capacity of 54
tons.  This route accounts for a large part of Brazil’s airfreight
traffic. Sao Paulo is the country’s fourth largest city in terms of GDP, with a
large number of companies, principally part of the electronics sector, in its
industrial pole. The special tax incentives offered by the Amazon capital of
Manaos as part of efforts to promote the area’s development, make it an
attractive alternative for exporter and importer clients. In the future, the
Company also plans to open a route between each of Sao Paulo, Fortaleza and
Recife.




During
the last five years, we also improved our competitive position as key operators
reduced their operations, and competitors such as UPS and FedEx either downsized
their operations or exited some markets. Since mid-2004, competition increased
as regional carriers added capacity, but despite this increase in competition,
we have been able to maintain solid market shares in large part because of the
efficient utilization of our fleet and network. Today, on Latin America-United
States routes, our main competitors are Centurion, Transportes Aéreos
Mercantiles Panamericanos S.A., or TAMPA, Arrow, and Polar Air, and on the Latin
American-Europe routes, our main competitors are Cargolux, Lufthansa Cargo,
Martinair and Air France-KLM.




Cargo
Agreements




Since
2002, Lan Cargo and Lufthansa Cargo have had a block space agreement between
Europe and Latin America. As part of this agreement, Lan Cargo allocates space
to Lufthansa Cargo on its flights between selected cities in Latin America and
Europe, and Lufthansa Cargo allocates space to Lan Cargo on its flights between
Europe and Brazil and Argentina.




We also
have agreements with Asian carriers such as Korean Airlines, JAL, China
Airlines, Air China and Cathay Pacific through which Lan Cargo receives space
allocations from these airlines to move our cargo from Seoul, Tokyo, Taipei,
Shanghai and Hong Kong to Los Angeles and Miami connecting with our network. In
exchange, Lan Cargo provides them with space from these same two hubs in the
United States to all Latin American destinations and also feeds them with
westbound cargo.




Marketing
and Sales




Our sales
and marketing efforts are carried out either directly when we have a local
office or through general sales agents. In Latin America we have our own offices
in all key markets. In the United States we have our own offices in Miami, New
York and Los Angeles, and work with representatives in various other cities. In
Europe we have offices in Frankfurt and Madrid and use agents in other key
cities. Finally, in Asia all our sales efforts are done through general sales
agents. In total, we maintain a network of more than forty independent cargo
sales agencies domestically and internationally.




Our cargo
marketing strategy emphasizes our combination of freighter and passenger
aircraft cargo capacity, which allows customers to ship large, bulky freight, as
well as smaller, high-density cargo, fresh products, express shipments, and
other types of cargo. Our cargo marketing strategy also emphasizes our
high-quality services, scheduling flexibility and punctuality. On some routes,
Lan Cargo offers special, value-added products such as Positive Flight Specific
or FS, which enables the customer to choose a specific passenger flight to
transport its goods.




Cargo-Related
Investigations




In
February 2006 the European Commission (“EC”), in conjunction with the Department
of Justice of the United States (“DOJ”), initiated a global investigation of a
large number of international cargo airlines (among them Lan Cargo, LAN’s cargo
subsidiary) for possible price fixing of cargo fuel surcharges and other fees in
the European and United States air cargo markets. On December 26, 2007, the
European competition authorities notified Lan Cargo and LAN of the initiation of
proceedings against twenty-five cargo airlines, among them Lan Cargo, for
allegations of anti-competitive behavior in the airfreight
business.




38
 Table of Contents


Lan Cargo
is a participant of an EC leniency program, which may allow the Company to
obtain considerable reductions on penalties that may be levied by the EC. There
are many factors that prevent us from determining the final amount of such
penalties, but according to pour external counsel in Brussels, Belgium and the
directives of the EC on this matter, and considering the inherent uncertainty of
the outcome, LAN recorded during the fourth quarter of 2007 and maintains as of
December 31, 2009 a provision for an amount of US$25 million. The EC’s decision
may penalize Lan Cargo and its parent company LAN.




The
investigation by the DOJ prompted the filing of numerous civil class actions by
freight forwarding and shipping companies against many airlines, including Lan
Cargo and Lan Airlines, including fifty-four in the United States and four in
Canada. The cases filed in the United States were consolidated in the United
States District Court, Eastern District of New York and the original complaint
was subsequently amended to include additional airlines, including ABSA. On
January 21, 2009, Lan Cargo announced that it had reached a plea agreement with
the DOJ in relation to the DOJ’s ongoing investigation regarding price fixing of
fuel surcharges and other fees for cargo shipments. Under the plea agreement,
Lan Cargo agreed to pay a fine of US$88 million. In addition, ABSA also reached
a plea agreement with the DOJ and agreed to pay a fine of US$21 million. These
amounts were stipulated to be paid over a five-year payment schedule starting in
2009.  As of December 31, 2009, the pending amount to be paid during
the next four years is approximately US$90 million and has been recorded within
“Other Accounts Payable.” It is not possible at this time to anticipate with any
precision the outcome of the four civil actions that were filed in Canada
against Lan Cargo, among other airlines.




On April
5, 2008, Brazilian authorities notified ABSA of the initiation of administrative
proceedings before the Conselho Administrativo de Defesa
Econômica (the Brazilian Antitrust Authority) against several cargo
airlines and airline officers, among them ABSA, for allegations of
anticompetitive practices regarding fuel surcharges in the air cargo business.
Given the current stage of the proceedings, it is not possible at this time to
anticipate with any precision their outcome, although it is expected to be a
lengthy process.




In June
2008, the Korean Fair Trade Commission notified LAN of an investigation into the
air cargo industry and its non-compliance with the Monopoly Regulation and Fair
Trade Act and has requested information and documentation from LAN, which LAN
duly submitted. Given the current stage of the investigation, it is not possible
at this time to anticipate with any precision its outcome.




The New Zealand Commerce Commission
also initiated an investigation into potential anti-competitive activities in
the international air cargo markets and requested information and documentation
from LAN, which LAN duly submitted. On December 15, 2008, the New Zealand
Commerce Commission announced it would focus its investigation on ten airlines
and excluded LAN from further investigation.




Fleet




General




As of
February 28, 2010, we operated a fleet of 96 jet aircraft, comprised of 86
passenger aircraft and 11 cargo aircraft, as set forth in the following
chart:




Number
      of aircraft in operation
              
              
              Average
                term
      of leaseTotal
              
              
              Owned(1)
              
              
              Operating
                  lease
              
              
              remaining
                  (years)
              
              
              Average
      age
                  (years)Passenger
      aircraftAirbus
      A318-100
              
              
              15
              
              
              
              15
              
              
              
              -
              
              
              
              -
              
              
              
              2.0Airbus
      A319-100
              
              
              20
              
              
              
              20
              
              
              
              -
              
              
              
              6.3
              
              
              
              3.6Airbus
      A320-200
              
              
              18
              
              
              
              16
              
              
              
              2
              
              
              
              3.3
              
              
              
              7.0Boeing
      767-300 ER
              
              
              27
              
              
              
              17
              
              
              
              10
              
              
              
              3.7
              
              
              
              7.4Airbus
      A340-300
              
              
              5
              
              
              
              4
              
              
              
              1
              
              
              
              3.1
              
              
              
              9.7Total
      passenger aircraft
              
              
              85
              
              
              
              72
              
              
              
              13
              
              
              
              3.9
              
              
              
              5.6Cargo
      aircraftBoeing
      767-300 Freighter
              
              
              9
              
              
              
              8
              
              
              
              1
              
              
              
              3.7
              
              
              
              7.7Boeing
      777-200 Freighter
              
              
              2
              
              
              
              -
              
              
              
              2
              
              
              
              7.2
              
              
              
              0.8Total
      cargo aircraft
              
              
              11
              
              
              
              8
              
              
              
              3
              
              
              
              6.0
              
              
              
              6.4Total
      fleet(2)
              
              
              96
              
              
              
              80
              
              
              
              16
              
              
              
              4.1
              
              
              
              5.7




39
 Table of Contents





(1)
            Aircraft
      included within property, plant and
equipment


(2)
            Does
      not include one Boeing 767-200 passenger aircraft leased to Aeromexico,
      and two Boeing 737-200 passenger aircraft leased to Sky
      Airline.




LAN’s
strategic fleet renewal plan involves the sale of five Airbus A318 during
2011.




The daily
average hourly utilization rates of our aircraft for each of the periods
indicated are set forth below.




Year
      ended December 31,2009
              
              
              2008
              
              
              2007(measured
      in hours)Passenger
      aircraftAirbus
      A340-300
              
              
              14.5
              
              
              
              14.6
              
              
              
              14.7Boeing
      767-300 ER
              
              
              13.2
              
              
              
              13.6
              
              
              
              14.2Airbus
      A320-Family Aircraft
              
              
              10.3
              
              
              
              10.4
              
              
              
              10.6Cargo
      aircraftBoeing
      767-300 Freighter
              
              
              14.9
              
              
              
              16.7
              
              
              
              16.5Boeing
      777-200 Freighter
              
              
              11.3
              
              
              
              -
              
              
              
              -





We
operate different aircraft types as we perform various different missions
ranging from short-haul domestic trips to long-haul trans-continental flights.
We have selected our aircraft based on the ability to effectively and
efficiently serve these missions while trying to minimize the number of aircraft
families we operate.




·
            For
      short-haul domestic and regional flights we operate Airbus A320-Family
      aircraft. In the first half of 2008 we phased out the entire Boeing
      B737-200 fleet. The A320-Family Aircraft that we currently operate have
      been acquired pursuant to a 1999 purchase agreement with Airbus
      subsequently amended in 2005, 2008 and 2009, and also incorporated
      pursuant to operating leases. As a consequence of the amended purchase
      agreement, as of February 28, 2010, we had outstanding orders for 16
      Airbus A319 and 29 Airbus A320 aircraft for delivery between 2010 and
      2016. Our purchase contracts with Airbus provide for some flexibility with
      regard to future changes in aircraft types and delivery dates. We believe
      that our fleet of A320-Family Aircraft will allow us to provide broader
      service across Latin America as well as the domestic markets that we serve
      given their longer range. We also believe that they will enable us to
      increase efficiency levels through reduced fuel consumption and
      maintenance costs.




·
            For
      long-haul passenger and cargo flights we operate Boeing 767-300 passenger
      aircraft and Boeing 767-300 Freighters, respectively. We believe that
      these aircraft’s size and range provide an optimal alternative for most of
      our long-haul passenger and cargo routes. Additionally, the commonality
      between the passenger and dedicated cargo versions allows us to leverage
      the ensuing economies of scale. We believe that these aircraft provide a
      key efficiency advantage over our peers, especially in the cargo business.
      The aircraft that we currently operate have been incorporated into our
      fleet pursuant to operating leases or have been purchased directly from
      Boeing pursuant to various purchase orders since 1997. Between 2004 and
      2006 we placed additional orders for eighteen Boeing 767-300 Passenger and
      Freighter aircraft for delivery between 2005 and 2009. The first two
      aircraft, both freighters, were delivered during the second half of 2005.
      In 2006 and 2007, we received seven passenger aircraft featuring a new
      upgraded two-class configuration, and one additional dedicated freighter.
      Five Boeing 767-300 Passenger aircraft were delivered during 2008 and of
      the remaining three aircraft, two were delivered in 2009 and one in
      February 2010. Our contract with Boeing provides for certain flexibility
      with respect to the aircraft types to be received. In 2008, we placed an
      additional order for four Boeing B767 Passenger Aircraft, which will be
      delivered in 2012. During 2009, the delivery of these four aircraft was
      rescheduled and an additional order was placed for two Boeing 767
      passenger aircraft. Three aircraft are scheduled to be delivered in 2011
      and three in 2012.




40
 Table of Contents


·
            We
      operate five Airbus A340-300 aircraft for long-haul routes. Given their
      range and four-engine configuration, these aircraft are well suited to
      perform trans-Atlantic and trans-Pacific missions out of
      Santiago.




·
            For
      our cargo operations, we operate nine Boeing 767 Freighter and during 2009
      we received two leased Boeing 777
Freighter.




For more
information, see “Additional Information—Material Contracts” under Item
10.




During
the first quarter of 2009, we initiated the process of incorporation of
winglets, advanced technology devices, in all our Passenger and Freighter Boeing
767-300 aircraft. Winglets are placed on the wings of an aircraft causing a more
efficient use of fuel. The reduction in usage equals approximately 450,000
gallons of fuel per year, which translates to an approximate 5% decrease in fuel
consumption. The investment in this project amounts to approximately US$70
million. As of February 28, 2010, 24 aircraft have been modified. We expect to
complete the implementation of this project in the third quarter of
2010.




Historically,
we have also utilized between one and six cargo aircraft pursuant to short-term
ACMI leases. These contracts enable us to adjust capacity on a short- to
medium-term basis in order to manage the volatility of the demand for cargo
services and increase access to certain cargo destinations resulting from
increased capacity and access to destinations outside the Lan Cargo network. As
of February 28, 2010, we were utilizing one Boeing 747 Freighter and one Boeing
767-200 Freighter under ACMI leases. Our current ACMI contracts are structured
for periods of less than twelve months.




Fleet
Leasing and Financing Arrangements




Our
financing and leasing methods include borrowing from financial institutions and
leasing under financial leases, tax leases and operating leases.




In 2000,
to finance Airbus aircraft, LAN entered into a US$1.3 billion umbrella credit
facility with a syndicate of international financial institutions under which
the Company borrowed in the form of separate loans in connection with the
specific financing requirements of each Airbus aircraft (including pre-delivery
and long-term financing). This umbrella facility was guaranteed by the English,
French and German Export Credit Agencies. The repayment profile for each
aircraft financed under the facility was for a period of up to eighteen years.
Under this financing package LAN incorporated Airbus aircraft into its fleet
through operating leases, financial leases and tax leases. Even though this
facility covered the aircraft scheduled to be delivered under our 1998/9 Airbus
purchase agreements through December 31, 2006, the Company decided to fund the
2006 deliveries with a new facility negotiated in 2006. This new facility
financed the acquisition of




·
            eight
      Airbus A319 delivered in 2006;




·
            five
      A318 and two A320 delivered in
2007;




·
            ten
      A318, two A319 and two A320 delivered in 2008;
  and




·
            three
      A319 delivered in the first quarter of
2009.




This new
US$920 million facility is similar to the previous one as there are separate
loans drawn in connection with the specific financing requirements of each
Airbus aircraft and is also based on support guarantees from the European Export
Credit Agencies. Under this financing package LAN incorporated into its fleet
Airbus aircraft through financial leases. The facility covered 85% of the
purchase price of each aircraft plus the associated export credit agencies
premium. The remaining 15% was funded directly by the Company. There is no
remaining drawdown availability under this facility.




Between
2004 and 2006, LAN ordered fifteen Boeing 767-300 Passenger aircraft and
Freighters for delivery between 2005 and 2008. In 2004 the Company structured a
new syndicated facility for US$260 million to finance the entire cost of the two
Boeing 767-300 Freighters delivered in 2005 and the first Boeing 767-300
Passenger aircraft delivered in 2006. In 2005, LAN finalized the syndicated
facility to fund the purchase of four Boeing 767-300 Passenger and Freighter
aircraft for delivery in 2006. Between 2005 and 2006, LAN also finalized two
additional syndicated facilities to fund the purchase of the remaining eight
Boeing 767-300 Passenger aircraft. Three of these aircraft were delivered in
2007, and five were delivered in 2008. Each loan with respect to these aircraft
is guaranteed by the Export-Import Bank of the United States (“Ex-Im Bank”) with
a twelve-year profile for the financing of 85% of the aircraft
value.




41
 Table of Contents


On June
12, 2005, LAN finished the payments with respect to a Boeing 767-200 aircraft
that was held under a capital lease. This aircraft has been subleased to a third
party at market rate until June 2010.




In 2006,
LAN also ordered three additional Boeing 767-300 passenger aircraft for delivery
between 2009 and 2010. The first aircraft, which was delivered in November 2009,
was financed through the issuance of an Ex-Im-Bank guaranteed bond and through
LAN’s own funds (85% and 15%, respectively). The remaining two aircraft were
financed through a new Ex-Im Bank guaranteed facility and through LAN’s own
funds (85% and 15%, respectively).




In April
2007, we entered into two lease agreements with GE Commercial Aviation Services
for the lease of two Boeing 777-200LR Freighters, for delivery in 2009. In
October 2007, we signed a purchase agreement with the Boeing Company for two
additional Boeing 777-200LR Freighters to be delivered in 2011 and
2012.  In March 2010, LAN and the Boeing Company agreed to switch the
first Boeing 777-200LR Freighter for two Boeing 767-300 Passenger aircraft to be
delivered in 2011.




In the
second half of 2007, the Company decided to acquire thirty-two new Boeing 787
Dreamliner aircraft with deliveries initially scheduled between 2011 and 2016.
The Company entered into a purchase agreement with the Boeing Company for 26 of
these aircraft and entered into leasing agreement with the International Lease
Finance Corporation for the remaining six aircraft.




In
November 2008, the Company entered into a purchase agreement for four additional
Boeing 767-300 Passenger aircraft to be delivered in 2012. In March 2010, LAN
decided to replace three of these passenger aircraft for three Boeing 767-300
Freighter to be delivered between 2013 and 2014. The fourth aircraft was
rescheduled to be delivered in 2011.




During
2008, LAN decided to exercise 15 options to acquire A320-Family Aircraft. Six of
these aircraft are scheduled to be delivered in 2010 and the remaining nine
during 2011. In March 2010 LAN entered into a credit facility to finance the
entire pre-delivery payments attached to these 15 aircraft. In April 2010, LAN
entered into an agreement to finance the purchase of these 15 aircraft partially
guaranteed by the European Credit Agencies and partially through its own funds
(85% and 15%, respectively).




In
December 2009, LAN entered into a purchase agreement with Airbus for 30 aircraft
of the A320 family to be delivered between 2011 and 2016.




As of May
10, 2009, and as a result of different aircraft purchase agreements entered into
with Airbus, 45 Airbus passenger aircraft of the A320 family are expected to be
delivered between 2010 and 2014. Regarding our Boeing fleet, three Boeing
767-300 Passenger aircraft are expected to be delivered in 2011, 26 Boeing
787-8/9 passenger aircraft are expected to be delivered between 2011 and 2018,
one Boeing 777-Freighter is expected to be delivered in 2012 and three Boeing
767-300 Freighter are expected to be delivered between 2013 and
2014.




As of
March 2010, we held 16 aircraft under operating leases compared to 32 as of the
March 31, 2009. Under the terms of our operating leases, we are required to
return the aircraft in an agreed upon condition at the end of the lease.
Although the title to the aircraft remains with the lessor, we are responsible
during the lease term for the maintenance, servicing, insurance, repair and
overhaul of the aircraft.




As of
December 31, 2009, aggregate future minimum lease payments required under our
aircraft operating leases were US$444 million. Our operating leases have terms
ranging from three months to twelve years from the date of delivery of the
aircraft. For more information, see Note 2.20 to our audited consolidated
financial statements.




For more
information on our expected future capital expenditures in connection with
aircraft purchases see “Capital Expenditures” under Item 5.




Maintenance




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




42
 Table of Contents


Our
facilities at Comodoro Arturo Merino Benítez International Airport in Santiago,
Chile are among the most extensive in Latin America and have been certified
according to IOSA standards and as a FAA approved repair station. Our hangars
and components shops at our Santiago repair station can service the Boeing 767,
Boeing 777, Airbus 340 and Airbus 320 Family Aircraft fleet.




In
addition, we have facilities for designing and manufacturing galleys, structures
and composite materials, and we have the capability to retrofit aircraft
interiors, including sophisticated in-flight entertainment equipment, and
blended winglets in the Boeing 767 fleet.




Our
engineering and maintenance division is supervised by the DGAC and subjected to
several recurrent external audits from civil aviation authorities and
international entities such as the FAA, the Argentine Dirección Nacional de
Aeronavegabilidad (the National Directorate of Airworthiness or “DNA”),
the Brazilian Agencia Nacional
de Aviacao Civil (the Brazilian National Civil Aviation Agency or
“BANAC”), the International Air Transport Association Operational Safety Audit
(“IOSA”) (from the International Air Transport Association or “IATA”) and the
International Civil Aviation Organization (“ICAO”), in order to strictly comply
with applicable regulations. The audits are conducted in connection with each
country’s certification procedures and enable us to continue to perform
maintenance for aircraft registered in the certificating jurisdictions. Our
repair station holds FAA Part-145 certifications under these
approvals.




We also
rely on third parties for certain maintenance support for our aircraft and
engines. Lufthansa Technik provides our Airbus A320-Family Aircraft and A340
Aircraft component support on a power-by-the-hour basis under a long-term
contract, which runs until 2019. International Aero Engines provides the A320
and A319 engine support on a power-by-the-hour contract, which runs for twelve
years once each engine is received. Pratt and Whitney provides the A318 engine
support on a power-by-the-hour basis contract, which runs for ten years once an
engine is received. General Electric provides the maintenance of our Airbus A340
engines under a similar contract, which also runs for twelve years once an
engine is received. General Electric, which services have been contracted until
2014, provides the maintenance of most of our Boeing 767 engines. Third parties
also provide certain additional engine maintenance services. Air France-KLM,
which services have been contracted until 2015, provides the maintenance of our
Boeing 777 engines and components and to our Boeing 767-300
components.




We
occasionally perform certain maintenance services for other airlines. Our
aircraft maintenance personnel participate in extensive training programs at the
jointly operated Lufthansa LAN Technical Training S.A., located in Santiago,
Chile.




In 2009,
LAN implemented the management system known as LEAN in an effort to increase
efficiency, specifically in its operational areas. The adoption of this system
constituted a redesigning of processes that permits solving problems that may
occur during aircraft maintenance. The foregoing renders the daily tasks and
processes carried out within the Company more efficient. Internationally, the
LEAN system has been defined as a methodology for achieving excellence and
continuous improvement. It seeks to eliminate activities that do not add value
to processes, increasing the value of each activity and suppressing those that
are superfluous, thereby allowing companies to reduce costs, improve processes
and increase customer satisfaction.




Due to
the implementation of LEAN, during 2009 we achieved a 37% reduction in the time
an aircraft remains in the hangar and a 37% reduction in the man-hours used in
the process. Furthermore, we were able to reduce the period for the installation
of winglets from 58 to 18 days, positioning us as the company with the best
indicators for this process. The benefits of the implementation of LEAN also
included a reduction of approximately 50% in the time that planes are on the
ground, a reduction of approximately 80% in errors and a gain of approximately
60% in productivity. In addition, by establishing clear roles, challenges and
achievements, the implementation of LEAN has had an important benefit in terms
of employee motivation.




Safety
and Security Corporate Direction




The
Safety and Security Corporate Direction (“SSCD”) is an internal division in
charge of the management of safety and security matters related to flight
operations, operative and administrative buildings, organization and
coordination of emergency response matters, safety and security audits and
safety and occupational health.




The SSCD
reports directly to LAN’s Chief Executive Officer (“CEO”), which reflects the
firm commitment that the Company’s senior management has with its employees. The
SSCD is comprised of three independent reporting management areas: safety
management, security management and emergency response management.




43
 Table of Contents


Safety
Management




We give
high priority to providing safe and reliable air service, as it is considered a
fundamental asset to LAN and one of the basic pillars for the development of our
Company. We have uniform safety standards and safety-related training programs
that cover all of our operations. LAN has implemented a Safety and Quality
Management System (“SMS”) throughout the operational areas of the Company, which
is certified by the Chilean DGAC. The SMS provides clear definitions of the
functions and responsibilities regarding operational safety for all persons
involved, from the top to the bottom of the operational structure of the
airline. It strengthens the commitment and knowledge required from everyone in
the Company regarding any and all actions that could affect safety.




The
Operational Safety Director (“OSD”) is responsible for the Operational Safety
Oversight and the implementation of the SMS. The OSD supervises a staff of
approximately twenty-one safety specialists of different backgrounds, including
pilots, aeronautical engineers, aircraft maintenance engineers, a psychologist,
and dangerous goods and ground handling safety specialists.




Our
corporate operational safety organization consists of four main
areas:




·
            Flight
      Safety Management: The Flight Safety Area oversees and audits our
      operational safety measures, investigates major incidents and programs and
      controls the LOSA and FOQA Programs (as defined below). The Flight Safety
      Area also oversees and audits safety measures related to ground handling
      and cargo areas and investigates related
  incidents.




·
            Maintenance
      Safety Management: The Maintenance Safety Area oversees and audits our
      maintenance safety measures and investigates maintenance-related
      incidents.




·
            Flight
      Data Monitoring Management: The Flight Data Monitoring Area is responsible
      for the maintenance and administration of the recorded flight data and
      safety-related databases and
software.




·
            Corporate
      Quality Management: The Corporate Quality Management Area is responsible
      for the administration of Internal Evaluation Program conducting
      organization-wide audits in all operational
  areas.




The main
safety programs, elements and procedures include:




·
            Flight
      Operations Quality Assurance (“FOQA”). Since the end of 2002, LAN has
      been implementing a Flight Data Monitoring (“FDM”) program using mainly
      two different analysis programs. The FDM program is fully developed for
      the A320-Family Aircraft, A340 and Boeing B767 fleets and is in process of
      implementation for the Boeing B777 fleet. The statistical information
      obtained has produced standard operational procedure changes and valuable
      inputs to the Advance Qualification Program project. We have also fully
      developed a maintenance variation for the same fleets which monitors the
      engines, flight controls and general performance of the
      airplanes.




·
            Mandatory
      Occurrence and Mandatory Reports. Our operations policy manuals define the
      incidents that require a mandatory report. On a voluntary basis, personnel
      can provide confidential reports to the flight safety area in hard copy or
      electronic form.




·
            Safety
      Information Management. All safety information regarding all occurrences
      is entered into dedicated software, where it is analyzed according to its
      potential risk. Important incidents are investigated thoroughly. The
      relevant areas related to each particular incident implement corrective
      actions with the assistance of the corporate operational safety
      directory.




·
            Line
      Operation Safety Audit (“LOSA”). LOSA is a program designed to survey and
      analyze the safety components of our equipment and operations. LOSA
      observations have been conducted on the A-340, A-320 and Boeing B767
      fleets. In 2007, a second LOSA observation has been applied to the A-340
      fleet, which has given important information of the effectiveness of the
      corrective actions recommended by the first observation conducted in
      2004.




44
 Table of Contents


·
            Human
      Factors Program. This program is based on a manual developed by LAN that
      includes all interconnectivities between flight operations and human
      factors. The program includes a Fatigue Risk Management Program that is
      being implemented since 2008..  The program also includes Crew
      Resource Management and Flight Crews Training and study of incidents using
      the Threat and Error Management (“TEM”)
model.




·
            Quality
      Assurance and IOSA Certification Programs. Our flight and maintenance
      safety areas have a quality assurance system and are currently certified
      ISO 9001-2000. Our safety management system is based on the ISO 9001-2000
      standards. We also periodically evaluate the skills, experience and safety
      records of our flight crews in order to maintain strict control over the
      quality of our flight crews. All of our aircraft pilots participate in
      training programs, some of which are sponsored by aircraft manufacturers,
      and all are required to undergo recurrent training. LAN Airlines, and
      passenger subsidiaries are IOSA registered. Currently, cargo subsidiaries
      IOSA audits are ongoing.




We also
have an operational safety committee, composed of senior executives and key
operational managers, responsible for the initiation of safety-related
actions.




All of
our Boeing 767, A320, A340 and Boeing 777 fleets are equipped with an enhanced
ground proximity warning system, a traffic collision avoidance system, a wind
shear detection system and reduced vertical separation minimum
capabilities.




Since
1991, we have had no accidents involving major injury to passengers, crew or
aircraft.




Security
Management




The main
policy and the essential principle of the Company is to ensure an adequate
security protection to all its flights, aircraft, passengers, crew members,
ground personnel, airport facilities and other services related to the
commercial civil aviation against any threat or unlawful action.




The
Company has implemented corporate policies and a quality management system
through the operational system to detect any lack of security in its operations.
Audits and assessments are used to assign different levels of security to
international and domestic operations.




The Corporate Security Manager
(“CSM”) has the responsibility to evaluate, analyze and assign threat
levels (high, medium, low) to international and domestic operations, proposing
security procedures for each scenario. The CSM leads an organization of five
security managers and approximately fifteen security specialists. The current
CSM is a former police officer with more than fifteen years of experience in the
civil aviation.




The
corporate security organization has five main areas:




·
            Domestic
      Security Operations: that report to a former police officer with more than
      17 years of experience in civil
aviation.




·
            International
      Security Operations: that report to a former police officer, with more
      than 19 years of experience in civil
aviation.




·
            North
      America, Caribbean and Europe Security Operations: that report to a
      security specialist, with more than 15 years of experience in civil
      aviation.




·
            Argentinean
      Security Operations: that report to a security specialist, with more than
      20 years of experience in civil
aviation.




·
            Peruvian
      Security Operations: that report to a security specialist, with more than
      19 years of experience in civil
aviation.




Each of
the five areas is subdivided in internal investigations, fraud, training, cargo
security, security of facilities and quality control.




Since
2002, the Company’s Corporate Security Manual unified international and domestic
security procedures:




·
            Manual de Gestión de
      Seguridad (Manual of Security Management). The basis for local
      security procedures.




45
 Table of Contents


·
            Airport
      Security Plan or Airport Security Program. Approved by the DGAC for each
      country in which we have operations. It includes procedures to prevent
      unlawful conducts and procedures for a bomb threat or hijacking
      drill.




·
            Corporate
      Security Training Program. It includes the contents and definitions
      regarding security training for all areas involved in acceptance of
      aircraft, baggage, cargo and
passengers.




·
            Airport
      Security Inspection Program. It has the contents and definitions regarding
      airport inspections and identification of security issues and corrective
      action plans for non-compliance.




Emergency
Response Management




The
emergency response area is responsible for the administration of the Emergency
Response Plan (“ERP”). It has been developed for the effective management of
accidents and serious incidents with the purpose of mitigating any impacts on
the passenger, their relatives and the operations.




Our ERP
consists mainly of:




·
            Emergency
      Procedures. They are widely advertised inside the Company, approved by the
      DGAC and covered by the emergency response
  manual.




·
            Emergency
      Response Centre (“ERC”).  The ERC includes three principal
      areas: the Emergency Executive Committee, the Emergency Resolution
      Committee and the Public Relations Monitoring Area, which are located at
      our offices in Santiago, Chile, and have meetings rooms, workstations, lap
      tops, satellite TV, conference call systems, video conference facilities,
      kitchens and rest rooms.




·
            Family
      Assistance Team (“FAT”). We have an in-house family assistance program
      that we deploy for family assistance. We have about 1,470 active
      volunteers for family assistance, distributed in Santiago (1,000
      volunteers), Miami (120 volunteers), Lima (120 volunteers), Ecuador (110
      volunteers), and Buenos Aires (120 volunteers). Our FAT is complemented
      with service providers.




·
            Technical
      Inquiry Center. It is located in Santiago, Chile at our call-center
      office  and has 400 agents. Toll free lines are activated for
      family member calls and are published/broadcast to the media in case of
      emergency.




·
            Go
      Team. Field team that is dispatched within 3 hours of confirmation of an
      emergency event involving a LAN aircraft. Our Go Team includes one
      director in charge, a family and passengers assistance leader, a field
      investigation team leader and other representatives from the general
      support, security, finance, legal and maintenance
    departments.




·
            Logistic
      Area. It is activated and deployed in our head quarters and at the
      location of the accident.




Safety
and Security Audit Department




The
Safety and Security Audit Department reports directly to the Corporate Director.
This department has the mission to advise senior management on issues relating
to planning and control, design, documentation, implementation, maintenance and
improvement of the SMS of LAN and its subsidiaries.




Functions
and Responsibilities:




·
            Advise
      to senior management regarding the fulfillment of IOSA and ISAGO
      standards.




·
            Report
      to senior management the status of the SMS and Corporate Quality
      Management Area.




·
            Coordination
      of the implementation of the IOSA and ISAGO external audits with the Audit
      Organization.




·
            Participation
      in the ISAGO IATA Audit Pool.




·
            Creation
      of guidelines for the quality assurance of the operational areas of Lan
      Airlines, Lan Express and Lan Cargo, and quality coordinators of the LAN
      subsidiaries.




46
 Table of Contents


·
            Implementation
      of the Internal Audit Plan and ISAGO and IOSA audits including operational
      processes relating to safety and security, quality objectives, status of
      corrective and prevented actions, and customer
  complains.




·
            Coordination
      of corrective and preventive actions arising from the implementation of
      the SMS and corporate quality.




·
            Establishing
      the IOSA and ISAGO Training and Qualification Auditors
      Procedure.




·
            Establishing
      a corporate system to evaluate and control the external suppliers, in case
      of outsourcing services.




Safety
and Occupational Health Department




The main
objective of the Safety and Occupational Health Department is to advise, manage
and assist the Company in preventing occupational accidents and diseases through
the identification and control of hazards in the workplace and medical
surveillance. The forgoing objectives are satisfied through a dedicated team of
professionals (engineers, doctors, risk prevention experts and paramedics), who
constantly develop activities aimed at protecting LAN employees




Functions
and Responsibilities:




·
            Implementation
      and control of the preventive management
  systems.




·
            Development
      of training programs.




·
            Medical
      assistance to all injured
employees.




·
            Assessment
      of risk of work place.




·
            Preemployment
      medical assessment.




·
            Compliance
      with legal regulations regarding occupational health, safety and
      environmental issues.




·
            Promotion
      and dissemination of safety and occupational
  guidelines.




·
            Checking
      of the emergency systems installed in the
  facilities.




·
            Investigation
      of serious or fatal accidents.




Fuel
Supplies




Fuel
costs comprise the major portion of our operating expenses. Over the last years,
our fuel consumption and operating expenses have increased due to the
significant growth in our operations and to the increase in fuel prices as a
result of economic and political factors. In 2009, the foregoing trend was
affected by the global economic crisis and the total fuel costs represented
29.80% of our total operating expenses showing a decrease compared to 2008, when
the fuel price reached historical heights and represented 37.91% of our total
operating expenses. The into-wing (fuel price plus taxes and transportation
costs) 2009 average final price was of 2.12 U.S. dollars per gallon,
representing a 32.0% decrease from the 2008 average. We can neither control nor
accurately predict the volatility of fuel prices. Despite the foregoing, it is
possible to partially offset the price volatility risk through our hedging and
fuel surcharge programs in place in both our passenger and cargo business. For
more information, see “Quantitative and Qualitative Disclosures About Market
Risk —Risk of Fluctuations in Jet Fuel Prices” under Item 11.




The
following table details our consolidated fuel consumption and operating costs
(which exclude fuel costs related to charter operations in which fuel expenses
are covered by the entity that charters the flight) during the two last
years.




Year
      ended December 31,2009
                  
                  
                  2008Fuel
      consumption (thousands of gallons)
                  
                  
                  452,708.5
                  
                  
                  
                  445,667.7ATKs
      (millions)
                  
                  
                  7,811.4
                  
                  
                  
                  7,652.2Fuel
      consumption per ATK (thousands of gallons)
                  
                  
                  0.06
                  
                  
                  
                  0.06Total
      fuel costs (US$ thousands)
                  
                  
                  959,608
                  
                  
                  
                  1,388,826Cost
      per gallon (US$)
                  
                  
                  2.12
                  
                  
                  
                  3.12Total
      fuel costs as a percentage of total operating costs
                  
                  
                  29.80
                  %
                  
                  
                  37.91
                  %




47
 Table of Contents





We have
entered into fuel contracts to serve operations to more than sixty international
and domestic destinations around the world.  Contractual terms and
conditions vary for each location depending on market conditions, logistics
network, volume, economic and political factors, among others. In 2009,
approximately 27.7% of our total fuel consumption was originated in Chile where
we maintain a long-term commercial relationship with a joint venture between Air
BP and Copec, and we have entered into specific supply contracts with Petrobras
Aviation and Shell Aviation. We have more than twenty additional suppliers in
our network such as Repsol YPF, Cepsa, Primax, Petroperu, Chevron, Air Total, Q8
Aviation and Exxon Mobil. In our secondary hubs we have the following fuel
suppliers: Shell Aviation (Miami), Repsol YPF and Petroperu (Lima and Buenos
Aires) and Primax (Guayaquil).




Ground
Facilities and Services




Our main
operations are based at the Comodoro Arturo Merino Benítez International Airport
in Santiago, Chile. We also operate from various other airports in Chile and
abroad. We operate hangars, aircraft parking and other airport service
facilities at the Comodoro Arturo Merino Benítez International Airport and other
airports throughout Chile pursuant to concessions granted by the DGAC. We also
maintain one customs warehouse at the Comodoro Arturo Merino Benítez
International Airport, additional customs warehouses in Chile (Iquique,
Antofagasta and Punta Arenas) and Argentina (Aeroparque) and operate cargo
warehouses at the Miami International Airport to service our cargo customers.
Our facilities at Miami International Airport include corporate offices for our
cargo and passenger operations and temperature-controlled and freezer space for
imports and exports.




We have
VIP lounges at the Comodoro Arturo Merino Benítez International Airport. The
7,500 square foot Neruda lounge, which represented an investment of
approximately US$550,000 in 2001, has been widely acclaimed. In 2005, Latin Trade magazine selected
it as the “Best Airline Lounge” in Latin America.




Finally,
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
addition to our airline operations, we generate revenues from a variety of other
activities. In 2009, LAN generated other revenues of US$154.5
million.




Our total
revenue from aircraft leases (including subleases to certain of our cargo
affiliates, dry-leases, wet-leases and capacity sales to alliance partners) and
charter flights amounted to US$20.7 million in 2009.




LAN also
provides cargo-related services such as courier, warehousing, value-added
door-to-door services and customs services, through various subsidiaries.
Through our subsidiary Blue Express Intl. (“Blue Express,” formerly Lan Courier)
we operate vans and trucks and offer distribution and warehouse services
throughout Chile. By using tracking and Internet technology, Blue Express
customers have real-time access to data regarding the status of their parcels.
During 2009, our logistics and courier businesses generated revenues of US$33.1
million. We also have storage and customs and warehousing operations that
generated revenues of US$18.7 million in 2009.




During
2009, we had revenues of US$31.1 million for tours and US$9.6 million for
duty-free in-flight sales. The balance of our operating revenues, US$23.2
million in 2009, was generated by maintenance and handling. Other revenues in
2009 decreased mainly driven by a decrease in onboard sales, storage and custom
services to third parties and lower revenues from aircraft leases, partially
offset by higher revenues from tour and travel services. The decline of other
revenues in 2009 was also explained by the fact that other revenues in 2008
included US$5.9 million in compensation from Airbus related to a change in the
delivery schedule for certain Airbus A318 aircraft.




48
 Table of Contents


Insurance




We carry
hull insurance that includes, among other coverage, “all risk,” war and allied
risks, spares and liability for passengers, cargo, mail, baggage and third
parties. We renew our insurance coverage yearly, and are subject to deductibles
that vary depending on the coverage type and the loss type. Our deductibles are
US$1,250 for loss or damage associated with passengers’ baggage liabilities,
US$10,000 for loss or damage associated with cargo liabilities and between
US$500,000 and US$1.0 million for hull “all risk” insurance (depending on the
aircraft type). Additionally, we have hull deductible coverage to reduce the net
hull deductible to US$100,000 per occurrence (aircraft and/or
engine).




Since
December 2006, we have negotiated common terms for Hull All Risk, Aviation Legal
Liabilities and Spares coverage, together with British Airways, which allows us
to obtain premium reductions and coverage improvements.




Our
insurance coverage has a one-year term starting in April of each year. The
aggregate cost of our insurance coverage for the 2009 calendar year was US$15.2
million, which represents a 4.8% increase in insurance expenses and a 4.4%
decrease in average insurance rates compared to the 2008 calendar
year.




Information
Technology




General




We use
information technology in almost every aspect of our business.




With the
exception of our reservations, departure control (check-in), inventory, flight
planning and baggage tracing systems, which are operated by Amadeus, Sabre,
Iberia and SITA, we operate our internal systems from two data center facilities
in Santiago, Chile. In 2006, we implemented a Disaster Recovery Plan between
those two sites in order to ensure the functionality of our critical systems,
with a recovery time objective of four days.  The line of business
infrastructure currently has a recovery time of, on average, two hours for 80%
of our systems and, on average, two days for the remaining 20%.




Third-party
suppliers provide us with the following technical infrastructure
elements:




·
            wide-area
      data network (provided mainly by SITA and Telefónica);
  and




·
            data
      centers and desktop operations and support (provided by Accenture and
      IBM).




Basic
Infrastructure Operation




Since
early 2010, we have outsourced our IT infrastructure with Accenture and IBM
worldwide. IBM manages the data center and Accenture handles our desktop
equipment. This outsourcing allowed us to:




·
            deliver
      a standard world-class service;




·
            increase
      the efficiency of our IT
operations;




·
            convert
      fixed costs into variable costs;




·
            guarantee
      that the service standards (such as up-time and response time) required by
      critical processes of our business are
  fulfilled;




·
            accelerate
      critical infrastructure projects while significantly reducing the
      resources required;




·
            increase
      the efficiency of our personnel;
and




·
            focus
      internal IT efforts on business functions, rather than basic hardware and
      software issues.




Telecommunications




We have
used the latest technology available with regard to our global
telecommunications network. Our network has the capacity to transport voice,
data, and video with the quality required by the Company, combining traditional
private data channels with virtual private networks through the
Internet.




49
 Table of Contents


Front-End
Systems




During
2002, we deployed new systems to support our sales personnel. These systems
provide the employees who have a direct contact with our customers with
additional tools to improve service, enhance customer information and increase
efficiency. During 2004 and 2005, we implemented these systems at our airport
counters and our call centers.




Since
2005, we have favored a strategy of encouraging and facilitating self service
alternatives for customers, through improving the functionality of the
www.lan.com website as well as implementing self check-in kiosks in
airports.




During
2009, we deployed a new online system in order to provide the processes that our
engineering, maintenance and materials areas develop, with technological
solutions.  This project has allowed us to establish and automate
simple and integrated processes, standardize processes for the Company
(including our subsidiaries and related companies), facilitate handling of
materials and maintenance, make relevant information available in a full, unique
and consistent way to all users, and optimize distribution and execution
(planned and non planned), among other benefits.




Enterprise
Resource Planning




In 2002,
we purchased an enterprise resource planning (“EREP”) system from SAP. This
system was fully implemented in the second quarter of 2004 for Lan Airlines and
almost all of its subsidiaries. This EREP system includes modules covering areas
such as: finance, accounting, inventory management, human resources, business
warehouse, as well as a user-friendly portal. We are currently working in
optimizing and simplifying this system, and in leveraging it to increase the
efficiency of our back-office processes.




Development
and Maintenance System




With
respect to new development needs, our first choice is to acquire existing
packaged software, but we outsource this service when such software is not
available in the market.  Since early 2007, we have outsourced our IT
system development to three principal vendors:  TATA Consultancy
Services, Everis and Indra.  Thanks to this outsourcing initiative, we
have achieved:




·
            a
      decrease in project delays;




·
            an
      increase in systems reliability;
and




·
            a
      shift in the efforts of the internal IT department to a more business
      oriented perspective.




New
initiatives




We are implementing a new
host (“Host”). A Host change is one of the most important decisions for the
passenger business division in an airline in terms of process and technology. It
consists in replacing the PSS, or Passenger Service System, that contains the
reservation, inventory and departure control systems of an airline. This
decision permits the understanding of the software from an aviation industry
provider in ASP mode, adherence to standard processes and best industry
practices and the integration of multiple legacy applications that complement
the needs of the processes model for the airline business. For LAN, the Host
change implies going from two suppliers (Amadeus and Resiber) currently covering
the role of the complete PSS, to a single supplier (Sabre). This project
represents an investment of US$50.0 million and will provide savings of 75% per
passenger in reservation transaction costs.




The IT
department expects to implement a Technology Refreshing Project between 2010 and
2012, to move to the platforms that will host our applications and services for
the next five years.  During 2010, Lan Airlines will define the Technology
Refreshing Project and all the platforms, software, solutions and services that
it will use to support its business. These hardware and software solutions will
be gradually implemented   between 2011 and 2012.




Regulation




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




50
 Table of Contents


Chile




Aeronautical
Regulation




Both the
DGAC and the 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 regulates the assignment
of international routes, and the compliance with certain insurance requirements,
and 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, an agency of
the United Nations established in 1947 to assist in the planning and development
of international air transport. The ICAO establishes technical standards for the
international aviation industry, which Chilean authorities have incorporated
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 relevant technical standards.




Route
Rights




Domestic Routes.Chilean
airlines are not required to obtain permits in connection with carrying
passengers or cargo on any domestic routes, but only to comply with the
technical requirements established by the DGAC. Non-Chilean airlines are
permitted to provide domestic air service between destinations in Chile,
provided that the country in which the foreign airline is based grants a
reciprocal right to Chilean airlines. 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.




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




Airfare Pricing Policy.Chilean airlines are permitted to establish their own domestic and
international fares without government regulation, as long as they do not abuse
any dominant market position they may enjoy. For more information, see
“Antitrust Regulation” below. Airlines may file complaints before the Antitrust
Court with respect to monopolistic or other pricing practices by other airlines
that violate Chile’s antitrust laws. In 1997, the Antitrust Commission approved
and imposed a specific self-regulatory fare plan for our domestic operations
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 twenty days in
advance. We must file notice with the JAC of any increase in fares on
“competitive” routes at least ten 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.




51
 Table of Contents


Registration of Aircraft.Aircraft registration in Chile is governed by the Chilean Aeronautical
Code (“CAC”). In order to register or continue to be registered in Chile, an
aircraft must be wholly owned by either:




·
            a
      natural person who is a Chilean citizen;
or


·
            a
      legal entity incorporated in and having its domicile and principal place
      of business in Chile and a majority of the capital stock of which is owned
      by Chilean nationals, among other requirements established in article 38
      of the CAC.




The
Aeronautical Code expressly allows the DGAC to permit registration of aircraft
belonging to non-Chilean individuals or entities with a permanent place of
business in Chile. Aircraft owned by non-Chileans, but operated by Chileans or
by an airline which is affiliated with a Chilean aviation entity, may also be
registered in Chile. Registration of any aircraft can be cancelled if it is not
in compliance with the requirements for registration and, in particular,
if:




·
            the
      ownership requirements are not met;
or


·
            the
      aircraft does not comply with any applicable safety requirements specified
      by the DGAC.




Safety.The DGAC requires
that all aircraft operated by Chilean airlines be registered either with the
DGAC or with an equivalent supervisory body in a country other than Chile, so
long as that country is a member of the Warsaw Convention. All aircraft must
have a valid certificate of airworthiness issued by either the DGAC or an
equivalent non-Chilean supervisory entity. In addition, the DGAC will not issue
maintenance permits to a Chilean airline until the DGAC has assessed the
airline’s maintenance capabilities. The DGAC renews maintenance permits
annually, and has approved our maintenance operations. Only DGAC-certified
maintenance facilities or facilities certified by an equivalent non-Chilean
supervisory body in the country where the aircraft is registered may maintain
and repair the aircraft operated by Chilean airlines. Aircraft maintenance
personnel at such facilities must also be certified either by the DGAC or an
equivalent non-Chilean supervisory body before assuming any aircraft maintenance
positions.




Security.The DGAC
establishes and supervises the implementation of security standards and
regulations for the Chilean commercial aviation industry. Such standards and
regulations are based on standards developed by international commercial
aviation organizations. Each airline and airport in Chile must submit an
aviation security handbook to the DGAC describing its security procedures for
the day-to-day operations of commercial aviation and procedures for staff
security training. Lan Airlines has submitted its aviation security handbook to
the DGAC. Chilean airlines that operate international routes must also adopt
security measures in accordance with the requirements of applicable bilateral
international agreements.




Airport Policy.The DGAC
supervises and manages airports in Chile, including the supervision of take-off
and landing charges. The DGAC proposes airport charges, which are approved by
the JAC and are the same at all airports. Since the mid-90s, a number of Chilean
airports have been privatized, including the Comodoro Arturo Merino Benítez
International Airport in Santiago. At the privatized airports, the airport
administration manages the facilities under the supervision of the DGAC and
JAC.




Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon
airlines, applicable to aircraft, or that otherwise affect us in Chile, except
for environmental laws and regulations of general applicability. There is no
noise restriction regulation currently applicable to aircraft in Chile. However,
Chilean authorities are planning to pass a noise-related regulation governing
aircraft that fly to and within Chile. The proposed regulation will require all
such aircraft to comply with certain noise restrictions, referred to in the
market as Stage 3 standards. LAN’s fleet already complies with the proposed
restrictions so we do not believe that enactment of the proposed standards would
impose a material burden on us.




52
 Table of Contents


Argentina




Aeronautical
Regulation.




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




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




Route
Rights




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




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




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




Airfare Pricing Policy.Argentine airlines are permitted to establish their own international
fares without government regulation, as long as they do not abuse any dominant
market position they may enjoy. Yet, there are government-fixed maximum and
minimum prices for domestic flights.




Registration of Aircraft.Aircraft registration in Argentina is governed by the Argentinean
Aeronautical Code (“AAC”). In order to register or continue to be registered in
Argentina, an aircraft must be wholly owned by either:




·
            a
      natural person who is an Argentinean citizen;
or


·
            a
      legal entity incorporated in and having its domicile and principal place
      of business in Argentina and a majority of the capital stock of which is
      owned, directly or indirectly, by Argentinean nationals, among other
      requirements established in the
AAC.




Safety.ANAC requires that
all aircraft operated by Argentinean airlines be registered with ANAC. All
aircraft must have a valid certificate of airworthiness issued by ANAC. In
addition, ANAC will not issue maintenance permits to an Argentinean airline
until ANAC has assessed the airline’s maintenance capabilities. ANAC renews
maintenance permits periodically and approves maintenance operations once the
airline initiates its operations and each time an airline changes its
maintenance regime. Only ANAC-certified maintenance facilities (in Argentina or
in any other country) may maintain and repair the aircraft operated by
Argentinean airlines. Aircraft maintenance personnel at such facilities must
also be certified by ANAC before assuming any aircraft maintenance
positions.




53
 Table of Contents


Security.ANAC establishes
and supervises the implementation of security standards and regulations for the
Argentinean commercial aviation industry. Such standards and regulations are
based on standards developed by international commercial aviation organizations.
Each airline and airport in Argentina must submit an aviation security handbook
to ANAC describing its security procedures for the day-to-day operations of
commercial aviation and procedures for staff security training. Lan Argentina
has submitted its aviation security handbook to ANAC. Argentinean airlines that
operate international routes must also adopt security measures in accordance
with the requirements of applicable bilateral international
agreements.




Airport Policy.The ORSNA
(Organismo Regulador del
Sistema Nacional de Aeropuertos) supervises and manages the airports in
Argentina, including the supervision of take-off and landing charges. The ORSNA
proposes airport charges, which are approved by ANAC and are the same at all
airports. Nevertheless, while domestic flights are charged in local currency,
international flights are charged in U.S. dollars. Since the late-90s, a number
of Argentinean airports have been privatized, including Aeroparque and
Aeropuerto Internacional de Ezeiza Ministro Pistarini in Buenos Aires, the two
most important airports in Argentina. At the privatized airports, the airport
administration manages the facilities under the supervision of ANAC and
ORSNA.




Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon
airlines, applicable to aircraft, or that otherwise affect us in Argentina,
except for environmental laws and regulations of general applicability and noise
restriction regulation currently applicable to aircraft in Argentina. Any
aircraft operated by an Argentinean airline should comply with certain noise
restrictions, specifically with Stage 3 standards, as set forth in chapter
91.805 of the Argentinean civilian aviation regulations (Regulaciones Argentinas de Aviación
Civil) referred to in the market as Stage 3 standards. LAN’s fleet
already complies with the proposed restrictions so we do not believe that
enactment of the proposed standards would impose a material burden on
us.




Peru




Aeronautical
Regulation.




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




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




Route
Rights




Domestic Routes.Peruvian
airlines are required to obtain permits in connection with carrying passengers
or cargo on any domestic routes, but only 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, Lan 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.




54
 Table of Contents


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




Airfare Pricing Policy.Peruvian airlines are permitted to establish their own domestic and
international fares without government regulation, as long as they do not abuse
any dominant market position they may enjoy. For more information, see
“Antitrust Regulation” below. Airlines may file complaints before the Institute
for Protection of Fair Competition and Consumer Rights (“Indecopi”) with respect
to monopolistic or other pricing practices by other airlines that violate Peru’s
antitrust laws.




Registration of Aircraft.Aircraft registration in Peru is governed by the Peruvian Civil Aviation
Law. In order to register or continue to be registered in Peru, an aircraft must
be wholly owned by either:




·
            a
      natural person who is a Peruvian citizen; or is domiciled in Peru;
      or


·
            a
      legal entity incorporated in and having its domicile and principal place
      of business in Peru and a majority of the capital stock of which is owned
      by Peruvian nationals, among other requirements established in article 47
      of the  Peruvian Civil Aviation
Law.




The Civil
Aviation Law expressly allows the PDGAC to permit registration of aircraft
belonging to non-Peruvian individuals or entities with a permanent place of
business in Peru. Aircraft owned by non-Peruvians, but operated by a Peruvian
airline, may also be registered in Peru but only if the aircraft is used for
general, not commercial aviation.  Registration of any aircraft can be
cancelled if it is not in compliance with the requirements for registration and,
in particular, if:




·
            the
      ownership requirements are not met;
or


·
            the
      aircraft does not comply with any applicable safety requirements specified
      by the PDGAC.




Safety. Peruvian law allows
the use of aircrafts that are registered either with the PDGAC or with an
equivalent supervisory body in a country other than Peru. All aircraft must have
a valid certificate of airworthiness issued by either the PDGAC or an equivalent
non-Peruvian supervisory entity. In addition, the PDGAC will not issue
maintenance permits to a Peruvian airline until the PDGAC has assessed the
airline’s maintenance capabilities. The PDGAC renews maintenance permits
annually, and has approved our maintenance operations. Only PDGAC-certified
maintenance facilities or facilities certified by an equivalent non-Peruvian
supervisory body in the country where the aircraft is registered may maintain
and repair the aircraft operated by Peruvian airlines. Aircraft maintenance
personnel at such facilities must also be certified either by the PDGAC or an
equivalent non-Peruvian supervisory body before be appointed to any aircraft
maintenance positions.




Security.The PDGAC
establishes and supervises the implementation of security standards and
regulations for the Peruvian commercial aviation industry. Such standards and
regulations are based on standards developed by international commercial
aviation organizations. Each airline and airport in Peru must submit an aviation
security handbook to the PDGAC describing its security procedures for the
day-to-day operations of commercial aviation and procedures for staff security
training. Lan Peru has submitted its aviation security handbook to the PDGAC.
Peruvian airlines that operate international routes must also adopt security
measures in accordance with the requirements of applicable bilateral
international agreements.




Airport Policy. CORPAC
supervises and manages airports in Peru, including the supervision of take-off
and landing charges. CORPAC sets airport charges for navigation facilities,
which may differ  from airport to airport. Since the mid-90s, a number
of Peruvian airports have been privatized, including the Aeropuerto
Internacional Jorge Chávez in Lima. At the privatized airports, the airport
administration manages the facilities under the supervision of the Organismo Supervisor de la Inversión
en Infraestructura de Transporte de Uso Público, (the Supervising Agency
of Investment in Public Transport Infrastructure Facilities or “OSITRAN”), an
independent regulatory and supervising entity.




55
 Table of Contents


Environmental and Noise Regulation.There are no material environmental regulations or controls imposed upon
airlines, applicable to aircraft, or that otherwise affect us in Peru, except
for environmental laws and regulations of general applicability, but there are
noise restriction regulations currently applicable to aircraft in Peru. LAN’s
fleet complies with the proposed restrictions so they do not impose a material
burden on us.




Ecuador




Aeronautical
Regulation.




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




Fundamentally,
the EDGAC is responsible for:




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


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


·
            maintaining
      the National Aircraft Registry;


·
            issuing
      licenses to crews; and


·
            controlling
      air traffic control inside domestic air
space.




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




Route
Rights




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




Shared
codes are allowed in Ecuador after authorization by the CNAC, but the respective
airlines must have the relevant traffic rights.




Airfare Pricing Policy.There
is no law in Ecuador regulating competition, although currently there is one
under discussion. So far, the government has enacted a decision of the CAN that
is being applied by the Undersecretary of Competition. This Department can
impose sanctions and penalties if it is proven that a certain fare is predatory,
i.e., when the fare is below cost.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.




Registration of Aircraft.The
legislation allows Ecuadorian companies to provide international air
transportation services using aircraft licensed in Ecuador and aircraft with a
foreign license, always provided the latter are exploited under dry leases. For
domestic operations, aircraft is authorized only pursuant to dry leases and
Ecuadorian registration. Aircraft interchange agreements are also allowed for
international operations, provided that the aviation authority can confirm that
the aircraft is under the operational control of an Ecuadorian operator. Wet
leases are permitted, but very restricted.




56
 Table of Contents


Safety. In order to ensure
aviation safety, the EDGAC requires that the airline hold an Air Operator
Certificate and have Operating Specifications that are examined technically and
rigorously to ensure compliance with the Civil Aviation Technical Regulations,
which are essentially the same as the Federal Aviation Regulations (“FAR”) of
the FAA. They cover matters of aircraft airworthiness, certification of
maintenance facilities, and oversight by the EDGAC.




Security.The governing rules
also apply to security in respect of the EDGAC. There are regulations, manuals
and procedures on airport security overseen by the EDGAC.




Airport Policy. The
international airports in Quito and Guayaquil are managed under administrative
concessions, and the EDGAC merely controls air traffic. Fees for the use of
airport facilities, terminal fees, landing fees, parking fees are all overseen
and collected by the operator. Over-flight and approach fees are controlled and
collected by the EDGAC.




Environmental and Noise Regulation.Aircraft must comply with the standards of category 3 under Ecuadorian
applicable noise regulations, as set forth in Executive Decree (Decreto Ejecutivo) 1,405,
enacted on October 24,2008, which provides certain technical specific criteria.
Beginning in May 2010, aircraft must comply with standards of category 4 under
cited regulation. Category 3 provides for compliance with ICAO regulations and
technical conditions mandatory in the United States of America.




United
States of America




Aeronautical
Regulation.




Operations
to and from the United States by non-U.S. airlines, such as Lan Airlines, are
subject to Title 49 of the U.S. Code, under which the Department of
Transportation (“DOT”) and the FAA exercise regulatory authority. The DOT has
jurisdiction over international aviation in connection with the United States,
subject to review by the President of the United States. The DOT also has
jurisdiction with respect to unfair practices and methods of competition by
airlines and related consumer protection matters. The U.S. DOJ also has
jurisdiction over airline competition matters under the federal antitrust laws.
Flight operations between Chile and the United States by airlines licensed by
either country are governed generally by the open skies air transport agreement
that Chile and the United States signed in October 1997. Under the open skies
agreement, there are no restrictions on the number of destinations or flights
that either a U.S. or a Chilean airline may operate between the two countries or
on the number of U.S. and Chilean airlines that may operate.




Authorizations and
Licenses.




Lan
Airlines is authorized by the DOT to engage in scheduled and charter air
transportation services, including the transportation of persons, property
(cargo) and mail, or combinations thereof, between points in Chile and points in
the United States and beyond (via intermediate points in other countries). Lan
Airlines holds the necessary authorizations from the DOT in the form of a
foreign air carrier permit, exemption authorizations and statements of
authorization to conduct current operations to and from the United States.
Exemptions and statements of authorization are temporary in nature and are
subject to renewal and therefore there can be no assurance that any particular
exemption or statement of authorization will be renewed. Lan Airlines’ foreign
air carrier permit has no expiration date, while a renewal of the exemption
authorization (which includes the open skies traffic rights) was timely filed
and the Authority was automatically extended until such time as the DOT issues
the renewal order. Lan Airlines intends to request the inclusion of the open
skies rights into our foreign air carrier permit, which would eliminate our need
to renew the exemption authority in the future.




The FAA
is engaged in the regulation with respect to safety matters, including aircraft
maintenance and operations, equipment, aircraft noise, ground facilities,
dispatch, communications, personnel, training, weather observation and other
matters affecting air safety. The FAA requires each foreign air carrier to
obtain certain operations specifications that authorize it to operate to
particular airports on approved international routes using specified equipment.
Lan Airlines currently holds FAA operations specifications under Part 129 of the
FAR in compliance in all material respects with all requirements necessary to
maintain in good standing of its operations specifications issued by the FAA.
The FAA can amend, suspend, revoke or terminate those specifications, or can
suspend temporarily or revoke permanently our authority if an airline fails to
comply with the regulations, and can assess civil penalties for such failure. A
modification, suspension or revocation of any of our DOT authorizations or FAA
operations specifications could have a material adverse effect on our
business.




The FAA
also conducts safety audits and has the power to impose fines and other
sanctions for violations of airline safety regulations. We have not incurred any
material fines related to operations.




57
 Table of Contents


Certain
Regulatory Authorizations in Connection with Strategic Alliances.




The
alliance between Lan Airlines and American Airlines includes three major
components: a frequent flyer agreement, a reciprocal code-share agreement and
the coordination of pricing, scheduling and other functions. The last two of
these items required the approval of regulatory authorities in both Chile and
the United States. With respect to the code-share agreement, the open skies
agreement between Chile and the United States expressly permits code-sharing
operations by U.S. and Chilean airlines. With regard to the coordination of
pricing and scheduling, Lan Airlines and American Airlines filed a joint
application with the DOT in December 1997, requesting approval of their alliance
agreement and immunity from the application of all U.S. antitrust laws pursuant
to Title 49 of the U.S. Code. Lan Airlines and American Airlines received
approval and antitrust immunity from the DOT in September 1999, and implemented
the code-share agreement in October 1999. In accordance with the terms of the
DOT’s 1999 approval, Lan Airlines and American Airlines were required to
resubmit their alliance agreement to the DOT for review within three years after
the DOT’s grant of approval. Lan Airlines and American Airlines resubmitted the
agreement in September 2002 and did not receive any comments from the
DOT.




Lan Peru
was granted antitrust immunity by the DOT on October 13, 2005 with respect to a
reciprocal code-share agreement and the coordination of pricing, scheduling and
other functions with Lan Airlines and American Airlines. In accordance with the
terms of the DOT’s 2005 approval, Lan Airlines, Lan Peru and American Airlines
are required to resubmit their alliance agreement to the DOT for review within
five years after the DOT’s grant of approval. Lan Airlines, in coordination with
Lan Peru and American Airlines, intends to resubmit said alliance agreement
prior to October 13, 2010.




Flight
operations between Argentina and the United States by airlines licensed by
either country are governed generally by the air transport agreement that
Argentina and the United States signed in 1986, as amended, including the
Memorandum of Consultation dated March 22, 2007.  Lan Argentina is
authorized by the DOT to engage in scheduled air transportation of persons,
property and mail, between any point or points in Argentina and Miami, Florida,
(via the intermediate point of Punta Cana, Dominican Republic).  Lan
Argentina holds the necessary authorizations from the DOT in the form of
exemption authorizations and statements of authorization to conduct current
operations to and from the United States. Lan Argentina also holds the necessary
DOT authorizations regarding code share with American Airlines, which have been
granted indefinitely, subject to applicable conditions and all other required
authorizations remaining in place for both air carriers.




Security. On November 19,
2001, the Congress of the United States passed, and the President signed into
law, the Aviation and Transportation Security Act, also referred to as the
Aviation Security Act. This law federalized substantially all aspects of civil
aviation security and created the Transportation Security Administration
(“TSA”), which took over security responsibilities previously held by the FAA.
The TSA is an agency of the U.S. Department of Homeland Security. The Aviation
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$2.50 per segment passenger security fee, subject to a US$10 per roundtrip
cap; however, airlines are responsible for costs in excess of this fee.
Implementation of the requirements of the Aviation Security Act has resulted in
increased costs for airlines and their passengers. Since the events of September
11, 2001, Congress has mandated and the TSA has implemented numerous security
procedures and requirements that have imposed and will continue to impose
burdens on airlines, passengers and shippers.




Noise Restrictions. Under the
Airport Noise and Capacity Act of 1990 (“ANCA”), and related FAA regulations,
aircraft that fly to the United States must comply with certain Stage 3 noise
restrictions, which are currently the most stringent FAA noise requirements. All
of our aircraft that fly to the United States meet the Stage 3
requirements.




Under the
direction of the ICAO, governments are considering the creation of a new and
more stringent noise standard than that contained in the ANCA. The ICAO adopted
new noise standards in 2001 that established more stringent noise requirements
for aircraft manufactured after January 1, 2006. In the U.S., legislation known
as the “Vision 100—Century of Aviation Reauthorization Act,” which was signed
into law in December 2003, required the FAA to issue regulations implementing
Stage 4 noise standards consistent with recommendations adopted by the ICAO. FAA
regulations require all aircraft designed and certified after January 1, 2006 to
comply with Stage 4 noise restrictions.




58
 Table of Contents


FAA
regulations also require compliance with the Traffic Alert and Collision
Avoidance System, approved airborne wind shear warning system and aging aircraft
regulations. Our entire fleet meets these requirements.




Brazil




Aeronautical
Regulation.




The
Brazilian aviation industry is regulated and overseen by the Brazilian National
Aviation Agency (“BANAC”). The BANAC reports directly to the Brazilian Defense
Ministry, which is subordinated by the Federal Executive Power of this country.
Primarily on the basis of Law No. 11.182/2005, BANAC 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 it activities and responsibilities with
the Departamento de Controle
do Espaço Aéreo (Department of Airspace Control, or “DECEA”), which is a
public secretary also subordinated by 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.




We have
obtained and maintain the necessary authority from the Brazilian government to
conduct flight operations, including authorization and technical operative
certificates from BANAC, 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.




BANAC 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, BANAC has
incorporated by reference the majority of the ICAO’s technical
standards.




Route
Rights.




Domestic Routes. Brazilian
airlines are not required to obtain permits in connection with domestic
passenger or cargo transportation, but only to comply with the technical
requirements established by BANAC. Based on the Brazilian Aeronautical Code
(“CBA”) established by Law No. 7.565/86, non-Brazilian airlines are not
permitted to provide domestic air service between destinations in Brazil. The
same law prevents a foreign airline from creating a Brazilian subsidiary and
entering the Brazilian domestic market using that subsidiary.




International Routes.
Brazilian 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 BANAC must carry
out a public bid and award it to the elected airline. BANAC grants route
frequencies subject to the condition that the recipient airline operate them on
a permanent basis. If an airline fails to operate a route for a period of six
months or more, BANAC may terminate its rights to that route. BANAC may also
terminate its right if the recipient airline does not operate at least 80% of
the frequency given for that specific route.




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.




59
 Table of Contents


Registration of Aircraft.
Aircraft registration in Brazil is managed by BANAC, which maintains the
Brazilian Aeronautical Register, as regulated by the CBA. The CBA allows BANAC
to permit registration of aircraft belonging to Brazilian and non-Brazilian
individuals.




Safety. BANAC requires that
all Brazilian aircraft must have a valid certificate of airworthiness issued by
BANAC. In addition, BANAC will not issue maintenance permits to a Brazilian
airline until it has assessed the airline’s maintenance capabilities. BANAC
renews maintenance permits annually, and has approved our maintenance
operations. Only BANAC certifies aircraft maintenance services and its
personnel.




Security. BANAC establishes
and supervises the implementation of security standards and regulations for the
Brazilian commercial aviation industry. Such standards and regulations are based
on standards developed by international commercial aviation organizations. Each
airline and airport in Brazil must submit an aviation security handbook to BANAC
describing its security procedures for the day-to-day operations of commercial
aviation and procedures for staff security training.




Brazilian Airport Policy.
INFRAERO supervises and manages airports in Brazil, including the supervision of
take-off and landing charges. INFRAERO proposes airport charges, which are
approved by BANAC and are the same at all airports. At privatized airports, the
airport administration manages the facilities under the supervision of
BANAC.




Environmental and Noise
Regulation. BANAC coordinates and supervises noise regulations by
regulation 121, which established noise restriction applicable to aircraft in
Brazil. There are no material environmental regulations or controls imposed
specifically upon airlines companies, applicable to aircraft, other than
Brazilian general environmental laws and regulations.




Colombia




Aeronautical
Regulation.




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




Route Rights.The AC grants
operation permits to domestic and foreign carrier that intend to operate in,
from and to Colombia. In the case of Colombian airlines such as LANCO, in order
to obtain the operational permit the company must comply with the RAC and
fulfill legal, economic and technical requirements, to later be subject to
public hearings where the public convenience and necessity of the service is
considered. The same process must be followed to add national or international
routes, whose concession is subject to the bilateral instruments entered into by
Colombia. LANCO has participated in three public audience processes, where it
has requested different routes to domestic and international destinations, and
has requested permits for charter flights, having being authorized to a number
of routes. LANCO’s operation permit was granted through a resolution of 2009
valid for five years, which is automatically renewable for equal and successive
terms. Routes cannot be transferred under any circumstance and there is no limit
to foreign investment in domestic airlines.




Airfare Pricing Policy.Domestic and international cargo transportation fares are not restricted
in Colombia, but are subject to market regulations.  In addition,
there is a fuel surcharge that is regulated by the AC and that fluctuates in
accordance with the cost of fuel.  This surcharge, which is regulated
by the authority, is not mandatory for cargo and it can be applied without
exceeding the regulated maximum.




Registration of Aircraft.The
AC, through the Office of Aeronautical Registration, is in charge of handling
the registration of aircraft that will be operated by Colombian airlines.
Registration may be obtained by a registration process fully conducted in
Colombia or through the validation in Colombia of a foreign registration. For
such registration, the aircraft must be legally imported to the country and
inspected by the aeronautical inspectors. This office is also in charge of
property registrations, lease contracts and liens of the registered
aircraft.




60
 Table of Contents


Safety. Aircraft registered
in Colombia obtain an airworthiness certificate or a validation of the
airworthiness certificate (if they operate under the approval of the foreign
registration). LANCO, which operates aircraft registered in the United States,
is subject to the latter.




Security.Following the
guidelines of the OACI annexes, the AC issued an airport security program that
must be strictly complied with by all the aircraft operators in the country as
well as by airports.  LANCO registered its airport security program,
which is approved by the aeronautical authority, and has its own security
department that allows it to comply with the regulations of the different
countries in which it operates.




Environmental and Noise Regulation.In Colombia, only aircraft that comply with category 3 noise limits may
operate.  There are strict regulations to control noise during
takeoffs and landings of the aircraft at the El Dorado Airport in Bogotá due to
its location in an urban area.




Antitrust
Regulation




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




Since
October 1997, Lan Airlines and Lan Express follow a self-regulatory plan, which
was modified and approved by the Tribunal de la Libre Competencia(the Competition Court) in July 2005. In February 2010, the Fiscalía Nacional Economica
(the National Economic Prosecutor’s Office) finalized the investigation
initiated in 2007 regarding our compliance with this self-regulatory plan and no
further observations were made.




For more
recent information regarding regulatory proceedings see “Other Financial
Information—Legal and Arbitration Proceedings” under Item 8.




Property




Headquarters




Our main
facilities are located on approximately five acres of land near the Comodoro
Arturo Merino Benítez International Airport. The complex includes approximately
150,695 square feet of office space, 32,292 square feet of conference space and
training facilities, 9,688 square feet of dining facilities and mock-up cabins
used for crew instruction. In 2004, we adapted part of this building to meet our
expanding training needs. This process included developing new rooms for
technical instruction, in-flight and airport services.




During
the fourth quarter of 2003, we moved some of our executive offices into a new
building in a more central location in Santiago, Chile, where we initially
occupied a total of four floors. In the first half of 2005 we added three more
floors to accommodate our growth requirements. In 2007, in order to accommodate
the Company’s growth, LAN leased two floors in an adjacent building (totaling
1,700 square meters), where some of LAN staff moved in February 2008. In order
to respond to the Company’s growth, during 2009 LAN leased two additional floors
in this building (totaling 1,200 square meters).


61
 Table of Contents


Maintenance
Base




Our
877,258 square feet maintenance base is located on a site that we own inside the
grounds of the Comodoro Arturo Merino Benítez International Airport. This
facility contains our aircraft hangar, warehouses, workshops and offices, as
well as a 559,720 square feet aircraft parking area capable of accommodating up
to seventeen short-haul aircraft. We have a five-floor, 53,820 square feet
office building plus a 10,000 square feet office and workshop space. This
facility is certified by several civil aviation authorities, including the
United States’ FAA. As such, we are permitted to perform maintenance work for
third parties at the facility. The FAA periodically inspects the facility to
ensure its compliance with FAA standards. In 2005, we finalized the construction
of an additional hangar, as well as 75,000 square feet of aircraft parking
space, for US$2.1 million. During 2006 we started a new investment plan at this
facility that includes building 64,580 square feet of additional aircraft
parking space, a new 15,340 square foot building for offices and maintenance
shops, a new 16,680 square feet engine shop and storage facility, and additional
warehousing and external work space. The plan also included the upgrade of some
of the current facilities, increasing parking space and building a new access
road. Further, in 2006 we completed construction of an engine workshop with
eight workstations and capacity for 36 engines, for a total investment of
US$820,000. We also lease from the DGAC 193,750 square feet of space inside the
Comodoro Arturo Merino Benítez International Airport for operational and service
purposes.




In 2007,
LAN approved a two-year capital expenditures plan earmarking approximately
US$7.0 million for preparing our buildings and plants for the future growth of
the Company and of its fleet.




During
2008, LAN finalized the construction of a 4,300 square feet warehouse especially
designed for the storage of oil and flammable supplies, which complies with all
the security standards required for its operation. We also upgraded some
facilities such as bathrooms and dressing rooms in our maintenance base
increasing the total area in 15,000 square feet.




During
2009, LAN finalized the construction of a new five-story building located in our
maintenance base, which has a total surface of 49,500 square feet and
represented an investment of US$5.8 million. This building has new workshops, a
new food court with capacity for over 2,500 people in different shifts, two
floors of new offices and meeting rooms.




Also,
during 2009, LAN finalized the extension of the engine workshop, which added 900
square feet and represented an investment of US$0.5 million. This extension will
be used mainly for the Boeing 777’s engine maintenance.




Miami
Facilities




We occupy
a 36.3-acre site at the Miami International Airport that has been leased to us
by the airport under a concession agreement. Our facilities include a 48,000
square foot corporate building, a 380,000 square foot cargo warehouse and a
783,000 square foot aircraft-parking platform, which were constructed and are
now leased to us under a long-term contract by a North American developer. We
began using these new facilities in September 2001 for our passenger and cargo
offices (with the exception of our reservations and ticket offices). We
converted 21,528 square feet of the warehouse into fully furbished offices
during 2004.




During
2009, LAN started the extension of the cooling area in the cargo warehouse. This
extension added 30,000 square feet and represented an investment of US$4.0
million. This extension was inaugurated on April 20, 2010.




Other
Facilities




We own a
building and sixteen acres of land on the west side of the Comodoro Arturo
Merino Benítez International Airport that houses a flight-training center. As of
March 2007, this facility features three full-flight simulators for Boeing 767,
Airbus A320 and Boeing 737 aircraft. We rent this flight-training center under a
long-term lease to CAE Inc. (a leading Canadian company in the flight training
business).




We own a
661,980-square foot warehouse in Santiago, which includes 91,493 square feet of
space for offices and other administrative facilities and 45,000 square foot
distribution center. We use this facility to support Blue Express door-to-door
cargo transport business.




In 2004,
Fast Air Almacenes de Carga S.A. (“Fast Air”), one of our subsidiaries that
operates import customs warehouses, began utilizing an import warehouse and
office building at the Comodoro Arturo Merino Benítez International Airport.
This 172,000 square foot building was developed in conjunction with two other
operators.




We have
also developed a recreational facility for our employees with Airbus’ support.
The facility, denominated “Parque LAN,” is located near the Comodoro Arturo
Merino Benítez International Airport. Parque LAN includes amenities such as a
gymnasium, synthetic fields for multiple uses and swimming pools.




62
 Table of Contents


During
2008, we acquired a 43,000 square feet piece of land in Chile, which represented
a US$12 million investment, for the purpose of constructing our new corporate
building.




During
2008, we acquired a 161,000 square feet piece of land near the Lima airport,
which will host new facilities for the Company.




In March
2009, we began the construction of a new maintenance base in Argentina. The
project includes a new hangar of 26,900 square feet with 9,600 square feet of
offices, 1,070 square feet of workshops and an exterior platform of 5,300 square
feet.  This project comprised a US$3.2 million investment and was
completed in 2009.




ITEM 4A.
            UNRESOLVED
      STAFF COMMENTS




None.




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-11 of this annual report.




The
summary consolidated annual financial information as of December 31, 2009 and
for the year ended December 31, 2009, has been prepared in accordance with IFRS
and has been derived from our audited consolidated annual financial statements
included in this annual report. The summary consolidated annual financial
information as of December 31, 2008 and for the year ended December 31, 2008
presented in this annual report were previously presented in accordance with
Chilean GAAP, and have been restated under IFRS only for comparative purposes.
For a description of the transition to IFRS, including the quantification of the
impact of the transition to IFRS, see Note 3 to our audited consolidated
financial statements.




Overview




The
principal and most distinctive aspect of our business model is the way in which
we integrate our passenger and cargo activities. Our sophisticated
service-oriented approach to combining passenger and cargo traffic enables us to
better utilize our aircraft, reduce our break-even load factors on passenger
flights, and diversify our revenue streams. These benefits have helped us
maintain strong profitability and expand our operations between 2008 and
2009.




Approximately
96% of our revenues are generated by our air transport activities. We generate
the balance of our operating revenues from, customs and storage brokerage
operations, aircraft leases, courier services, on-board sales, tour operator
services, third-party maintenance, ground handling and interest
income.




Between
2008 and 2009, our operating environment continued to be subject to certain
conditions that had a mixed effect on our results. Specifically, we
faced:




·
            strong
      passenger demand in domestic markets, partly offset by a lower growth in
      international passenger demand due to the global economic
      crisis;




·
            weak
      cargo demand due to the global economic crisis, combined with imbalances
      in cargo flows; and




·
            external
      cost pressures, especially those related to the price of
    fuel.




During
2009, growth in passenger demand was primarily driven by growth in domestic
markets.  During this period, cargo demand showed a decrease as a
result of the global economic crisis, which affected global trade. In addition,
cargo demand continued to experience significant imbalances between northbound
and southbound routes. While competition on both passenger and cargo routes has
grown gradually since 2005, changes in competitive conditions in specific
markets generated opportunities for us to expand. Certain factors outside of our
control, such as fuel prices that have risen consistently since 2002, reaching
historically record-high levels in mid-2008, have also generated significant
cost pressures. During 2009, however, fuel prices decreased as compared to
2008.


63
 Table of Contents


Our
results for the period between 2008 and 2009 reflect our efforts in recent years
to expand and diversify our revenue base while maintaining an efficient cost
base. We have aimed to effectively respond to the opportunities and challenges
presented by the expansion and diversification of our revenue base. This process
included expanding our domestic passenger operations in Peru, supporting the
launch of Lan Argentina and since April 2009, beginning domestic operations of
Lan Ecuador. As a result, we have significantly increased our passenger capacity
and redeployed our assets in response to specific opportunities. In the cargo
business, we have adjusted our routes and our capacity mix to adapt to changing
cargo flows and we have expanded cargo operations within the region and on long
haul routes to take advantage of existing opportunities. We have also launched
initiatives to enhance customer preference and increase efficiency. These
initiatives have enabled us to maintain a solid market position and to develop
new mechanisms to sustain high levels of profitability despite facing
unprecedented high fuel prices during 2008 and the negative effect of the global
economic crisis during 2009. As a result, net income amounted to US$336.5
million in 2008 and US$231.1million in 2009.




Passenger
Business




In
general, our passenger revenues are driven by international and country-specific
political and economic conditions, competitive activity, the attractiveness of
the destinations that we serve, and the capacity we allocate among our different
routes.




Passenger
demand has grown in the last years, driven by positive economic conditions in
Latin America. Economic growth and improved customer confidence have led to an
expansion in both business and leisure traffic to and from Latin America.
Increased interest in travel into South America from Europe and the United
States has been another factor positively impacting overall passenger traffic.
As a consequence, passenger volumes in markets such as Chile, Peru, Argentina
and Ecuador grew significantly between 2008 and 2009. LAN’s traffic growth
during 2009, which reached 10.7%, was also based on a capacity expansion plan
driven by the delivery of five new passenger aircraft during the year, despite
several events that affected our operations during the year, such as the global
economic crisis and the outbreak of H1N1 flu.




Competitive
activity on both our domestic and international passenger routes has also varied
over the last several years. On our international routes, competition gradually
increased as both incumbent and new competitors expanded their operations.
Nevertheless, we have maintained our market share in most of our international
markets since 2005 and have gradually increased our presence in the domestic
markets of Chile and Peru, as well as in the Argentine domestic and
international routes, in addition to initiating domestic operations in Ecuador
in April 2009.




Overall,
market conditions on the passenger business provided us with opportunities to
advance on our strategic development plans and expand our operations. We
addressed these by taking advantage of our integrated business model, efficient
operations, continued customer focus, and flexible capacity management. Customer
focus has provided a key tool to address competitive challenges as well as to
successfully enter new markets.




We also
took advantage of our flexibility to adapt capacity quickly in response to
demand shocks or market opportunities. We actively manage our capacity by
transferring capacity between routes or adding new aircraft when necessary. This
enabled us to rapidly respond by adding capacity in the Peruvian domestic market
during 2004 and supporting the launch of Lan Argentina’s domestic operations in
2005, as well as launching the latter’s international operations in October
2006, and launching domestic operations in Ecuador in April 2009.




These
opportunistic actions fit in with our long-term development strategy, which is
aimed at consolidating LAN as the preferred carrier in the Southern Cone. This
plan incorporates development of domestic, regional and intercontinental routes
in the markets we serve. Continuous monitoring of demand trends and competitive
activity has allowed us to identify opportunities and, as a consequence,
additional capacity has also been allocated to operations to the South Pacific,
Europe and the United States, as well to specific regional routes. We also
shifted capacity among our routes in order to better match seasonal patterns in
flights to the United States and to other destinations. Further refinements to
our itineraries were also implemented in order to improve connectivity between
our operations and those of our partners.




64
 Table of Contents


We have
also enhanced our regional network by selectively adding new destinations and
launching new routes. Since 2004, we have been developing an intra-regional hub
in Lima. We have launched several routes that enable us to effectively use Lima
as a connecting point for passengers traveling between Mexico City, Bogotá,
Caracas, Guayaquil, Quito, Buenos Aires, La Paz, Santa Cruz, Sao Paulo and
Santiago de Chile. In 2007 we began direct service between Lima and Madrid, in
2008 we began service to Medellín, Colombia (with one stop in Quito), and in
2009 we began direct service to Cartagena de Indias, Colombia as well as service
between Lima and Cali via Quito and from Lima to Punta Cana, Cancun and Cordoba.
We plan to continue growing our operation in Lima by increasing the number of
flight frequencies we operate on these routes and also by adding new
destinations. In line with the expansion of LAN’s passenger operations, during
the first half of 2010 the Company announced the implementation of various new
passenger destinations. Lan Peru will launch a new regional route in August 2010
between Lima and Brasilia. Regarding long-haul operations, in July 2010, LAN
Peru will launch four weekly frequencies between Lima and San Francisco, with
connections from Sao Paulo, Santiago and Buenos Aires. In addition, in September
2010, LAN will begin operations between Santiago and Paris via Madrid, with
three weekly flights. Furthermore, on May 10, 2010, LAN Argentina launched three
daily flights between Santiago and Aeroparque and in June 2010 it launched
services between Aeroparque and Sao Paulo.




Our
domestic operations have also grown between 2008 and 2009. In both the Chilean
and Peruvian domestic markets, total domestic traffic increased significantly
during 2009, driven mainly by new fare structures in line with the
implementation of our new model for short haul operations. Between 2005 and
2009, Lan Argentina increased the number of Argentine domestic destinations to
thirteen and, based on our internal estimates, our market share increased to
approximately 30%. By the end of 2008, Ecuador’s NCAC granted the airline
permission to operate domestic flights within the country. These operations
started in April 2009 with flights between the cities of Quito and Guayaquil. As
of December 2009, LAN Ecuador was operating 49 flights a week between Guayaquil
and Quito, one of the heaviest routes in Latin America, as well as four flights
a week to Cuenca from Quito and seven from Guayaquil. In its first nine months
of operations in the domestic passenger market, LAN Ecuador carried 367,000
people, achieving a load factor of 71.1% and a 15% market share of all domestic
routes. In September 2010, LAN Ecuador will launch regular service to the
Galapagos Islands, offering a daily flight from Quito and
Guayaquil.




Cargo
Business




Our cargo
business depends on exports from and imports to South America and is, therefore,
affected by economic conditions, foreign exchange rates, changes in
international trade, the health of particular industries, competition and fuel
prices (which we usually pass on to our customers through a cargo fuel
surcharge). The relative size of inbound and outbound flows to a particular
market or route is a key element in cargo operations as the unidirectional
nature of freight flows requires airlines to create routes that combine
origin-destination pairs that feature complementary freight flows. Changes in
macroeconomic conditions may lead to major fluctuations in cargo flows to and
from Latin America, therefore requiring continuous route and capacity
adjustments.




The
flexibility that this business model allows based on adaptation to changes in
market trends was key for LAN’s operations in 2009 when the business was
affected by the contraction of import and export markets in response to the
global economic crisis. In addition, LAN Cargo saw a sharp drop in salmon
exports from Chile as a result of an outbreak of the ISA virus.




In this
context, our international cargo traffic declined 9.7% between 2008 and 2009,
from 2,906.7 million cargo revenue ton kilometers in 2008 to 2,623.3 million
cargo revenue ton kilometers in 2009. This decline was in line with the 10.1%
contraction experienced by this segment of the international air cargo industry.
International cargo traffic accounted for around 94.0% of our total cargo
revenues during 2008 and 2009. During 2009, the company reduced its capacity by
approximately 6.0%, resulting in a 2.8-point drop in its load factor to 68.4%.
The reduction in capacity was mainly driven by a decrease in wet leases to
approximately 4.0% of our cargo capacity, as well as by lower utilization of the
freighter fleet. LAN Cargo transported 649.2 thousand tons of freight in 2009, a
decrease of 1.8% as compared to 2008.




In 2009,
LAN’s cargo revenues fell by 32.1% to US$895.6 million, representing 24.4% of
the Company’s total annual revenues. The decline in revenues also reflects the
24.8% decline in cargo yields. Approximately half of this decline is explained
by the reduction of the fuel surcharge, which fell in line with the decline in
fuel prices during 2009.




A sharp
contraction of LAN’s traditional markets—imports into the region and exports
from the region—was partially offset by the implementation of a series of
measures that demonstrate the flexibility permitted by its business model. These
included principally an adjustment of its capacity through a reduction in the
number of planes rented under ACMI leases and optimization of its own cargo
fleet of nine Boeing 767F. This process was also reinforced by its receipt in
mid-year 2009 of two new Boeing 777-200F, the most modern and efficient cargo
aircraft of its type in the world, with a capacity for 104 tons of freight and a
range of 9,045 kilometers when carrying its maximum weight. This important
investment will allow LAN to consolidate its regional competitiveness by
positioning it as the first airline in the region - and only the second
internationally - to use these latest-generation cargo planes.




65
 Table of Contents


The
incorporation of these cargo planes also means that the Company will be able to
expand its coverage beyond the region and strengthen its cargo services to
Europe where it currently operates routes between Frankfurt and Brazil,
Argentina and Chile as well as between Ecuador and Colombia and Amsterdam and
Frankfurt. In line with this strategy, since October 2009 the Company has
increased to four its weekly freighter frequencies to Europe, more than
duplicating its cargo operation in this market.




The
Company also achieved an important regional expansion in 2009. In March, LAN
Cargo launched LANCO, which started operations after successfully obtaining the
necessary operational and technical certification. It launched its services with
two latest-generation Boeing 767-300Fs, with a capacity for 54 tons of freight,
connecting the cities of Bogotá and Medellín with Miami. It is important to note
that Colombia is Latin America’s largest market for exports by air to the United
States reaching an estimated 200,000 tons annually.




In
addition, in March 2009, the Company’s cargo subsidiary in Brazil, ABSA, began
operations in that country’s domestic market, with one flight daily - from
Monday to Friday - between the cities of Sao Paulo and Manaos. On this route,
ABSA operates an advanced-technology Boeing 767-300F with a capacity of 54
tons.  This route accounts for a large part of Brazil’s airfreight
traffic. Sao Paulo is the country’s fourth largest city in terms of GDP, with a
large number of companies, principally in the electronics sector, in its
industrial pole. The special tax incentives offered by the Amazon capital of
Manaos as part of efforts to promote the area’s development, make it an
attractive alternative for exporter and importer clients. During 2010, the
Company also plans to open a route between Sao Paulo and Fortaleza and Sao Paulo
and Recife.




Cost
Structure




Cost
controls were critical to maintaining our profitability over the period from
2008 and 2009, especially as we faced significant volatility in fuel prices
during 2008. In absolute terms, the main drivers of our costs are the size of
our operations, fuel prices, fleet costs and exchange rates.




As an
airline, we are subject to fluctuations in costs that are outside our control,
particularly fuel prices and exchange rates. However, we manage part of our
exposure to changes in fuel prices through a fuel-hedging policy and the use of
pass-through mechanisms on both the passenger and cargo businesses. For more
information see “Quantitative and Qualitative Disclosures About Market Risk—Risk
of Fluctuations in Jet Fuel Prices” under Item 11. Personnel expenses are
another significant component of our overall costs. Because a significant
portion of our labor costs is denominated in pesos, appreciation of the peso
against the dollar as well as increases in local inflation rates can result in
increased costs in dollar terms and can negatively affect our results. However,
this cost pressure is mitigated by the partial natural hedge between the
currencies of denomination of our total operating revenues and
expenses.




Commissions
to travel and cargo agents also compose a significant cost to us. We compete
with other airlines over the amount of commission we pay per sale, particularly
in connection with special programs and marketing efforts, and to maintain
competitive incentives with travel agents. In February 2007 we reduced
commissions paid to agents in Chile for economy class ticket sales from 6% to
1%. Between 2007 and 2008, commissions were also reduced to 1% in Ecuador,
Argentina and Peru.




Fleet
related expenses, basically aircraft rentals and depreciation, are another
significant cost. These costs are mainly fixed and can be reduced on a per unit
basis by achieving higher daily aircraft utilization rates.




During
2009, fuel prices decreased from record-high levels in 2008, which led to
US$451.2 million in reduced fuel expenses and contributed to a 13.1% decrease in
cost per ATK (a key industry metric). Excluding fuel costs, the decrease in cost
per ATK over this period was 1.2%.  In addition, the Company
recognized a US$128.7 million fuel hedge loss compared to a US$35.4 million fuel
hedge gain in 2008.




Apart
from lower expenditure on fuel, the drop in the Company’s operating costs also
reflected different strategic initiatives implemented by the Company during 2009
to increase the efficiency of its processes and reduce costs. These included the
renegotiation of contracts with external suppliers and a reduction in the rental
of cargo aircraft under ACMI leases. A 4.5% increase in wage costs in 2009, due
to an increase in the Company’s average workforce, was partially offset by a
depreciation of local currencies.




66
 Table of Contents


In
addition, we have launched various efficiency-related initiatives aimed at
reducing fuel consumption and increasingly incorporating efficient aircraft into
the fleet.




Higher
aircraft utilization has been an important source of improved efficiency. Our
long-haul passenger and cargo aircraft are used, on average, approximately
fourteen hours per day. Our utilization strategy in 2009 was designed in concert
with the addition of new routes to our network, which enabled us to leverage our
human and physical assets for increased efficiency. This was especially the case
in our domestic operations in Chile and Peru, where we increased aircraft
utilization as a result of the itineraries of our new short haul business model,
as well as due to the phasing out of the older Boeing 737-200 aircraft on
Chilean domestic routes. Utilization of our narrow body fleet of Airbus
A320-Family Aircraft has increased to approximately ten block hours per day per
aircraft.




In
domestic operations we have also worked consistently to improve our cost
structure. This process has included initiatives such as the modification of
short-haul service standards, which were implemented in late 2005 and modified
further in 2007 as a result of the new business model on domestic routes,
enabling us to reduce passenger service expenses. The key elements of this new
business model have been the reduction in sales and distribution costs through
higher Internet penetration and reduced agency commissions, a faster turnaround
time, and increased self check-in service through web check-in and kiosks at
airports.




Outlook




Our
long-term strategy is aimed at consolidating LAN’s position as the main
passenger and cargo airline in South America. We will continue to expand our
network by further developing our existing routes, adding new destinations,
developing new alliances, and entering new markets. We expect our brand
recognition and a continuous effort to improve service standards to drive
increased customer preference, ultimately leading to strong market shares in the
markets we serve. Our product and service design is aimed at providing
passengers and cargo customers with differentiated offerings that provide
valuable solutions to the needs of each of our customer types. We also aim to
have products and services that evolve together with changes in technology,
market conditions and competitive actions. We plan to maintain a highly
competitive cost structure by leveraging our cost-conscious culture,
incorporating new technologies and practices, and by identifying and
implementing adequate cost-reduction and efficiency-related initiatives. We
believe that a focus on flexibility will enable us to adequately react to
changing market conditions. Finally, a healthy financial structure will allow us
to effectively fund our growth, enhance our strategic development and reinforce
our customer appeal.




Our
results will be mainly determined by the expansion of our current network, the
evolution of our market share in our main markets, our level of success in
entering new markets, the continued implementation of new efficiency-related
programs, the implementation of our new business model for short-haul
operations, and fuel price levels.




·
            We
      plan to increase frequencies on long-haul flights out of Chile, Peru,
      Ecuador and Argentina, and eventually add new destinations in the United
      States and Europe. We plan to reinforce our regional network through the
      addition of new frequencies on our current routes and the addition of new
      destinations. We will also seek to enter into new alliances in both the
      passenger and cargo business, especially to build up our presence in new
      markets.




·
            Competitive
      activity in key markets has increased gradually in recent years, and we
      expect it to continue doing so in the future. Nevertheless, we expect to
      maintain solid market shares based on offering attractive value
      propositions that combine broad international and domestic networks, a
      strong customer focus and a competitive cost
  base.




·
            We
      are also working on increasing efficiency by streamlining our support
      processes, reducing commercial costs, and by continuing with the
      implementation of our new business model on short-haul operations. Further
      enhancements should arise from economies of scale, especially as solid
      growth in the passenger business accompanied by controlled fixed costs
      will serve to dilute our fixed costs base. In both the passenger and the
      cargo business, efficiencies are also expected to come from the
      replacement of older aircraft with new and more fuel-efficient Boeing 787
      and Boeing 777 models and from efficiency-related initiatives such as
      installing winglets on the B767 fleet as well as continuing to adjust
      aircraft configuration to market
demand.




67
 Table of Contents


Our
financial performance will also be highly dependent on the evolution of jet fuel
prices, which rose significantly until mid-2008 and led to a sharp rise in our
fuel expenditures, but substantially declined in 2009. Although we have devised
and implemented a number of strategies to mitigate the impact of the volatility
of fuel prices, including financial hedging and the use of fuel surcharges, it
is impossible for us to predict if we will be able to fully protect ourselves
against the volatility of fuel costs.




Overall,
we believe that these initiatives will enable us to successfully respond to
growth opportunities, maintain a solid competitive position, and enhance our
distinct cost performance.




68
 Table of Contents


Operating
Results




The
following table sets forth certain income statement data for Lan
Airlines.




(in US$ millions,
                  except per share and capital
                  stock data)
              
              
              As a percentage of total
                  operating revenues
              
              
              % changeYear Ended December 31,2009
              
              
              2008
              
              
              2009
              
              
              2008
              
              
              
              09/08Consolidated
      Results of Income by FunctionOperating
      revenuesPassenger
              
              
              2,623.6
              
              
              
              2,820.8
              
              
              
              74.6
              
              
              
              68.1
              
              
              
              (7.0
              )Cargo
              
              
              895.6
              
              
              
              1,319.4
              
              
              
              25.4
              
              
              
              31.9
              
              
              
              (32.1
              )Total
      operating revenues
              
              
              3,519.2
              
              
              
              4,140.2
              
              
              
              100.0
              
              
              
              100.0
              
              
              
              (15.0
              )Cost
      of sales
              
              
              (2,522.8
              )
              
              
              (2,893.9
              )
              
              
              (71.7
              )
              
              
              (69.9
              )
              
              
              (12.8
              )Gross
      margin
              
              
              996.4
              
              
              
              1,246.3
              
              
              
              28.3
              
              
              
              30.1
              
              
              
              (20.1
              )Other
      operating income
              
              
              154.5
              
              
              
              161.4
              
              
              
              4.4
              
              
              
              3.9
              
              
              
              (4.3
              )Marketing
      costs
              
              
              (114.5
              )
              
              
              (107.3
              )
              
              
              (3.3
              )
              
              
              (2.6
              )
              
              
              6.7Distribution
      costs
              
              
              (327.0
              )
              
              
              (366.7
              )
              
              
              (9.3
              )
              
              
              (8.9
              )
              
              
              (10.8
              )Administrative
      expenses
              
              
              (155.1
              )
              
              
              (167.6
              )
              
              
              (4.4
              )
              
              
              (4.0
              )
              
              
              (7.5
              )Other
      operating expenses
              
              
              (100.5
              )
              
              
              (127.9
              )
              
              
              (2.9
              )
              
              
              (3.1
              )
              
              
              (21.4
              )Financial
      costs (from non-financial activities)
              
              
              (153.1
              )
              
              
              (125.5
              )
              
              
              (4.4
              )
              
              
              (3.0
              )
              
              
              22.0Earning
      on investments (equity method)
              
              
              0.3
              
              
              
              0.7
              
              
              
              0.0
              
              
              
              0.0
              
              
              
              (54.7
              )Exchange
      rate differences
              
              
              (11.2
              )
              
              
              23.4
              
              
              
              (0.3
              )
              
              
              0.6
              
              
              
              -Result
      of indexation units
              
              
              (0.6
              )
              
              
              1.2
              
              
              
              0.0
              
              
              
              0.0
              
              
              
              -Negative
      goodwill
              
              
              -
              
              
              
              0.6
              
              
              
              0.0
              
              
              
              0.0
              
              
              
              -Other
      net earnings (losses)
              
              
              (11.7
              )
              
              
              (135.3
              )
              
              
              (0.3
              )
              
              
              (3.3
              )
              
              
              (91.3
              )Income
      before income taxes
              
              
              277.5
              
              
              
              403.4
              
              
              
              7.9
              
              
              
              9.7
              
              
              
              (31.2
              )Income
      tax
              
              
              (44.5
              )
              
              
              (65.1
              )
              
              
              (1.3
              )
              
              
              (1.6
              )
              
              
              (31.7
              )Net
      income for the period
              
              
              233.0
              
              
              
              338.3
              
              
              
              6.6
              
              
              
              8.2
              
              
              
              (31.1
              )Income
      for the period attributable to the parent company’s equity
      holders
              
              
              231.1
              
              
              
              336.5
              
              
              
              6.6
              
              
              
              8.1
              
              
              
              (31.3
              )Income
      for the period attributable to minority interests
              
              
              1.9
              
              
              
              1.8
              
              
              
              0.1
              
              
              
              0.0
              
              
              
              4.0Net
      income for the period
              
              
              233.0
              
              
              
              338.3
              
              
              
              6.6
              
              
              
              8.2
              
              
              
              (31.1
              )Earnings
      per shareBasic
      and diluted earnings per share (US$)
              
              
              0.68
              
              
              
              0.99
              
              
              
              
              
              
              
              
              
              
              
              (31.1
              )





2009
Compared with 2008




Net
Income




Net
income for the period decreased 31.1% from US$338.3 million in 2008 to US$233.0
million in 2009. Net income attributable to the parent company’s equity holders
decreased 31.3% from US$336.5 million in 2008 to US$231.1 million in
2009.




69
 Table of Contents


The
revenue decline during 2009 was partially offset by a strong capacity expansion
and an improvement in demand in the passenger business, mainly driven by the
domestic markets. The decline in cargo revenues reflected the impact of the
global crisis in both import and export markets, as well as the salmon ISA Virus
crisis in Chile. These negative impacts were partially offset by our entrance
into new markets, and the expansion of our routes network. Operating costs
declined mainly due to lower fuel prices, as well as due to expense-reduction
initiatives. In addition, during 2008 the Company had recorded a provision of
US$109.0 million in other net earnings in connection with a plea agreement
entered into with the DOJ regarding an antitrust investigation related to our
cargo business (see “Item 4. Information on the Company—Business of the
Company—Cargo Operations—Cargo-Related Investigations”).




Operating
Revenues




Operating
revenues in 2009 totaled US$3,519.2 million, a 15.0% decrease as compared to
total operating revenues of US$4,140.2 million in 2008. Our consolidated
passenger revenues declined 7.0% to US$2,623.6 million in 2009 from US$2,820.8
million in 2008, due to a 16.0% decrease in yields (from US¢10.5 to US¢8.8),
which was partially offset by a 10.7% increase in passenger traffic. Load
factors increased from 76.6% in 2008 to 76.9% in 2009 as the 10.7% increase in
traffic outpaced the 10.2% capacity increase. Overall, revenues per ASK
decreased 15.6%. Traffic grew as a result of a 20.6% increase in domestic
traffic (including domestic operations by LAN and its affiliates in Chile,
Argentina, Peru and Ecuador), and a 6.9% increase in international traffic.
International traffic accounted for approximately 70% of our total passenger
traffic during 2009. Yields decreased 16.0% as a result of lower fuel surcharges
and lower fares due to price promotions implemented on certain routes as a
result of weaker demand during 2009.




Domestic
passenger revenues in Chile, Peru, Argentina and Ecuador, which accounted for
approximately 36% of our total passenger revenues in 2009 as compared to
approximately 32% in 2008, increased 2.6% to US$934.9 million in 2009 from
US$911.5 million in 2008. Domestic passenger traffic (as measured in RPKs)
increased 20.6%, while domestic passenger capacity (as measured in ASKs)
increased 22.3%, resulting in a decrease in load factor from 76.0% in 2008 to
74.9% in 2009. Domestic passenger yield decreased 14.9% from US¢12.2 in 2008 to
US¢10.4 in 2009, mainly due to lower fuel surcharges driven by lower fuel prices
and lower fares due to price promotions.




International
passenger revenues, which accounted for approximately 64% of total passenger
revenues in 2009 as compared to approximately 67% of passenger revenues in 2008,
decreased 11.1% to US$1,672.0 million in 2009 from US$1,880.9 million in 2008.
International passenger traffic (as measured in RPKs) increased 6.9%, while
passenger capacity (as measured in ASKs) increased 5.6% in 2009, resulting in an
improvement in load factor from 76.9% in 2008 to 77.8% in 2009. Total
international passenger yield (based on RPKs) decreased 16.9% to US¢8.0 in 2009
from US¢9.6 in 2008, driven by lower fuel surcharges and nominal fare decreases
due to price promotions.




Cargo
revenues fell by 32.1%, to US$895.6 million in 2009 from US$1,319.4 million in
2008, mainly driven by a 24.8% decrease in yields (US¢34.1 in 2009 from US¢45.4
in 2008), and coupled with a 9.7% decrease in traffic. In 2009, cargo traffic
was impacted by the global economic crisis, a very weak seed export season, as
well as by the decline in salmon exports from Chile as a result of the ISA
virus. Capacity during 2009 decreased 6.0%. As a consequence, load factors
decreased from 71.2% in 2008 to 68.4% in 2009. Revenues per ATK decreased 27.8%
as compared to 2008.




Cost
of Sales




Cost of
sales in 2009 totaled US$2,522.8 million, representing a 12.8% decrease as
compared to cost of sales of US$2,893.9 million in 2008. As a percentage of
total revenues, cost of sales increased from 69.9% in 2008 to 71.7% in
2009.




The
decline in cost of sales was driven by lower aircraft fuel expenses, which
totaled US$959.6 million in 2009, a 30.9% decrease as compared to aircraft fuel
expenses of US$1,388.8 million in 2008. Fuel expenses declined due to a 42.6%
decrease in average fuel prices, which was partially offset by the Company’s
recognition of a US$128.7 million fuel hedge loss, as compared to a US$35.4
million fuel hedge gain in 2008.




In
addition, the Company recorded lower ACMI leases in the cargo business. These
lower costs were offset in part by higher fleet costs. Depreciation expenses
increased mainly due to the incorporation of two new Boeing 767 aircraft and
three Airbus A319 aircraft to LAN’s fleet during 2009. For further information
on depreciation policies, please refer to “Critical Accounting Policies” below,
and Note 2 to our audited consolidated financial statements.




70
 Table of Contents


Aircraft
maintenance expenses increased by 14.3%, from US$105.9 million in 2008 to
US$121.0 million in 2009, due to a larger fleet and the escalation in
maintenance contracts. Aircraft rental expenses increased mainly due to an
increase in the average rental cost due to the arrival of two Boeing 777
freighters in the second quarter of 2009. Wages and benefits expenses increased
mainly driven by an increase in average headcount during 2009, which was
partially offset by an average depreciation of local currencies versus the U.S.
dollar.




Passenger
service expenses totaled US$92.8 million in 2009 compared to US$85.3 million in
2008. This represented an 8.8% increase driven mainly by a 16.3% increase in the
number of passengers transported during 2009. This was partially offset by a
decrease in on-board service costs due to a renegotiation of agreements with
third party suppliers and an increase in logistics’ efficiencies in the on board
service process.




As a
result of the above, gross margin declined 20.1% from US$1,246.3 million in 2008
to US$996.4 million in 2009.




Other
operating income decreased by 4.3% to US$154.5 million in 2009 from US$161.4
million in 2008, mainly driven by a decrease in onboard sales, storage and
custom services to third parties and lower revenues from aircraft leases, which
was partially offset by higher revenues from tour and travel services. Interest
income decreased by 1.6% to US$18.2 million in 2009 from US$18.5 million in 2008
as a higher cash balance during 2009 was largely offset by lower interest rates.
Marketing costs increased by 6.7% from US$107.3 million in 2008 to US$114.5
million in 2009, mainly driven by higher selling and marketing
expenses.




Distribution
costs declined 10.8% from US$366.7 million in 2008 to US$327.0 million in
2009.This decline was driven by lower commissions to agents (related to both
passenger and cargo sales), which decreased by 24.4% to US$143.9 million in 2009
from US$190.2 million in 2008, due to a 15.0% decrease in traffic revenues
(passenger and cargo), coupled with a 0.5% reduction in average commissions.
This reduction was mainly related to lower commissions in the passenger business
as a result of a higher penetration of internet sales and to a higher percentage
of passengers traveling in Economy Class.




Administrative
expenses declined 7.5% from US$167.6 million in 2008 to US$155.1 million in 2009
due to lower general and administrative expenses, offset in part by higher wages
related to administrative personnel and higher asset (non aircraft)
depreciation.




Other
operating expenses declined 21.4% from US$127.9 million in 2008 to US$100.5
million in 2009, as a result of lower sales costs, as well as lower costs
related to on-board sales, employee travel expenses and lower general
expenses.




Financial
costs (from non-financial activities) increased by 22.0% to US$153.1 million in
2009 from US$125.5 million in 2008 due to increased average long-term debt
related to fleet financing.




Exchange
rate differences decreased to an expense of US$11.2 million in 2009 from a gain
of US$23.4 million in 2008. In addition, during 2009 the Company recognized a
US$28.0 million charge related to the impact that the devaluation of the
Venezuelan currency had on the Company’s operations in that
country.  As of December 31, 2009 the Company held US$ 28.0 million in
assets located in Venezuela (net of  already registered charges), of
which  over 94.0% constituted cash equivalents. On a consolidated
basis, the Company’s assets related to its operations in Venezuela represented
less than 0.5% of the total assets of the Company.  For the year 2009,
operating revenues of the Venezuelan regional office represented 2.4% of the
Company’s consolidated revenues.  Given the foregoing, the Company
does not foresee that hyperinflationary accounting will have a material effect
on the Company in the near future.




Other net
earnings (losses) amounted to a loss of US$11.7 million in 2009 as compared to a
loss of US$135.3 million in 2008. In 2008, the Company recorded a provision of
US$109.0 million in other net earnings in connection with a plea agreement
entered into with the DOJ regarding an antitrust investigation related to our
cargo business (see “Item 4. Information on the Company—Business of the
Company—Cargo Operations—Cargo-Related Investigations”).




Income
tax expense decreased by 31.7%, amounting to US$44.5 million in 2009 as compared
to US$65.1 million in 2008. This was mainly the result of a 31.2% decrease in
pre-tax income, coupled with a 0.1% decrease in the average tax rate (currently
16.1%) in 2009. For more information, see “—Critical Accounting
Policies—Deferred Income Taxes” below and Note 20 to our audited consolidated
financial statements.




71
 Table of Contents


U.S.
Dollar Presentation and Price-Level Adjustments




General




Foreign
currency transactions




(a)           Presentation
and functional currencies




The items
included in the financial statements of each of Lan Airlines and its
consolidated subsidiaries are valued using the currency of the main economic
environment in which the entity operates (the “functional currency”). The
functional currency of Lan Airlines is the U.S. dollar, which is also the
currency of presentation of the consolidated financial statements of Lan
Airlines and its 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.




(c)           Group
entities




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




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




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




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




For
consolidation purposes, exchange differences arising from the translation of a
net investment in foreign entities (or in local entities with a functional
currency different to that of the parent), and of loans and other foreign
currency instruments designated as hedges for such investments, are recorded
within net equity. When the investment is sold, these exchange differences are
shown in the consolidated statement of income as part of the loss or gain on the
sale.




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




Effects
of Exchange Rate Fluctuations




Our
functional currency is the U.S. dollar in terms of the pricing of our products,
composition of our balance sheet and effects on our results of operations. Most
of our revenues (80% in 2009) are in U.S. dollars or in prices pegged to the
U.S. dollar and a substantial portion of our expenses (65% in 2009) is
denominated in dollars or pegged to the U.S. dollar, in particular fuel costs,
landing and overflight fees, aircraft rentals, insurance and aircraft components
and supplies. Almost all of our liabilities are denominated in U.S. dollars (91%
as of December 31, 2009), including bank loans, air traffic liabilities, and
certain amounts payable to our suppliers. As of December 31, 2009, 88% 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 leases and purchase commitments for
aircraft, are denominated in U.S. dollars.




Although
we generally maintain our international passenger fares and cargo prices in U.S.
dollars or at prices pegged to the U.S. dollar, we are exposed to foreign
exchange losses and gains due to exchange rate fluctuations. We recorded a net
foreign exchange profit of US$23.4 million in 2008 and a net foreign exchange
loss of US$11.2 million in 2009, which are set forth in our consolidated
statement of income under “Exchange rates differences.” For more information,
see Notes 2.3(a) and 34 to our audited consolidated financial statements. The
loss incurred in 2009 was mainly related to the depreciation of the Chilean peso
against the U.S. dollar.




72
 Table of Contents


IFRS/Non-IFRS
Reconciliation




We use
“Cost per ATK” and “Cost per ATK excluding fuel price variations” in analyzing
operating costs on a per unit basis. “ATKs” (available ton kilometers) measure
the number of tons of capacity available for the transportation of revenue load
(passengers and/or cargo) multiplied by the kilometers flown. To obtain our unit
costs, which are used by our management in the analysis of our results, we
divide our “total costs” by our total ATKs. “Total costs” are calculated by
starting with operating costs as defined under IFRS and making certain
adjustments for interest costs and other  revenues. The cost component
is further adjusted to obtain “costs per ATKs excluding fuel price variations,”
in order to remove the impact of changes in fuel prices for the year. “Cost per
ATK” and “Cost per ATK 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 costs or as indicators
of performance or cash flows as a measure of liquidity.




The table
below reconciles operating costs as defined by IFRS to costs used in the
calculation of “Cost per ATK” and “Cost per ATK excluding fuel price
variations.”




2009
                
                
                2008Cost
      per ATKOperating
      cost (US$ thousands)
                
                
                3,219,821
                
                
                
                3,663,395+
      Interest expense (US$ thousands)
                
                
                153,109
                
                
                
                125,488−
      Other operating income(US$ thousands)
                
                
                154,534
                
                
                
                161,422ATK
      operating costs
                
                
                3,218,396
                
                
                
                3,627,461Divided
      by system’s ATKs (thousands)
                
                
                7,811,446
                
                
                
                7,652,230=
      Cost per ATK (US$ cents)
                
                
                41.20
                
                
                
                47.40Cost
      per ATK excluding fuel price variationsATK
      operating costs (thousands)
                
                
                3,218,396
                
                
                
                3,627,461−
      Actual fuel expenses (US$ thousands)
                
                
                959,608
                
                
                
                1,388,826+
      (Gallons consumed) times (previous year’s fuel price)
                
                
                1,410,767
                
                
                
                1,019,420ATK
      operating costs excluding fuel price variations
                
                
                3,669,550
                
                
                
                3,258,055Divided
      by system’s ATKs (thousands)
                
                
                7,811,446
                
                
                
                7,652,230=
      Cost per ATK excluding fuel price variations (US$ cents)
                
                
                46.98
                
                
                
                42.58




In
addition, we use revenues per ASK or ATK, as applicable, in analyzing revenues
on a per unit basis. To obtain our unit revenues, which are used by our
management in the analysis of our results, 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.
It is not an IFRS based measure of performance or liquidity. This metric 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:




2009
                
                
                2008Passenger
      Revenues (US$ million)
                
                
                2,623.61
                
                
                
                2,820.83ASK
      (million)
                
                
                38,777.14
                
                
                
                35,176.15Passenger
      Revenues/ASK (US$ cents)
                
                
                6.8
                
                
                
                8.0Cargo
      Revenues (US$ million)
                
                
                895.55
                
                
                
                1,319.42ATK
      (million)
                
                
                3,834.98
                
                
                
                4,080.25Cargo
      Revenues/ATK (US$ cents)
                
                
                23.4
                
                
                
                32.3


73
 Table of Contents


Seasonality




Our
operating revenues are substantially dependent on overall passenger and cargo
traffic volume, which is subject to seasonal and other changes in traffic
patterns. Our passenger revenues are generally higher in the first and fourth
quarters of each year, during the southern hemisphere’s (Chile and Argentina)
spring and summer, than in the second and third quarters. Since Peru and Ecuador
have different seasonal patterns, the expansion into those markets has led to
stronger passenger revenues in the second and third quarters, therefore
moderating the overall seasonality of our passenger business. Our cargo revenues
generally are higher in the fourth quarter, which correspond to the harvest
season in the southern hemisphere.




Critical
Accounting Policies




A summary
of our significant accounting policies is included in Note 2 to our audited
consolidated financial statements. We believe that the consistent application of
these policies enables us and our subsidiaries to provide readers of the
financial statements with more useful and reliable information about our
operating results and financial condition. The preparation of financial
statements requires management to make certain estimates and assumptions. The
following are the accounting policies that we believe are the most important to
the portrayal of our financial condition and results of operations and require
our most difficult, subjective or complex judgments.




Accounting
estimates judgments




The
Company has used estimates to value and book some of the assets, liabilities,
revenues, expenses and commitments; these basically refer to:




·
            The
      evaluation of possible impairment loss for certain
  assets.




·
            The
      useful life and residual value of fixed assets and intangible
      assets.




·
            The
      criteria employed in the valuation of certain
  assets.




·
            Air
      tickets sold that are not actually
used.




·
            The
      calculation of deferred income at the period-end corresponding to the
      valuation of kilometers credited to holders of the LANPASS loyalty card,
      pending their use.




·
            The
      need for provisioning and, if required, the value of such
      provisions.




·
            The
      recoverability of deferred tax
assets.




These
estimates are made on the basis of the best information available on the matters
analyzed. Events taking place in the future might result in a modification of
such estimates prospectively and for future periods.




Revenue
Recognition




Operating
revenues include the fair value of the proceeds received or to be received on
sales of goods and services, in the ordinary course of the Company’s business.
Operating revenues are shown net of refunds, rebates and discounts.




(a)           Sales
of services




a.1           Passenger
and cargo transport




We
recognize passenger and cargo revenues either when the transportation service is
provided or when we determine that the tickets will not be used or refunded,
which, in the case of passenger revenues, reduces the air traffic liability. We
estimate revenue breakage based on historical breakage experience that takes
into account the aging of tickets that will not be used or refunded. Commissions
payable related to such unearned earnings are shown net of the air traffic
liability.  Other revenues, including aircraft leases, courier,
logistic and ground services, duty free sales, and storage and customs
brokering, are recognized when services are provided.




The
amount of passenger ticket sales not yet recognized as revenue is reflected as
an air traffic liability. Air traffic liability includes estimates of the amount
of future refunds and exchanges, net of forfeitures for all unused tickets once
the flight date has passed. We perform periodic evaluations of this estimated
liability based on actual results. Any adjustments, which can be significant,
are included in the results of operations for the periods in which the
evaluations are completed. These adjustments relate primarily to the differences
between our estimation of certain revenue transactions and the related sales
price, as well as refunds, exchanges and other items for which final settlement
occurs in periods subsequent to the sale of the related tickets at amounts other
than the original sales price.




74
 Table of Contents


Actual
events and circumstances may differ from historical fare sale activity and
customer travel patterns and can result in refunds, exchanges or forfeited
tickets differing significantly from estimates. We evaluate our estimates
periodically. If actual refunds, exchanges or forfeitures fall outside of our
estimated ranges, we review our estimates and assumptions and adjust air traffic
liability and passenger revenues as necessary. Our estimation techniques have
been consistently applied from year to year and in the last two years,
deviations from our estimates did not result in material differences that
required adjustments. Nevertheless, as with any estimates, actual results may
vary from estimated amounts.




a.2           Frequent
flyer program




The
Company has a frequent flyer program called LANPASS. The objective of the
program is to achieve customer loyalty through the delivery of kilometers every
time the members make certain flights, use the services of partner entities or
make purchases with associated credit cards. The kilometers earned can be
exchanged for flights tickets or other services of associated entities. The
audited consolidated financial statements include liabilities for this concept
(deferred income), based on the estimate of the valuation established for the
kilometers accumulated pending use at that date (in accordance with IFRIC 13:
“Customer loyalty programs”).




Property
and Equipment




The lands
of Lan Airlines and its subsidiaries are recognized at cost less any accumulated
impairment loss. The rest of the property, plant and equipment are shown,
initially and subsequently, at their historic cost less the corresponding
depreciation.




Advance
payments to manufacturers of aircraft are activated by the Company under
“Construction in progress” until their receipt, when they are
liquidated.




Subsequent
costs (such as replacement of components, improvements and extensions) are
included in the value of the initial asset or shown as a separate asset only
when it is probable that the future economic benefits associated with the
elements of property, plant and equipment will end up flowing to the Company and
the cost of such element can be determined reliably. The value of the component
replaced is written-off in the books. The rest of the repairs and maintenance
are charged to the result of the year in which they are incurred.




Depreciation
of property, plant and equipment is calculated using the straight-line method
over their estimated useful lives; except in the case of certain technical
components, which are depreciated on the basis of cycles and hours
flown.




The
residual value and useful life of assets is revised, and adjusted if necessary,
once a year.




When the
value of an asset is higher than its estimated recoverable amount, its value is
reduced immediately to its recoverable amount. For more information, see Notes
2.7 to our audited consolidated financial statements.




Losses
and gains on the sale of property, plant and equipment are calculated by
comparing the proceeds obtained with the book value and are included in the
consolidated statement of income.




Maintenance




Costs
incurred in connection with scheduled major maintenance of aircraft fuselage and
engines are capitalized and depreciated until the next maintenance. The
depreciation rate is determined on technical grounds, based on cycles and flight
hours. Unscheduled maintenances of aircraft and engines are charged to income as
incurred.




Derivative
Financial Instruments and Hedging Activities




Derivatives
are booked initially at fair value on the date the derivative contracts are
signed and they continue to be valued at their fair value. The method for
booking the resultant loss or gain depends on whether the derivative has been
designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:




75
 Table of Contents


(a)           Hedge
of the fair value of recognized assets (“fair value hedge”);




(b)           Hedge
of a concrete risk associated with a recognized liability or an expected
highly-probable transaction (“cash-flow hedge”); or




(c)           Derivatives
that do not qualify for hedge accounting.




The
Company documents, at the inception of each transaction, the relationship
between the hedging instrument and the hedged item, as well as its objectives
for managing risk and the strategy for carrying out various hedging transaction.
The Company also documents its assessment, both at the beginning and on an
ongoing basis, as to whether the derivatives used in the hedging transactions
are highly effective in offsetting the changes in the fair value or cash flows
of the items being hedged.




The total
fair value of the hedging derivatives is booked as a non-current asset or
liability if the remaining maturity of the item hedged is over 12 months, and as
a current asset or liability if the remaining term of the item hedged is less
than 12 months. Derivatives not booked as hedges are classified as a current
asset or liability.




(a)           Fair
value hedges




Changes
in the fair value of derivatives designated and that qualify as fair value
hedges are shown in the consolidated statement of income, together with any
change in the fair value of the asset or liability hedged that is attributable
to the risk being hedged.




(b)           Cash
flow hedges




The
effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is shown in net equity. The loss or
gain relating to the ineffective portion is recognized immediately in the
consolidated statement of income under “Other net gains (losses).”




In the
case of variable interest-rate hedges, the amounts recognized in equity are
reclassified to results within Financial cost at the time the associated debts
accrue interest.




For fuel
price hedges, the amounts shown in equity are reclassified to income as Cost of
sales to the extent that the fuel subject to the hedge is used.




When
hedging instruments mature or are sold or when they do not meet the requirements
to be accounted for as hedges, any gain or loss accumulated in net equity until
that moment remains in equity and is reclassified to the consolidated statement
of income when the hedged transaction is finally recognized. When the hedged
transaction is no longer expected to occur, the gain or loss accumulated in net
equity is reclassified immediately to the consolidated statement of income as
“Other net gains (losses).”




(c)           Derivatives
not booked as a hedge




Certain
derivatives are not booked as a hedge. The changes in fair value of any
derivative instrument that is not booked as a hedge are shown immediately in the
consolidated statement of income, in “Other net gains (losses).”




Deferred
Income Taxes




Deferred
taxes are calculated, based on the balance-sheet method, on the temporary
differences arising between the fiscal amounts of assets and liabilities and
their book values. However, if deferred taxes arise from the initial recognition
of a liability or an asset in transactions other than business combinations that
at the time of the transaction does not affect the accounting result or the tax
gain or loss, such deferred taxes are not booked. The deferred tax is determined
using the tax rates and laws that have been enacted or substantially enacted by
the balance sheet day, and are expected to apply when the related deferred tax
asset is realized or the deferred tax liability is discharged.




Deferred
tax assets are recognized when it is probable that there will be sufficient
future tax earnings with which to compensate the temporary
differences.




Deferred
taxes are not recorded on temporary differences that arise on investments in
subsidiaries because the Company controls the timing of the reversal of these
differences and estimates that they will not reverse in the foreseeable
future.




76
 Table of Contents


Liquidity
and Capital Resources




Our cash
and cash equivalents totaled US$791.9 million as of December 31, 2009 compared
to US$411.0 million as of December 31, 2008. The increase in our cash and cash
equivalents during 2009 was due to lower operational costs, the receipt of
disbursements derived from various three year unsecured commercial bank loans
entered into to increase our liquidity position and the reimbursement of margin
call deposits which were held with different counterparties as of December 31,
2008.




Cash from
operations is derived primarily from providing air passenger and cargo
transportation to customers. Operating cash outflows are primarily related to
the recurring expenses of airline operations. Net cash inflows from operating
activities were US$845.8 million in 2009 and US$631.1 million in 2008. Net cash
inflows increased $214.7 million due to lower fuel costs and recovery of cash
posted as collateral in connection with fuel and interest rate
derivatives.




In recent
years, we have been able to meet our working capital and capital expenditure
requirements through cash from our operations. Given the nature of our business,
the Company generally benefits from having a positive working capital (cash
inflows). We expect to continue generating positive working capital through our
operations. However, we cannot predict whether current trends and conditions
will continue, or how the effects of competition or other factors that are
beyond our control could affect us.




We have
generally been able to arrange for short-term loans with local Chilean and
international banks when we have needed to finance working capital expenditures
or increase our liquidity. During the first quarter of 2009, the Board of
Directors of the Company approved entering into loans with different local
financial institutions for a total of US$250 million in order to increase the
Company’s cash position during the global economic crisis. As of December 31,
2009 the Company had borrowed the equivalent of US$252 million in U.S. dollar
and Chilean peso denominated facilities. In order to avail itself of U.S. dollar
cash flows, the Company entered into cross currency swaps for an equivalent
amount of US$171 million. As of December 31, 2009, we maintained US$515 million
in short-term credit lines with both local and foreign banks. With respect to
collateral posting, during the first semester of 2009, the Company issued
stand-by letters of credit for approximately US$98.0 million for the partial
replacement of US$177.8 million cash collateral. The issuance of such letters of
credit and the increase of the price of crude oil in the first semester of 2009
resulted in a reduction of the cash pledged to financial institutions to US$2.4
million as of December 31, 2009.




Cash
capital expenditures were US$538.6 million in 2009 and US$779.3 million in 2008.
The decrease in capital expenditures was due to a lower number of aircraft
acquired during 2009.




Our
capital expenditures for 2009 were mainly composed of:




·
            cash
      contributions for pre-delivery deposits related to aircraft that will be
      incorporated to our fleet in 2009, 2010 and
  2011;




·
            the
      acquisition of three Airbus A319 Passenger aircraft and three Boeing
      B767-300 Passenger aircraft; and




·
            the
      acquisition of aircraft spare parts and spare
  engines.




Our
capital expenditures for 2008 were mainly composed of:




·
            cash
      contributions for pre-delivery deposits related to aircraft that will be
      incorporated into our fleet in 2008, 2009 and
  2010;




·
            the
      acquisition of four Boeing 767-300 Passenger aircraft, ten Airbus A318
      Passenger aircraft, two Airbus A319 and two A320 Passenger aircraft;
      and




·
            the
      acquisition of aircraft spare parts and spare
  engines.




For more
information about current and future capital expenditures, see “—Capital
Expenditures” under this Item 5. The difference between net cash used in
investing activities and cash capital expenditures during 2008 and 2009 relates
mainly to the investment in and sale of financial instruments.




77
 Table of Contents


Net cash
inflows from financing activities were US$99.2 million in 2009, compared to
US$100.4 million in 2008. Such variance was due to higher loan payments offset
by lower dividend payments. In 2009, our main uses of cash were US$261.7 million
for loan payments, US$139.6 million for dividends payments and US$129.3 for
interest payments. In 2008, our main uses of cash were US$222.4 million for
dividend payments, US$102.6 million for loan payment and US$81.4 million for
interest payments.




Our cash
and cash equivalents are mainly held in U.S. dollars or U.S. dollar-based
instruments. A fraction (around 10%) of our cash position is held in currencies
other than U.S. dollars to fulfill short-term obligations denominated in local
currencies.




We have
contractual obligations and commitments primarily related to the payment of
debt, lease arrangements and for the future incorporation of aircraft to our
fleet. As of December 31, 2009 we have financed the acquisition of 17 Boeing
767-300 Passenger aircraft and eight Boeing 767-300 Freighters through
syndicated loans provided by international financial institutions with the
support of partial guarantees issued by the Ex-Im Bank with repayment profiles
of either 12 or 15 years. The Ex-Im Bank guarantees support 85% of the net
purchase price and are secured with a first priority mortgage on the aircraft in
favor of a security trustee on behalf of Ex-Im Bank. The documentation for each
loan follows standard market forms for this type of financing, including
standard events of default. We have financed the remaining 15% of the net
purchase price with commercial loans or with our own funds. Our Ex-Im Bank
supported financings are denominated in U.S. dollars and have quarterly
amortizations with a combination of fixed and floating rates linked to U.S.
dollar LIBOR. Through the use of interest rate swaps, we have effectively
converted almost all of our floating rate debt under these loans into fixed rate
debt. See “Quantitative and Qualitative Disclosures about Market Risk—Risk of
Fluctuations in Interest Rates” under Item 11 for more information. Between
2004 and 2008, LAN sold its ownership in the entities borrowing some of these
loans and they were therefore reclassified as financial leases. As of December
31, 2009, the total amount outstanding under our Ex-Im Bank-supported financings
totaled US$1,186.9 million.




In 2000,
in order to finance our Airbus aircraft, we entered into a US$1.3 billion
umbrella credit facility with a syndicate of international financial
institutions under which we borrowed in the form of separate loans in connection
with the specific financing requirements of each Airbus aircraft (including
pre-delivery and long-term financings). This umbrella facility provided for
guarantees from the English, French and German export credit agencies and
contained customary terms for the industry, including standard events of
default. Loans under the facility were denominated in U.S. dollars and bore
interest at floating rates linked to LIBOR. The majority of these loans were
converted into fixed rate loans through interest rate swaps. All the aircraft
acquired under this facility were delivered by the end of 2005. In late 2005, we
decided to negotiate a US$920 million facility to finance the acquisition of the
32 Airbus A320-Family Aircraft that were received in 2006, 2007, 2008 and in the
first quarter of 2009. The new facility, arranged in early 2006, provided us
with guarantees from the export credit agencies for 85% of the net purchase
price of each aircraft. The remaining 15% of the net purchase price was funded
internally. As of March 31, 2009, all the aircraft acquired under this new
facility have been delivered and there are no remaining availabilities
thereunder.




Our total
long-term debt (including capital leases) as of December 31, 2009, was
US$2,694.8 million compared to US$2,373.2 million in 2008. The increase in
long-term debt during 2009 relates to the incorporation of debt-financed fixed
assets and the loan taken with local financial institution to increase
liquidity. We have minimum lease payment obligations primarily associated with
our aircraft leases. As of December 31, 2009, we had 16 aircraft under operating
leases, and we had minimum lease payment obligations of US$444 million compared
to US$207 million as of December 31, 2008. The average interest rate of our
long-term debt was 5.0% as of December 31, 2009. Of the total debt amount, 95.0%
accrues interest at a fixed rate (either through a stated fixed interest rate or
through our use of interest rate swap agreements) or is subject to interest rate
caps. As of December 31, 2009, we also had purchase obligations for




·
            13
      Airbus A319, 32 Airbus A320s;




·
            4
      Boeing 767-300 Passenger aircraft;




·
            3
      Boeing 767-300 Freighter aircraft;




·
            1
      Boeing 777-200 Freighter aircraft;
and




·
            26
      Boeing 787 Passenger aircraft;




amounting
to a combined total of US$5,419 .0 million, with delivery between 2010 and
2018.




78
 Table of Contents


The
following table sets forth our material expected obligations and commitments as
of December 31, 2009:




Payments
      due by period, as of December 31, 2009Total
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                Thereafter(in
      US$ millions)Principal
      debt payments
                
                
                2,185.5
                
                
                
                229.2
                
                
                
                241.8
                
                
                
                251.8
                
                
                
                224.1
                
                
                
                204.5
                
                
                
                1,034.1Interest
      debt payments
                
                
                469.5
                
                
                
                91.6
                
                
                
                80.8
                
                
                
                69.3
                
                
                
                57.9
                
                
                
                48.7
                
                
                
                121.2Capital leases(1)
                
                
                297.2
                
                
                
                59.9
                
                
                
                61.5
                
                
                
                51.3
                
                
                
                41.7
                
                
                
                41.5
                
                
                
                41.4Operating leases(2)
                
                
                836.3
                
                
                
                92.4
                
                
                
                90.9
                
                
                
                81.9
                
                
                
                67.5
                
                
                
                54.4
                
                
                
                449.2Purchase
      obligations
                
                
                5,419.0
                
                
                
                412.4
                
                
                
                1,027.8
                
                
                
                512.8
                
                
                
                876.8
                
                
                
                325.0
                
                
                
                2,264.2Total
                
                
                9,207.5
                
                
                
                885.5
                
                
                
                1,502.8
                
                
                
                967.1
                
                
                
                1,268.0
                
                
                
                674.1
                
                
                
                3,910.1





(1)
            Includes
      interests.


(2)
            Includes
      aircraft leases and other non-cancelable
leases.




Trend
Information




During
2010, we expect a significant recovery in both passenger and cargo operations as
a result of expected improvements in the economic activity after the global
crisis that affected markets worldwide during 2009. Specifically, we expect to
face:




·
            revenue
      growth in the passenger business, driven by capacity expansion and a
      recovery in yields. During January and February 2010, passenger traffic
      increased 13.8%, driven mainly by a strong recovery in international
      passenger operations, which increased 15.8% as compared to 2009. During
      such period, total passenger capacity increased 9.4%, leading to a 3.2
      points  increase in load factors from 78.9% to 82.1%. On
      February 27, 2010, Chile was struck by a strong earthquake that caused
      significant damage to the Santiago international airport. As a result of
      the earthquake, outbound LAN’s operations had to be shut down for three
      days and significantly reduced for several weeks thereafter. This event
      affected March 2010 passenger traffic, which declined 8.2% as compared to
      March 2009. If compared with the first quarter of 2009, during the first
      quarter of 2010 total passenger traffic increased 6.7%, with a 4.9%
      capacity increase, causing a 1.4 points increase in load factors from
      78.0% to 79.3%. Passenger yields show an improving trend, with 6.6%
      increase if compared to first quarter 2009. During April and May 2010, we
      observed improving demand trends as operations return to normal levels
      after the impact of the earthquake, with RPKs growing 0.1% in April 2010
      and 13.9% in May 2010, as compared to the same period in 2009. We also
      continue to observe improvements in
yields.




·
            a
      strong recovery in cargo demand, in line with global and regional trends.
      This recovery is expected to be driven by a sustained increase in the
      Brazilian import market, by an increase in our capacity between Latin
      America and Europe (with the new Boeing 777 Freighters delivered in 2009)
      and by the new domestic cargo operation in Brazil launched in March 2009.
      During the first quarter of 2010, cargo demand as measured in RTKs
      increased 29.0%with higher fares
      compared with the first quarter of 2009 as yields increased 4.9%. During
      April and May 2010, RTKs continued to increase, growing by 39.6% and 39.3%
      as compared to April and May 2009.




In 2010,
we expect to continue expanding and diversifying our revenue base through the
expansion of our network by further developing our existing routes, adding new
destinations, developing new alliances, and entering new markets. For example,
in the first quarter of 2010, we received one Boeing 767 aircraft designated for
international long-haul passenger operations and we expect to receive eight
additional passenger aircraft (all Airbus A320 family aircraft designated for
domestic and regional passenger operations) during the second half of
2010.




In the
cargo business, we will continue adjusting our routes and our capacity mix to
adapt to changing cargo flows and to take advantage of expansion opportunities.
During 2010, we intend to expand our Boeing 777 Freighter operation between
Latin America and Europe, adding a fifth weekly frequency, and our domestic
cargo operation in Brazil. Although cargo operations continue to be affected by
reduced salmon exports from Chile as a result of the ISA Virus, the flexibility
of Lan Cargo’s freighter network has allowed us to accommodate lower demand from
Chile and reassign freighter capacity accordingly. We are currently evaluating
an increase in cargo capacity for 2010 and 2011.




79
 Table of Contents


We
continue to have a significant amount of flexibility to adjust the size of our
fleet. Between 2011 and 2013, we will have ten operating lease expirations
(including Japanese operating leases) in our wide body passenger fleet, which
can be exercised without cost. Furthermore, during 2010 part of our Boeing 767
fleet will begin to be fully paid for, providing us with additional
flexibility.




We also
intend to lower our cost structure and offset reductions in demand through
careful cost management and more efficient asset utilization and we aim at
increasing efficiency by streamlining our support processes, reducing commercial
costs, continuing with the implementation of our new business model for
short-haul operations, and continuing with the implementation of the LEAN system
in our processes.




We expect
jet fuel prices to continue being volatile in 2010 and we expect to continue
using fuel hedging programs and fuel surcharge mechanisms in both the passenger
and cargo businesses, to help protect us against short-term movements in crude
oil prices. For instance, as of March 31, 2010 we have hedged approximately 62%
of our estimated fuel requirements for the second quarter 2010, 42% for the
third quarter, and 37% for the fourth quarter, as well as 10% of our estimated
fuel requirements for the first quarter of 2011. These hedging instruments are
comprised by a combination of collars and swaps at an average price of
approximately US$79 per barrel.




Capital
Expenditures




Our
capital expenditures are related to the acquisition of aircraft,
aircraft-related equipment, IT equipment, support infrastructure and the funding
of pre-delivery deposits. Net cash flow used in investment activities totaled
US$538.6 million in 2009 and US$779.3 million in 2008. The decrease in capital
expenditure is explained by a lower number of aircraft acquired during 2009
partially offset by a higher expenditure in pre-delivery deposits.




The
following chart sets forth our estimate, as of May 10, 2010, of our future
capital expenditures for 2010, 2011, 2012, 2013 and 2014:




Expenditures
      by year, as of May 10, 20102010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014(in
      US$ millions)Expenditures
      on aircraft
                
                
                426
                
                
                
                1,058
                
                
                
                790
                
                
                
                1,129
                
                
                
                289PDPs(1)
                
                
                312
                
                
                
                7
                
                
                
                (47
                )
                
                
                (289
                )
                
                
                90Purchase
      Obligations
                
                
                738
                
                
                
                1,065
                
                
                
                743
                
                
                
                840
                
                
                
                380Other expenditures(2)
                
                
                136
                
                
                
                126
                
                
                
                160
                
                
                
                172
                
                
                
                162Total
                
                
                875
                
                
                
                1,191
                
                
                
                903
                
                
                
                1,012
                
                
                
                542





(1)
            Pre-delivery
      payments.


(2)
            Includes
      expenditures on spare engines and parts, information technology and other
      expenditures.




The
expenditures set out in the table above reflect payments for purchases and other
fleet-related items, as well as for information technology and other items. See
“Business of the Company — Fleet” under Item 4 above. Principally, we have
projected our capital expenditures based on:




·
            the
      delivery of eight Airbus A320-Family Aircraft in 2010, 15 in 2011, eight
      in 2012, 10 in 2013 and four in
2014;




·
            the
      delivery of one Boeing B767-300 Passenger aircraft in 2010 and three in
      2011;




·
            the
      delivery of one Boeing 777 Freighter aircraft in
  2012;




·
            the
      delivery of two Boeing 787-8 passenger aircraft in 2011, three in 2012 and
      five in 2013;




·
            the
      implementation of a new host system as a part of a three year capital
      expenditure plan, totaling approximately US$ 48 million;
    and




80
 Table of Contents


·
            expenses
      related to the incorporation of the new Boeing 787 Family aircraft for a
      total expenditure amount of US$ 41.0 million during
  2010.




We expect
that cash generated from operations, short-term credit-lines and long-term
syndicated loans with various banks will be sufficient to meet our cash
requirements in the foreseeable future, although events that materially affect
our operating results could also have a negative impact on our
liquidity.




Credit
Card Receivables Securitization




We have
raised a total of US$100.0 million through two similar transactions involving
the private placement of certificates backed by our credit card receivables. In
these transactions, we sold our right to receive certain present and future U.S.
dollar payment obligations, referred to as future credit card receivables,
arising from the purchase of passenger tickets and related services in the
United States through American Express, Diners Club, Discover, Visa and
MasterCard to Pelican Finance Ltd. (“Pelican”). In the first transaction,
completed in March 1999, we sold US$60.0 million of our future credit card
receivables to Pelican which then issued notes to a United States trust, backed
by payments received on these payment obligations, which in turn issued trust
certificates, backed by payments received on the notes, to investors. This
transaction had a term of seven years and our sale of these receivables
authorized Pelican to collect payments on them until March 2006. We utilized
this securitization facility to pay down our short-term debt. Final payment for
this transaction was made in June 2006. In August 2002, we entered into a
similar sale of future credit card receivables to Pelican for an additional
US$40.0 million. This transaction had a term of seven years, with a four-year
grace period on principal payments. Our sale of these receivables authorized
Pelican to collect payments on them until the earlier of the date the notes
issued by Pelican were fully redeemed and August 2009. We utilized this
securitization facility to improve our liquidity.  Final payments for
this transaction were made on June 30, 2009.




As of
March 31, 2010, LAN has no securitization agreement in place.




Off-Balance
Sheet Arrangements




As of
December 31, 2009 the Company had aircraft and aircraft engines under operating
leases. These operating leases provide us with great flexibility to adjust to
any demand volatility that may affect the airline industry and therefore we
consider such arrangements to be of great value.




Under the
aforementioned operating leases, LAN 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.




The
Company operates 17 aircraft under a financing structure called Japanese
Operating Lease (“JOL”). This method involves the creation of a special purpose
entity that acquires aircraft with bank and third party financing. Under Chilean
GAAP JOLs were booked as operating leases, generating a charge for aircraft
leasing in the consolidated statement of income. Since the Company moved towards
IFRS accounting, these aircraft are shown in the consolidated statement of
financial position as part of “Property, plant and equipment” and the
corresponding debt is shown as a liability.




Revenues
from aircraft under operating leases account for approximately 17% of the total
revenues of the Company.




As of
March 31, 2010 we are not aware of any event, lawsuit, commitment, trend or
uncertainty that may result in, or is reasonably likely to result in, the
termination of the operating leases. See Note 37 to our audited consolidated
financial statements for a more detailed discussion of these
commitments.




ITEM
6.            DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES




Directors
and Senior Management




The
management of Lan Airlines is conducted by its board of directors which, in
accordance with Lan Airlines’ by-laws, consists of nine directors who are
elected every two years for two-year terms at annual regular shareholders’
meetings, and may be re-elected. The board of directors may appoint replacements
to fill any vacancies that occur during periods between elections. Scheduled
meetings of the board of directors are held once a month and extraordinary board
of directors’ meetings are called when summoned by the chairman of the board of
directors and two other directors, or when requested by a majority of the
directors.




81
 Table of Contents


The
current board of directors was elected at the annual shareholders’ meeting held
on April 29, 2010. Its term expires in April 2012. The following are Lan
Airlines’ directors and senior management:




Directors
            
            PositionJorge
      Awad Mehech(1)
            
            Director
      / ChairmanDarío
      Calderón González
            
            DirectorJosé
      Cox Donoso
            
            DirectorJuan
      José Cueto Plaza(2)
            
            DirectorJuan
      Cueto Sierra(2)
            
            DirectorRamón
      Eblen Kadis(3)
            
            DirectorBernardo
      Fontaine Talavera
            
            DirectorCarlos
      Heller  Solari(4)
            
            DirectorGerardo
      Jofré Miranda
            
            DirectorSenior
      Management
            
            PositionEnrique
      Cueto Plaza(2)
            
            Chief
      Executive OfficerIgnacio
      Cueto Plaza(2)
            
            President
      and Chief Operating OfficerAlejandro
      de la Fuente Goic
            
            Chief
      Financial OfficerArmando
      Valdivieso Montes
            
            Chief
      Executive Officer-PassengerCristián
      Ureta Larraín
            
            Chief
      Executive Officer-CargoRoberto
      Alvo Milosawlewitsch
            
            Senior
      Vice President, Strategic Planning and Corporate
    DevelopmentCristian
      Toro Cañas
            
            Senior
      Vice President, LegalEnrique
      Elsaca Hirmas
            
            Senior
      Vice President, OperationsEmilio
      del Real Sota
            
            Senior
      Vice President, Human ResourcesRene
      Muga Escobar
            
            Senior
      Vice President, Corporate Affairs





(1)
            Mr.
      Jorge Awad Mehech was re-elected chairman of the board of directors in May
      2010.


(2)
            Messrs.
      Ignacio, Juan José and Enrique Cueto Plaza are brothers, and Mr. Juan
      Cueto Sierra is their father. All four are members of the Cueto Group (as
      defined in “Item 7”), the Controlling
  Shareholders.


(3)
            Mr.
      Ramón Eblen Kadis is a member of the Eblen Group, which is defined in
      “Item 7” as a “Major Shareholder.”


(4)
            Mr.
      Carlos Heller Solari is a member of the Bethia Group, which is defined in
      “Item 7” as a “Major Shareholder.”





Biographical
Information




Set forth
below are brief biographical descriptions of Lan Airlines’ directors and senior
management.




Directors




Mr. Jorge Awad Mehech, 64
years old, has served as chairman and member of Lan Airlines’ board of directors
since July 2001. Mr. Awad had previously served as chairman of our board of
directors from 1994 to October 2000. Mr. Awad’s current term as chairman ends on
the date of the annual shareholders’ meeting to be held in 2012. He held the
position of Senior Vice President of Fast Air from 1979 to 1993. Additionally
Mr. Awad serves on the board of directors of Banco de Chile. He is also a board
member of ICARE (Instituto
Chileno de Administración Racional de Empresas), a Chilean organization
seeking to promote private enterprise and Prohumana a Chilean organization that
promotes corporate social responsibility within Chilean corporations. As of
March 31, 2010, according to shareholder registration data in Chile, Mr. Awad
shared in the beneficial ownership of Lan Airlines, through Inversiones y
Asesorías Fabiola S.A., of 201,784 common shares (0.06% of Lan Airlines’
outstanding shares).




Mr. Darío Calderón González,
63 years old, has served on Lan Airlines’ board of directors since 1994. Mr.
Calderón’s term as a director ends on the date of the annual shareholders’
meeting to be held in 2012. Mr. Calderón has been a partner in Calderón y Cía, a
Chilean law firm, since 1970. Mr. Calderón currently serves on the board of
directors of other Chilean companies, including Integramédica S.A., Imprenta A
Molina Flores S.A., Enjoy S.A., and Nutrechile A.G.




82
 Table of Contents


Mr. José Cox Donoso, 55 years
old, has served on Lan Airlines’ board of directors from April 1994 to June 1995
and from September 1995 to the present. Mr. Cox’s term as a director ends on the
date of the annual shareholders’ meeting to be held in 2012. Mr. Cox has also
served as chairman of the board of directors of Lan Cargo since September 1995.
In addition, Mr. Cox serves on the board of directors CMB-Prime Asset Managing
Corp. and Socovesa S.A. As of March 31, 2010, according to shareholder
registration data in Chile, Mr. Cox shared in the beneficial ownership of Lan
Airlines, through Asesorías e Inversiones Ilihue Limitada, 2,654,324 common
shares of Lan Airlines (0.78% of Lan Airlines’ outstanding shares).




Mr. Juan José Cueto Plaza, 50
years old, has served on Lan Airlines’ board of directors since 1994. Mr.
Cueto’s term as a director ends on the date of the annual shareholders’ meeting
to be held in 2012. Mr. Cueto currently serves as Executive Vice President of
Inversiones Costa Verde S.A., a position he has held since 1990, and serves on
the boards of directors of Consorcio Maderero S.A. and Minera Michilla S.A. Mr.
Cueto is the son of Mr. Juan Cueto Sierra, a director of Lan Airlines, and the
brother of Messrs. Enrique and Ignacio Cueto Plaza, Chief Executive Officer and
Chief Operating Officer of Lan Airlines, respectively. Mr. Cueto is a member of
the Cueto Group (one of Lan Airlines’ Controlling Shareholders). As of March 31,
2010, Mr. Cueto shared in the beneficial ownership of 115,399,502 common shares
of Lan Airlines (34.1% of Lan Airlines’ outstanding shares) held by the Cueto
Group. For more information see “Item 7. Controlling Shareholders and Related
Party Transactions.”




Mr. Juan Cueto Sierra, 80
years old, was one of the founders of Fast Air in 1978 and has served on Lan
Airlines’ board of directors since 1998. Mr. Cueto’s term as a director ends on
the date of the annual shareholders’ meeting to be held in 2012. Mr. Cueto has
wide experience in a range of business activities. Mr. Cueto is the father of
Messrs. Juan José, Enrique and Ignacio Cueto Plaza, Director, Chief Executive
Officer and Chief Operating Officer of Lan Airlines, respectively.




Mr. Ramón Eblen Kadis, 65
years old, has served on Lan Airlines’ board of directors since June 1994. Mr.
Eblen’s term as a director ends on the date of the annual shareholders’ meeting
to be held in 2012. Mr. Eblen has served as President of Comercial Los Lagos
Ltda., Inversiones Santa Blanca S.A., and TJC Chile S.A. Mr. Eblen is a member
of the Eblen Group (a major shareholder of Lan Airlines). As of March 31, 2010,
Mr. Eblen shared in the beneficial ownership of 31,778,049 common shares of Lan
Airlines (approximately 9.38% of Lan Airlines’ outstanding shares) held by the
Eblen Group. For more information see “Item 7. Controlling Shareholders and
Related Party Transactions.”




Mr. Bernardo Fontaine
Talavera, 45 years old, has served on Lan Airlines’ board of directors
since April 2005. Mr. Fontaine’s term ends on the date of the annual
shareholders’ meeting to be held in 2012.Mr. Fontaine wasHead ofthe financial services
branch of Falabella, a major Chilean retailer, and served as Executive Director
of CMR Falabella and Vice-Chairman of the Board of Banco Falabella. Mr. Fontaine
also served as head of the M&A Corporate Finance division of
Citicorp-Citibank Chile. Mr. Fontaine currently serves on the boards of Deutsche
Bank Chile, Metro S.A., Aquamont S.A., South-Am S.A. and Loginsa S.A. He is also
the general manager of Tres Mares S.A., Indigo S.A. and Sarlat S.A., which
owned, together, as of March 31, 2010, 5,500,000 shares of Lan Airlines S.A.
(1.6% of Lan Airlines’ outstanding shares).




Mr. Carlos Heller
Solari,48
years old, joined Lan Airline’s board of directors in May 2010.  Mr.
Heller ́s term as a director ends on the date of the annual shareholders’ meeting
to be held in 2012. Mr. Heller has a vast experience in the retail, transports
and agriculture sectors. Mr. Heller is Vice President of Bethia (holding company
and owner of Axxion), Chairman of Axxion S.A., Club Hípico de Santiago, Sotraser
S.A. and Agrícola Ancali. He also participates as a board of directors member of
SACI Falabella S.A., Falabella Retail S.A., Sodimac S.A. and Titanium S.A.
Additionally he is the major shareholder and Vice President of “Azul Azul”
(Universidad de Chile’s first division soccer team administrator).




Mr. Gerardo Jofré Miranda, 60
years old, has joined Lan Airlines’ Board of directors on May 2010. Mr. Jofré ́s
term as a director ends on the date of the annual shareholders’ meeting to be
held in 2012. Mr. Jofré is Chairman of Codelco and member of the boards of
directors of Construmart S.A. and Air Life Chile S.A. Mr. Jofré is President of
Saber Más Foundation and member of the Real Estate Investment Council of
Santander Real Estate Funds. From 2005 to 2008 he served as member of the boards
of directors of Endesa Chile S.A., Viña San Pedro Tarapacá S.A., D&S S.A.,
Inmobiliaria Titanium S.A. and Inmobiliaria Parque del Sendero S.A. Mr. Jofré
was Director of Insurance for America for Santander Group of Spain between the
years 2004 and 2005. From 1989 to 2004 he served on Santander Group in Chile, as
Vice Chairman of the Group and as CEO, member of the boards of directors and
Chairman of many of the Group’s companies.




83
 Table of Contents


Senior
Management




Mr. Enrique Cueto Plaza, 51
years old, is Lan Airlines’ Chief Executive Officer, and has held this position
since 1994. From 1993 to 1994, Mr. Cueto served on Lan Airlines’ board of
directors. From 1983 to 1993, Mr. Cueto was Chief Executive Officer of Fast Air,
a Chilean Cargo airline. Mr. Cueto has in-depth knowledge of passenger and cargo
airline management, both in commercial and operational aspects, gained during
his 22 years in the airline industry. Mr. Cueto is an active member of the oneworld® Alliance
Governing Board, the IATA (International Air Transport Association) Board of
Governors. He is also member of the Board of the Federation of Chilean Industry
(SOFOFA) and of the Board of the Endeavor foundation, an organization dedicated
to the promotion of entrepreneurship in Chile. Mr. Cueto is the son of Mr. Juan
Cueto Sierra, a member of the board of Lan Airlines, and the brother of Messrs.
Juan José and Ignacio Cueto Plaza, member of the board and President and Chief
Operating Officer of Lan Airlines, respectively. Mr. Cueto is also a member of
the Cueto Group (one of Lan Airlines’ Controlling Shareholders). As of March 31,
2010, Mr. Cueto shared in the beneficial ownership of 115,399,502 common shares
of Lan Airlines (34.1% of Lan Airlines’ outstanding shares) held by the Cueto
Group. For more information see “Item 7. Controlling Shareholders and Related
Party Transactions.”




Mr. Ignacio Cueto Plaza, 46
years old, is Lan Airlines’ President and Chief Operating Officer. Until being
promoted to his current position in 2005, Mr. Cueto served as Chief Executive
Officer-Passenger Business, a position he assumed in 1999. Mr. Cueto served on
the board of directors of Lan Airlines and Ladeco from 1995 to 1997 and from
1994 to 1997, respectively. In addition, Mr. Cueto served as Chief Executive
Officer of Fast Air from 1993 to 1995 and as President of the LAN Cargo Group
from 1995 to 1998. Between 1985 and 1993, Mr. Cueto held several positions at
Fast Air, including Service Manager for the Miami sales office, Director of
Sales for Chile and Vice President of Sales and Marketing. Mr. Cueto is the son
of Mr. Juan Cueto Sierra, director of Lan Airlines, and the brother of Messrs.
Juan José and Enrique Cueto Plaza, Director and Chief Executive Officer of Lan
Airlines, respectively. Mr. Cueto is also a member of the Cueto Group (one of
Lan Airlines’ Controlling Shareholders). As of March 31, 2010, Mr. Cueto shared
in the beneficial ownership of 115,399,502 common shares of Lan Airlines (34.1%
of Lan Airlines’ outstanding shares) held by the Cueto Group. For more
information see “Item 7. Controlling Shareholders and Related Party
Transactions.”




Mr. Alejandro de la Fuente
Goic, 51 years old, is Lan Airlines’ Chief Financial Officer, and has
held this position since October 1995. Mr. de la Fuente joined Lan Airlines in
April 1995. Prior to joining Lan Airlines, Mr. de la Fuente served as Chief
Financial Officer of Chiquita Frupac Ltd., a subsidiary of Chiquita Brands Inc.,
beginning in 1992. As of March 31, 2010, Mr. de la Fuente owned 37,383 common
shares of Lan Airlines (0.01% of Lan Airlines’ outstanding shares).




Mr. Armando Valdivieso
Montes, 47 years old, is Lan Airlines’ Chief Executive Officer-Passenger,
a position he assumed in 2006. Between 1997 and 2005 he served as Chief
Executive Officer-Cargo Business. From 1994 to 1997, Mr. Valdivieso was
President of Fast Air. From 1991 to 1994, Mr. Valdivieso served as Vice
President, North America of Fast Air Miami. As of March 31, 2010, according to
shareholder registration data in Chile, Mr. Valdivieso owned 59,704 common
shares of Lan Airlines (0.02% of Lan Airlines’ outstanding shares).




Mr. Cristian Ureta Larrain,
47 years old, is Lan Airlines’ Chief Executive Officer-Cargo, a position he
assumed in 2005. Mr. Ureta has an Engineering degree from Pontificia Universidad
Católica and a Special Executive Program from Stanford University. Between 2002
and 2005 Mr. Ureta served as Production Vice President for Lan Cargo. Between
1998 and 2002 he was Lan Cargo’s Planning and Development Vice President. Prior
to that, Mr. Ureta served as General Director and Commercial Director at MAS
Air, and as Service Manager for Fast Air.




Mr. Roberto Alvo
Milosawlewitsch, 41 years old, is Lan Airlines’ Senior Vice-president
Strategic Planning and
Development, a position he assumed in 2008. Prior to holding his current
position, Mr. Alvo served as CFO of Lan Argentina from 2005 until 2008, as
Vice-president of Development of Lan Airlines from 2003 until 2005 and
Vice-president of Treasury of Lan Airlines from 2001 until 2003. Before 2001 Mr.
Alvo held various positions at Sociedad Química y Minera de Chile S.A., a
leading non-metallic Chilean mining company. Mr. Alvo is a civil engineer and
obtained an MBA from IMD in Lausanne, Switzerland.




Mr. Cristian Toro Cañas, 39
years old, is Lan Airlines’ Senior Vice President, Legal, a position he assumed
in January 2008. Mr. Toro has a law degree from Pontificia Universidad Católica
de Chile (1993), as well as a master's law degree (MCJ 97') from New York
University. Prior to joining Lan Airlines, Mr. Toro served as General Counsel
for Citibank Chile, where he worked and held various positions from 1997 until
2007. He also worked as an international trainee at Shearman & Sterling in
New York (1999).




84
 Table of Contents


Mr. Enrique Elsaca Hirmas, 42
years old, is Lan Airlines’ Senior Vice President, Operations, a position he
assumed in 2008. Between 2004 and 2008, Mr. Elsaca served as Senior Vice
President, Strategic Planning.  Mr. Elsaca has a degree in industrial
engineering from Pontificia UniversidadCatólica de Chile, as well as a Master in
Business Administration from Massachusetts Institute of Technology. Prior to
joining Lan Airlines, Mr. Elsaca served as Real Estate and Development Manager
of Cencosud, Chile’s second largest retail group. From 1997 to 1999, Mr.
Elsaca worked at Booz Allen & Hamilton in Latin America, and from 1991 to
1995, Mr. Elsaca held various positions in Esso Chile, a subsidiary of
Exxon.




Mr. Emilio del Real Sota, 45
years old, is Lan Airlines’ Senior Vice President, Human Resources, a position
he assumed in August 2005. Mr. del Real has a Psychology degree from Universidad
Gabriela Mistral. Between 2003 and 2005, Mr. del Real was the Human Resource
Manager of DYS, a Chilean retail company. Between 1997 and 2003 Mr. del Real
served in various positions in Unilever, including Human Resource Manager for
Chile, and Training and Recruitment Manager and Management Development Manager
for Latin America.




Mr. Rene Muga Escobar, 46
years old, is Lan Airlines’ Senior Vice President of Corporate
Affairs.  Mr. Muga holds a degree in Business Administration and a
Master’s degree in International Economic Relations from the Catholic University
of Chile. Previously, he was General Manager of the Confederation for Production
and Commerce, which groups and represents the Chilean business community. During
his career he also was Director of Business Development of the Corporación
Nacional del Cobre de Chile (“CODELCO”), the leading mining company in Chile and
the world’s largest copper producer.




Compensation




For the
year ended December 31, 2009, the aggregate amount of compensation we paid to
all executives and senior managers was US$61.9million, which did not
include US$14.1million paid as bonuses.
Our variable compensation plan is based on our corporate profits, and team and
individual performance.




Under
Chilean law, Lan Airlines must disclose in its annual report details of all
compensation paid to its directors during the relevant fiscal year, including
any amounts that they received from Lan Airlines for functions or employment
other than serving as a member of the board of directors, including amounts
received as per diem stipends, bonuses and, generally, all other payments.
Additionally, pursuant to regulations of the Superintendencia de Valores y
Seguros (the Chilean Securities and Insurance Supervisor, or “SVS”), the
annual report must also include the total compensation and severance payments
received by managers and principal executives, and the terms of and the manner
in which board members and executive officers participate in any stock option
plans.




Lan
Airlines’ directors are paid 24 UF per meeting (56 UF for the chairman of the
board). Lan Airlines also provides certain benefits to its directors and
executive officers, such as free and discounted airline tickets and health
insurance. We do not have contracts with any of our directors to provide
benefits upon termination of employment.




On April
5, 2007, the extraordinary shareholders meeting approved a capital increase of
22,090,910 shares. The same meeting designated 10% of the approved capital
increase (2,209,091 shares) for purposes of a proposed employee stock option
compensation plan. The shareholders’ meeting authorized our board of directors
to elaborate the compensation plan. For more detailed information, please see
Note 39 to our audited consolidated financial statements.




85
 Table of Contents


As set
forth in further detail in the following table, in 2009 the members of our board
of directors currently in office received fees and salaries in the aggregate
amount of US$133,653.03.




Board
                  Members
              
              Fees
      (US$)(1)Jorge
      Awad Mehech
              
              
              34,548.97Ramón
      Eblen Kadis
              
              
              21,875.38José
      Cox Donoso
              
              
              20,083.36Darío
      Calderón González
              
              
              10,937.69Andrés
      Navarro Haeussler
              
              
              6,199.49Juan
      José Cueto Plaza
              
              
              10,937.69Juan
      Cueto Sierra
              
              
              7,195.09Bernardo
      Fontaine Talavera
              
              
              10,937.69Ignacio
      Guerrero Gutiérrez
              
              
              10,937.69Total
              
              
              133,653.03





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




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




Board
of Directors’ Committee and Audit Committee




Pursuant
to Chilean Corporation Law, as amended by Law No. 19,705, Lan Airlines must have
a board of directors’ committee composed of no less than three board members.
Lan Airlines has established a three-person committee of its board of directors,
which, among other duties, is responsible for:




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




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




·
            evaluating
      and proposing external auditors and rating
  agencies;




·
            reviewing
      internal control reports pertaining to related party
      transactions;




·
            examining
      and reporting on all related-party transactions;
  and




·
            reviewing
      the pay scale of Lan Airlines’ senior
  management.




Under
Chilean law we are required, to the extent possible, to appoint a majority of
independent directors to the board of directors committee. The corresponding
independence requirements are set forth in Chilean Corporation Law, as amended
by Law No. 19,705, and relate to the relationship between the directors and the
shareholders that control a corporation. A director is considered independent
when he or she can be elected regardless of the voting of the controlling
shareholders.




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 May
25, 2010, 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 May 25, 2010, the committee members were Mr. Jorge Awad Mehech, Mr.
Gerardo Jofré Miranda and Mr. Ramón Eblen Kadis. We pay each member of the
committee 24 UFs per meeting.




86
 Table of Contents


Employees




General




The
following table sets forth the number of employees in various positions at Lan
Airlines, Lan Cargo and our other subsidiaries.




As
      of December 31, 2009Employees(1)
              
              2009
              
              
              2008
              
              
              2007Administrative
              
              
              3,106
              
              
              
              3,181
              
              
              
              3,106Sales
              
              
              2,352
              
              
              
              2,276
              
              
              
              2,352Maintenance
              
              
              2,264
              
              
              
              2,147
              
              
              
              2,264Operations
              
              
              4,852
              
              
              
              4,784
              
              
              
              4,852Cabin
      crew
              
              
              2,890
              
              
              
              2,587
              
              
              
              2,890Cockpit
      crew
              
              
              1,380
              
              
              
              1,346
              
              
              
              1,380Total
              
              
              16,844
              
              
              
              16,321
              
              
              
              16,844





(1)
            By
      the end of 2009, approximately 59% of our employees worked in Chile, 39%
      in other Latin American countries and 2% in the rest of the
      world.




We have a
performance-related pay structure for our administrative, management and flight
personnel (such as cabin crew members, airport and sales agents, call-center
employees, and some back office employees) including performance-based bonuses
and pay scales that reward foreign language proficiency among counter, technical
and administrative personnel. During 2009, over 94% of our employees were
eligible to receive performance related bonus payments that are linked to
personal, team and corporate performance.




We
provide our employees with medical insurance complementary to the coverage of
the private health system, and also grant other benefits, such as free and
discounted airline tickets, to our permanent employees. In 2009, a stock option
compensation plan was offered to key senior executives. For a detailed
description of the stock option compensation plan, please see Note 39 to our
audited consolidated financial statements for the fiscal year ended December 31,
2009.




As
required by Chilean law, we make obligatory contributions to the privatized
pension fund system on behalf of our employees, but we do not maintain any
separate program to provide pension, retirement or similar benefits to these or
any other employees. However, the pilots’ collective bargaining agreement
includes a clause that permits resignation with severance payment, in case a
pilot reaches a certain age and is still providing services to the
company.




One of
our main goals for 2009 was to complete the first stage of the communication of
our four principal values (safety and security, achievement, efficiency and
warmth) to our employees. The campaign included internal training sessions,
internal memoranda and posters to explain the meaning of each value and how
employees can further these values in their daily work.




Training




Some of
our populations, such as the flight operations, maintenance and customer ground
operations personnel undergo training when they join the Company and throughout
their employment with us. We invested US$8.0 million in 2007, US$12.5 million in
2008 and US$12.4 million in 2009. We generally recruit our pilots from the Academia de Ciencias
Aeronáuticas (at the Universidad Técnica Federico Santa
María), aeroclubs and the armed forces. Before being promoted to the
position of captain, first officers must have logged at least 4,000 flight hours
and received the approval of a special pilots’ committee. We provide
ground-school training in Santiago, as well as in Lima and Quito for our
Peruvian and Ecuadorian crews. We maintain an agreement with CAE (a Canadian
firm specializing in flight simulators and training centers) to develop a pilot
training center in Santiago de Chile. This training center includes two Airbus
A320 and one Boeing 767 Full Flight simulators plus 1 MFTD A320/340 simulator.
Our pilot staff also receives simulator training at sites in the United States
and Brazil.




Our
pilots are rated for only one aircraft type by local aeronautical authorities,
and they are not cross-qualified between two or more aircraft types. Chilean
regulations require pilots to be licensed as commercial pilots for a first
officer position and as an airline transport pilot for a captain position, with
specific type, function and special ratings for each aircraft to be flown, and
to be medically certified as physically fit. Licenses and medical certifications
are subject to periodic reevaluation, including flight simulator recurrent
training, ground recurrent training, annual emergency procedures training,
safety and security training and recent flying experience. Our pilots receive a
variety of training, such as lectures, simulations and gaming and computer based
training. Cabin crew must have initial and periodic competency fitness
training.




87
 Table of Contents


Aircraft
mechanics and maintenance supervisory personnel must be licensed by the DGAC and
other corresponding authorities in other countries in which we operate. We train
our technicians (Mechanics, Specialists, Inspectors and Maintenance Supervisors)
in all programs required by both local authority (DGAC) and international
authorities and aviation associations, such as the FAA, the European Aviation
Safety Agency (“EASA”), IATA rules and regulations, those required by aircraft
manufacturers and the training needs that we identify during our annual reviews.
The program of study contains initial and continuing training. Initial training
is level III ATA SPEC 104 and lasts forty to fifty days depending on the
aircraft types and continuing training lasts up to five to six
days.




During
2009, we continued training sales and administrative personnel in areas such as
service and sales quality. We also continued delivering learning programs to
develop leadership skills and others with different methodologies including
e-learning.




Labor
Relations




We have
negotiated longer-term labor contracts with the labor unions in anticipation of
their scheduled expirations, which under Chilean law are limited to a period of
four years. In general, the expiration of our labor agreements with the several
unions that represent our pilots and other personnel are staggered in a way that
we avoid being in the position of having to renegotiate contract terms with
substantially all of our pilots or other personnel at the same
time.




Two
collective contracts are in place between Lan Airlines and its pilots, both
through the pilots’ union. Non-unionized pilots (less than 5% of the pilot
corps), have the same benefits, through direct extension of the union’s
collective agreement. These contracts were negotiated in February 2009 and
expire between August 2012 and January 2013. Lan Cargo is also a party to an
employment agreement with its pilots that expires in November 2012. Finally, Lan
Express has two collective agreements with its pilots, both unionized and
non-unionized. Those contracts expire between September and December
2012.




Lan
Airlines has also entered into collective bargaining agreements covering the
majority of its flight attendants that expire at various times, ranging from
June 2009 to September 2011. Lan Airlines renewed the collective bargaining
agreements with its maintenance personnel in June 2008 for a period of four
years. The collective bargaining agreement with maintenance personnel working
for Lan Express, one of our Chilean subsidiaries, will expire in 2011. The
agreement with the union representing our administrative personnel from Lan
Airlines expires in July 2013. The contract of the Lan Express administrative
personnel expires in April 2013.




The
majority of Lan Argentina’s employees belong to industry-wide
unions.  Currently, labor relations are stable. In 2005, Lan Argentina
hired employees from another airline and agreed to maintain their employment
conditions and labor stability during a three-year period. The conditions and
labor relations that Lan Argentina had to maintain expired on September 2008, a
situation that did not generate any conflict for the company. During 2009, we
renewed the collective agreements with pilots and maintenance personnel; the
negotiations were developed with a fluid dialogue between the parties. On
December 2009, salary agreements were finalized with the five unions in Lan
Argentina. These agreements expire on September 2010. In 2010 the three
remaining collective agreements (Land personnel, Hierarchical Personnel and
Cabin Crew) will expire.




We
believe we generally have good relations with our employees and the unions, and
expect to continue to enjoy good relations with our employees and the unions in
the future. We also believe that we have built a solid base among our employees
that will support and facilitate our growth plans. We can provide no assurance,
however, that our employee compensation arrangements may not be subject to
change or modification after the expiration of the contracts currently in
effect, or that we will not be subject to labor-related disruptions due to
strikes, stoppages or walk-outs.




88
 Table of Contents




ITEM 7.
            CONTROLLING
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS




Controlling
Shareholders




As of
December 31, 2009, two shareholder groups controlled the Company. These
shareholder groups were:




·
            the
      Cueto Group, which included Mr. Juan Cueto Sierra, Mr. Juan José Cueto
      Plaza, Mr. Ignacio Cueto Plaza, Mr. Enrique Cueto Plaza and certain other
      family members; and




·
            the
      Piñera Group, which included Mr. Sebastián Piñera Echenique and certain
      members of his family.




Beginning
in the first quarter of 2010, the Piñera Group, which owned 26.3% of the voting
common shares as of December 31, 2009, commenced to sell its ownership of the
Company after Sebastián Piñera Echenique was elected as the new president of
Chile.




On March
9, 2010, the Cueto Group acquired an 8.6% stake of the Company from the Piñera
Group. As a result of this transaction, the shareholders agreement between the
two groups was terminated.




In
addition, the Piñera Group sold 9.8% of the Company through two auctions in the
Santiago Stock Exchange, which took place on February 25, 2010 and on March 25,
2010 respectively.




Finally,
on March 24, 2010, the Piñera Group signed an agreement to sell an additional
8.0% stake in the Company to Bethia S.A.




As a
result of the above, the Cueto Group controls the Company. As of March 31, 2010,
the Controlling Shareholder owned 34.1% of the voting common
shares.  This Controlling Shareholder is entitled to elect a four of
the nine members of our board of directors and is in a position to direct the
management of the Company.




As of
March 31, 2010, a second shareholder group, which includes our director Ramón
Eblen Cádiz, owned 9.38% of our common shares. Also Bethia Group, which includes
our director Carlos Heller Solari, owned 8.0% of LAN ́s common
shares.




The table
below sets forth the beneficial ownership of common shares as of March 31, 2010,
broken down between our Controlling Shareholders, other major shareholders
(beneficial owners of more than 5% of the Company) and minority
shareholders.




Beneficial ownership
                    (as of March 31, 2010)Number of shares
                    of common stock
                    beneficially owned
                
                
                Percentage of
                    common stock
                    beneficially ownedShareholderCueto
      Group
                
                
                115,399,502
                
                
                
                34.1
                %Costa
      Verde Aeronáutica S.A.
                
                
                107,575,407
                
                
                
                31.8
                %Inv.
      Mineras del Cantábrico S.A.
                
                
                7,824,095
                
                
                
                2.3
                %Eblen
      Group.
                
                
                31,778,049
                
                
                
                9.4
                %Inv.
      Andes S.A.
                
                
                22.288.695
                
                
                
                6.6
                %Other
                
                
                9,489,354
                
                
                
                2.8
                %Bethia
      Group.
                
                
                27.103.273
                
                
                
                8
                %Axxion.
                
                
                27.103.273
                
                
                
                8
                %Others
                
                
                164,510,085
                
                
                
                48.6
                %Total
                
                
                338,790,909
                
                
                
                100.00
                %





On July
6, 2007, the Superintendencia de Valores y Seguros (“SVS”) fined Juan José Cueto
Plaza 1,620 UF (approximately US$58,000) in connection with the purchase of
Shares that he carried out through Mineras del Cantábrico on July 24, 2006. The
SVS considered that such purchase had breached an obligation not to acquire
Shares until the financial statements of the company became publicly available,
in alleged violation of Article 165, paragraph 1 of Law No.18,045 of October 22,
1981. The SVS ruled that, although Mr. Cueto had not used any privileged
information, LAN’s financial statements should be considered to be privileged
information per se, and thus, created a duty to abstain from trading the
securities prior to the disclosure of the financial statements. On July 26, 2007
Juan José Cueto filed an appeal of this fine before the 27° Civil Court of
Santiago, which was dismissed on January 8, 2009. The defense of Mr. Cueto filed
two legal recourses against the first dismissal, which were rejected by the
Court of Appeals of Santiago on March 8, 2010. Against this second dismissal
Juan José Cueto filed two additional and separate legal recourses, which as of
this date are pending before the Supreme Court of Chile. A final decision
is pending.




89
 Table of Contents


As of
March 31, 2010, investors outside of Chile held 8.6% of our capital stock in the
form of ADSs, Chilean pension funds held 12.1% of our capital stock and other
minority investors held 27.8% in the form of common shares. It is not
practicable for us to determine the number of ADSs or common shares beneficially
owned in the United States. As of March 31, 2010, we had 1,180 record holders of
our common shares. It is not practicable for us to determine the portion of
shares held in Chile or the number of record holders in Chile.




All of
our shareholders have identical voting rights.




Related
Party Transactions




General




We have
engaged in a variety of transactions with our affiliates, including entities
owned or controlled by certain of our controlling shareholders. It is our policy
not to engage in any transaction with or for the benefit of any shareholder or
member of the board of directors, or any entity controlled by such a person or
in which such a person has a substantial economic interest, unless the
transaction is related to our business and the price and other terms are at
least as favorable to us as those that could be obtained on an arm’s-length
basis from a third party.




In the
ordinary course of our business we render to and receive from related companies
services of various types, including aircraft leases, aircraft interchanges,
freight transportation and reservation services. Such transactions, none of
which is individually material, are summarized in Note 38 to our audited
consolidated financial statements for the fiscal year ended December 31,
2009.




ITEM 8.
            FINANCIAL
      INFORMATION




Consolidated
Financial Statements




See Item
18, “Financial Statements” and pages F-1 through F-102.




Other
Financial Information




Legal
and Arbitration Proceedings




We are
involved in routine litigation and other proceedings relating to the ordinary
course of our business.




In
February 2006 the EC, in conjunction with the (“DOJ”), initiated a global
investigation of a large number of international cargo airlines (among them Lan
Cargo, LAN’s cargo subsidiary) for possible price fixing of cargo fuel
surcharges and other fees in the European and United States air cargo markets.
On December 26, 2007, the European competition authorities notified Lan Cargo
and LAN of the initiation of proceedings against twenty-five cargo airlines,
among them Lan Cargo, for allegations of anti-competitive behavior in the
airfreight business.




Lan Cargo
is a participant of an EC leniency program, which may allow the Company to
obtain considerable reductions on penalties that may be levied by the EC. There
are many factors that prevent us from determining the final amount of such
penalties, but according to our external counsel in Brussels, Belgium and the
directives of the EC on this matter, and considering the inherent uncertainty of
the outcome, LAN recorded during the fourth quarter of 2007, and maintains as of
December 31, 2009 a provision for an amount of US$25 million. The EC’s decision
may penalize Lan Cargo and its parent company LAN.




90
 Table of Contents


The
investigation by the DOJ prompted the filing of numerous civil class actions by
freight forwarding and shipping companies against many airlines, including Lan
Cargo and Lan Airlines, including fifty-four in the United States and four in
Canada. The cases filed in the United States were consolidated in the United
States District Court, Eastern District of New York and the original complaint
was subsequently amended to include additional airlines, including ABSA. On
January 21, 2009, Lan Cargo announced that it had reached a plea agreement with
the DOJ in relation to the DOJ’s ongoing investigation regarding price fixing of
fuel surcharges and other fees for cargo shipments. Under the plea agreement,
Lan Cargo agreed to pay a fine of US$88 million. In addition, ABSA also reached
a plea agreement with the DOJ and agreed to pay a fine of US$21 million. These
amounts were stipulated to be paid over a five-year payment schedule starting in
2009.  As of December 31, 2009, the pending amount to be paid during
the next four years is approximately US$90 million and has been recorded within
“Other Accounts Payable.” It is not possible at this time to anticipate with any
precision the outcome of the four civil actions that were filed in Canada
against Lan Cargo, among other airlines.




On April
5, 2008, Brazilian authorities notified ABSA of the initiation of administrative
proceedings before the Conselho Administrativo de Defesa
Econômica (the Brazilian Antitrust Authority) against several cargo
airlines and airline officers, among them ABSA, for allegations of
anticompetitive practices regarding fuel surcharges in the air cargo business.
Given the current stage of the proceedings, it is not possible at this time to
anticipate with any precision their outcome, although it is expected to be a
lengthy process.




In June
2008, the Korean Fair Trade Commission notified LAN of an investigation into the
air cargo industry and its non-compliance with the Monopoly Regulation and Fair
Trade Act and has requested information and documentation from LAN, which LAN
duly submitted. Given the current stage of the investigation, it is not possible
at this time to anticipate with any precision its outcome.




The New
Zealand Commerce Commission also initiated an investigation into potential
anti-competitive activities in the international air cargo markets and requested
information and documentation from LAN, which LAN duly submitted. On December
15, 2008, the New Zealand Commerce Commission announced it would focus its
investigation on ten airlines and excluded LAN from further
investigation.




In
January 2007 we announced that we had provided, through our wholly owned
subsidiary, Atlantic Aviation Investments LLC (“AAI”), a total of US$17.1
million in financing to Brazilian company VRG LINHAS AEREAS S.A. (“New Varig”),
convertible into shares of New Varig. On March 28, 2007, GOL announced that it
was acquiring 100% of the equity participation in New Varig. Pursuant to the
terms of the relevant loan agreements, upon the sale of New Varig to GOL, we
sought repayment of the principal of the loans plus interest from Varig
Logística S.A. (“VarigLog”), the parent company of New Varig. VarigLog failed to
respond to our demands for repayment and we subsequently filed a lawsuit in New
York State court on August 29, 2007, seeking repayment of the outstanding
principal plus interest. On October 10, 2008, the Court granted summary judgment
in our favor for the full principal amount of the loans, US$17.1 million and
entered a final judgment on December 1, 2008.  The Court also held
that AAI was entitled to collect the interest due under the loan agreement along
with reasonable attorneys’ fees. After a hearing, a special arbitrator appointed
by the Court to decide the issue recommended that AAI recover US$1.9 million in
accrued interest and attorneys’ fees, and the Court approved that
recommendation.  VarigLog has appealed that decision, and the appeal
is still pending.  On March 3, 2009, VarigLog filed an insolvency
proceeding (recuperação
judicial) before the bankruptcy court in Brazil, and on March 31, 2009,
VarigLog filed a Chapter 15 petition in bankruptcy court in Florida seeking
recognition of its Brazilian filing.  The Florida court has entered an
order, based upon AAI’s stipulation with VarigLog pursuant to which there would
be no stay against the continuation and commencement of legal actions by AAI
against VarigLog and any of its affiliates but AAI would not be able take any
action against two discreet VarigLog assets located in the United
States.  AAI continues its enforcement efforts to recover the amounts
owed to it by VarigLog under the loan agreements.




In July
2009, as a result of VarigLog’s continued failure to repay the amount owed to
AAI, we instituted a second lawsuit in New York State court against
MatlinPatterson Global Advisers LLC, MatlinPatterson Global Opportunities
Partners II LP, MatlinPatterson Global Opportunities (Cayman) II LP and Volo
Logistics LLC (collectively, the “MP Entities”), seeking to hold them liable as
the alter egos of
VarigLog and asserting separate contract-based claims related to AAI’s loans to
VarigLog.  If AAI succeeds in its alter ego claim, the MP
Entities would be liable for VarigLog’s debts, and obligated to repay what
VarigLog has been adjudged to owe AAI by the prior decisions of the New York
courts.  The MP Entities moved to dismiss AAI’s
complaint.  The Court heard oral argument on November 18, 2009, but
has yet to announce its decision.  The discovery phase of this case is
ongoing.




91
 Table of Contents


During
2009, two antitrust administrative investigations were initiated against our
subsidiary in Ecuador, and conducted before the Undersecretary of Competition
and Consumer Defense (Subsecretaría de la Competencia y
Defensa del Consumidor) of the Ministry of Industries and Productivity
(Ministerio de Industrias y
Productividad), arising from the introductory fares offered by Aerolane
for its Guayaquil-Quito and Quito-Guayaquil routes. The first proceeding was
initiated on April 7, 2009, following a request by Aerogal alleging predatory
pricing. The second proceeding was initiated on April 20, 2009, following a
request by Tame based on similar allegations. The evidentiary stages of both
investigations have been completed, and we are currently awaiting sentences. It
is not possible at this time to anticipate with any precision the outcome of
these investigations.




Dividend
Policy




In
accordance with the Chilean Corporation Law, Lan Airlines must distribute cash
dividends equal to at least 30% of its annual consolidated net income calculated
in accordance with IFRS, unless otherwise decided by a unanimous vote of the
holders of all issued shares and unless and except to the extent it has
accumulated losses. If there is no net income in a given year, Lan Airlines can
elect but is not legally obligated to distribute dividends out of retained
earnings. The board of directors may declare interim dividends out of profits
earned during such interim period. Pursuant to Lan Airlines’ by-laws, the annual
cash dividend is approved by the shareholders at the annual ordinary
shareholders’ meeting held between February 1 and April 30 of the year following
the year with respect to which the dividend is proposed. All outstanding common
shares are entitled to share equally in all dividends declared by Lan Airlines,
unless the shares have not been fully paid by the shareholder after being
subscribed.




Holders
of ADSs will be entitled to receive dividends on the underlying common shares to
the same extent as holders of common shares. Holders of ADRs on the applicable
record dates will be entitled to receive dividends paid on the common shares
represented by the ADSs evidenced by such ADRs. Dividends payable to holders of
ADSs will be paid by us to the depositary in Chilean pesos and remitted by the
depositary to such holders net of foreign currency conversion fees and expenses
of the depositary and will be subject to Chilean withholding tax currently
imposed at a rate of 35% (subject to credits in certain cases as described under
“Chilean Taxation—Cash Dividends and Other Distributions” under Item 10). Owners
of the ADSs will not be charged any dividend remittance fee by the depositary
with respect to cash dividends.




Chilean
law requires that holders of shares of Chilean companies that are not residents
of Chile register as foreign investors under one of the foreign investment
regimes established by Chilean law in order to have dividends, sale proceeds or
other amounts with respect to their shares remitted outside Chile through the
Formal Exchange Market (Mercado Cambiario Formal).
Under our Foreign Investment Contract, the depositary, on behalf of ADS holders,
will be granted access to the Formal Exchange Market to convert cash dividends
from pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside
Chile.




ITEM 9.
            THE
      OFFER AND LISTING




Stock
Price History




The
principal trading market for our common shares is the Santiago Stock Exchange.
The common shares have been listed on the Santiago Stock Exchange under the
symbol “LAN” since 1989, and the ADSs have been listed on The New York Stock
Exchange under the symbol “LFL” since November 7, 1997. The common shares also
trade on the Bolsa de Valores
de Valparaísoand the Bolsa Electrónica de Chile.
The outstanding ADSs are identified by the CUSIP number 501723100. The following
table sets forth, for the periods indicated, the high and low closing sale
prices on the Santiago Stock Exchange for the common shares and the high and low
closing prices on The New York Stock Exchange for the common shares represented
by ADSs. The information set forth in the table below reflects actual historical
amounts and has not been restated in constant Chilean pesos.


92
 Table of Contents




Ch$
      per Common Share
              
              
              US$
      per ADSYear ended December 31,
              
              Low
              
              
              High
              
              
              Low
              
              
              High2005
              
              
              3,240.00
              
              
              
              4,370.00
              
              
              
              30.25
              
              
              
              38.052006
              
              
              3,250.40
              
              
              
              5,867.00
              
              
              
              29.85
              
              
              
              55.342007(1)
              
              
              5,839.90
              
              
              
              8,997.00
              
              
              
              13.03
              
              
              
              84.152008First
      Quarter
              
              
              4,710.00
              
              
              
              7,095.00
              
              
              
              9.30
              
              
              
              14.80Second
      Quarter
              
              
              5,095.00
              
              
              
              6,580.00
              
              
              
              9.92
              
              
              
              14.87Third
      Quarter
              
              
              4,350.00
              
              
              
              6,520.00
              
              
              
              8.71
              
              
              
              13.17Fourth
      Quarter
              
              
              4,420.00
              
              
              
              6,850.00
              
              
              
              6.90
              
              
              
              11.552009First
      Quarter
              
              
              4,400.00
              
              
              
              5,700.00
              
              
              
              7.08
              
              
              
              9.14Second
      Quarter
              
              
              4,810.00
              
              
              
              6,761.00
              
              
              
              8.11
              
              
              
              12.66Third
      Quarter
              
              
              6,200.00
              
              
              
              7,220.00
              
              
              
              11.14
              
              
              
              13.21Fourth
      Quarter
              
              
              7,000.00
              
              
              
              8,670.00
              
              
              
              12.31
              
              
              
              17.09December
      2009
              
              
              7,798.10
              
              
              
              8,664.30
              
              
              
              15.77
              
              
              
              16.902010Monthly
      PricesJanuary
      2010
              
              
              8,120.00
              
              
              
              8,798.00
              
              
              
              15.60
              
              
              
              17.81February
      2010
              
              
              8,600.00
              
              
              
              9,330.00
              
              
              
              15.79
              
              
              
              17.84March
      2010
              
              
              8,799.00
              
              
              
              9,470.10
              
              
              
              16.91
              
              
              
              18.31April
      2010
              
              
              9,220.00
              
              
              
              9,989.00
              
              
              
              17.83
              
              
              
              19.15May
      2010
              
              
              9,390.40
              
              
              
              10,079.00
              
              
              
              17.55
              
              
              
              19.15







Source:Santiago
Stock Exchange and the New York Stock Exchange.


(1)
            In
      August 2007, the ADR to common share ratio was changed from 5:1 to
      1:1.




As of
March 31, 2010, a total of 338,790,909 common shares were outstanding,
including 28,083,768 common shares represented by ADSs.




Trading




The
Chilean stock market, which is regulated by the SVS under Law 18,045 of October
22, 1981, as amended, which we refer to as the Securities Market Law, is one of
the most developed among emerging markets, reflecting the particular economic
history and development of Chile. The Chilean government’s policy of privatizing
state-owned companies, implemented during the 1980s, led to an expansion of
private ownership of shares, resulting in an increase in the importance of stock
markets. Privatization extended to the social security system, which was
converted into a privately managed pension fund system. These pension funds have
been allowed, subject to certain limitations, to invest in stocks and are
currently major investors in the stock market. Some market participants,
including pension fund administrators, are highly regulated with respect to
investment and remuneration criteria, but the general market is less regulated
than the U.S. market with respect to disclosure requirements and information
usage.




The
Santiago Stock Exchange is Chile’s principal exchange and accounts for
approximately 86.8% of securities traded in Chile. Approximately 12.8% of equity
trading is conducted on the Chilean Electronic Stock Exchange, an electronic
trading market created by banks and non-member brokerage houses. The remaining
equity trading is conducted on the Valparaíso Stock Exchange.




Equities,
closed-end funds, fixed-income securities, short-term and money market
securities, gold and U.S. dollars are traded on the Santiago Stock Exchange. In
1991, the Santiago Stock Exchange initiated a futures market with two
instruments: U.S. dollar futures and Selective Shares Price Index, or IPSA,
futures. Securities are traded primarily through an open voice auction system; a
firm offers system or daily auctions. Trading through the open voice system
occurs on each business day between 9:30 a.m. to 4:30 p.m. The Santiago Stock
Exchange has an electronic system of trade, called Telepregón, which operates
continuously for stocks trading in high volumes from 9:30 a.m. to 4:30 p.m. The
Chilean Electronic Stock Exchange operates continuously from 9:30 a.m. to 4:30
p.m. (or 5:30 p.m., depending on the period of the year) on each business day.
In February 2000, the Santiago Stock Exchange Off-Shore Market began operations.
In the Off-Shore Market, publicly offered foreign securities are traded and
quoted in U.S. dollars.




93
 Table of Contents




ITEM 10.
            ADDITIONAL
      INFORMATION




This Item
10 reflects recent legal amendments effected by Law No. 20,382 on Corporate
Governance, which was enacted on October 20, 2009, and came into effect on
January 1, 2010.




Memorandum
and Articles of Association




Set forth
below is information concerning our share capital and a brief summary of certain
significant provisions of our by-laws and Chilean law. This description contains
all material information concerning the common shares but does not purport to be
complete and is qualified in its entirety by reference to our by-laws, the
Chilean Corporation Law and the Securities Market Law, each referred to below.
For additional information regarding the common shares, reference is made to our
by-laws, a copy of which is included as Exhibit 1.1 to this annual report on
Form 20-F.




Organization
and Register




Lan
Airlines is a publicly held stock corporation (sociedad anónima abierta)
incorporated under the laws of Chile. Lan Airlines was incorporated by a public
deed dated December 30, 1983, an abstract of which was published in the Chilean
Official Gazette (Diario
Oficial de la República de Chile) No. 31.759 on December 31, 1983, and
registered on page 20,341, No. 11,248 of the Chilean Real Estate and Commercial
Registrar (Registro de
Comercio del Conservador de Bienes Raices y Comercio de Santiago) for the
year 1983. Our corporate purpose, as stated in our by-laws, is to provide a
broad range of transportation and related services, as more fully set forth in
Article Four thereof.




General




Shareholders’
rights in a Chilean company are generally governed by the company’s by-laws and
the Chilean Corporation Law. Article 22 of the Chilean Corporation Law states
that the purchaser of shares of a company implicitly accepts its by-laws and any
prior agreements adopted at shareholders’ meetings. Additionally, the Chilean
Corporation Law regulates the government and operation of corporations (“sociedades anónimas,” or
S.A.) and provides for certain shareholder rights. Article 137 of the Chilean
Corporation Law provides that the provisions of the Chilean Corporation Law take
precedence over any contrary provision in a corporation’s by-laws. The Chilean
Corporation Law and our by-laws also provide that all disputes arising among
shareholders in their capacity as such or between us or our administrators and
the shareholders may either be submitted to arbitration in Chile or to the
courts of Chile at the election of the plaintiff initiating the action. Despite
the foregoing a recent legal amendment has forbidden certain individuals
(directors, senior managers, administrators and main executives of the
corporation, and any shareholder that directly or indirectly holds shares whose
book or market value exceed 5,000 UF at the moment of filing of the action) from
submitting such action before the ordinary courts, thus obligating them to
proceed with arbitration in all situations.. Finally, Decree-Law No. 3,500 on
Pension Fund Administrators, which allows pension funds to invest in the stock
of qualified corporations, indirectly affects corporate governance and
prescribes certain rights of shareholders. The Chilean Corporation Law sets
forth the rules and requirements under which a corporation is deemed to be
“publicly held.” Article 2 of the Chilean Corporation Law defines publicly held
corporations as corporations that register their shares with the Registro de Valores
(Securities Registry) of the SVS, either voluntarily or pursuant to a legal
obligation. In addition, Article 5 of the Chilean Securities Market Law
indicates which corporation’s shares must be registered with the Securities
Registry:




·
            one
      with 500 or more shareholders; and




·
            one
      in which 100 or more shareholders own at least 10% of the subscribed
      capital (excluding any direct or indirect individual holdings exceeding
      10%).




The
framework of the Chilean securities market is regulated by the SVS under the
Securities Market Law and the Chilean Corporation Law, which imposes certain
disclosure requirements, restricts insider trading, prohibits price manipulation
and protects minority investors. In particular, the Securities Market Law
establishes requirements for public offerings, stock exchanges and brokers and
outlines disclosure requirements for corporations that issue publicly offered
securities.




94
 Table of Contents


Ownership
Restrictions




Under
Articles 12 and 20 of the Securities Market Law and Circular 289 issued by the
SVS in 2009, certain information regarding transactions in shares of publicly
held corporations must be reported to the SVS and the Chilean stock exchanges on
which the shares are listed. Since the ADRs are deemed to represent the shares
underlying the ADSs, transactions in ADRs will be subject to those reporting
requirements. Among other matters, the beneficial owners of ADSs that directly
or indirectly hold 10% or more of the subscribed capital of Lan Airlines, or
that reach or exceed such percentage through an acquisition, are required to
report to the SVS and the Chilean stock exchanges, the day following the
event:




·
            any
      acquisition or sale of shares; and




·
            any
      acquisition or sale of contracts or securities the price or performance of
      which depends on the price variation of the Lan Airlines’
      shares.




These
obligations are extended (i) to certain individuals (immediate family, next of
kin and others) if the ADSs holder is a natural person; (ii) to any entity
controlled by the holder, if the ADSs is an legal entity,; and (iii) to groups,
if a holder has any joint action agreement with other holders and the group
reaches or exceeds the cited threshold.




In
addition, majority shareholders must state in their report whether their purpose
is to acquire control of the company or if they are making a financial
investment.




Under
Article 54 of the Securities Market Law and under SVS regulations, persons or
entities that intend to acquire control, whether directly or indirectly, of a
publicly traded company, must follow certain notice requirements, regardless of
the acquisition vehicle or procedure or whether the acquisition will be made
through direct subscriptions or private transactions. In the first place, the
potential acquiror must first send a written communication to the target
corporation, any companies controlling or controlled by the target corporation,
the SVS and the Chilean stock exchanges on which the target’s securities are
listed, stating, among other things, the person or entity purchasing or selling
and the price and conditions of any negotiations. Subsequently, the potential
acquiror must also inform the public of its planned acquisition by means of a
publication in two Chilean newspapers with national distribution and by
uploading such notice to the acquiror’s website, if available. Both requirements
shall be met at least ten business days prior to the date on which the
acquisition transaction is to close, and in any event, as soon as negotiations
regarding the change of control have been formalized or when confidential
information or documents concerning the target are delivered to the potential
acquiror. The notices must state, among other things, the person or entity
purchasing or selling and the price and conditions of any
negotiations.




In
addition to the foregoing, Article 54A of the Securities Market Law requires
that within two business days of the completion of the transactions pursuant to
which a person has acquired control of a publicly traded company, a notice shall
be published in the same newspapers in which the notice referred to above was
published and notices shall be sent to the same persons mentioned in the
preceding paragraphs.




Consequently,
a beneficial owner of ADSs intending to acquire control of Lan Airlines will be
subject to the foregoing reporting requirements.




The
provisions of the aforementioned articles do not apply whenever the acquisition
is being made through a tender or exchange offer.




Title XXV
of the Securities Market Law on tender offers and SVS regulations provide that
the following transactions shall be carried out through a tender
offer:




·
            an
      offer which allows to take control of a publicly traded company, unless
      the shares are being sold by a controlling shareholder of such company at
      a price in cash which is not substantially higher than the market price
      and the shares of such company are actively traded on a stock
      exchange;




·
            an
      offer for all the outstanding shares of a publicly traded company upon
      acquiring two-thirds or more of its voting shares (this offer must be made
      at a price not lower than the price at which appraisal rights may be
      exercised, that is, book value if the shares of the company are not
      actively traded or, if the shares of the company are actively traded, the
      weighted average price at which the stock has been traded during the two
      months immediately preceding the acquisition);
  and




95
 Table of Contents


·
            an
      offer for a controlling percentage of the shares of a publicly traded
      company if the acquiror intends to take control of the company (whether
      publicly-traded or privately held) controlling such publicly traded
      company, to the extent that the latter represents 75.0% or more of the
      consolidated net assets of the
former.




Article
200 of the Securities Market Law prohibits any shareholder that has taken
control of a publicly traded company from acquiring, for a period of twelve
months from the date of the transaction that granted it control of the publicly
traded company, a number of shares equal to or higher than 3.0% of the
outstanding issued shares of the target without making a tender offer at a price
per share not lower than the price paid at the time of taking control. Should
the acquisition from the other shareholders of the company be made on the floor
of a stock exchange and on a pro rata basis, the controlling shareholder may
purchase a higher percentage of shares, if so permitted by the regulations of
the stock exchange.




Title XV
of the Securities Market Law sets forth the basis for determining what
constitutes a controlling power, a direct holding and a related
party.




Capitalization




Under
Chilean law, the shareholders of a company, acting at an extraordinary
shareholders’ meeting, have the power to authorize an increase in the company’s
share capital. When an investor subscribes issued shares, the shares are
registered in that investor’s name even without payment, and the investor is
treated as a shareholder for all purposes except with regard to receipt of
dividends and return of capital, provided that the shareholders may, by amending
the by-laws, also grant the right to receive dividends of distribution of
capital despite not having paid for the subscribed shares. The investor becomes
eligible to receive dividends once it has paid for the shares, or, if it has
paid for only a portion of such shares, it is entitled to receive a
corresponding pro rata portion of the dividends declared with respect to such
shares, unless the company’s by-laws provide otherwise. If an investor does not
pay for shares for which it has subscribed on or prior to the date agreed upon
for payment, the company is entitled under Chilean law to auction the shares on
the appropriate stock exchange, and it has a cause of action against the
investor to recover the difference between the subscription price and the price
received for the sale of those shares at auction. However, until such shares are
sold at auction, the investor continues to exercise all the rights of a
shareholder (except the right to receive dividends and return of capital, as
noted above). Regarding shares issued but not paid for within the period
determined by the extraordinary shareholders’ meeting for their payment (which
period cannot exceed three years from the date of such shareholders’ meeting),
until January 1, 2010 they were canceled and no longer available for issuance by
us. As of January 1, 2010, the board of directors of Lan Airlines has a legal
obligation to initiate the necessary legal actions to collect the unpaid
amounts, unless the shareholders’ meeting which authorized the capital increase,
allowed the board to abstain from taking such action by a vote of two thirds of
the issued shares, in which case the former rule still applies. Once the
foregoing legal actions are exhausted, the board of directors shall propose to
the shareholders’ meeting the appropriate capital adjustment measures, to be
decided by simple majority. Fully paid shares are not subject to further calls
or assessments or to liabilities of Lan Airlines.




As of
March 31, 2010, our share capital consisted of 338,790,909 common shares, all of
which were subscribed and fully paid. Chilean law recognizes the right to issue
common and preferred shares. To date, we have issued and are authorized by our
shareholders to issue only common shares. Each share of stock is entitled to one
vote. Pursuant to an employee compensation plan approved by extraordinary
shareholders’ meetings dated April 5, 2007, and October 29, 2009, the issuance
of certain shares has been authorized but that has not been made effective as
such issuance is subject to the exercising of rights granted to certain
employees.




Preemptive
Rights and Increases in Share Capital




The
Chilean Corporation Law requires Chilean companies to offer existing
shareholders the right to purchase a sufficient number of shares to maintain
their existing percentage of ownership in a company whenever that company issues
new shares for cash, except for up to 10% of the capital increase which may be
destined to employee compensation pursuant to article 24 of the Corporation Law.
Under this requirement, any preemptive rights will be offered by us to the
depositary as the registered owner of the common shares underlying the ADSs, but
holders of ADSs and shareholders located in the United States will not be
allowed to exercise preemptive rights with respect to new issuances of shares by
us unless a registration statement under the Securities Act is effective with
respect to those common shares or an exemption from the registration
requirements thereunder is available.




96
 Table of Contents


We intend
to evaluate at the time of any preemptive rights offering the costs and
potential liabilities associated with the preparation and filing of a
registration statement with the Securities and Exchange Commission, as well as
the indirect benefits of enabling the exercise by the holders of ADSs and
shareholders located in the United States of preemptive rights and any other
factors we consider appropriate at the time. No assurances can be given that any
registration statement would be filed. If preemptive rights are not made
available to ADS holders, the depositary may sell those holders’ preemptive
rights and distribute the proceeds thereof if a secondary market for such rights
exists and a premium can be recognized over the cost of such sale. In the event
that the depositary does not sell such rights at a premium over the cost of any
such sale, all or certain holders of ADRs may receive no value for the
preemptive rights. The inability of holders of ADSs to exercise preemptive
rights in respect of common shares underlying their ADSs could result in a
change in their percentage ownership of common shares following a preemptive
rights offering.




Under
Chilean law, preemptive rights are freely exercisable, transferable or waived by
shareholders during a thirty-day period commencing upon publication of the
official notice announcing the start of the preemptive rights period in the
newspaper designated by the shareholders’ meeting. The preemptive right of the
shareholders is the pro rata amount of the shares registered in their name in
the shareholders’ registry of Lan Airlines as of the fifth business day prior to
the date of publication of the notice announcing the start of the preemptive
rights period. During such thirty-day period (except for shares as to which
preemptive rights have been waived), Chilean companies are not permitted to
offer any newly issued common shares for sale to third parties. For that
thirty-day period and an additional thirty-day period, Chilean publicly held
corporations are not permitted to offer any unsubscribed common shares for sale
to third parties on terms that are more favorable to the purchaser than those
offered to shareholders. At the end of such additional thirty-day period,
Chilean publicly held corporations are authorized to sell non-subscribed shares
to third-parties on any terms, provided they are sold on a Chilean stock
exchange.




Directors




Our
by-laws provide for a board of nine directors. Compensation to be paid to
directors must be approved by vote at the annual shareholders’ meeting. We hold
elections for all positions on the board of directors every two years. Under our
by-laws, directors are elected by cumulative voting. Each shareholder has one
vote per share and may cast all of his or her votes in favor of one nominee or
may apportion his or her votes among any number of nominees. These voting
provisions currently ensure that a shareholder owning more than 10% of our
outstanding shares is able to elect at least one representative to our board of
directors.




Under the
Chilean Corporation Law, transactions of a publicly-traded company with a
“related” party must be conducted on an arm’s-length basis and must satisfy
certain approval and disclosure requirements which are different from the ones
that apply to a privately-held company. The conditions apply to the
publicly-traded company and to all of its subsidiaries.




These
transactions include any negotiation, act, contract or operation in which the
publicly-traded company intervenes together with either (i) parties which are
legally deemed related pursuant to article 100 of the Chilean Securities Market
Law, (ii) a director, senior manager, administrator, main executive or
liquidator of the company, either on their own behalf or on behalf of a third
party, including those individuals’ spouses or close relatives, (iii) companies
in which the foregoing individuals own at least 10% (directly or indirectly), or
in which they serve as directors, senior managers, administrators or main
executives (iv) parties indicated as such in the publicly-traded company’s
by-laws, or identified by the directors’ committee, or (v) those who have served
as directors, senior managers, administrators, main executives or liquidators of
the counterparty in the last eighteen months and are now serving in one of those
positions at the publicly-traded company.




Corporations
may enter into transactions with interested parties if (i) the transaction is in
the interest of the corporation, (ii) the transaction is made on an arm’s-length
basis at market conditions, (iii) the individuals involved in the transactions
report them immediately to the board, (iv) the transaction is approved after a
reasoned explanation by the majority of the board, excluding those directors or
liquidators that are involved in the transaction (who shall, nonetheless, render
an opinion on the matter if required by the board), (v) the decisions of the
board is disclosed at the next shareholders’ meeting, and (vi) in case the
majority of the board is disqualified to vote, the majority of the non-involved
directors have approved the transaction, or two thirds of the voting shares have
approved the transaction).




97
 Table of Contents


If as
noted in (vi) above, the transaction is to be approved by the shareholder’s
meeting, the following additional rules apply: (i) the board shall appoint an
independent appraiser that shall report to the shareholders on the transaction;
(ii) the director’s committee or the non-involved directors may appoint a second
independent appraiser; (iii) the appraiser’s reports shall be made available for
fifteen days; (iv) the receipt and availability of the reports shall be
disclosed as a material fact; (iv) directors shall render an opinion on the
transaction within five business days after receiving the reports.




Transactions
which do not meet the foregoing requirements are valid and enforceable, but
neither the corporation nor its shareholders shall have a cause of action to sue
the infringing party for reimbursement on behalf of the corporation, for a total
of the benefits reported to the interested party, in addition to indemnification
for the damages caused. In such proceedings, the defendant shall prove that the
transaction met the legal requirements.




The
Chilean Corporation Law sets forth a number of exceptions to the foregoing
rules. In the following situations, transactions with related parties may be
carried out without complying with the foregoing rules: (i) if a transaction
does not involve a substantial amount (if it does not exceed 1.0% of the net
worth of the company and does not exceed the equivalent of 2,000 UF or
approximately US$79,000 as of the date of this annual report) unless such a
transaction exceeds 20,000 UF  (for this calculation all similar
transactions carried out within a consecutive 12-month period between the same
parties or for the same subject matter, shall be deemed as a single
transaction), (ii) transactions which according to the policies determined by
the board of directors, are deemed to be within the ordinary course of business
(the determination of such policies shall be disclosed as a material fact and
made available to shareholders), and (iii) if the counterparty is an entity in
which the publicly-traded company has, directly or indirectly, at least a 95.0%
ownership. As per the exemption indicated in (ii) above, on December 29, 2009,
the Board of Directors of LAN determined the cited policies setting forth the
transactions that fall within the ordinary course of business. That
determination was publicly disclosed on the same day and is currently available
on LAN’s website under the “Corporate Governance” section.”




Shareholders’
Meetings and Voting Rights




The
Chilean Corporation Law requires that an ordinary annual meeting of shareholders
be held within the first four months of each year after being called by the
board of directors (generally they are held in April, but in any case following
the preparation of our financial statements, including the report of our
auditors, for the previous fiscal year). Lan Airlines’ by-laws further provide
that the ordinary annual meeting of shareholders must take place between
February 1 and April 30. The shareholders at the ordinary annual meeting approve
the annual financial statements, including the report of our auditors, the
annual report, the dividend policy and the final dividend on the prior year’s
profits, elect the board of directors (in our case, every two years or earlier
if a vacancy occurs) and approve any other matter that does not require an
extraordinary shareholders’ meeting. The most recent extraordinary meeting of
our shareholders was held on October 29, 2009, and the most recent ordinary
annual meeting of our shareholders was held on April 29, 2010.




Extraordinary
shareholders’ meetings may be called by the board of directors, if deemed
appropriate, and ordinary or extraordinary shareholders’ meetings must be called
by the board of directors when requested by shareholders representing at least
10.0% of the issued voting shares or by the SVS. In addition, as from January 1,
2010 there are two new rules in this regard: (i) the SVS may directly call for
an extraordinary shareholders’ meeting in case of a publicly-traded companies,
and (ii) any kind of shareholders’ meeting may be self-convened and take place
if all voting shares attend, regardless of the fulfillment of the notice and
other type of procedural requirements.




Notice to
convene the ordinary annual meeting or an extraordinary meeting is given by
means of three notices which must be published in a newspaper of our corporate
domicile (currently Santiago, Chile) designated by the shareholders at their
annual meeting and, if the shareholders fail to make such designation, the
notice must be published in the Chilean Official Gazette pursuant to legal
requirements. The first notice must be published not less than fifteen days and
not more than twenty days in advance of the scheduled meeting. Notice also must
be mailed not less than fifteen days in advance of the meeting to each
shareholder and to the SVS and the Chilean stock exchanges. Currently, we
publish our official notices in the newspaper La Tercera(available online
at www.latercera.com).




The
quorum for a shareholders’ meeting is established by the presence, in person or
by proxy, of shareholders representing a majority of our issued common shares.
If that quorum is not reached, the meeting can be reconvened within forty-five
days, and at the second meeting the shareholders present are deemed to
constitute a quorum regardless of the percentage of the common shares that they
represent.




98
 Table of Contents


Only
shareholders registered with us on the fifth business day prior to the date of a
meeting are entitled to attend and vote their shares. A shareholder may appoint
another individual (who need not be a shareholder) as his or her proxy to attend
and vote on his or her behalf. Proxies addressed to us that do not designate a
person to exercise the proxy are taken into account in order to determine if
there is a sufficient quorum to hold the meeting, but the shares represented
thereby are not entitled to vote at the meeting. The proxies must fulfill the
requirements set forth by the Chilean Corporation Law and its regulatory norms.
Every shareholder entitled to attend and vote at a shareholders’ meeting has one
vote for every share subscribed.




The
following matters can only be considered at an extraordinary shareholders’
meeting:




·
            our
      dissolution;




·
            a
      merger, transformation, division or other change in our corporate form or
      the amendment of our by-laws;




·
            the
      issuance of bonds or debentures convertible into
  shares;




·
            the
      conveyance of 50% or more of our assets (whether or not it includes our
      liabilities);




·
            the
      adoption or amendment of any business plan which contemplates the
      conveyance of assets in excess of the foregoing
  percentage;




·
            the
      conveyance of 50% or more of the assets of a subsidiary, if the latter
      represents at least 20% of our
assets;




·
            the
      conveyance of shares of a subsidiary which entails the transfer of
      control;




·
            granting
      of a security interest or a personal guarantee in each case to secure the
      obligations of third parties, unless to secure or guarantee the
      obligations of a subsidiary, in which case only the approval of the board
      of directors will suffice; and




·
            other
      matters that require shareholder approval according to Chilean law or the
      by-laws.




The
matters referred to in the first seven items listed above may only be approved
at a meeting held before a notary public, who shall certify that the minutes are
a true record of the events and resolutions of the meeting.




The
by-laws establish that resolutions are passed at shareholders’ meetings by the
affirmative vote of an absolute majority of those voting shares present or
represented at the meeting. However, under the Chilean Corporation Law, the vote
of a two-thirds majority of the outstanding voting shares is required to approve
any of the following actions:




·
            a
      change in our corporate form, division or merger with another
      entity;




·
            amendment
      to our term of existence, if any;




·
            our
      early dissolution;




·
            change
      in our corporate domicile;




·
            decrease
      of our capital stock;




·
            approval
      of contributions and the assessment thereof whenever consisting of assets
      other than money;




·
            any
      modification of the authority reserved for the shareholders’ meetings or
      limitations on the powers of the board of
  directors;




·
            decrease
      in the number of members of the board of
  directors;




·
            the
      conveyance of 50% or more our assets (whether or not it includes our
      liabilities);




99
 Table of Contents


·
            the
      adoption or amendment of any business plan which contemplates the
      conveyance of assets in excess of the foregoing
  percentage;




·
            the
      conveyance of 50% or more of the assets of a subsidiary, if the latter
      represents at least 20% of our
assets;




·
            the
      conveyance of shares of a subsidiary which entails the transfer of
      control;




·
            the
      form that dividends are paid in;




·
            granting
      a security interest or a personal guarantee in each case to secure
      obligations of third parties that exceeds 50% of our assets, unless to
      secure or guarantee the obligations of a subsidiary, in which case only
      approval of the board of directors will
suffice;




·
            the
      acquisition of our own shares, when, and on the terms and conditions,
      permitted by law;




·
            all
      other matters provided for in the by-laws;
and




·
            the
      correction of any formal defect in our incorporation or any amendment to
      our by-laws that refers to any of the matters indicated in the first
      thirteen items listed above;




·
            the
      institution of the right of the controlling shareholder who has purchases
      at least 95% of the shares, to purchase shares of the outstanding minority
      shareholders pursuant to the procedure set forth in article 71 bis of the
      Corporation Law;




·
            the
      approval or ratification of  transactions with related parties,
      as per article 147 of the Corporation Law (described
    above).




Amendments
to the by-laws that have the effect of establishing, modifying or eliminating
any special rights pertaining to any series of shares require the consenting
vote of holders of two-thirds of the shares of the affected series. As noted
above, Lan Airlines does not have special series of shares.




In
general, Chilean law does not require a publicly held corporation to provide the
level and type of information that the U.S. securities laws require a reporting
company to provide to its shareholders in connection with a solicitation of
proxies. However, shareholders are entitled to examine the books of the company
and its subsidiaries within the fifteen-day period before the scheduled meeting.
No later than the first notice summoning an ordinary shareholder’s meeting, the
board of directors of a publicly held corporation shall send to every
shareholder notice by regular mail, containing a reference to the issues that
will be discussed, together with instructions to obtain all the appropriate
documentation regarding those issues, in addition to being obligated to publish
them in our website, and also a copy of the annual report and the financial
statements of the company. However, the SVS may authorize companies that have a
large number of shareholders to limit the sending of such documents only to
those shareholders who have a number of shares exceeding a certain number, and,
in any case, to any shareholder that has required of the company such sending.
Shareholders who do not fall into this category but who request it must be sent
a copy of our annual report. In addition to these requirements, we regularly
have provided, and currently intend to continue to provide, together with the
notice of shareholders’ meeting, a proposal for the final annual dividend for
shareholder approval. See “—Dividend and Liquidation Rights” below.




The
Chilean Corporation Law provides that, whenever shareholders representing 10% or
more of the issued voting shares so request, a Chilean company’s annual report
must include such shareholders’ comments and proposal in relation to the
company’s affairs, together with the comments and proposals set forth by the
directors’ committee. Similarly, the Chilean Corporation Law provides that
whenever the board of directors of a publicly held corporation convenes an
ordinary meeting of the shareholders and solicits proxies for that meeting, or
distributes information supporting its decisions or other similar material, it
is obligated to include as an annex to its annual report any pertinent comments
and proposals that may have been made by shareholders owning 10% or more of the
company’s voting shares who have requested that such comments and proposals be
included, together with the comments and proposals set forth by the directors’
committee.




100
 Table of Contents


Dividend
and Liquidation Rights




In
accordance with the Chilean Corporation Law, Lan Airlines must distribute an
annual cash dividend equal to at least 30% of its annual net income calculated
in accordance with IFRS, unless otherwise decided by a unanimous vote of the
holders of all issued shares, and unless and except to the extent it has
accumulated losses. If there is no net income in a given year, Lan Airlines can
elect but is not legally obligated to distribute dividends out of retained
earnings. All outstanding common shares are entitled to share equally in all
dividends declared by Lan Airlines, unless the shares have not been fully paid
by the shareholder after being subscribed.




For all
dividend distributions agreed by the board of directors in excess of the
mandatory minimum of 30% noted in the preceding paragraph, Lan Airlines may
grant an option to its shareholders to receive those dividends in cash, or in
shares issued by either Lan Airlines or other corporations. Shareholders who do
not expressly elect to receive a dividend other than in cash are legally
presumed to have decided to receive the dividend in cash. A U.S. holder of ADSs
may, in the absence of an effective registration statement under the Securities
Act or an available exemption from the registration requirement thereunder,
effectively be required to receive a dividend in cash. See “—Preemptive Rights
and Increases in Share Capital” above.




Dividends
that are declared but not paid within the appropriate time period set forth in
the Chilean Corporation Law (as to minimum dividends, thirty days after
declaration; as to additional dividends, the date set for payment at the time of
declaration) are adjusted to reflect the change in the value of the UF. The UF
is a daily indexed, Chilean peso-denominated accounting unit designed to
discount the effect of Chilean inflation and it is based on the previous month’s
inflation rate as officially determined. Such dividends also accrue interest at
the then-prevailing rate for UF-denominated deposits during such period. The
right to receive a dividend lapses if it is not claimed within five years from
the date such dividend is payable. After that period, the amount not claimed is
given to a non-profit organization, the Junta Nacional de Cuerpos de
Bomberos de Chile(the National Corporation of
Firefighters).




In the
event of Lan Airlines’ liquidation, the holders of fully paid common shares
would participate pro rata in the distribution of assets remaining after payment
of all creditors. Holders of shares not fully paid will participate in such
distribution in proportion to the amount paid.




Approval
of Financial Statements




The board
of directors is required to submit our consolidated financial statements to the
shareholders for their approval at the annual ordinary shareholders’ meeting. If
the shareholders reject the financial statements, the board of directors must
submit new financial statements not later than sixty days from the date of that
meeting. If the shareholders reject the new financial statements, the entire
board of directors is deemed removed from office and a new board is to be
elected at the same meeting. Directors who approved such financial statements
are disqualified for re-election for the ensuing period.




Right
of Dissenting Shareholders to Tender Their Shares




The
Chilean Corporation Law provides that, upon the adoption at an extraordinary
meeting of shareholders of any of the resolutions or if it takes place any of
the situations enumerated below, dissenting or affected shareholders acquire the
right to withdraw and to compel the company to repurchase their shares, subject
to the fulfillment of certain terms and conditions. However, such right shall be
suspended if we are declared bankrupt or are subject to a creditor’s agreement
pursuant to Title XII of Book IV of the Commerce Code. In the case of holders of
ADRs, however, in order to exercise such rights, holders of ADRs would be
required to first withdraw the common shares represented by the ADRs pursuant to
the terms of the deposit agreement. Such holders of ADRs would need to perfect
the withdrawal of the common shares on or before the fifth business day prior to
the date of the meeting.




“Dissenting
shareholders” are defined as those who attend a shareholders’ meeting and vote
against a resolution which results in the withdrawal right, or, if absent at
such a meeting, those who state in writing to the company their opposition to
such resolution within the following thirty days. Dissenting shareholders must
perfect their withdrawal rights by tendering their stock to the company within
thirty days after adoption of the resolution.




The price
paid to a dissenting shareholder of a publicly held corporation is the weighted
average of the sales prices for the shares as reported on the Chilean stock
exchanges on which the shares are quoted for the two-month period preceding the
event giving rise to the withdrawal right. If, because of the volume, frequency,
number and diversity of the buyers and sellers, the SVS determines that the
shares are not shares actively traded on a stock exchange (acciones de transacción
bursátil), the price paid to the dissenting shareholder is the book
value. Book value for this purpose equals paid capital plus reserves and
profits, less losses, divided by the total number of subscribed shares (whether
entirely or partially paid). For the purpose of making this calculation, the
last annual balance sheet is used and adjusted to reflect inflation up to the
date of the shareholders’ meeting that gave rise to the withdrawal
right.




101
 Table of Contents


The
resolutions and situations that result in a shareholder’s right to withdraw are
the following:




·
            the
      transformation of the company into an entity that is not a publicly held
      corporation governed by the Chilean Corporation
  Law;




·
            the
      merger of the company with or into another
  company;




·
            the
      conveyance of 50% or more of the assets of the company, whether or not
      such sale includes the company’s
liabilities;




·
            the
      adoption or amendment of any business plan which contemplates the
      conveyance of assets in excess of the foregoing
  percentage;




·
            the
      conveyance of 50% or more of the assets of a subsidiary, if the latter
      represents at least 20% of our
assets;




·
            the
      conveyance of shares of a subsidiary which entails the transfer of
      control;




·
            the
      creation of preferential rights for a class of shares or an extension,
      amendment or reduction to those already existing, in which case the right
      to withdraw only accrues to the dissenting shareholders of the class or
      classes of shares adversely
affected;




·
            the
      correction of any formal defect in the incorporation of the company or any
      amendment to the company’s by-laws that grants the right to
      withdraw;




·
            the
      granting of security interests or personal guarantees to secure or
      guarantee third parties’ obligations exceeding 50% of the company’s
      assets, except with regard to
subsidiaries;




·
            resolutions
      of the shareholders’ meeting approving the decision to make private a
      public corporation in the case the requirements set forth in “—General”
      cease to be met;




·
            if
      a publicly-traded company ceases to be obligated to register its shares in
      the Securities Registry of the SVS, and an extraordinary shareholders’
      meeting agrees to de-register the shares and finalize its disclosure
      obligations mandated by the Corporation
Law;




·
            if
      the controlling shareholder of a publicly-traded company reaches over 95%
      of the shares (in such case, the right must be exercised within 30 days of
      the date in which the threshold is reached, circumstance that must be
      communicated by means of a publication);
and




·
            such
      other causes as may be established by the company’s by-laws (no such
      additional resolutions currently are specified in our
      by-laws).




In
addition, shareholders of publicly held corporations have the right to withdraw
if a person acquires two-thirds or more of the outstanding shares of such
corporation with the right to vote (except as a result of other shareholders not
having subscribed and paid a capital increase) and does not make a tender offer
for the remaining shares within thirty days after acquisition.




Under
Article 69(bis) of the Chilean Corporation Law, the right to withdraw also is
granted to shareholders (other than pension funds that administer private
pension plans under the national pension law), under certain terms and
conditions, if a company were to become controlled by the Chilean government,
directly or through any of its agencies, and if two independent rating agencies
downgrade the rating of its stock from first class because of certain actions
specified in Article 69(bis) undertaken by the company or the Chilean government
that affect negatively and substantially the earnings of the company.
Shareholders must perfect their withdrawal rights by tendering their shares to
the company within thirty days of the date of the publication of the new rating
by two independent rating agencies. If the withdrawal right is exercised by a
shareholder invoking Article 69(bis), the price paid to the dissenting
shareholder shall be the weighted average of the sales price for the shares as
reported on the stock exchanges on which the company’s shares are quoted for the
six-month period preceding the publication of the new rating by two independent
rating agencies. If, as previously described, the SVS determines that the shares
are not actively traded on a stock exchange, the price shall be the book value
calculated as described above.




102
 Table of Contents


There is
no legal precedent as to whether a shareholder that has voted both for and
against a proposal (such as the depositary) may exercise withdrawal rights with
respect to the shares voted against the proposal. As such, there is doubt as to
whether holders of ADRs who have not surrendered their ADRs and withdrawn common
shares on or before the fifth business day prior to the shareholder meeting will
be able to exercise withdrawal rights either directly or through the depositary
with respect to the shares represented by ADRs. Under the provisions of the
deposit agreement the depositary will not exercise these withdrawal
rights.




The
circumstance indicated above regarding ownership in excess of 95% by the
controlling shareholder creates not only a withdrawal right for the remaining
minority shareholders, but as of January 1, 2010, it also creates a “squeeze
out” right by the controlling shareholder with respect to those same
shareholders (granting a call option by means of which the controlling
shareholder may buy-out the existing ownership participations pursuant to the
provisions of article 71 bis of the Corporation Law).




Registration
and Transfers




The Depósito Central de Valores,
(“DCV”), acts as Lan Airlines’ registration agent. In the case of jointly owned
common shares, an attorney-in-fact must be appointed to represent the joint
owners in dealings with us.




Material
Contracts




On March
31, 2006, we entered into supplemental agreement No. 22, to purchase agreement
No. 2126 dated as of January 30, 1998 (“Purchase Agreement No. 2126”), whereby
we agreed to purchase a total of three Boeing 767-300 aircraft. Five
passenger aircraft were delivered in 2008 pursuant to Purchase Agreement No.
2126. We had the option to convert some of the orders from the passenger version
to the freighter version or vice versa with certain notice. The estimated gross
value (at list prices) of the Boeing aircraft for which we had firm commitments
to take delivery under this contract was US$0.5 billion. On March 6, 2007, we
entered into amendment No.3 to the First A340 purchase agreement with Airbus
S.A.S. for the cancellation of two A340 aircraft, and amendment No.3 to the
Second A320-Family purchase agreement with Airbus S.A.S. for the conversion of
fifteen options to purchase aircraft into firm orders. The net increase in
capital expenditures related to these agreements is US$315 million.




On April
30, 2007, we also entered into an Aircraft Lease Common Terms Agreement with GE
Commercial Aviation Services Limited and two Aircraft Lease Agreements with
Wells Fargo Bank Northwest N.A., as owner trustee, for the lease of two Boeing
B777-200LRF aircraft.




On July
3, 2007, we entered into a purchase agreement with the Boeing Company for the
acquisition of two Boeing 777-Freighter aircraft.  Delivery is
scheduled to take place in 2011 and 2012.




On
October 29, 2007, we entered into a purchase agreement with the Boeing Company
for the acquisition of twenty-six Boeing 787-8 and 787-9 aircraft to be
delivered between 2012 and 2016. This purchase agreement provides us with the
option of purchasing ten additional aircraft to be delivered in 2017 and
2018.




On
November 10, 2008, we entered into a supplemental agreement to the purchase
agreement entered into with the Boeing Company for the acquisition of four
additional Boeing 767-300 passenger aircraft.  Delivery is scheduled
to take place in 2012. The estimated gross value (at list prices) of these
aircraft is US$636 million.




On
November 10, 2008, we entered into Supplemental Agreement No. 24 to the Purchase
Agreement No. 2126 dated January 30, 1998, as amended, with the Boeing
Company.




On
December 23, 2009, we entered into Amendment No. 5 to the Second A320-Family
Purchase Agreement dated March 20, 1998, as amended, with Airbus S.A.S., for the
acquisition of 30 additional A-319 and A-320 Airbus aircraft, for a list price
amount of US$2.0 billion.




For more
information, see “Information on the Company—Fleet—Fleet Leasing and Financing
Arrangements” under Item 4.




103
 Table of Contents


Foreign
Investment and Exchange Controls in Chile




The
Central Bank of Chile is responsible, among other things, for monetary policies
and exchange controls in Chile. Equity investments, including investments in
shares of stock by persons who are non-Chilean residents, have been generally
subject in the past to various exchange control regulations restricting the
repatriation of their investments and the earnings thereon.




Article
47 of the Central Bank Act and Chapter XXVI of the Central Bank Foreign Exchange
Regulations regulated the foreign exchange aspects of the issuance of ADSs by a
Chilean company until April 2001. According to Chapter XXVI, the Central Bank of
Chile and the depositary had to enter into an agreement in order to gain access
to the formal exchange market. The issuers of the shares underlying the ADSs and
the custodian could also be parties to these agreements and we are party to such
agreement.




On April
16, 2001, the Central Bank of Chile agreed that, effective April 19,
2001:




·
            prior
      foreign exchange restrictions would be eliminated:
  and




·
            a
      new Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios
      Internacionales) would be
applied.




The main
objective of these amendments, as declared by the Central Bank of Chile, is to
facilitate movement of capital in and out of Chile and to encourage foreign
investment.




In
connection with the change in policy, the Central Bank of Chile eliminated the
following restrictions:




·
            a
      reserve requirement with the Central Bank of Chile for a period of one
      year (this mandatory reserve was imposed on foreign loans and funds
      brought into Chile to purchase shares other than those acquired in the
      establishment of a new company or in the capital increase of the issuing
      company; the reserve requirement was gradually decreased from 30% of the
      proposed investment to 0%);




·
            the
      requirement of prior approval by the Central Bank of Chile for certain
      operations;




·
            mandatory
      return of foreign currencies to Chile;
and




·
            mandatory
      conversion of foreign currencies into Chilean
  pesos.




Under the
new regulations, only the following limitations apply to these
operations:




·
            the
      Central Bank of Chile must be provided with information related to certain
      operations; and




·
            certain
      operations must be conducted with the Formal Exchange
    Market.




The
Central Bank of Chile also eliminated Chapter XXVI of the Compendium of Foreign
Exchange Regulations, which regulated the establishment of an ADR facility by a
Chilean company. Pursuant to the new rules, it is no longer necessary to seek
the Central Bank of Chile’s prior approval in order to establish an ADR facility
nor to enter into a foreign investment contract with the Central Bank of Chile.
The establishment of an ADR facility is now regarded as an ordinary foreign
investment, and simply requires that the Central Bank of Chile be informed of
the transaction pursuant to Chapter XIV of the revised Compendium of Foreign
Exchange Regulations and that the transaction be conducted exclusively through
the Formal Exchange Market.




However,
all contracts executed under the provisions of Chapter XXVI (including the
foreign investment contract among Lan Airlines, the Central Bank of Chile and
the ADS depositary, or the “Foreign Investment Contract”), remain in full force
and effect and continue to be governed by the provisions, and continue to be
subject to the restrictions, set forth in Chapter XXVI at the time of its
abrogation. Our Foreign Investment Contract guarantees ADS investors access to
the Formal Exchange Market to convert amounts from Chilean pesos into U.S.
dollars and repatriate amounts received with respect to deposited common shares
or common shares withdrawn from deposit or surrender of ADRs (including amounts
received as cash dividends and proceeds from the sale in Chile of the underlying
common shares and any rights arising from them).




The
guarantee of access to the Formal Exchange Market under the Foreign Investment
Contract requires compliance of the following conditions:




104
 Table of Contents


·
            the
      funds to purchase the common shares underlying the ADSs are brought into
      Chile and converted into Chilean pesos through the Formal Exchange
      Market;




·
            the
      purchase of the underlying common shares is made on a Chilean stock
      exchange; and




·
            within
      five business days from conversion of the funds into Chilean pesos, the
      Central Bank of Chile is informed that the conversion funds were used to
      purchase the underlying common
shares.




The
following is a summary of material provisions of the Foreign Investment
Contract, a form of which was filed as an exhibit to the registration statement
on Form F-1 (File No. 333-7750) that we filed on October 10, 1997 in connection
with our November 6, 1997 offering. This summary is not complete and is
qualified in its entirety by reference to Chapter XXVI and the Foreign
Investment Contract.




Under
Chapter XXVI and the Foreign Investment Contract, the Central Bank of Chile
agreed to grant to the depositary, on behalf of ADR holders, and to any investor
not residing or domiciled in Chile who withdraws common shares upon surrender of
ADRs, access to the Formal Exchange Market to convert Chilean pesos into U.S.
dollars (and to remit those dollars outside Chile) in respect of common shares
represented by ADSs or withdrawn shares, including amounts received
as:




·
            cash
      dividends;




·
            proceeds
      from the sale in Chile of withdrawn shares or from shares distributed as a
      result of a liquidation, merger or consolidation of Lan Airlines (subject
      to receipt by the Central Bank of Chile of a certificate from the holder
      of the withdrawn shares or the distributed shares (or from an institution
      authorized by the Central Bank of Chile) that the holder’s residence and
      domicile are outside of Chile, and a certificate from a Chilean stock
      exchange (or from a brokerage or securities firm established in Chile)
      that the withdrawn shares or the distributed shares were sold on a Chilean
      stock exchange);




·
            proceeds
      from the sale in Chile of preemptive rights to subscribe for additional
      common shares;




·
            proceeds
      from the liquidation, merger or consolidation of Lan
    Airlines;




·
            proceeds
      from the sale in Chile of common shares received as a dividend;
      and




·
            other
      distributions, including those in respect of any recapitalization
      resulting from holding common shares represented by ADSs or withdrawn
      shares.




Chapter
XXVI provided that access to the Formal Exchange Market in connection with
dividend payments is conditioned on our certifying to the Central Bank of Chile
that a dividend payment has been made and that any applicable tax has been
withheld. We agreed to provide this certification. Chapter XXVI also provides
that access to the Formal Exchange Market in connection with the sale of
withdrawn shares, or distribution on them, is conditioned upon receipt by the
Central Bank of Chile of a certification by the depositary or custodian, as the
case may be, that the common shares have been withdrawn in exchange for delivery
of the appropriate ADRs and receipt of a waiver of the benefit of the Foreign
Investment Contract with respect to them (except in connection with the proposed
sale of the common shares) until the withdrawn shares are
redeposited.




Chapter
XXVI and the Foreign Investment Contract provided that a person who brings
foreign currency into Chile to purchase common shares pursuant to the Foreign
Investment Contract must convert that foreign currency into Chilean pesos on the
date of entry into Chile, and must invest in common shares within five banking
business days in order to receive the benefits of the Foreign Investment
Contract. If a person does not invest in common shares within that period, that
person can access the Formal Exchange Market to reacquire foreign currency,
provided that the request is presented to the Central Bank of Chile within seven
banking business days of the initial conversion into pesos. Common shares
acquired as described above may be deposited in exchange for ADRs and will
receive the benefits of the Foreign Investment Contract, subject
to:




·
            receipt
      by the Central Bank of Chile of a certificate from the depositary that the
      common shares have been deposited and that the related ADRs have been
      issued; and




·
            receipt
      by the custodian of a declaration from the person making the deposit
      waiving the benefits of the Foreign Investment Contract with respect to
      the deposited common shares.




105
 Table of Contents


Access to
the Formal Exchange Market under any of the circumstances described above is not
automatic. Pursuant to Chapter XXVI, such access required approval of the
Central Bank of Chile based on a request presented through a banking institution
established in Chile. The Foreign Investment Contract provides that if the
Central Bank of Chile has not acted on the request within seven banking days,
the request is deemed approved.




Under
current Chilean law, the Foreign Investment Contract cannot be changed
unilaterally by the Central Bank of Chile. We cannot guarantee, however, 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.  On May 10, 2007, the Council of the Central Bank of Chile
agreed to grant the Chilean companies that increased their capital stock between
the date of the agreement and August 31, 2007 the option to request, on a
one-time only basis, the application of Chapter XXVI to those shares issued and
actually paid before August 31, 2008 (assuming prior fulfillment of the
requirements of the Central Bank of Chile).




Voting
Rights




Holders
of our ADSs, which represent common shares, may instruct the depositary to vote
the shares underlying their ADRs. If we ask holders for instructions, the
depositary will notify such holders of the upcoming vote and arrange to deliver
our voting materials to such holders. The materials will describe the matters to
be voted on and explain how holders may instruct the depositary to vote the
shares or other deposited securities underlying their ADSs as they direct by a
specified date. For instructions to be valid, the depositary must receive them
on or before the date specified as “Vote Cut-Off Date.” The depositary will try,
as far as practical, subject to Chilean law and the provisions of our by-laws,
to vote or to have its agents vote the shares or other deposited securities as
holders instruct. Otherwise, holders will not be able to exercise their right to
vote unless they withdraw the shares. However, holders may not know about the
meeting far enough in advance to withdraw the shares. We will use our best
efforts to request that the depositary notify holders of upcoming votes and ask
for their instructions.




If the
depositary does not receive voting instructions from a holder by the specified
date, it will consider such holder to have authorized and directed it to give a
discretionary proxy to a person designated by our board of directors to vote the
number of deposited securities represented by such holder’s ADSs. The depositary
will give a discretionary proxy in those circumstances to vote on all questions
to be voted upon unless we notify the depositary that:




·
            we
      do not wish to receive a discretionary
proxy;




·
            we
      think there is substantial shareholder opposition to the particular
      question; or




·
            we
      think the particular question would have an adverse impact on our
      shareholders.




The
depositary will only vote or attempt to vote as such holder instructs or as
described above.




We cannot
assure holders that they receive the voting materials in time to ensure that
they can instruct the depositary to vote their shares. This means that holders
may not be able to exercise their right to vote and there may be nothing they
can do if their shares are not voted as they requested.




Exchange
Rates




Prior to
1989, Chilean law permitted the purchase and sale of foreign exchange only in
those cases explicitly authorized by the Central Bank of Chile. The Central Bank
Act liberalized the rules that govern the ability to buy and sell foreign
currency. The Central Bank Act empowers the Central Bank of Chile to determine
that certain purchases and sales of foreign currency specified by law must be
carried out exclusively in the Formal Exchange Market, which is made up of the
banks and other entities authorized by the Central Bank of Chile. All payments
and distributions with respect to the ADSs must be conducted exclusively in the
Formal Exchange Market.




For
purposes of the operation of the Formal Exchange Market, the Central Bank of
Chile sets a reference exchange rate (dólar acuerdo). The Central
Bank of Chile resets the reference exchange rate monthly, taking internal and
external inflation into account, and adjusts the reference exchange rate daily
to reflect variations in parities between the Chilean peso, the U.S. dollar, the
Japanese yen and the European euro.




106
 Table of Contents


The
observed exchange rate (dólar
observado) is the average exchange rate at which transactions were
actually carried out in the Formal Exchange Market on a particular day, as
certified by the Central Bank of Chile on the next banking day.




Prior to
September 3, 1999, the Central Bank of Chile was authorized to buy or sell
dollars in the Formal Exchange Market to maintain the observed exchange rate
within a specified range above or below the reference exchange rate. On
September 3, 1999, the Central Bank of Chile eliminated the exchange band. As a
result, the Central Bank of Chile may buy and sell foreign exchange in the
Formal Exchange Market in order to maintain the observed exchange rate at a
level the Central Bank of Chile determines.




Purchases
and sales of foreign exchange may be effected outside the Formal Exchange Market
through the Informal Exchange Market (Mercado Cambiario Informal)
established by the Central Bank in 1990. There are no limits on the extent to
which the rate of exchange in the Informal Exchange Market can fluctuate above
or below the observed exchange rate.




Although
our results of operations have not been significantly affected by fluctuations
in the exchange rates between the peso and the U.S. dollar because our
functional currency is the U.S. dollar, we are exposed to foreign exchange
losses and gains due to exchange rate fluctuations. Even though the majority of
our revenues are denominated in or pegged to the U.S. dollar, the Chilean
government’s economic policies affecting foreign exchange and future
fluctuations in the value of the peso against the U.S. dollar could adversely
affect our results of operations and an investor’s return on an investment in
ADSs.




Chilean
Taxation




The
following discussion relates to Chilean income tax laws presently in force,
including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue
Service (“Chilean IRS”) and other applicable regulations and rulings, all of
which are subject to change. The discussion summarizes the principal Chilean
income tax consequences of an investment in the ADSs or common shares by a
person who is neither domiciled in, nor a resident of, Chile or by a legal
entity that is not organized under the laws of Chile and does not have a branch
or a permanent establishment located in Chile (such an individual or entity is
referred to herein as a Foreign Holder). For purposes of Chilean tax law, an
individual holder is a resident of Chile if such person has resided in Chile for
more than six consecutive months in one calendar year or for a total of six
months, whether consecutive or not, in two consecutive tax years. In addition,
an individual is considered domiciled in Chile in case he or she resides in
Chile with the actual or presumptive intent of staying in the country. The
discussion is not intended as tax advice to any particular investor, which can
be rendered only in light of that investor’s particular tax
situation.




Under
Chilean law, provisions contained in statutes such as tax rates applicable to
foreign investors, the computation of taxable income for Chilean purposes and
the manner in which Chilean taxes are imposed and collected may only be amended
by another statute. In addition, the Chilean tax authorities enact rulings and
regulations of either general or specific application and interpret the
provisions of Chilean tax law. Chilean tax may not be assessed retroactively
against taxpayers who act in good faith relying on such rulings, regulations and
interpretations, but Chilean tax authorities may change these rulings,
regulations and interpretations prospectively. There is no income tax treaty in
force between Chile and the United States.




Cash
Dividends and Other Distributions.




Cash
dividends we pay with respect to the ADSs or common shares held by a Foreign
Holder will be subject to a 35% Chilean withholding tax, which we withhold and
pay over to the Chilean tax authorities and which we refer to as the Withholding
Tax. A credit against the Withholding Tax is available based on the level of
corporate income tax we actually paid on the income to be distributed (referred
to herein as the First Category Tax); however, this credit does not reduce the
Withholding Tax on a one-for-one basis because it also increases the base on
which the Withholding Tax is imposed. If we register net income but taxable
losses, no credit against the Withholding Tax will be available. In addition, if
we distribute less than all of our distributable income, the credit for First
Category Tax we pay is proportionately reduced. Currently, the First Category
Tax rate is 17%. In general, the example below illustrates the effective
Withholding Tax burden on a cash dividend received by a Foreign Holder, assuming
a Withholding Tax rate of 35%, an effective First Category Tax rate of 17% the
actual payment of such First Category Tax at that 17% rate and a distribution of
30% of the consolidated net income of the Company after payment of the First
Category Tax:




107
 Table of Contents




The
      Company’s taxable income
                
                
                100.00First
      Category Tax (17% of Ch$100)
                
                
                (17
                )Net
      distributable income
                
                
                83.00Dividend
      distributed (30% of net distributable income)
                
                
                24.9First
      category increase
                
                
                5.1Withholding
      Tax (35% of the sum of Ch$24.9 dividend plus Ch$5.1 First Category Tax
      paid)
                
                
                (10.5
                )Credit
      for 17% of First Category Tax
                
                
                5.1Net
      tax withheld
                
                
                (5.4
                )Net
      dividend received
                
                
                19.5Effective
      dividend withholding rate
                
                
                21.69
                %





In
general, the effective dividend Withholding Tax rate, after giving effect to the
credit for the First Category Tax, can be calculated using the following
formula:




(Withholding Tax rate) −
(First Category Tax effective rate)


1 −
(First Category Tax effective rate)




Under
Chilean income tax law, dividends generally are assumed to have been paid out of
our oldest retained profits for purposes of determining the level of First
Category Tax that we paid. The effective rate of Withholding Tax to be imposed
on dividends we pay will vary depending upon the amount of First Category Tax we
paid (if any) on the earnings to which the dividends are attributed, according
to the Company’s Taxable Profit Fund. The Effective Withholding Tax rate for
dividends attributed to earnings from 1991 until 2001, for which the First
Category Tax rate was 15%, will be 23.5%. For 2002, the First Category Tax rate
was 16.0%, which results in an effective rate of 22.62%. In 2003, the First
Category Tax rate was 16.5%, which results in an effective rate of 22.16%, and
from 2004 onwards, the First Category Tax rate is 17%, which results in an
effective rate of Withholding Tax of 21.69%.




For
dividends attributable to our profits during years when the First Category Tax
was 10% (before 1991), the effective rate will be 27.8%. However, whether the
First Category Tax is 10%, 15%, 16%, 16.5% or 17%, the effective overall
combined tax rate imposed on our distributed profits will be 35%. In the event
that profits from previous years are not sufficient to cover a particular
dividend, and the dividend is attributable to the current year, we will
generally withhold tax from the dividend at the full 35% rate. If as of December
31 of the year in which the dividend is paid, the withholding is determined to
be excessive taking into account First Category Tax, holders may file for a
refund.




Dividend
distributions made in property would be subject to the same Chilean tax rules as
cash dividends based on the fair market value of such property. Stock dividends
and the distribution of preemptive rights are not subject to Chilean
taxation.




Capital
Gains




Gain from
the sale or other disposition by a Foreign Holder of ADRs evidencing ADSs
outside Chile will not be subject to Chilean taxation. The deposit and
withdrawal of common shares in exchange for ADRs will not be subject to any
Chilean taxes.




Gain
recognized on a sale or disposition of common shares (as distinguished from
sales or exchanges of ADRs evidencing ADSs representing such common shares) may
be subject to both the First Category Tax and the Withholding Tax (the former
being creditable against the latter) if:




·
            the
      Foreign Holder has held the common shares for less than one year since
      exchanging ADSs for the Shares;




·
            the
      Foreign Holder acquired and disposed of the common shares in the ordinary
      course of its business or as a habitual trader of shares;
    or




·
            the
      Foreign Holder and the purchaser of the common shares are “related
      parties” or has an interest in the latter within the meaning of Article
      17, Number 8, of the Chilean Income Tax
Law.




108
 Table of Contents


In all
other cases, gain on the disposition of common shares will be subject only to a
flat capital gains tax which is assessed at the same rate as the First Category
Tax as sole income tax (currently imposed at a rate of 17%) and no withholding
tax will apply. The sale of shares of common stock by a Foreign Holder to an
individual or entity resident or domiciled in Chile is subject to a provisional
withholding. Such a provisional withholding will be equal to (i) 5% of the total
(sale price) amount, without any deduction, paid to, credited to, account for,
put at the disposal of, or corresponding to, the Foreign Holder if the
transaction is subject to the First Category Tax, as a sole tax. Unless the gain
subject to taxation can be determined, case in which the withholding is equal to
17% on the gain, or (ii) 20% of the total amount (the sale price without any
deduction, paid to, credited to, account for, put at the disposal of, or
corresponding to, the Foreign Holder if the transaction is subject to the
general tax regime, that is, the First Category Tax, and the Withholding Tax,
with a credit of the First Category Tax already paid. The Foreign Holder would
be entitled to request a tax refund for any amounts withheld in excess of the
taxes actually due, in April of the following year upon filing its corresponding
tax return. Gain recognized in the transfer of common shares that have a high
presence in the stock exchange, however, is not subject to capital gains tax in
Chile, provided that the common shares are transferred in a local stock
exchange, in other authorized stock exchanges or within the process of a public
tender of common shares governed by the Securities Market Law.




Chile’s
Internal Revenue Service Ruling No224 (issued on January 30, 2008) confirmed
that capital gains stemming from the sale of shares with high stock-market
presence acquired through the exchange of American Depositary Receipts (ADRs)
for shares is not subject to capital gains tax in Chile. Such exemption is
applicable provided that the purchase of such ADR certificates has been made at
stock exchanges duly authorized by SVS (which includes the New York Stock
Exchange).




The
common shares must also have been acquired either in a stock exchange, within
the process of a public tender of common shares governed by the Securities
Market Law, in an initial public offer of common shares resulting from the
formation of a corporation or a capital increase of the same, or in an exchange
of convertible bonds. Shares are considered to have a high presence in the stock
exchange when they:




·
            are
      registered in the Securities
Registry;




·
            are
      registered in a Chilean Stock exchange;
and




·
            have
      an adjusted presence equal to or above
25%.




To
calculate the adjusted presence of a particular share, the aforementioned
regulation first requires a determination of the number of days in which the
operations regarding the stock exceeded, in Chilean pesos, the equivalent of 200
UF (US$7,900 as of February 28, 2010) within the previous 180 business days of
the stock market. That number must then be divided by 180, multiplied by 100,
and expressed in a percentage value. This tax regime does not apply if the
transaction involves an amount of shares that would allow the acquirer to take
control of the publicly traded corporation, in which case the ordinary tax
regime referred to in the previous paragraph will apply, unless the transfer is
part of a tender offer governed by the Securities Market Law or the transfer is
done on a Chilean stock exchange, without substantially exceeding the market
price.




Capital
gains obtained in the sale of shares that are publicly traded and have a high
presence in a stockexchange are
also exempt from capital gains tax in Chile when the sale is made by “foreign
institutional investors” such as mutual funds and pension funds, provided that
the sale is made in a stock exchange or in accordance with the provisions of the
Securities Market Law, or in any other form authorized by the SVS. To qualify as
a foreign institutional investor, an entity must be formed outside of Chile, not
have a domicile in Chile, and must be at least one of the
following:




·
            a
      fund that offers its common shares or quotas publicly in a country with
      investment grade public debt, according to a classification performed by
      an international risk classification entity registered with the
      SVS;




·
            a
      fund registered with a regulatory agency or authority from a country with
      investment grade public debt, according to a classification performed by
      an international risk classification entity registered with the SVS,
      provided that its investments in Chile constitute less than 30% of the
      share value of the fund, including deeds issued abroad representing
      Chilean securities, such as ADRs of Chilean
  companies;




109
 Table of Contents


·
            a
      fund whose investments in Chile represent less than 30% of the share value
      of the fund, including deeds issued abroad representing Chilean
      securities, such as ADRs of Chilean companies, provided that not more than
      10% of the share value of the fund is directly or indirectly owned by
      Chilean residents;




·
            a
      pension fund that is formed exclusively by natural persons that receive
      pensions out of an accumulated capital in the
  fund;




·
            a
      Foreign Capital Investment Fund, as defined in Law No. 18,657, in which
      case all quota holders shall be Chilean residents or domestic
      institutional investors; or




·
            any
      other foreign institutional investor that complies with the requirements
      set forth in general regulations for each category of investor or prior
      information from the SVS and the Chilean
IRS.




The
foreign institutional investor must not directly or indirectly participate in
the control of the corporations issuing the shares it invests in, nor possess or
participate in 10% or more of the capital or the profits of such
corporations.




Another
requirement for the exemption is that the foreign institutional investor must
execute a written contract with a bank or a stock broker incorporated in Chile.
In this contract, the bank or stock broker must undertake to execute purchase
and sale orders, verify the applicability of the tax exemption or tax
withholding and inform the Chilean IRS of the investors it works with and the
transactions it performs. Finally, the foreign institutional investor must
register with the Chilean IRS by means of a sworn statement issued by such bank
or stock broker.




The tax
basis of common shares received in exchange for ADRs will be the acquisition
value of the common shares on the date of exchange duly adjusted for local
inflation. The valuation procedure set forth in the deposit agreement, which
values common shares which are being exchanged at the highest price at which
they trade on the Santiago Stock Exchange on the date of the exchange, will
determine the acquisition value for this purpose. Consequently, the surrender of
ADRs for common shares and the immediate sale of the common shares for the value
established under the Deposit Agreement will not generate a capital gain subject
to taxation in Chile, provided that the sale of the common shares is made on the
same date on which the exchange of ADRs for common shares is recorded, or if the
price of the common shares at the exchange date, as determined above, is higher
than the price at which the common shares are sold.




The
exercise of preemptive rights relating to the common shares will not be subject
to Chilean taxation. Any gain on the sale of preemptive rights relating to the
common shares will be subject to both the First Category Tax and the Withholding
Tax (the former being creditable against the latter).




Other
Chilean Taxes




There are
no Chilean inheritance, gift or succession taxes applicable to the ownership,
transfer or disposition of ADSs by a Foreign Holder, but such taxes generally
will apply to the transfer at death or by gift of the common shares by a Foreign
Holder. There are no Chilean stamp, issue, registration or similar taxes or
duties payable by Foreign Holders of ADSs or common shares.




Withholding
Tax Certificates




Upon
request, we will provide to Foreign Holders appropriate documentation evidencing
the payment of the Withholding Tax (net of the applicable First Category
Tax).




United
States Federal Income Tax Considerations




The
following is a summary of certain U.S. federal income tax considerations that
may be relevant to the purchase, ownership and disposition of our common shares
and ADSs by a beneficial owner that is: (i) a citizen or resident of the United
States; (ii) a U.S. domestic corporation; (iii) an estate the income of which is
subject to U.S. federal income tax regardless of its source; or (iv) a trust if
a court within the United States is able to exercise primary supervision over
its administration and one or more U.S. persons have the authority to control
all substantial decisions of the trust (or otherwise if the trust has a valid
election in effect under current Treasury regulations to be treated as a U.S.
person). For purposes of this discussion, we refer to these owners of common
shares and ADSs as U.S. Holders. If a partnership holds common shares or ADSs,
the tax treatment of a partner will generally depend upon the status of the
partner and upon the activities of the partnership. A prospective investor who
is a partner of a partnership holding our common shares or ADSs should consult
its own tax advisor.




110
 Table of Contents


This
summary is not a comprehensive discussion of all of the tax considerations that
may be relevant to your decision to purchase ADSs or common shares. In
particular, this discussion is directed only to U.S. Holders that will hold ADSs
or common shares as capital assets and it does not address any special U.S.
federal income tax consequences that may be applicable to U.S. Holders that are
subject to special treatment under the U.S. Internal Revenue Code of 1986, as
amended, commonly referred to as the “Code,” such as banks, brokers or dealers
in securities or currencies, traders in securities electing to mark to market,
financial institutions, life insurance companies, tax exempt entities, holders
that own or are treated as owning 10% or more of our voting common shares,
persons holding common shares or ADSs as part of a hedging or conversion
transaction or a straddle, or persons whose functional currency is not the U.S.
dollar. Prospective purchasers are advised to satisfy themselves as to the
overall U.S. federal, state and local tax consequences of their ownership of
ADSs or common shares by consulting their own tax advisers.




The
statements of U.S. federal income tax laws set out below are based on the laws
in force as of the date hereof and may be subject to changes in U.S. federal
income tax law occurring after that date, including changes that may have
retroactive effect.




ADRs




In
general, if you are a U.S. Holder of ADRs evidencing our ADSs, you will be
treated, for U.S. federal income tax purposes, as the beneficial owner of the
underlying common shares that are represented by those ADSs and evidenced by
those ADRs.




Taxation
of Dividends




If you
are a U.S. Holder, distributions of cash or property (other than common stock,
if any, distributed pro rata to all of our shareholders, including holders of
ADSs) paid out of our current or accumulated earnings and profits (as determined
for U.S. federal income tax purposes) with respect to common shares or ADSs,
including the net amount of the Chilean Withholding Tax withheld on the
distribution (after taking into account the credit for the First Category Tax),
will be includible in your gross income as ordinary income on the day on which
you receive the dividends, in the case of common shares, or the date the
depositary receives the dividends, in the case of common shares represented by
ADSs, and will not be eligible for the dividends-received deduction allowed to
corporations under the Code. If you are a U.S. Holder, dividends paid in pesos
generally will be includible in your gross income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day you receive
the dividends, in the case of common shares, or the date the depositary receives
the dividends, in the case of common shares represented by ADSs. U.S. Holders
should consult their own tax advisers regarding the treatment of foreign
currency gain or loss, if any, on any pesos received which are converted into
U.S. dollars after they are received. To the extent that the amount of any
distribution exceeds our current and accumulated earnings and profits as
determined for U.S. federal income tax purposes, such excess amounts will be
treated first as a nontaxable return of capital to the extent of such U.S.
Holder’s tax basis in the common shares or ADSs and, thereafter, as capital
gain.




Subject
to certain exceptions for short-term and hedged positions, the U.S. dollar
amount of dividends received by an individual prior to January 1, 2011 with
respect to the ADSs will be subject to taxation at a maximum rate of 15% if the
dividends are “qualified dividends.” Dividends paid on the ADSs will be treated
as qualified dividends if:




·
            the
      ADSs are readily tradable on an established securities market in the
      United States; and




·
            we
      were not, in the year prior to the year in which the dividend was paid,
      and are not, in the year in which the dividend is paid, a passive foreign
      investment company (“PFIC”).




The ADSs
are listed on the New York Stock Exchange, and will qualify as readily tradable
on an established securities market in the United States so long as they are so
listed. Moreover, based on our audited financial statements and relevant market
and shareholder data, we believe that we were not treated as a PFIC, for U.S.
federal income tax purposes with respect to our 2008 or 2009 taxable year. In
addition, based on our audited financial statements and our current expectations
regarding the value and nature of our assets, the sources and nature of our
income, and relevant market and shareholder data, we do not anticipate becoming
a PFIC for our 2010 taxable year. However, there can be no assurance in this
regard because the PFIC determination is made annually and is based on the
portion of our assets (including goodwill) and income that is characterized as
passive under the PFIC rules.




111
 Table of Contents


Based on
existing guidance, it is not clear whether dividends received with respect to
the common shares will be treated as qualified dividends, because the common
shares are not themselves listed on a U.S. exchange. In addition, the U.S.
Treasury has announced its intention to promulgate rules pursuant to which U.S.
Holders of ADSs or common shares and intermediaries through whom such securities
are held will be permitted to rely on certifications from issuers to establish
that dividends are treated as qualified dividends. Because such procedures have
not yet been issued, it is not clear whether we will be able to comply with
them. Holders should consult their own tax advisers regarding the availability
of the reduced dividend tax rate in light of their own particular
circumstances.




Subject
to generally applicable limitations and conditions under the Code, Chilean
Withholding Tax withheld from dividends (after taking into account the credit
for the First Category Tax, when it is available) will be treated as a foreign
income tax eligible for credit against a U.S. Holder’s U.S. federal income tax
liability. If the amount of Chilean Withholding Tax initially withheld from a
dividend is determined to be excessive, however (as described above under
“Taxation—Chilean Taxation—Cash Dividends and Other Distributions”), the excess
tax will not be creditable. For purposes of calculating the foreign tax credit,
dividends paid on the common shares will generally constitute foreign source
“passive income.” U.S. Holders are not allowed foreign tax credits for
withholding taxes imposed in respect of certain short-term or hedged positions
in securities and may not be allowed foreign tax credits in respect of
arrangements in which their expected economic profit is insubstantial. U.S.
Holders should consult their own advisers concerning the implications of these
rules in light of their particular circumstances.




U.S.
Holders that receive distributions of additional common shares or rights to
subscribe for common shares as part of a pro rata distribution to all our
shareholders generally will not be subject to U.S. federal income tax in respect
of the distributions.




Taxation
of Capital Gains or Losses




If you
are a U.S. Holder, gain or loss realized on the sale, exchange or other taxable
disposition of ADSs or common shares, generally will be capital gain or loss and
generally will be long-term capital gain or loss if the ADSs or common shares
have been held for more than one year. Long-term capital gain realized by an
individual  U.S. Holder generally is subject to a maximum tax rate of
15%. The deductibility of capital losses is subject to significant
limitations.




Any gain
or loss a U.S. Holder realizes on such a sale, exchange or other taxable
disposition will generally be treated as U.S. source income or loss for U.S.
foreign tax credit purposes. Consequently, in the case of a disposition of
common shares (which, unlike a disposition of ADSs, could be taxable in Chile),
a U.S. Holder generally would not be able to utilize foreign tax credits in
respect of any Chilean tax imposed on the disposition (see “Taxation—Chilean
Taxation—Capital Gains”) unless the U.S. Holder has other income from foreign
sources, in the appropriate category, for purposes of the foreign tax credit
limitation rules. U.S. Holders should consult their own tax advisers regarding
the application of the foreign tax credit limitation rules to their investment
in, and disposition of, the ADSs and common shares.




Deposits
and withdrawals of common shares by U.S. Holders in exchange for ADSs will not
result in the realization of gain or loss for U.S. federal income tax
purposes.




Backup
Withholding and Information Reporting




Dividends
paid on, and proceeds from the sale or other disposition of, the ADSs or common
shares to a U.S. Holder generally may be subject to the information reporting
requirements of the Code and may be subject to backup withholding unless the
U.S. Holder provides an accurate taxpayer identification number and makes any
other required certification or otherwise establishes an exemption. Backup
withholding is not an additional tax. The amount of any backup withholding from
a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s
U.S. federal income tax liability and may entitle the U.S. Holder to a refund,
provided that certain required information is timely furnished to the U.S.
Internal Revenue Service.




112
 Table of Contents


A holder
that is a foreign corporation or a non-resident alien individual may be required
to comply with certification and identification procedures in order to establish
its exemption from information reporting and backup withholding.




In
addition, U.S. Holders should be aware that recently enacted legislation imposes
new reporting requirements with respect to investments in certain foreign
financial assets, if the aggregate value of all such assets exceeds
$50,000.  Investors who fail to report required information could
become subject to substantial penalties. Potential investors are encouraged to
consult with their own tax advisors regarding the possible implications of this
legislation on their investment in ADSs or common shares.




HOLDERS
AND/OR PROSPECTIVE PURCHASERS OF ADSs OR COMMON SHARES SHOULD CONSULT THEIR OWN
TAX ADVISERS AS TO THE CHILEAN, U.S. FEDERAL INCOME OR OTHER TAX CONSEQUENCES OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR COMMON SHARES, INCLUDING, IN
PARTICULAR, THE EFFECT OF ANY NON-U.S., STATE OR LOCAL TAX LAWS.




Documents
on Display




We are
subject to the information requirements of the Exchange Act, as amended. In
accordance with these requirements, we file reports, including annual reports on
Form 20-F and other information with the SEC. These materials, including this
annual report and the exhibits hereto, may be inspected and copied at the SEC’s
public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. In addition, some of our
SEC filings, including those filed on and after February 19, 2002, are also
available to the public through the SEC’s website at www.sec.gov.




ITEM
11.            QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




General




Given the
nature of its business, LAN is exposed mainly to three market
risks:




·
            Jet
      fuel price fluctuations;




·
            Interest
      rate fluctuations; and




·
            Exchange
      rate fluctuations.




The level
of exposure to these risks is periodically assessed to determine the most
effective mechanisms to hedge against them. LAN purchases derivative instruments
in foreign markets to offset market risk exposure, typically utilizing a mixture
of call options, collar structures and fixed price swaps agreements. LAN does
not hold derivative contracts for trading purposes.




Risk
of Fluctuations in Jet Fuel Prices




Jet fuel
price fluctuations are largely dependent on supply and demand for crude oil,
OPEC decisions, refinery capacities, stock levels of crude oil and geopolitical
factors. In order to minimize the risk of jet fuel price fluctuations, LAN
hedges against such risk using derivative instruments.




Because
jet fuel is not traded in organized futures exchanges, there are limited options
to hedge against jet fuel price fluctuations. However, LAN deems financial
derivative instruments in other commodities such as crude oil or heating oil,
useful for decreasing its exposure to jet fuel price increases.




LAN uses
swaps, calls and collars to hedge against fuel prices fluctuations. Swap
contracts allow us to eliminate the volatility risk by fixing the price. In a
typical swap contract, LAN is compensated if the market price is above the fixed
price at certain predetermined dates or needs to make disbursements if the
market price is below the fixed price in those dates. Call options give us
protection against rise in prices. Call option are only exercised when the
market price is above the predetermined strike price thus providing with
protection with no downward risk. Collars are a combination of call and put
options that limit the range of possible positive or negative outcomes to a
specific price range. Above the predetermined ceiling price, LAN is compensated
for the difference between the market price and the ceiling price. For any price
below the predetermined floor price, LAN has to disburse the difference between
the market price and the floor price.




113
 Table of Contents


We are
exposed to fuel hedging transaction losses if the counterparties default. To
manage this credit risk, we select counterparties based on their credit ratings
and monitor our relative market position on a daily basis. For more information
see “—Our operations are subject to fluctuations in the supply and cost of jet
fuel which could materially impact our business” under Item 3.




During
2009 and 2008 we entered into a mix of swaps, calls, zero cost collars and
collars option contracts on WTI with investment banks and other financial
entities for notional fuel purchases of 205.2 million gallons and 218.5 million
gallons respectively (which represent 45.7% and 48.0%  of our total
fuel consumption, respectively). The combined result of these contracts was a
loss of US$128.7 million in 2009, compared to a gain of US$35.4 million in 2008.
As of December 31, 2009, the fair value of our outstanding fuel related
derivative contracts was estimated to be a positive US$13.6
million.




114
 Table of Contents




Fair
      value by quarter, as of December 31, 20091Q10
                
                
                2Q10
                
                
                3Q10
                
                
                4Q10
                
                Total(in
      US$ millions)Fair
      value of outstanding fuel derivative contracts
                
                
                (0.3
                )
                
                
                7.6
                
                
                
                3.9
                
                
                
                2.2
                
                13.6





Gains and
losses on the hedging contracts outlined above are recognized as a cost of sales
in the income statement when the fuel subject to the hedge is consumed. Premiums
paid related to fuel derivative contracts are recorded as prepaid expenses
(current assets) and amortized over the respective contract
periods.




Under
IFRS, the fair value of the hedging derivatives is booked as a non-current asset
or liability if the remaining maturity of the item hedged is over 12 months, and
as a current asset or liability if the remaining term of the item hedged is less
than 12 months. The fair value of the derivative contracts is deferred within an
equity reserve account. Please see Note 2.9 to our audited consolidated
financial statements.




Sensitivity
analysis




A drop in
fuel prices positively affects the Company through a reduction in costs.
However, this drop negatively affects hedging contracts as these are entered
into to protect the Company against the risk of a rise in prices. The Company’s
policy consists of not hedging against a portion of its fuel price risk in order
to remain competitive in the event of a drop in prices.




As the
current positions do not represent changes in cash flows but a variation in the
exposure to the market value, the Company’s current hedge positions have no
impact on income (they are booked as cash flow hedge contracts, so a variation
in fuel prices has an impact on the Company’s net equity).




The
following table shows the sensitivity analysis of the financial instruments
reflecting reasonable changes in fuel prices and their effect on equity. The
term used for the projection was December 31, 2010, the final date of the last
current fuel hedge contract. The calculations were made considering a parallel
movement of US$ 5 per barrel in the curve of the WTI crude futures benchmark
price at the end of December 2009 and 2008 and January 1, 2008.





Position as of December 31 (effect on equity),
                
                
                Position as of January 1
                    (effect on equity),WTI benchmark price
                
                2009
                
                
                2008
                
                
                2008(US$
      per barrel)
                
                (millions
      of US$)+5
                
                
                +14.6
                
                
                
                +15.7
                
                
                
                +1.2-5
                
                
                -13.6
                
                
                
                -16.1
                
                
                
                -1.0





The
Company seeks to reduce the risk of increases in fuel price in order to maintain
its competitivity in the event of a sharp price fall. The Company therefore uses
hedge instruments like swaps, options and collars to partially hedge against
fluctuation in fuel prices.




During
the periods presented, the Company has not recorded amounts for ineffectiveness
in the consolidated income statement pursuant to IAS 39 (IFRS principles for
recognizing and measuring financial instruments).




Given the
fuel hedge structure as of December 31, 2009, which considers a hedge-free
portion, a vertical fall by US$ 5 in the WTI benchmark price (the monthly daily
average) for each month would have meant a saving of approximately US$ 31,6
million in the cost of the Company’s total fuel consumption.




Risk
of Fluctuations in Interest Rates




As of
December 31, 2009, LAN’s debt amounted to US$2,775 million in interest bearing
loans. LAN uses swaps and caps to reduce the impact of an increase of interest
rates. As of December 31, 2009, 95% of our outstanding debt was subject to a
fixed rate either through a fixed rate loan or through hedging agreements
containing a floating to fix derivative instrument.




115
 Table of Contents


Given the
percentage of our standing debt that is hedged and the instruments that we use
to hedge, an increase in interest rates has no material impact on LAN’s costs.
Under interest rate swap contracts in case of decreases in interest rates, LAN
has to pay a compensation equal to the difference between the fixed and floating
rate times the outstanding debt under the specific contract. However, under such
contracts the interest rate has a floor preventing LAN from incurring in major
financial losses.




In May
2001, we entered into six swap contracts in order to hedge our floating
rate-exposure on US$331 million of our debt. Pursuant to these contracts, we pay
or receive, depending on the case, the difference between the agreed fixed rate
and the floating rate, calculated on the notional amount of each contract. In
October 2005, the Company entered into two interest rate swap contracts in order
to hedge the LIBOR exposure of the financing of two Airbus A319 aircraft
delivered in 2005.




In July
2003, we purchased four interest rate cap contracts for a total notional amount
of US$127.7 million. These caps are intended to limit the Company’s exposure
arising from variable-rate debt. These contracts qualify as cash flow hedges
with no ineffectiveness associated to them due to the fact that all critical
terms of the debt and the caps match perfectly.  As of December 31,
2009, the fair value of these contracts has been estimated at US$575.7
thousand.




In July
2003, the Company purchased two additional interest rate cap contracts. These
caps are intended to limit the exposure of LIBOR-linked operational lease
payments on aircraft received during 2004. As of December 2009, the fair value
of these contracts at year-end amounted to US$514.2 thousand.




In April
2004, the Company purchased two additional interest rate Cap contracts. These
caps are intended to limit the exposure of LIBOR-linked operational lease
payments on aircraft received during 2005.  As of December 31, 2009,
the fair value of these contracts at year-end amounted to US$547.1
thousand.




In 2005,
the Company purchased three additional interest rate Cap contracts. These
contracts are intended to limit the exposure of LIBOR-linked financing on
aircraft delivered in 2005 and 2006. As of December 31, 2009, the fair
value of these contracts at year-end amounted US$31.5 thousand.




The
premiums paid on the cap were allocated to individual caplets and recognized in
the income statement throughout the term of each contract. Under IAS 39 these
derivatives qualify as cash flow hedges even though some ineffectiveness exists
as the notional amount over which some caps are calculated is different from the
one used to determine the interest and lease payments on the aircraft. For IFRS
purposes, there was no amount of ineffectiveness recorded in earnings because
the change in fair value of the perfect hypothetical option was greater than the
change in the fair value of the Company’s option.




In the
first half of 2006, the Company also entered into ten fixed-floating interest
rate swap contracts in order to hedge the variable interest payments on the
unhedged portion of existing debt of approximately US$46.7 million.
Additionally, in May 2006 the Company entered into thirty-two forward starting
interest rate swap contracts in order to hedge the LIBOR exposure of the
financing of thirty-two A320-Family Aircraft to be delivered between 2006 and
2009. Of these thirty-two contracts, twenty-five were contracted directly with
the debt provider, while the remaining seven swaps were contracted with a
different institution. As of December 31, 2009, all of the thirty-two aircraft
had already been delivered to the Company.  Of those, twenty-five were
converted into fixed interest rate debt.




In June
2006 the Company entered into eleven forward starting interest rate swap
contracts in order to hedge the LIBOR exposure of the financing of 11 Boeing
767-300 ER aircraft to be delivered between 2006 and 2009. All of those aircraft
have already been delivered to the Company, and the corresponding swap and loan
were restructured into fixed rate debt.




In August
2007 the Company entered into three forward starting interest rate swaps
contracts in order to hedge the LIBOR exposure of the financing of three Boeing
767-300 ER aircraft to be delivered in 2009. This debt allows for conversion of
the variable interest rate loan into fixed interest rate debt by capital markets
financing after the arrival of the aircrafts. As of February 28, 2010, the three
aircraft had been delivered to the Company. While the first aircraft was
refinanced through a fixed interest rate bond issued in December 2009, the
second was refinanced at a fixed rate using an interest rate swap and the third
was refinanced through a fixed interest rate bond issued in April 2010. In
September 2007, the Company entered into another three forward starting interest
rate swaps contracts in order to hedge the LIBOR exposure of the financing of
three Airbus A320-Family Aircraft to be delivered in 2010.




116
 Table of Contents


In June
2008, the Company entered into fourteen forward starting interest rate swaps
contracts in order to hedge the LIBOR exposure of the financing of 12
A320-Family Aircraft to be delivered in 2010 and 2011, two Boeing 767-300 to be
delivered in 2011 and two Boeing 787-8 to be delivered in 2012.




As of
December 31, 2009, the fair value of all the aforementioned interest rate swaps
was estimated to be a negative US$69.8 million.




Under
IFRS, the positive fair value of these interest rate swaps is reflected in the
balance sheet as hedging assets and the negative fair value of these agreements
is reflected as hedging liabilities.




The
utilization of the aforementioned hedging instruments, combined with fixed
interest rate financing for two Boeing 767-300 F aircraft delivered in 2001, 17
Boeing 767-300 Passenger and Freighter aircraft delivered in 2005, 2006, 2007,
2008 and 2009 and 32 Airbus A320-Family Aircraft delivered in 2006, 2007, 2008
and 2009, has enabled the Company to have a predictable interest rate costs,
reducing the cash volatility. As of December 2009, the average interest of all
of our outstanding interest-bearing long-term debt rate was 5.0%.




The
following table summarizes our principal payment obligations on our
interest-bearing long-term debt and capital leases as of December 31, 2009 and
the related average interest rates. The average interest rates for U.S. dollar
liabilities are calculated based on the prevailing interest rate on December 31,
2009 for each loan.




Principal
      payment obligations by year of expected maturity(1)(in
      US$ millions)Liabilities
              
              Average
                  interest
                  rate(2)
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
              
              
              Thereafter
                  2014U.S.
      dollars
              
              
              5.0
              %
              
              
              365.0
              
              
              
              452.0
              
              
              
              378.2
              
              
              
              264.0
              
              
              
              245.2
              
              
              
              1075.4





(1)
            At
      cost, this approximates market
value.


(2)
            Average
      interest rate means the average prevailing interest rate on December 31,
      2009 on our debt.




The
following table shows the sensitivity of changes in financial obligations that
are not hedged against interest-rate variations.  These changes are
considered reasonably possible based on current market conditions.




Position as of December 31 (effect on pre-tax earnings)Increase (decrease)
                    in Libor
                
                2009
                
                
                2008In
      Libor
                
                (millions
      of US$)+100
      basis points
                
                
                (0.87
                )
                
                
                (0.65
                )-100
      basis points
                
                
                0.87
                
                
                
                0.65




Changes
in market conditions produce a change in the valuation of current financial
instruments hedging against fluctuations in interest rates, causing an effect on
the Company’s equity (because they are booked as cash-flow hedges). These
changes are considered reasonably possible based on current market conditions.
The calculations were made vertically increasing (decreasing) 100 basis points
of the three-month Libor futures curve.




Position as of December 31 (effect on equity),
                      
                      
                      Position as of January 1
                          (effect on equity),Increase (decrease
                          in three month Libor)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2008Future rates
                      
                      (millions of US$)+100
      basis points
                      
                      
                      49,64
                      
                      
                      
                      63,37
                      
                      
                      
                      59,2-100
      basis points
                      
                      
                      (53,23
                      )
                      
                      
                      (68,94
                      )
                      
                      
                      (64,2
                      )


117
 Table of Contents


During
the periods presented, the company has not recorded amounts for ineffectiveness
in the consolidated income statement pursuant to IAS 39.




There are
market-related limitations in the method used for the sensitivity analysis.
These limitations derive from the fact that the levels indicated by the futures
curves may not be necessarily met and may change in each period.




Risk
of Variation in Foreign Currency Exchange Rates




LAN sells
most of its services in U.S. dollars (or prices equivalent to the U.S. dollar),
and a large part of its expenses are denominated in U.S. dollars (or its
equivalents), particularly fuel costs, aeronautic charges, aircraft leases,
insurance and aircraft components and accessories. Of the Total expenses, the
main item denominated in local currencies is Remunerations. During 2009, 80% of our operating revenues
and 65% of our operating
expenses were denominated in U.S. dollars. However, because we conduct business
in local currencies in several countries, we face the risk of variations in
foreign currency exchange rates. A depreciation of the Chilean peso, the
Brazilian real, the Argentine peso, the Mexican peso, the Peruvian nuevo sol,
the Venezuelan bolivar or the euro against the U.S. dollar could have an adverse
effect on us as part of our revenues and receivables are denominated in those
currencies. LAN has entered into currency forward contracts in order to convert
its deposit in Chilean pesos to U.S. dollars. As of December 31, 2009 we had
foreign exchange forward contracts for a notional amount of US$367 million with a market
positive value of US$0.7
million.




During
the first half of 2009, the Company entered into foreign exchange swaps for a
notional amount of US$171 million in order to hedge future cash flows of euros
and Chilean pesos. For accounting purposes, the market value of this position
was reflected in hedging assets, with a market value of positive US$20 million
as of December 31, 2009.




Our
foreign currency exchange exposure pertaining to our balance sheet as of
December 31, 2009 was as follows:




US
                    dollars
                
                
                % of
                    total
                
                
                Chilean
                    pesos
                
                
                % of
                    total
                
                
                Other
                    currencies
                
                
                % of
                    total
                
                
                TotalCurrent
      assets
                
                
                729,523
                
                
                
                51.78
                
                
                
                491,710
                
                
                
                34.90
                
                
                
                187,738
                
                
                
                13.32
                
                
                
                1,408,971Other
      assets
                
                
                4,354,052
                
                
                
                99.79
                
                
                
                8,415
                
                
                
                0.19
                
                
                
                534
                
                
                
                0.01
                
                
                
                4,363,001Total
      assets
                
                
                5,083,575
                
                
                
                88.07
                
                
                
                500,125
                
                
                
                8.66
                
                
                
                188,272
                
                
                
                3.26
                
                
                
                5,771,972Current
      liabilities
                
                
                1,262,705
                
                
                
                82.89
                
                
                
                130,378
                
                
                
                8.56
                
                
                
                130.256
                
                
                
                8.55
                
                
                
                1,523,339Long-term
      liabilities
                
                
                2,964,870
                
                
                
                94.34
                
                
                
                175,657
                
                
                
                5.59
                
                
                
                2,180
                
                
                
                0.07
                
                
                
                3,142,707Total
      liabilities and shareholders’ equity
                
                
                5,333,501
                
                
                
                92.40
                
                
                
                306,035
                
                
                
                5.30
                
                
                
                132,436
                
                
                
                2.29
                
                
                
                5,771,972




For more
information on Market Risk, see Note 4 “Financial Risk Management” to our
audited consolidated financial statements




ITEM 12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES




12.D.3
Fees and Charges for ADR Holders




The Bank
of New York Mellon, as depositary, collects its fees for delivery and surrender
of ADSs directly from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them. The depositary
collects fees for making distributions to investors by deducting those fees from
the amounts distributed or by selling a portion of the distributable property to
pay the fees. The depositary may also collect its annual fee for depositary
services by deductions from cash distributions, by directly billing investors or
by charging the book-entry system accounts of participants acting for them. The
depositary may generally refuse to provide fee-attracting services until its
fees for those services are paid.




118
 Table of Contents




Persons
      depositing or withdrawing shares must pay:
              
              For:US$5.00
      (or less) per 100 ADSs (or portion of 100 ADSs)
              
              •
      Issuance of ADSs, including issuances resulting from a distribution of
      shares or rights or other property
                
                •
      Cancellation of ADSs for the purpose of withdrawal, including if the
      deposit agreement terminatesUS$.02
      (or less) per ADS
              
              •
      Any cash distribution to ADS registered holdersA
      fee equivalent to the fee that would be payable if securities distributed
      had been shares and the shares had been deposited for issuance of
      ADSs
              
              •
      Distribution of securities distributed to holders of deposited securities
      which are distributed by the depositary to ADS registered
      holdersUS$.02
      (or less) per ADSs per calendar year
              
              •
      Depositary servicesRegistration
      or transfer fees
              
              •
      Transfer and registration of shares on the depositary’s  share
      register to or from the name of the depositary or its agent when investors
      deposit or withdraw sharesExpenses
      of the depositary
              
              •
      Cable, telex and facsimile transmissions
                •
      Conversion of foreign currencies into U.S. dollarsTaxes
      and other governmental charges the depositary or the custodian have to pay
      on any ADS or share underlying an ADS, such as stock transfer taxes, stamp
      duty or withholding taxes
              
              •
      As necessaryAny
      charges incurred by the depositary or its agents for servicing the
      deposited securities
              
              •
      As necessary





12.D.4
Fees and Direct and Indirect Payments Made by the Depositary to the Foreign
Issuer





Past
Fees and Payments





From
January 1, 2009 to February 28, 2010, the Company received from the depositary
$629,460.78 for continuing annual stock exchange listing fees, standard
out-of-pocket maintenance costs for the ADRs (consisting of the expenses of
postage and envelopes for mailing annual and interim financial reports, printing
and distributing dividend checks, electronic filing of U.S. Federal tax
information, mailing required tax forms, stationery, postage, facsimile, and
telephone calls), any applicable performance indicators relating to the ADR
facility, underwriting fees and legal fees.





Future
Fees and Payments





The
depositary has agreed to reimburse the Company for expenses incurred by the
Company in connection with the establishment and maintenance of the ADS program.
The depositary has agreed to reimburse the Company for its continuing annual
stock exchange listing fees. The depositary has also agreed to pay the standard
out-of-pocket maintenance costs for the ADRs, which consist of the expenses of
postage and envelopes for mailing annual and interim financial reports, printing
and distributing dividend checks, electronic filing of U.S. Federal tax
information, mailing required tax forms, stationery, postage, facsimile, and
telephone calls. The depositary has also agreed to annually reimburse the
Company for certain investor relationship programs or special investor
relationship promotional activities. In certain instances, the depositary has
agreed to provide additional payments to the Company based on any applicable
performance indicators relating to the ADR facility. There are limits on the
amount of expenses for which the depositary will reimburse the Company, but the
amount of such reimbursements is not necessarily tied to the amount of fees the
depositary collects from investors.


119
 Table of Contents


PART
II




ITEM 13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES




Not
applicable.




ITEM 14.
            MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS




Not
applicable.




ITEM 15.
            CONTROLS
      AND PROCEDURES




(a)           Controls and Procedures. We
carried out an evaluation under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2009. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon our evaluation, our chief executive officer and chief
financial officer concluded that the disclosure controls and procedures, as of
December 31, 2009, were effective in providing reasonable assurance that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act, as amended, is recorded, processed, summarized and
reported within the time periods specified in the applicable rules and forms,
and that it is accumulated and communicated to our management including our
Chief Executive Officer and Chief Financial Officer as appropriate to allow
timely decisions regarding required disclosure.




(b)           Management’s annual report on
internal control over financial reporting.




The
management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, as amended.




The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of internal control to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, and that the
degree of compliance with the policies or procedures may
deteriorate.  Lan Airlines’ management, including the Chief Executive
Officer and the Chief Financial Officer, has assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009
based on the criteria established in Internal Control - “Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and, based on such criteria, Lan Airlines’ management has concluded
that, as of December 31, 2009, the Company’s internal control over financial
reporting is effective. The Company’s internal control over financial reporting
effectiveness as of December 31, 2009 has been audited by PricewaterhouseCoopers
Consultores, Auditores y Companía Limitada, an independent registered public
accounting firm, as stated in their report included herein.




120
 Table of Contents


(c)           Attestation report of the registered
public accounting firm. See page F-2 of our audited consolidated
financial statements.




(d)           Changes in internal control over
financial reporting. There has been no change in our internal control
over financial reporting during 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




ITEM 16.
            RESERVED




ITEM 16A.
            AUDIT
      COMMITTEE FINANCIAL EXPERT




Our Board
of Directors has designated Jorge Awad Mehech, as an “audit committee financial
expert” within the meaning of this Item 16A. See “Item 6. Directors, Senior
Management and Employees—Directors.”




ITEM 16B.
            CODE
      OF ETHICS




We have
adopted a code of ethics and conduct, as defined in Item 16B of Form 20-F under
the Exchange Act. Our code of ethics applies to our senior management, including
our chief executive officer, our chief financial officer and our chief
accounting officer, as well as to other employees. Our code is freely available
online at our website, www.lan.com, under the heading “Corporate Governance” in
the Investor Relations page. In addition, upon written request, by regular mail,
to the following address: Lan Airlines S.A., Investor Relations Department,
attention: Investor Relations, Av. Presidente Riesco 5711, Piso 20, Comuna Las
Condes, Santiago, Chile, or by e-mail at investor.relations@lan.com, we will
provide any person with a copy of it without charge. If we amend the provisions
of our code of ethics that apply to our senior management or to other persons
performing similar functions, or if we grant any waiver of such provisions, we
will disclose such amendment or waiver on our website.




ITEM 16C.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




Audit
and Non-Audit Fees





The
following table sets forth the fees billed to us by our independent auditors,
PricewaterhouseCoopers, during the fiscal years (ended December 31) 2007, 2008
and 2009:





2009
                
                
                2008Audit
      fees
                
                
                1,431.4
                
                
                
                1,323.2Audit-related
      fees
                
                
                0.0
                
                
                
                0.0Tax
      fees
                
                
                0.0
                
                
                
                3.8Other
      fees
                
                
                37.7
                
                
                
                158.8Total
      fees
                
                
                1,469.1
                
                
                
                1,485.8




Audit
fees in the above table are the aggregate fees billed by PricewaterhouseCoopers
in connection with the audit of our annual consolidated financial statements, as
well as the review of other filings and fees related to the audit of the
effectiveness of the Company’s internal controls over financial reporting
required by the Sarbanes-Oxley Act of 2002.




Tax fees
in the above table are fees billed by PricewaterhouseCoopers for tax advice and
tax planning services.




Other
fees in the above table are fees billed by PricewaterhouseCoopers primarily for
training services in IFRS.


121
 Table of Contents


Board
of Directors’ Committee Pre-Approval Policies and Procedures




Since
January 2004, LAN complies with the SEC regulation regarding what type of
additional services PricewaterhouseCoopers is authorized to offer to us. In
addition to this, our Board of Directors’ Committee decided to automatically
authorize those accepted services for an amount of up to 10% of the fees charged
by the auditing firm, and for an amount of up to 50% when adding all those
services together. In case the amount is larger than that, then it will need the
approval of the Board of Directors’ Committee.




ITEM 16D.
            EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES




Not
applicable.




ITEM 16E.
            PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS




Neither
we nor any affiliated purchaser has engaged in share repurchases during the year
ended December 31, 2009.




ITEM
      16F.
            CHANGE
      IN REGISTRANT’S CERTIFYING
ACCOUNTANT




Not
applicable.




ITEM
      16G.
            CORPORATE
      GOVERNANCE




New
York Stock Exchange Corporate Governance Comparison




Pursuant
to Section 303A.11 of the Listed Company Manual of the The New York Stock
Exchange (“NYSE”), we are required to provide a summary of the significant ways
in which our corporate governance practices differ from those required for U.S.
companies under the NYSE listing standards.  We are a Chilean
corporation with shares listed on the Santiago Stock Exchange, the Chilean
Electronic Exchange and the Valparaiso Stock Exchange and ADSs on the
NYSE.  Our corporate governance practices are governed by our bylaws,
the Chilean Corporation Law and the Securities Market Law.




The table
below discloses the significant differences between our corporate governance
practices and the NYSE standards.




NYSE
      Standards
              
              Our
      Corporate Governance PracticeDirector
      Independence.  Majority of board of directors must be
      independent.  §303A.01
              
              Under
      Chilean law, we are not required to have a majority of independent
      directors on our board.Our
      board of directors’ committee (all of whom are members of our board of
      directors) is composed of three directors, two of whom must be independent
      if we have a sufficient number of independent directors on our
      board.The
      definition of independence applicable to us pursuant to the Chilean
      Corporation Law differs in certain respects from the definition applicable
      to U.S. issuers under the NYSE rules.Pursuant
      to Law No. 20,382 on Corporate Governance, which came into effect on
      January 1, 2010, we are also required to have at least one independent
      director.Until
      January 1, 2010, under the Chilean Corporation Law, a director was deemed
      to be independent if such member would have been elected as a Director at
      the Shareholders Meeting after excluding the votes of any controlling
      shareholder or party related to
it.


122
 Table of Contents





NYSE
      Standards
              
              Our
      Corporate Governance PracticeStarting
      on January 1, 2010, directors are deemed to be independent if they have
      not fallen within any of the following categories during the 18 months
      prior to their election: (i) had a relevant relationship, interest or
      dependence on us, our subsidiaries, controlling shareholders, main
      executives, or had served any of the foregoing in a senior position; (ii)
      had a close family relationship with any of the individuals indicated in
      (i); (iii) had served in a non-profit organization which received
      significant funds from the individuals indicated in (i); (iv) had been a
      partner or shareholder (with a direct or indirect participation in excess
      of 10%) in, or had a senior position at a company which has rendered
      significant services to, the individuals indicated in (i); (v) had been a
      partner or shareholder (with a direct or indirect participation in excess
      of 10%) in, or had a senior position at, our main competitors, suppliers
      or clients. In addition, the election of such an independent director is
      subject to a procedure set forth by the cited Corporation
    Law.Executive Sessions.
      Non-management directors must meet regularly in executive sessions without
      management. Independent directors should meet alone in an executive
      session at least once a year. §303A.03
              
              There
      is no similar requirement under our bylaws or under applicable Chilean
      law.Audit committee. Audit
      committee satisfying the independence and other requirements of Rule 10A-3
      under the Exchange Act, as amended, and the more stringent requirements
      under the NYSE standards is required. §§303A.06, 303A.07
              
              We
      are in compliance with Rule 10A-3. We are not required to satisfy the NYSE
      independence and other audit committee standards that are not prescribed
      by Rule 10A-3.Nominating/corporate governance
      committee. Nominating/corporate governance committee of independent
      directors is required. The committee must have a charter specifying the
      purpose, duties and evaluation procedures of the committee. §
      303A.04
              
              We
      are not required to have, and do not have, a nominating/corporate
      governance committee.Compensation committee.
      Compensation committee of independent directors is required, which must
      approve executive officer compensation. The committee must have a charter
      specifying the purpose, duties and evaluation procedures of the committee.
      §303A.05
              
              We
      are not required to have a compensation committee. Pursuant to the Chilean
      Corporation Law, our board of directors’ committee must approve our senior
      management and employee’s compensation.Equity compensation
      plans. Equity compensation plans require shareholder approval,
      subject to limited exemptions.
              
              Under
      the Chilean Corporation Law, equity compensation plans require shareholder
      approval.


123
 Table of Contents





NYSE
      Standards
              
              Our
      Corporate Governance PracticeCode of
      Ethics.  Corporate governance guidelines and a code of
      business conduct and ethics is required, with disclosure of any waiver for
      directors or executive officers.  §303A.10
              
              We
      have adopted a code of ethics and conduct applicable to our senior
      management, including our chief executive officer, our chief financial
      officer and our chief accounting officer, as well as to other
      employees.  Our code is freely available online at our website,
      www.lan.com,
      under the heading “Corporate Governance” in the Investor Relations
      informational page. In addition, upon written request, by regular mail to
      Lan Airlines S.A., Investor Relations Department, attention: Investor
      Relations, Av. Presidente Riesco 5711, Piso 20, Comuna Las Condes,
      Santiago, Chile or by e-mail at Investor.Relations@lan.com, we will
      provide any person with a copy of our code of ethics without charge. We
      are required by Item 16B of Form 20-F to disclose any waivers granted to
      our chief executive officer, chief financial officer, principal accounting
      officer and persons performing similar
  functions.





The
disclosure of the significant ways in which our corporate governance practices
differ from those required for U.S. companies under the New York Stock Exchange
listing standards is also posted on our website and can be accessed at
www.lan.com.


124
 Table of Contents


PART
III




ITEM 17.
            FINANCIAL
      STATEMENTS




Our
financial statements have been prepared in accordance with Item 18
hereof.




ITEM 18.
            FINANCIAL
      STATEMENTS




In
accordance with SVS’s regulations, Chile started a process to adopt IFRS for all
public companies with significant market presence over a three-year period from
2009 to 2011, as follows:




·
            January
      1, 2009: major listed (open) companies were required to report under IFRS
      (i.e. 2009 financial statements had to be prepared using IFRS and had to
      include 2008 comparative information using IFRS). However, IFRS reporting
      may be postponed until 2010 so long as a supplemental “pro forma”
      disclosure of expected impact of moving to IFRS is
    provided;




·
            January
      1, 2010: smaller listed (open) companies, insurance companies, mutual
      funds, pension funds, stock brokers and dealers, insurance agents,
      companies that issue publicly traded debt securities, and large listed
      (open) companies that were unable to move to IFRS in 2009;
    and




·
            January
      1, 2011: other entities registered with the SVS (non-issuers who have
      voluntarily registered).




We have
adopted, and have started reporting under, IFRS as of January 1,
2009.




See pages
F-1 through F-102, incorporated herein. The following is an index of the
financial statements.




Consolidated
Financial Statements for Lan Airlines and its Subsidiaries




PageAudited
      Consolidated Financial StatementsReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Statements of Financial Position at December 31, 2008 and 2009 and at
      January 1, 2008
              F-4Consolidated
      Statement of Income by Function for the years ended December 31, 2008 and
      2009
              F-6Consolidated
      Statement of Comprehensive Income by Function for the years ended December
      31, 2008 and 2009
              F-7Statement
      of Changes in net equity for the year ended December 31, 2008 and
      2009
              F-8Consolidated
      Statements of Cash Flows – Direct Method for the years ended December 31,
      2008 and 2009
              F-10Notes
      to Consolidated Financial Statements at December 31, 2009
              F-11


125
 Table of Contents




ITEM 19.
            EXHIBITS




Documents
filed as exhibits to this annual report:




Exhibit
      No.
              
              Description1.1
              
              By-laws
      of Lan Airlines S.A.2.1
              
              Amended
      and Restated Deposit Agreement among LanChile S.A., The Bank of New York,
      and all registered holders from time to time of any American Depositary
      Receipts, including the form of American Depositary Receipt (incorporated
      by reference to our annual report on Form 20-F (File No. 001-14728) filed
      on June 14, 2004).2.2
              
              Foreign
      Investment Contract among the Central Bank of Chile, LanChile S.A. and
      Citibank, N.A., as depositary, relating to the foreign exchange treatment
      of holders of ADSs (incorporated by reference to our annual report on Form
      20-F (File No. 001-14728) filed on June 14, 2004).2.3
              
              Foreign
      Investment Contract Assignment Agreement among the Central Bank of Chile,
      LanChile S.A., Citibank N.A., as assignor, and The Bank of New York, as
      assignee, relating to the foreign exchange treatment of holders of ADSs
      (incorporated by reference to our annual report on Form 20-F (File No.
      001-14728) filed on June 14, 2004).4.1
              
              Purchase
      Agreements between LanChile S.A. and Airbus Industrie relating to Airbus
      A320-Family Aircraft and Airbus A340 series aircraft (incorporated by
      reference to our annual report on Form 20-F (File No. 001-14728) filed on
      June 24, 2001 and portions of which have been omitted pursuant to a
      request for confidential treatment).4.1.1
              
              Amendment
      No. 2 dated as of October 4, 2005, to the Second A320-Family Purchase
      Agreement dated as of March 20, 1998, as amended and restated, and
      Amendment No. 3 dated as of October 4, 2002, to the Second A320-Family
      Purchase Agreement dated as of March 20, 1998, as amended and restated,
      Letter Agreements No. 1, 2, 3, 4, 5, 6A, 6B, 7, 8 to Amendment No. 2, Side
      Letters to Amendment No. 2 and Side Letter to Amendment No. 3, between Lan
      Airlines S.A. (formerly known as LanChile S.A.) and Airbus S.A.S. (as
      successor to Airbus Industrie) (incorporated by reference to our amended
      annual report on Form 20-F (File No. 001-14728) filed on May 7, 2007 and
      portions of which have been omitted pursuant to a request for confidential
      treatment).4.1.2
              
              Amendment
      No. 3 dated as of March 6, 2007, to the Second A320-Family Purchase
      Agreement dated as of March 20, 1998, as amended and restated, between Lan
      Airlines S.A. and Airbus S.A.S. (incorporated by reference to our amended
      annual report on Form 20-F (File No. 001-14728) filed on April 23, 2007
      and portions of which have been omitted pursuant to a request for
      confidential treatment).4.1.3
              
              Amendment
      No. 5 dated as of December 23, 2009, to the Second A320-Family Purchase
      Agreement dated as of March 20, 1998, as amended and restated, between Lan
      Airlines S.A. and Airbus S.A.S.  Portions of this document have
      been omitted pursuant to a request for confidential treatment. Such
      omitted portions have been filed separately with the Securities and
      Exchange Commission.4.2
              
              Purchase
      Agreement No. 2126 dated as of January 30,1998, between LanChile S.A. and
      The Boeing Company as amended and supplemented, relating to Model
      767-316ER, Model 767-38EF, and Model 767-316F Aircraft (incorporated by
      reference to our amended annual report on Form 20-F (File No. 001-14728)
      filed on December 21, 2004 and portions of which have been omitted
      pursuant to a request for confidential treatment).4.2.1
              
              Supplemental
      Agreements No. 16, 17, 18, 19, 20, 21 and 22 (dated as of November 11,
      2004, January 21, March 10, April 1, April 28, and July 20, 2005, and
      March 31, 2006, respectively) to the Purchase Agreement No. 2126 dated
      January 30, 1998, between Lan Airlines S.A. (formerly known as LanChile
      S.A.) and The Boeing Company, relating to Model 767-316ER, Model 767-38EF,
      and Model 767-316F Aircraft, (incorporated by reference to our amended
      annual report filed on Form 20-F (File No. 001-14728) filed on May 7, 2007
      and portions of which have been omitted pursuant to a request for
      confidential treatment).


126
 Table of Contents





Exhibit
      No.
              
              Description4.2.2
              
              Supplemental
      Agreement No. 23 dated as of March 6, 2007, to the Purchase Agreement No.
      2126, dated as of January 30, 1998, between Lan Airlines S.A. and The
      Boeing Company (incorporated by reference to our amended annual report on
      Form 20-F (File No. 001-14728) filed on April 23, 2007 and portions of
      which have been omitted pursuant to a request for confidential
      treatment).4.2.3
              
              Supplemental
      Agreement No. 24 dated as of November 10, 2008, to the Purchase Agreement
      No. 2126, dated as of January 30, 1998, between Lan Airlines S.A. and The
      Boeing Company. Portions of this document have been omitted pursuant to a
      request for confidential treatment. (incorporated by reference to our
      amended annual report on Form 20-F (File No. 001-14728) filed on June 25,
      2009 and portions of which have been omitted pursuant to a request for
      confidential treatment).4.3
              
              Aircraft
      Lease Common Terms Agreement between GE Commercial Aviation Services
      Limited and Lan Cargo S.A., dated as of April 30, 2007, and Aircraft Lease
      Agreements between Wells Fargo Bank Northwest N.A., as owner trustee, and
      Lan Cargo S.A., dated as of April 30, 2007 (incorporated by reference to
      our amended annual report on Form 20-F (File No. 001-14728) filed on May
      7, 2007 and portions of which have been omitted pursuant to a request for
      confidential treatment).4.4
              
              Purchase
      Agreement No 3194 between The Boeing Company and Lan Airlines S.A.
      relating to Boeing Model 777-Freighter aircraft dated as of July 3, 2007
      (incorporated by reference to our amended annual report on Form 20-F (File
      No. 001-14728) filed on June 25, 2008 and portions of which have been
      omitted pursuant to a request for confidential
  treatment).4.5
              
              Purchase
      Agreement No. 3256 between The Boeing Company and Lan Airlines S.A.
      relating to Boeing Model 787-8 and 787-9 aircraft dated as of October 29,
      2007 (incorporated by reference to our amended annual report on Form 20-F
      (File No. 001-14728) filed on June 25, 2008 and portions of which have
      been omitted pursuant to a request for confidential
      treatment).8.1
              
              List
      of subsidiaries of the Company12.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.12.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.13.1
              
              Certifications
      of Chief Financial Officer and Chief Executive Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002.15.1
              
              Consent
      of
PricewaterhouseCoopers.


127
 Table of Contents


SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.




Lan Airlines
      S.A./s/ Alejandro de la Fuente
    GoicName:
      Alejandro de la Fuente GoicTitle:
      Chief Financial Officer





Date:
June 29, 2010


128
 Table of Contents




LAN
AIRLINES S.A. AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





DECEMBER
31, 2009





CONTENTS




Report
      of Independent Registered Public Accounting Firm
                                                              F-2Consolidated
      statement of financial position
                                                              F-4Consolidated
      statements of income by function
                                                              F-6Consolidated
      statement of comprehensive income by function
                                                              F-7Statement
      of changes in net equity
                                                              F-8Consolidated
      statement of cash flows-direct method
                                                              F-10Notes
      to the consolidated financial statements
                                                              F-11




US$
                -
                United
      States DollarsTHUS$
                -
                Thousands
      of United States
dollars


F-1
 Table of Contents


Report of Independent
Registered Public Accounting Firm





To the
Board of Directors and Shareholders of Lan Airlines S.A.





In our
opinion, the accompanying consolidated statement of financial position and the
related consolidated statements of income by function, comprehensive income by
function, statement of changes in net equity and cash flows present fairly, in
all material respects, the financial position of Lan Airlines S.A. and its
subsidiaries at December 31, 2009 and 2008, and January 1, 2008 and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2009 in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards
Board.  Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal
Control over Financial Reporting appearing under Item 15.  Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits.  We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects.  Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.


F-2
 Table of Contents


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





/s/
PricewaterhouseCoopers


Santiago,
Chile


March 2,
2010


F-3
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





CONSOLIDATED STATEMENT OF
FINANCIAL POSITION





As of
                            
                            
                            As of
                            
                            
                            As ofDecember 31,
                            
                            
                            December 31,
                            
                            
                            January 01,Note
                            
                            2009
                            
                            
                            2008
                            
                            
                            2008ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$ASSETSCurrent
      assetsCurrent
      assets in operationCash
      and cash equivalents
                            
                            7
                            
                            
                            731,497
                            
                            
                            
                            400,972
                            
                            
                            
                            445,583Other
      financial assets
                            
                            8
                            
                            
                            60,415
                            
                            
                            
                            10,065
                            
                            
                            
                            21,439Trade
      and other accounts receivable
                            
                            9
                            
                            
                            423,739
                            
                            
                            
                            342,665
                            
                            
                            
                            349,433Accounts
      receivable from related entities
                            
                            10
                            
                            
                            38
                            
                            
                            
                            1,117
                            
                            
                            
                            228Inventories
                            
                            11
                            
                            
                            46,563
                            
                            
                            
                            45,950
                            
                            
                            
                            46,104Hedging
      assets
                            
                            12
                            
                            
                            38,640
                            
                            
                            
                            612
                            
                            
                            
                            5,356Prepaid
      expenses
                            
                            13
                            
                            
                            15,258
                            
                            
                            
                            11,518
                            
                            
                            
                            11,563Prepaid
      and recoverable taxes
                            
                            
                            
                            
                            68,420
                            
                            
                            
                            72,125
                            
                            
                            
                            65,990Other
      current assets
                            
                            14
                            
                            
                            13,482
                            
                            
                            
                            181,722
                            
                            
                            
                            8,206Subtotal
      current assets in operation
                            
                            
                            
                            
                            1,398,052
                            
                            
                            
                            1,066,746
                            
                            
                            
                            953,902Non-current
      assets and disposal groups held for sale
                            
                            15
                            
                            
                            10,919
                            
                            
                            
                            10,444
                            
                            
                            
                            10,784Total
      current assets
                            
                            
                            
                            
                            1,408,971
                            
                            
                            
                            1,077,190
                            
                            
                            
                            964,686Non-current
      assetsOther
      financial assets
                            
                            8
                            
                            
                            508
                            
                            
                            
                            506
                            
                            
                            
                            1,808Trade
      and other accounts receivable
                            
                            9
                            
                            
                            7,190
                            
                            
                            
                            3,574
                            
                            
                            
                            4,543Accounts
      receivable from related entities
                            
                            10
                            
                            
                            -
                            
                            
                            
                            251
                            
                            
                            
                            -Investments
      in associates
                            
                            17
                            
                            
                            1,236
                            
                            
                            
                            1,389
                            
                            
                            
                            1,484Intangible
      assets
                            
                            18
                            
                            
                            98,607
                            
                            
                            
                            90,374
                            
                            
                            
                            88,857Property,
      plant and equipment
                            
                            19
                            
                            
                            4,196,556
                            
                            
                            
                            3,966,063
                            
                            
                            
                            3,449,448Deferred
      tax assets
                            
                            20
                            
                            
                            10,652
                            
                            
                            
                            12,585
                            
                            
                            
                            20,378Hedging
      assets
                            
                            12
                            
                            
                            4,409
                            
                            
                            
                            2,733
                            
                            
                            
                            1,806Other
      non-current assets
                            
                            14
                            
                            
                            43,843
                            
                            
                            
                            42,201
                            
                            
                            
                            33,689Total
      non-current assets
                            
                            
                            
                            
                            4,363,001
                            
                            
                            
                            4,119,676
                            
                            
                            
                            3,602,013Total
      assets
                            
                            
                            
                            
                            5,771,972
                            
                            
                            
                            5,196,866
                            
                            
                            
                            4,566,699





The
accompanying Notes 1 to 42 form an integral part of
these  consolidated financial statements.


F-4
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





CONSOLIDATED STATEMENT OF
FINANCIAL POSITION





As of
                                                    
                                                    
                                                    As of
                                                    
                                                    
                                                    As ofDecember31,
                                                    
                                                    
                                                    December 31,
                                                    
                                                    
                                                    January 01,Note
                                                    
                                                    2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2008ThUS$
                                                    
                                                    
                                                    ThUS$
                                                    
                                                    
                                                    ThUS$LIABILITIES AND NET EQUITYCurrent
      liabilitiesCurrent
      liabilities in operationInterest-bearing
      loans
                                                    
                                                    21
                                                    
                                                    
                                                    385,421
                                                    
                                                    
                                                    
                                                    284,028
                                                    
                                                    
                                                    
                                                    235,935Other
      financial liabilities
                                                    
                                                    22
                                                    
                                                    
                                                    2,031
                                                    
                                                    
                                                    
                                                    1,345
                                                    
                                                    
                                                    
                                                    1,586Trade
      and other accounts payable
                                                    
                                                    23
                                                    
                                                    
                                                    377,438
                                                    
                                                    
                                                    
                                                    388,777
                                                    
                                                    
                                                    
                                                    364,369Accounts
      payable to related entities
                                                    
                                                    10
                                                    
                                                    
                                                    297
                                                    
                                                    
                                                    
                                                    302
                                                    
                                                    
                                                    
                                                    355Provisions
                                                    
                                                    24
                                                    
                                                    
                                                    970
                                                    
                                                    
                                                    
                                                    2,217
                                                    
                                                    
                                                    
                                                    -Taxes
      payable
                                                    
                                                    
                                                    
                                                    
                                                    11,287
                                                    
                                                    
                                                    
                                                    7,858
                                                    
                                                    
                                                    
                                                    15,374Other
      liabilities
                                                    
                                                    25
                                                    
                                                    
                                                    73,424
                                                    
                                                    
                                                    
                                                    109,764
                                                    
                                                    
                                                    
                                                    121,637Deferred
      income
                                                    
                                                    
                                                    
                                                    
                                                    542,832
                                                    
                                                    
                                                    
                                                    446,381
                                                    
                                                    
                                                    
                                                    433,882Hedging
      liabilities
                                                    
                                                    27
                                                    
                                                    
                                                    30,480
                                                    
                                                    
                                                    
                                                    180,113
                                                    
                                                    
                                                    
                                                    6,936Liabilities
      accrued at the date of the report
                                                    
                                                    28
                                                    
                                                    
                                                    99,159
                                                    
                                                    
                                                    
                                                    130,675
                                                    
                                                    
                                                    
                                                    114,499Total
      current liabilities
                                                    
                                                    
                                                    
                                                    
                                                    1,523,339
                                                    
                                                    
                                                    
                                                    1,551,460
                                                    
                                                    
                                                    
                                                    1,294,573Non-current
      liabilitiesInterest-bearing
      loans
                                                    
                                                    21
                                                    
                                                    
                                                    2,389,521
                                                    
                                                    
                                                    
                                                    2,087,859
                                                    
                                                    
                                                    
                                                    1,791,468Other
      financial liabilities
                                                    
                                                    22
                                                    
                                                    
                                                    305,287
                                                    
                                                    
                                                    
                                                    285,313
                                                    
                                                    
                                                    
                                                    271,853Trade
      and other accounts payable
                                                    
                                                    23
                                                    
                                                    
                                                    72,000
                                                    
                                                    
                                                    
                                                    90,000
                                                    
                                                    
                                                    
                                                    -Provisions
                                                    
                                                    24
                                                    
                                                    
                                                    26,834
                                                    
                                                    
                                                    
                                                    26,344
                                                    
                                                    
                                                    
                                                    25,399Deferred
      tax liabilities
                                                    
                                                    20
                                                    
                                                    
                                                    240,619
                                                    
                                                    
                                                    
                                                    167,372
                                                    
                                                    
                                                    
                                                    171,046Other
      liabilities
                                                    
                                                    25
                                                    
                                                    
                                                    55,038
                                                    
                                                    
                                                    
                                                    47,664
                                                    
                                                    
                                                    
                                                    61,586Obligations
      for long-term and post-employment benefits
                                                    
                                                    26
                                                    
                                                    
                                                    5,555
                                                    
                                                    
                                                    
                                                    3,865
                                                    
                                                    
                                                    
                                                    4,082Hedging
      liabilities
                                                    
                                                    27
                                                    
                                                    
                                                    47,853
                                                    
                                                    
                                                    
                                                    168,385
                                                    
                                                    
                                                    
                                                    47,815Total
      non-current liabilities
                                                    
                                                    
                                                    
                                                    
                                                    3,142,707
                                                    
                                                    
                                                    
                                                    2,876,802
                                                    
                                                    
                                                    
                                                    2,373,249Total
      liabilities
                                                    
                                                    
                                                    
                                                    
                                                    4,666,046
                                                    
                                                    
                                                    
                                                    4,428,262
                                                    
                                                    
                                                    
                                                    3,667,822NET
      EQUITYNet
      equity attributable to the parent company’s equity holdersPaid
      capital
                                                    
                                                    29
                                                    
                                                    
                                                    453,444
                                                    
                                                    
                                                    
                                                    453,444
                                                    
                                                    
                                                    
                                                    453,444Other
      reserves
                                                    
                                                    29
                                                    
                                                    
                                                    (97,321
                                                    )
                                                    
                                                    
                                                    (306,256
                                                    )
                                                    
                                                    
                                                    (45,477
                                                    )Retained
      earnings
                                                    
                                                    29
                                                    
                                                    
                                                    742,704
                                                    
                                                    
                                                    
                                                    614,587
                                                    
                                                    
                                                    
                                                    485,721Sub-total
      net equity attributable to the parent company’s equity
    holders
                                                    
                                                    
                                                    
                                                    
                                                    1,098,827
                                                    
                                                    
                                                    
                                                    761,775
                                                    
                                                    
                                                    
                                                    893,688Minority
      interest
                                                    
                                                    
                                                    
                                                    
                                                    7,099
                                                    
                                                    
                                                    
                                                    6,829
                                                    
                                                    
                                                    
                                                    5,189Total
      net equity
                                                    
                                                    
                                                    
                                                    
                                                    1,105,926
                                                    
                                                    
                                                    
                                                    768,604
                                                    
                                                    
                                                    
                                                    898,877Total
      liabilities and net equity
                                                    
                                                    
                                                    
                                                    
                                                    5,771,972
                                                    
                                                    
                                                    
                                                    5,196,866
                                                    
                                                    
                                                    
                                                    4,566,699





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-5
 Table of Contents





LAN AIRLINES S.A. AND
SUBSIDIARIES





CONSOLIDATED STATEMENT OF
INCOME BY FUNCTION





For the yearsended December 31,Note
                              
                              2009
                              
                              
                              2008ThUS$
                              
                              
                              ThUS$Operating
      revenues
                              
                              30
                              
                              
                              3,519,162
                              
                              
                              
                              4,140,245Cost
      of sales
                              
                              
                              
                              
                              (2,522,778
                              )
                              
                              
                              (2,893,944
                              )Gross
      margin
                              
                              
                              
                              
                              996,384
                              
                              
                              
                              1,246,301Other
      operating income
                              
                              33
                              
                              
                              154,534
                              
                              
                              
                              161,422Marketing
      costs
                              
                              
                              
                              
                              (114,462
                              )
                              
                              
                              (107,304
                              )Distribution
      costs
                              
                              
                              
                              
                              (326,964
                              )
                              
                              
                              (366,652
                              )Administrative
      expenses
                              
                              
                              
                              
                              (155,126
                              )
                              
                              
                              (167,646
                              )Other
      operating expenses
                              
                              
                              
                              
                              (100,483
                              )
                              
                              
                              (127,864
                              )Financial
      costs (from non-financial activities)
                              
                              31
                              
                              
                              (153,109
                              )
                              
                              
                              (125,488
                              )Earnings
      on investments (equity method)
                              
                              17
                              
                              
                              315
                              
                              
                              
                              696Exchange
      rate differences
                              
                              34
                              
                              
                              (11,237
                              )
                              
                              
                              23,443Result
      of indexation units
                              
                              
                              
                              
                              (605
                              )
                              
                              
                              1,229Negative
      goodwill
                              
                              
                              
                              
                              -
                              
                              
                              
                              581Other
      net earnings (losses)
                              
                              
                              
                              
                              (11,728
                              )
                              
                              
                              (135,312
                              )Income
      before income taxes
                              
                              
                              
                              
                              277,519
                              
                              
                              
                              403,406Income
      tax
                              
                              20
                              
                              
                              (44,487
                              )
                              
                              
                              (65,094
                              )NET
      INCOME FOR THE PERIOD
                              
                              
                              
                              
                              233,032
                              
                              
                              
                              338,312Income
      for the period attributable to the parent company’s equity
      holders
                              
                              
                              
                              
                              231,126
                              
                              
                              
                              336,480Income
      for the period attributable to minority interests
                              
                              
                              
                              
                              1,906
                              
                              
                              
                              1,832Net
      income for the period
                              
                              
                              
                              
                              233,032
                              
                              
                              
                              338,312EARNINGS
      PER SHAREBasic
      and diluted earnings per share (US$)
                              
                              35
                              
                              
                              0.68
                              
                              
                              
                              0.99





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-6
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME BY FUNCTION





For the yearsended December 31,Note
                              
                              2009
                              
                              
                              2008ThUS$
                              
                              
                              ThUS$NET
      INCOME FOR THE PERIOD
                              
                              
                              
                              
                              233,032
                              
                              
                              338,312Other
      income and expenses credited/charged to net equity:Cash
      flow hedges
                              
                              
                              
                              
                              252,508
                              
                              
                              
                              (308,901
                              )Translation
      adjustments
                              
                              34
                              
                              
                              1,442
                              
                              
                              
                              (7,371
                              )Other
      reserves
                              
                              29
                              
                              
                              (2,657
                              )
                              
                              
                              -Income
      tax related to components of other income and expenses credited/charged to
      net equity
                              
                              20
                              
                              
                              (41,917
                              )
                              
                              
                              52,513Comprehensive
      income and expenses for the period
                              
                              
                              
                              
                              209,376
                              
                              
                              
                              (263,759
                              )Total
      comprehensive income for the period
                              
                              
                              
                              
                              442,408
                              
                              
                              
                              74,553Comprehensive
      income attributable to:Majority
      shareholders
                              
                              
                              
                              
                              439,320
                              
                              
                              
                              73,900Minority
      interests
                              
                              
                              
                              
                              3,088
                              
                              
                              
                              653COMPREHENSIVE
      INCOME FOR THE PERIOD
                              
                              
                              
                              
                              442,408
                              
                              
                              
                              74,553





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-7
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





STATEMENT OF CHANGES IN NET
EQUITY





Changes in other reserves
                          
                          
                          
                          
                          
                          
                          
                          
                          Changes in
                          
                          
                          Changes inReserve
                          
                          
                          
                          
                          
                          
                          
                          
                          Other
                          
                          
                          Changes in
                          
                          
                          net equity
                          
                          
                          equity
                          
                          
                          Changes inChanges in
                          
                          
                          for stock
                          
                          
                          Translation
                          
                          
                          Hedging
                          
                          
                          sundry
                          
                          
                          retained
                          
                          
                          attributable to
                          
                          
                          minority
                          
                          
                          net equityNotes
                          
                          Paid-in capital
                          
                          
                          options
                          
                          
                          reserve
                          
                          
                          reserves
                          
                          
                          reserves
                          
                          
                          earnings
                          
                          
                          the parent
                          
                          
                          interests
                          
                          
                          totalThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$Opening balance as of January 1, 2009
                          
                          
                          
                          
                          453,444
                          
                          
                          
                          1,801
                          
                          
                          
                          (6,192
                          )
                          
                          
                          (301,813
                          )
                          
                          
                          (52
                          )
                          
                          
                          614,587
                          
                          
                          
                          761,775
                          
                          
                          
                          6,829
                          
                          
                          
                          768,604Issuance
      of stock options
                          
                          29-39
                          
                          
                          -
                          
                          
                          
                          676
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          676
                          
                          
                          
                          -
                          
                          
                          
                          676Comprehensive
      income for the period
                          
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,268
                          
                          
                          
                          209,583
                          
                          
                          
                          (2,657
                          )
                          
                          
                          231,126
                          
                          
                          
                          439,320
                          
                          
                          
                          3,088
                          
                          
                          
                          442,408Dividends
                          
                          29
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (104,622
                          )
                          
                          
                          (104,622
                          )
                          
                          
                          -
                          
                          
                          
                          (104,622
                          )Other
      increases (decreases) in net equity
                          
                          29
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          65
                          
                          
                          
                          1
      ,613
                          
                          
                          
                          1,678
                          
                          
                          
                          (2,818
                          )
                          
                          
                          (1,140
                          )Closing
      balance as of December 31, 2009
                          
                          
                          
                          
                          453,444
                          
                          
                          
                          2,477
                          
                          
                          
                          (4,924
                          )
                          
                          
                          (92,230
                          )
                          
                          
                          (2,644
                          )
                          
                          
                          742,704
                          
                          
                          
                          1,098,827
                          
                          
                          
                          7,099
                          
                          
                          
                          1,105,926





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-8
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





STATEMENT OF CHANGES IN NET
EQUITY





Changes in other reserves
                            
                            
                            
                            
                            
                            Changes in
                            
                            
                            Changes inReserve
                            
                            
                            
                            
                            
                            
                            
                            
                            Other
                            
                            
                            Changes in
                            
                            
                            net equity
                            
                            
                            equity
                            
                            
                            Changes inChanges in
                            
                            
                            for stock
                            
                            
                            Translation
                            
                            
                            Hedging
                            
                            
                            sundry
                            
                            
                            retained
                            
                            
                            attributable to
                            
                            
                            minority
                            
                            
                            net equityNotes
                            
                            Paid-in capital
                            
                            
                            options
                            
                            
                            reserve
                            
                            
                            reserves
                            
                            
                            reserves
                            
                            
                            earnings
                            
                            
                            the parent
                            
                            
                            interests
                            
                            
                            totalThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$Opening
      balance as of January 1, 2008
                            
                            
                            
                            
                            453,444
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (45,425
                            )
                            
                            
                            (52
                            )
                            
                            
                            485,721
                            
                            
                            
                            893,688
                            
                            
                            
                            5,189
                            
                            
                            
                            898,877Issuance
      of stock options
                            
                            29-39
                            
                            
                            -
                            
                            
                            
                            1,801
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,801
                            
                            
                            
                            -
                            
                            
                            
                            1,801Comprehensive
      income for the period
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (6,192
                            )
                            
                            
                            (256,388
                            )
                            
                            
                            -
                            
                            
                            
                            336,480
                            
                            
                            
                            73,900
                            
                            
                            
                            653
                            
                            
                            
                            74,553Dividends
                            
                            29
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (207,614
                            )
                            
                            
                            (207,614
                            )
                            
                            
                            -
                            
                            
                            
                            (207,614
                            )Other
      increases (decreases) in net equity
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            987
                            
                            
                            
                            987Closing
      balance as of December 31, 2008
                            
                            
                            
                            
                            453,444
                            
                            
                            
                            1,801
                            
                            
                            
                            (6,192
                            )
                            
                            
                            (301,813
                            )
                            
                            
                            (52
                            )
                            
                            
                            614,587
                            
                            
                            
                            761,775
                            
                            
                            
                            6,829
                            
                            
                            
                            768,604





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-9
 Table of Contents









LAN AIRLINES S.A. AND
SUBSIDIARIES





CONSOLIDATED STATEMENT OF
CASH FLOWS - DIRECT-METHOD





For the yearsended December 31,Note
                        
                        2009
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$Cash
      flows from operationsCollection
      of trade accounts receivable
                        
                        
                        
                        
                        3,871,189
                        
                        
                        
                        4,648,591Payments
      to suppliers
                        
                        
                        
                        
                        (2,494,716
                        )
                        
                        
                        (3,243,160
                        )Payments
      to personnel
                        
                        
                        
                        
                        (636,603
                        )
                        
                        
                        (614,528
                        )Refunds
      and payments of value added tax
                        
                        
                        
                        
                        40,319
                        
                        
                        
                        (40,063
                        )Cash
      flows from operations, total
                        
                        
                        
                        
                        780,189
                        
                        
                        
                        750,840Interest
      received classified as from operations
                        
                        
                        
                        
                        13,542
                        
                        
                        
                        8,226Income
      tax refunds
                        
                        
                        
                        
                        15,460
                        
                        
                        
                        -Income
      tax payments
                        
                        
                        
                        
                        (5,156
                        )
                        
                        
                        (26,994
                        )Other
      inflows (outflows) from operating activities
                        
                        
                        
                        
                        41,792
                        
                        
                        
                        (100,977
                        )Cash
      flows from other operating activities, total
                        
                        
                        
                        
                        65,638
                        
                        
                        
                        (119,765
                        )Net
      cash flow from operating activities
                        
                        
                        
                        
                        845,827
                        
                        
                        
                        631,075Net
      cash flow used in investment activitiesDisposals
      of property, plant and equipment
                        
                        
                        
                        
                        10,777
                        
                        
                        
                        6,625Disposals
      of subsidiaries, net of cash
                        
                        
                        
                        
                        1,568
                        
                        
                        
                        6,708Disposals
      of other financial assets
                        
                        
                        
                        
                        8,743
                        
                        
                        
                        14,511Other
      cash flows (used in) investing activities
                        
                        
                        
                        
                        -
                        
                        
                        
                        5Dividends
      received classified as investment
                        
                        
                        
                        
                        414
                        
                        
                        
                        813Interest
      received classified as investment
                        
                        
                        
                        
                        2,637
                        
                        
                        
                        2,743Acquisitions
      of property, plant and equipment
                        
                        
                        
                        
                        (538,576
                        )
                        
                        
                        (779,315
                        )Acquisitions
      of subsidiaries, net of cash acquired
                        
                        
                        
                        
                        (3,360
                        )
                        
                        
                        (698
                        )Acquisitions
      of other financial assets
                        
                        
                        
                        
                        (58,983
                        )
                        
                        
                        (2,607
                        )Other
      investment disbursements
                        
                        
                        
                        
                        (12,888
                        )
                        
                        
                        (23,388
                        )Net
      cash flow used in investment activities
                        
                        
                        
                        
                        (589,668
                        )
                        
                        
                        (774,603
                        )Net
      cash flow from financing activitiesLoans
      obtained
                        
                        
                        
                        
                        671,425
                        
                        
                        
                        574,874Loans
      repaid
                        
                        
                        
                        
                        (261,705
                        )
                        
                        
                        (102,644
                        )Payments
      of liabilities under financial leases
                        
                        
                        
                        
                        (62,858
                        )
                        
                        
                        (52,386
                        )Interest
      payments classified as financing
                        
                        
                        
                        
                        (129,323
                        )
                        
                        
                        (81,421
                        )Dividend
      payments to minority shareholders
                        
                        
                        
                        
                        (315
                        )
                        
                        
                        (417
                        )Dividend
      payments by the reporting entity
                        
                        
                        
                        
                        (139,622
                        )
                        
                        
                        (222,386
                        )Other
      cash flows from (used in) financing activities
                        
                        
                        
                        
                        21,588
                        
                        
                        
                        (15,210
                        )Net
      cash flow from financing activities
                        
                        
                        
                        
                        99,190
                        
                        
                        
                        100,410Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        
                        
                        355,349
                        
                        
                        
                        (43,118
                        )Effects
      of exchange-rate fluctuations on cash and cash equivalents
                        
                        
                        
                        
                        (24,824
                        )
                        
                        
                        (1,493
                        )CASH
      AND CASH EQUIVALENTS SHOWN IN THE STATEMENT OF CASH FLOWS, OPENING
      BALANCE
                        
                        7
                        
                        
                        400,972
                        
                        
                        
                        445,583CASH AND CASH EQUIVALENTS SHOWN
      IN THE STATEMENTOF CASH FLOWS,
      CLOSING BALANCE
                        
                        7
                        
                        
                        731,497
                        
                        
                        
                        400,972





The
accompanying Notes 1 to 42 form an integral part of these consolidated financial
statements.


F-10
 Table of Contents









Contents
of the notes to the consolidated financial statements of Lan Airlines S.A. and
Subsidiaries





Notes
                                    
                                    Page1
                                    General
      information
                                    F-132
                                    Summary
      of significant accounting policies
                                    F-152.1.
                                    Preparation
                                    F-152.2.
                                    Consolidation
                                    F-162.3.
                                    Foreign
      currency transactions
                                    F-172.4.
                                    Property,
      plant and equipment
                                    F-182.5.
                                    Intangible
      assets
                                    F-182.6.
                                    Interest
      costs
                                    F-192.7.
                                    Losses
      from impairment of non-financial assets
                                    F-192.8.
                                    Financial
      assets
                                    F-192.9.
                                    Derivative
      financial instruments and hedging activities
                                    F-202.10.
                                    Inventories
                                    F-212.11.
                                    Trade
      and other accounts receivable
                                    F-212.12.
                                    Cash
      and cash equivalents
                                    F-212.13.
                                    Paid
      capital
                                    F-222.14.
                                    Trade
      and other accounts payable
                                    F-222.15.
                                    Interest-bearing
      loans
                                    F-222.16.
                                    Deferred
      taxes
                                    F-222.17.
                                    Employee
      benefits
                                    F-232.18.
                                    Provisions
                                    F-232.19.
                                    Revenue
      recognition
                                    F-232.20.
                                    Leases
                                    F-242.21.
                                    Non-current
      assets (or disposal groups) held for sale
                                    F-252.22.
                                    Maintenance
                                    F-252.23.
                                    Environment
                                    F-253
                                    Transition
      to IFRS
                                    F-253.1.
                                    Basis
      of transition to IFRS
                                    F-253.1.1 Application
      of IFRS 1
                                    F-253.1.2 Exemptions
      from retroactive application chosen by Lan Airlines S.A. and
      Subsidiaries
                                    F-253.2.
                                    Reconciliation
      of IFRS and Accounting principles generally accepted in
    Chile
                                    F-263.2.1
      Reconciliation of net equity as of December 31, 2008
                                    F-263.2.2
      Reconciliation of net equity as of January 1, 2008
                                    F-273.2.3
      Reconciliation of consolidated income for the period ended December 31,
      2008
                                    F-273.2.4
      Reconciliation of consolidated statement of cash flows for the year ended
      December 31, 2008
                                    F-294
                                    Financial
      risk management
                                    F-304.1.
                                    Financial
      risk factors
                                    F-304.2.
                                    Capital
      risk management
                                    F-394.3.
                                    Fair
      value estimation
                                    F-405
                                    Accounting
      estimates and judgments
                                    F-416
                                    Segment
      information
                                    F-427
                                    Cash
      and cash equivalents
                                    F-43


F-11
 Table of Contents





Notes
                                  
                                  Page8
                                  Financial
      instruments
                                  F-448.1.
                                  Financial
      instruments by category
                                  F-448.2.
                                  Credit
      quality of financial assets
                                  F-459
                                  Trade
      and other accounts receivable
                                  F-4610
                                  Accounts
      receivable from/payable to related companies
                                  F-5011
                                  Inventories
                                  F-5212
                                  Hedging
      assets
                                  F-5213
                                  Advance
      payments
                                  F-5314
                                  Other
      assets
                                  F-5315
                                  Non-current
      assets and disposal groups held for sale
                                  F-5416
                                  Investments
      in subsidiaries
                                  F-5417
                                  Investments
      in associate companies
                                  F-5918
                                  Intangible
      assets
                                  F-6119
                                  Property,
      plant and equipment
                                  F-6320
                                  Taxes
      and deferred taxes
                                  F-6921
                                  Interest-bearing
      loans
                                  F-7322
                                  Other
      financial liabilities
                                  F-7423
                                  Trade
      and other accounts payable
                                  F-7524
                                  Provisions
                                  F-7625
                                  Other
      liabilities
                                  F-7826
                                  Obligations
      for long-term and post-employment benefits
                                  F-7827
                                  Hedging
      liabilities
                                  F-8028
                                  Accrued
      liabilities at the date of the report
                                  F-8229
                                  Equity
                                  F-8230
                                  Operating
      revenues
                                  F-8531
                                  Costs
      and expenses by nature
                                  F-8632
                                  Gains
      (losses) on sales of non-current assets not held for sale
                                  F-8733
                                  Other
      operating revenues
                                  F-8834
                                  Exchange
      rate differences
                                  F-8835
                                  Earnings
      per share
                                  F-8936
                                  Contingencies
                                  F-9037
                                  Commitments
                                  F-9338
                                  Transactions
      with related parties
                                  F-9639
                                  Share-based
      payments
                                  F-10040
                                  Environment
                                  F-10141
                                  Sanctions
                                  F-10142
                                  Events
      after the reporting period
                                  F-102


F-12
 Table of Contents









LAN
AIRLINES S.A. AND SUBSIDIARIES





NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS





AS OF
DECEMBER 31, 2009




NOTE 1 - GENERAL
INFORMATION





Lan
Airlines S.A. (the “Company” or “LAN”) is an open corporation registered with
the Chilean Superintendency of Securities and Insurance (SVS), under No.306,
whose shares are quoted in Chile on the Valparaíso Stock Exchange, the Chilean
Electronic Exchange and the Santiago Stock Exchange; it is also quoted on the
New York Stock Exchange (NYSE) in the form of American Depositary Receipts
(ADRs). Its principal business is passenger and cargo air transportation, both
in the domestic markets of Chile, Peru, Argentina, Ecuador and Brasil and a
series of regional and international routes in America, Europe and Oceania.
These businesses are performed directly or through its subsidiaries in different
countries.





The
Company is located at Avenida Américo Vespucio Sur 901, Renca, Santiago,
Chile.





Corporate
governance practices of the Company are set in accordance with Securities Market
Law 18,045, the Corporations Law 18,046 and its regulations, and the regulations
of the SVS and the laws and regulations of the United States of America and the
US Securities and Exchange Commission (SEC) with respect to the issuance of
ADRs.





The Board
of the Company is composed of nine members who are elected every two years by
the ordinary shareholders meeting. The board meets in regular monthly sessions
and in extraordinary sessions as the corporate needs demand. Of the nine board
members, three form part of its Directors’ Committee which fulfills both the
role foreseen in the Corporations Law and the functions of the Audit Committee
required by the Sarbanes Oxley Act of the United States of America and the
respective regulations of the SEC.





Under a
shareholder agreement signed in 2004, the Society is controlled jointly by the
Cueto group, represented by Costa Verde Aeronáutica S.A. and Inversiones Mineras
del Cantábrico S.A., and the Piñera group, through Axxion S.A. and Inversiones
Santa Cecilia S.A. As of December 31, 2009, the Company had a total of 1,211
registered shareholders, and 8.65% of the Company’s share capital was in the
form of ADRs.





For the
year ended on Decemer 31, 2009 the Company had an average of 16,579 employees,
ending the year with a total of 16,844 people, with 3,106 in administration,
2,264 in maintenance, 4,852 in operations, 2,890 cabin crew, 1,380 flight
personnel and 2,352 in sales.


F-13
 Table of Contents


The
subsidiaries included in these consolidated financial statements are as
follows:





As
      of December 31, 2009
                  
                  
                  As
      of December 31, 2008
                  
                  
                  As
      of January 01, 2008Company
                  
                  Tax
      No.
                  
                  
                  Direct
                  
                  
                  Indirect
                  
                  
                  Direct
                  
                  
                  Indirect
                  
                  
                  Direct
                  
                  
                  Indirect%
                  
                  
                  %
                  
                  
                  %
                  
                  
                  %
                  
                  
                  %
                  
                  
                  %Comercial
      Masterhouse S.A.
                  
                  
                  96.518.860-6
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100Inmobiliaria
      Aeronáutica S.A.
                  
                  
                  96.763.900-1
                  
                  
                  
                  99.0100
                  
                  
                  
                  0.9900
                  
                  
                  
                  99.0100
                  
                  
                  
                  0.9900
                  
                  
                  
                  99.0100
                  
                  
                  
                  0.9900Lan
      Card S.A.
                  
                  
                  96.967.400-9
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  99.0000
                  
                  
                  
                  1.0000Lan
      Pax Group S.A. and Subsidiaries
                  
                  
                  96.969.680-0
                  
                  
                  
                  99.8361
                  
                  
                  
                  0.1639
                  
                  
                  
                  99.8361
                  
                  
                  
                  0.1639
                  
                  
                  
                  99.8361
                  
                  
                  
                  0.1639Sistema
      de Distribución Amadeus Chile S.A.
                  
                  
                  78.074.340-9
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  50.0000
                  
                  
                  
                  50.0000Lan
      Perú S.A.
                  
                  Foreign
                  
                  
                  
                  49.0000
                  
                  
                  
                  21.0000
                  
                  
                  
                  49.0000
                  
                  
                  
                  21.0000
                  
                  
                  
                  49.0000
                  
                  
                  
                  21.0000Lan
      Chile Investments Limited and Subsidiaries
                  
                  Foreign
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100
                  
                  
                  
                  99.9900
                  
                  
                  
                  0.0100Lan
      Cargo S.A. and Subsidiaries
                  
                  
                  93.383.000-4
                  
                  
                  
                  99.8939
                  
                  
                  
                  0.0041
                  
                  
                  
                  99.8939
                  
                  
                  
                  0.0041
                  
                  
                  
                  99.8939
                  
                  
                  
                  0.0041South
      Florida Air Cargo INC.
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Connecta
      Corporation
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000Prime
      Airport Services Inc.
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Transporte
      Aéreo S.A.
                  
                  
                  96.951.280-7
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Ediciones
      Ladeco América S.A.
                  
                  
                  96.634.020-7
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Aircraft
      International Leasing Limited
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Fast
      Air Almacenes de Carga S.A.
                  
                  
                  96.631.520-2
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Ladeco
      Cargo S.A.
                  
                  
                  96.631.410-9
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Laser
      Cargo S.R.L.
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Lan
      Cargo Overseas Limited and Subsidiaries
                  
                  Foreign
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Lan
      Cargo Inversiones S.A. and Subsidiary
                  
                  
                  96.969.690-8
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  99.0000
                  
                  
                  
                  1.0000Blue
      Express INTL S.A. and Subsidiary
                  
                  
                  96.801.150-2
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Inversiones
      Lan S.A. and Subsidiaries
                  
                  
                  96.575.810-0
                  
                  
                  
                  99.7100
                  
                  
                  
                  0.0000
                  
                  
                  
                  99.7100
                  
                  
                  
                  0.0000
                  
                  
                  
                  99.7100
                  
                  
                  
                  0.0000Sociedad
      de Seguridad Aérea S.A.
                  
                  
                  78.005.760-2
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000Terminal
      de Exportación Inter S.A.
                  
                  
                  96.854.560-4
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  0.0000
                  
                  
                  
                  100.0000





Additionally
as indicated in Note 3, the Company has proceeded to consolidate certain special
purpose entities according to Standing Interpretations Committee 12:
Consolidation Special purpose entities (“SIC 12”).





All the
entities controlled have been included in the consolidation.





Changes
in the scope of consolidation from  January 01, 2008 and December 31,
2009, are detailed below:





(1)
            Sales
      of company





Sistema
de Distribución Amadeus Chile S.A., direct subsidiary of Lan Airlines
S.A.


Sociedad
de Seguridad Aérea S.A., direct subsidiary of Lan Cargo S.A.


Terminal
de Exportación Inter. S.A., direct subsidiary of Lan Cargo S.A.





(2)
            Dissolution
      of Societies





Línea
Aérea de Navegación Dominicana S.A., indirect subsidiary  of Lan Chile
Investments   Limited.


South
Florida Air Cargo Inc.,  direct subsidiary of Lan Cargo
S.A.


Lan Card
S.A., direct subsidiary of Inversiones Lan S.A.


Trinery
S.A., indirect subsidiary of Lan Chile Investments Limited.


Nicsy
S.A., indirect subsidiary of Lan Chile Investments Limited





(3)
            Incorporation
      or acquisition of companies





Connecta
Corporation, direct subsidiary of  Lan Cargo S.A.


Línea
Aérea Carguera de Colombia S.A., direct subsidiary of de Lan Cargo Inversiones
S.A.


Florida
West Technical Services LLC., direct subsidiary of Prime Airport Services
S.A.




F-14
 Table of Contents




NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





The
following describes the principal accounting policies adopted in the preparation
of these consolidated financial statements. As required by International
Financial Reporting Standard 1: first-time adoption (“IFRS 1”), these policies
have been determined on the basis of the IFRS current at December 31, 2009,
which have been applied uniformly in all the periods shown in these consolidated
financial statements.





2.1.
            Preparation





These
consolidated financial statements of the Company relate to the period ended
December 31, 2009 constitute the first annual financial statement prepared in
accordance with International Financial Reporting Standars (IFRS), as issued by
the International Accounting Standards Board (IASB) which have been adopted in
Chile under the name of Chilean Financial Reporting Standards (CHFRS), and
represent the integral, explicit and unreserved adoption of these international
standards. Before, the group’s consolidated financial statements were prepared
in accordance with accounting principles generally accepted in Chile (Chilean
GAAP).





The
consolidated financial statements have been prepared under the historic-cost
criterion, although modified by the valuation at fair value of certain financial
instruments.





The
preparation of the consolidated financial statements in accordance with IFRS
requires the use of certain critical accounting estimates. It also requires
management to use its judgment in applying the Company’s accounting policies.
Note 5 shows the areas that imply a greater degree of judgment or complexity or
the areas where the assumptions and estimates are significant to the
consolidated financial statements.





At the
date of these consolidated financial statements, the following accounting
pronouncements had been issued by the IASB, but whose application was not
mandatory:





Mandatory application:Standards and amendments
                
                periods beginningIFRS
      1 revised: First-time adoption of international financial reporting
      standards
                
                01/07/2009IFRS
      3 revised: Business combinations
                
                01/07/2009Amendment
      to International Accounting Standard (“IAS 27”):
                
                01/07/2009Consolidated
      and separate financial statementsAmendment
      to IAS 39: Financial instruments: recognition and
    measurement
                
                01/07/2009Improvement
      to the IFRS
                
                01/01/2010Amendment
      to IFRS 2: Share based payments
                
                01/01/2010Amendment
      to IAS 1: Presentation of the financial statements
                
                01/01/2010





F-15
 Table of Contents





Amendment
      to IAS 32: Financial instruments, presentation on classification of rights
      issues
              
              01/01/2010Amendment
      to IAS 24: Related party disclosures
              
              01/01/2011IFRS
      9: Financial instruments, classification and measurement
              
              01/01/2013





Mandatory application:Interpretation
              
              periods beginningInternational
      Financial Reporting Interpretations Committee (“IFRIC
      17”):  Distributions to owners of non-monetary
      assets
              
              01/07/2009IFRIC
      18: Transfers of assets from customers
              
              01/07/2009IFRIC
      19: Extinguishing financial liabilities with equity
      instruments
              
              01/07/2010Amendment
      to IFRIC 14: Pre-payments of a minimum funding requirement
              
              01/01/2011





The
Company’s management believes that the adoption of the standards, amendments and
interpretations described above will not have a significant impact on the
Company’s consolidated financial statements in the period of their first
application.





2.2.
            Consolidation





(a)
            Subsidiaries





Subsidiaries
are all the entities (including special-purpose entities) over which the Company
has the power to control the financial and operating policies, which are
generally accompanied by a holding of more than half of the voting rights. In
evaluating whether the Company controls another entity, the existence and effect
of potential voting rights that are currently excercisable or
convertible  to the date of the consolidated financial statements. The
subsidiaries are consolidated from the date on which control is passed to the
Company and they are excluded from the consolidation on the date they cease to
be so controlled.





The
Company uses the acquisition-cost method or the purchase for accounting for the
purchase of subsidiaries. The cost of acquisition is the fair value of the
assets delivered, the equity instruments issued and the liabilities incurred or
assumed on the exchange date, plus the costs directly attributable to the
acquisition. The identifiable assets acquired and the liabilities and contingent
liabilities assumed in a business combination are initially valued at their fair
value on the date of acquisition, regardless of the extent of the minority
interests. The excess of the acquisition cost over the fair value of the
Company’s holding in the net identifiable assets acquired is shown as goodwill.
If the cost is less than the fair value of the net assets of the acquired
subsidiary, the difference is recorded directly in the consolidated statement of
income (Note 2.5. (a)).





Inter-company
transactions, balances and unrealized gains on transactions between the
Company’s entities are eliminated. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment loss of the asset
transferred. When necessary in order to ensure uniformity with the policies
adopted by the Company, the accounting policies of the subsidiaries are
modified.




F-16
 Table of Contents




(b)
            Transactions
      and minority holdings





The Group
applies the policy of considering transactions with minorities as transactions
with parties outside Lan Airlines S.A. and Subsidiaries. The disposal of
minority holdings generates gains or losses for Lan Airlines S.A. and
Subsidiaries which are shown in the consolidated statement of income. The
acquisition of minority holdings generates goodwill, this being the difference
between the price paid and the corresponding proportion of the book value of the
net assets of the subsidiary.





(c)
            Investees
      or associates





Investees
or associates are all entities over which Lan Airlines S.A. and Subsidiaries
exercise a significant influence but has no control, this usually arise by a
holding of between 20% and 50% of the voting rights. Investments in associates
are booked using the equity method and are initially recorded at their
cost.





The
participation of Lan Airlines S.A. and Subsidiaries in the losses or gains after
the acquisition of its investees or associates is shown in results, and its
participation in post.acquisition movements in reserves of investees or
associates are shown in reserves. Movements post-acquisition accumulated is
adjusted against the carrying amount of the investment. When the participation
of Lan Airlines S.A. and Subsidiaries in the losses of an investee or associate
is equal to or more than its holding in it, including any other non guaranteed
account receivable, Lan Airlines S.A. and Subsidiaries will not show the
additional losses unless it has incurred obligations or made payments on behalf
of the investee or associate.





Gains or
losses for dilution in investees or associates are shown in the consolidated
statement of income.





2.3.
            Foreign
      currency transactions





(a)
            Presentation
      and functional currencies





The items
included in the financial statements of each of the entities of Lan Airlines
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 Lan Airlines S.A. is the United States dollar which is
also the currency of presentation of the consolidated financial statements of
Lan Airlines 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.





(c)
            Group
      entities





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


F-17
 Table of Contents


(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 results account are translated at the
      exchange rates prevailing on the transaction
  dates,


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





In the
consolidation, exchange differences arising from the translation of a net
investment in foreign entities (or local with a functional currency different to
that of the parent), and of loans and other foreign currency instruments
designated as hedges for these investments, are recorded within net equity. When
the investment is sold, these exchange differences are shown in the consolidated
statement of income as part of the loss or gain on the sale.





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





2.4.
            Property,
      plant and equipment





The land
of Lan Airlines S.A. and Subsidiaries are recognized at cost less any
accumulated impairment loss. The rest of the property, plant and equipment are
shown, initially and subsequently, at their historic cost less the corresponding
depreciation.





The
amounts of advance payments to manufacturers of aircraft, are activated by the
Company under Construction in progress until receipt of them, at which they are
liquidated.





Subsequent
costs (replacement of components, improvements, extensions, etc.) are included
in the value of the initial asset or shown as a separate asset only when it is
probable that the future economic benefits associated with the elements
of  property, plant and equipment  are going to flow to the
Company and the cost of the element can be determined reliably. The value of the
component replaced is written off in the books. The rest of the repairs and
maintenance are charged to the result of the year in which they are
incurred.





Depreciation
of property, plant and equipment is calculated using the straight-line method
over their estimated useful lives technical; except in the case of certain
technical components which are depreciated on the basis of cycles and hours
flown.





The
residual value and useful life of assets is revised, and adjusted if necessary,
once a year.





When the
value of an asset is higher than its estimated recoverable amount, its value is
reduced


immediately
to its recoverable amount (Note 2.7).





Losses
and gains on the sale of property, plant and equipment are calculated by
comparing the proceeds obtained with the book value and are included in the
consolidated statement of income.





2.5.
            Intangible
      assets





(a)
            Goodwill





Goodwill
represents the excess of acquisition cost over the fair value of the Company’s
participation in the net identifiable assets of the subsidiary or associate on
the acquisition date. Goodwill related to acquisitions of subsidiaries is
included in Intangible assets and is subjected to tests for impairment annually.
Gains and losses on the sale of an entity include the book amount of the
goodwill related to the entity sold.


F-18
 Table of Contents





(b)
            Computer
      software





Licenses
for computer software acquired are capitalized on the basis of the costs
incurred in acquiring them and preparing them for using the specific software.
These costs are amortized over their estimated useful lives.





Expenses
related to the development or maintenance of computer software, are shown as an
expense when incurred. Costs directly related to the production of unique and
identifiable computer software controlled by the Company, are shown as
intangible assets when met all the criteria for capitalization. The direct costs
include the expenses of the personnel who develop the computer software and
other costs directly associated.





Development
costs of computer software shown as assets are amortized over their estimated
useful lives.





2.6.
            Interest
      costs





Interest
costs incurred for the construction of any qualified asset are capitalized over
the time necessary for completing and preparing the asset for its intended use.
Other interest costs are charged to income.





2.7.
            Losses
      for impairment of non-financial
assets





Assets
that have an indefinite useful life, and developing IT projects, are not subject
to amortization and are subject to annual testing for impairment losses. Assets
subject to amortization are subjected to impairment tests whenever any event or
change in circumstances indicates that the book value of the assets may not be
recoverable. An impairment loss is recorded when the book value is greater than
the recoverable value. The recoverable value is the greater of the fair value of
an asset less the costs of the sale or its value in use. In evaluating the
impairment, the assets are grouped at the lowest level for which cash flows are
separately identifiable (CGUs). Non-financial assets other than goodwill that
have suffered an impairment loss are subjected to a test once a year to check
that there has been no reversal of the loss.





2.8.
            Financial
      assets





The
Company classifies its financial instruments in the following categories:
financial assets at fair value through profit and loss, loans and accounts
receivable and financial assets held to maturity. The classification depends on
the purpose for which the financial instruments were acquired. Management
determines the classification of its financial instruments at the time of they
are purchased.





(a)
            Financial
      assets at fair value through profit and
loss





Financial
assets at fair value through profit and loss are financial instruments held for
trading. A financial assetes is classified in this category if acquired mainly
for the purpose of being sold in the near future. Derivatives are also
classified as acquired for trading unless they are designated as hedges. Assets
in this category are classified as current assets.


F-19
 Table of Contents


(b)
            Loans
      and accounts receivable





Loans and
accounts receivable are non-derivative financial instruments with fixed or
determinable payments not traded on an active market. These items are classified
in current assets except for those with maturity over 12 months from the date of
the consolidated statement of financial position, which are classified as
non-current assets. Loans and accounts receivable are included in trade and
other accounts receivable in the consolidated statement of financial position
(Note 2.11).





(c)
            Financial
      assets held to maturity





Financial
assets held to maturity are non-derivative financial instruments with fixed or
determinable payments and fixed maturities that the Company’s management has the
positive intention and capacity to hold until their maturity. Should the Company
sell a not-insignificant amount of the financial assets held to their maturity,
the whole category is reclassified as available for sale. These financial
instruments  held to maturity  are included in non-current
assets, except for those maturing within 12 months from the consolidated
statement of financial position, which are classified as current
assets.





The
company valued at the date of each consolidated statement of financial position
if there is objective evidence that a financial asset or group of financial
assets may have suffered an impairment loss. For the case of financial
assets held to maturity, if any evidence of impairment, the amount of the
provision is  the difference between the book value of the assets and
the present value of the estimated future cash flows, discounted at the original
effective interest rate





2.9.
            Derivative
      financial instruments and hedging
activities





Derivatives
are booked initially at fair value on the date the derivative contracts are
signed and later they continue to be valued at their fair value. The method for
booking the resultant loss or gain depends on whether the derivative has been
designated as a hedging instrument and, if so, the nature of the item hedged.
The Company designates certain derivatives as:





(a)
            Hedge
      of the fair value of recognized assets (fair value
  hedge);





(b)
            Hedge
      of a concrete risk associated with a recognized liability or an expected
      highly-probable transaction (cash-flow hedge),
  or





(c)
            Derivatives
      that do not qualify for hedge
accounting.





The
Company documents, at the inception of each transaction, the relationship
between the hedging instrument and the hedged item, as well as its objectives
for managing risk and the strategy for carrying out various hedging transaction.
The Company also documents its assessment, both at the beginning and on an
ongoing basis, as to whether the derivatives used in the hedging transactions
are highly effective in off setting the changes in the fair value or cash flows
of the items being hedged.





The total
fair value of the hedging derivatives is booked as a non-current asset or
liability if the remaining maturity of the item hedged is over 12 months, and as
a current asset or liability if the remaining term of the item hedged is less
than 12 months. Derivatives not booked as hedges are classified as a current
asset or liability.


F-20
 Table of Contents





(a)
            Fair
      value hedges





Changes
in the fair value of derivatives designated and that qualify as fair value
hedges are shown in the consolidated statement of income, together with any
change in the fair value of the asset or liability hedged that is attributable
to the risk being hedged.





(b)
            Cash
      flow hedges





The
effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is shown in net equity. The loss or
gain relating to the ineffective portion is recognized immediately in the
consolidated statement of income under Other net gains / (losses).





In the
case of variable interest-rate hedges, this means that the amounts recognized in
equity are reclassified to results within Financial cost at the same time the
associated debts accrue interest.





For fuel
price hedges, the amounts shown in equity are reclassified to income as Cost of
sales to the extent that the fuel subject to the hedge is used.





When
hedging instruments mature or are sold or when they do not meet the requirements
to be accounted for as hedges, any gain or loss accumulated in net equity until
that moment remains in equity and is reclassified to the consolidated statement
of income when the hedged transaction is finally recognised. When it is expected
that the hedged transaction is no longer going to occur, the gain or loss
accumulated in net equity is taken immediately to the consolidated statement of
income as Other net gains (losses).





(c)
            Derivatives
      not booked as a hedge





Certain
derivatives are not booked as a hedge. The changes in fair value of any
derivative instrument that is not booked as a hedge are shown immediately in the
consolidated statement of income, in “Other net gains (losses)”.





2.10.
            Inventories





Inventories,
detailed in note 11, are shown at the lower of cost and their net realization
value. The cost is determined on the basis of the weighted average cost method.
The net realization value is the estimated sale price in the normal course of
business, less applicable variable sale costs.





2.11.
            Trade
      and other accounts receivable





Trade
accounts receivable are shown initially at their fair value and later at their
amortized cost in accordance with the effective interest rate method, less the
allowance for impairment losses.  An allowance for impairment losses
of trade accounts receivable is made when there is objective evidence that the
Company will not be able to recover all the amounts due according to the
original terms of the accounts receivable. The existence of significant
financial difficulties by the debtor, the probability that the debtor is
entering bankruptcy or financial reorganization and the default or delay in
making payments are considered as indicators that the receivable has been
impaired. The amount of the provision is the difference between the book value
of the assets and the present value of the estimated future cash flows,
discounted at the original effective interest rate. The book value of the asset
is reduced by the amount of the allowance and the loss is shown in the
consolidated statement of income in Cost
of sales. When an account receivable is written off, it is charged to the
allowance account for the accounts receivable.





2.12.
            Cash
      and cash equivalents





Cash and
cash equivalents include cash and bank balances, time deposits in credit
institutions, other short-term and easily-liquidated investments with an
original maturity of three months or less.




F-21
 Table of Contents




2.13.
            Capital





The
common shares are classified as net equity.





Incremental
costs directly attributable to the issuance of new shares or options are shown
in net equity as a deduction, net of taxes, from the proceeds
obtained.





2.14.
            Trade
      and other accounts payable





Trade
payables and other accounts payables are initially recognized at fair value and
subsequently at amortized cost are valued according to the method of the
effective interest rate.





2.15.
            Interest-bearing
      loans





Financial
liabilities are shown initially at their fair value, net of the costs incurred
in the transaction. Later, these financial liabilities are valued at their
amortized cost; any difference between the proceeds obtained (net of the
necessary arrangement costs) and the repayment value, is shown in the
consolidated statement of income during the term of the debt, according to the
effective interest rate method.





Financial
liabilities are classified in current and non-current liabilities according to
the contractual payment dates of the nominal principal.





2.16.
            Deferred
      taxes





Deferred
taxes are calculated, according to the balance-sheet method, on the temporary
differences arising between the fiscal amounts of assets and liabilities and
their book values. However, if the deferred taxes arise from the initial
recognition of a liability or an asset in a transaction different from a
business combination that at the time of the transaction does not affect the
accounting result or the tax gain or loss, they are not booked. The deferred tax
is determined using the tax rates (and laws), that have been enacted or
substantially enacted by balance sheet day, and are expected to apply when the
related deferred tax asset is realized or the deferred tax liability
discharged.





Deferred
tax assets are recognised when it is probable that there will be sufficient
future tax earnings with which to compensate the temporary
differences.





Deferred
taxes are recorded on the temporary differences arising on investments in
subsidiaries and associates, since it controls the date on which these will be
rolled back and is likely that these will not reverse in the foreseeable
future.


F-22
 Table of Contents





2.17.
            Employee
      benefits





(a)
            Personnel
      vacations





The
Company recognizes the expense for personnel vacations on an accrual
basis.





(b)
            Share-based
      compensation





The
compensation plans implemented by the granting of options for the subscription
and payment of shares are shown in the consolidated financial statements in
accordance with IFRS 2: Share based payments, showing the effect of the fair
value of the options granted as a charge to remuneration on a straight-line
basis between the date of granting such options and the date on which these
become vested.





(c)
            Post-employment
      and other long-term benefits





Provisions
are made for these obligations by the application of the actuarial value of the
accrued cost of the benefit method, and take into account estimates of future
permanence, mortality rates and future wage increases determined on the basis of
actuarial calculations. The discount rates are determined by reference to market
interest-rate curves. Actuarial gains or losses are shown in results in the
period when they occur.





(d)
            Incentives





The
Company contemplates an annual incentives plan for its personnel for compliance
with objectives and individual contribution to the results. The incentives
eventually granted consist of a given number or portion of monthly remuneration
and the provision is made on the basis of the estimated amount for
distribution.





2.18.
            Provisions





Provisions
are recognised when:





(i)
            The
      Company has a present legal or implicit obligation as a result of past
      events.





(ii)
            It
      is probable that some payment is going to be necessary to settle an
      obligation, and





(iii)
            The
      amount has been reliably estimated.





Provisions
are shown at the present value of the disbursements expected to be necessary for
settling the obligation using the Company’s best estimates. The discount rate
used for determining the present value reflects current market evaluations on
the consolidated statements of financial position date of the time value of
money, plus the specific risk related to the liability in
particular.





2.19.
            Revenue
      recognition





Operating  revenues
include the fair value of the proceeds received or to be received on sales of
goods and services in the ordinary course of the Company’s business. Operating
revenues are shown net of refunds, rebates and discounts.





(a)
            Sales
      of services





a.1
            Passenger
      and cargo transport




F-23
 Table of Contents




The
Company shows revenue from the transportation of passengers and cargo once the
service has been provided.





a.2
            Frequent
      flyer program





The
Company currently has a frequent flyer program called Lan Pass, whose objective
is customer loyalty through the delivery of kilometers every time that members
make certain flights, use the services of entities inscribed to it or make
purchases with an associated credit card. The kilometers earned can be exchanged
for flights tickets or other services of associated entities. The consolidated
financial statements include liabilities for this concept (deferred income),
according to the estimate of the valuation established for the kilometers
accumulated pending use at that date, in accordance with IFRIC 13: Customer
loyalty programmes.





a.3
            Other
      revenues





The
      Company records revenues for other services when these have been
      provided.





(b)
            Interest
      income





Interest
income is booked using the effective interest rate method.





(c)
            Dividend
      income





Dividend
income is booked when the right to receive the payment is
established.





2.20.
            Leases





(a)
            When
      the Company is the lessee – financial
lease





The
Company leases certain property, plant and equipment in which it has
substantially all the risk and benefits deriving from the ownership; they are
therefore classified as financial leases. Financial leases are capitalized at
the start of the lease at the lower of the fair value of the asset leased and
the present value of the minimum lease payments.





Every
lease payment is separated between the liability component and the financial
expenses so as to obtain a constant interest rate over the outstanding amount of
the debt. The corresponding leasing obligations, net of financial charges, are
included in Interest-bearing loans. The element of interest in the financial
cost is charged in the consolidated statement of income over the lease period so
that it produces a constant periodic rate of interest on the remaining balance
of the liability for each period. The asset acquired under a financial lease is
depreciated over the shorter; its useful life and lease term is included in
Property, plant and equipment.


F-24
 Table of Contents





(b)
            When
      the Company is the lessee – operating
lease





Leases,
in which the lessor retains an important part of the risks and benefits deriving
from ownership, are classified as operating leases. Payments with respect to
operating leases (net of any incentive received from the lessor) are charged in
the consolidated statement of income on a straight-line basis over the term of
the lease.





2.21.
            Non-current
      assets (or disposal groups) held for
sale





Non-current
assets (or disposal groups) are classified as assets held for sale and are shown
at the lesser of their book value and the fair value less the cost of
sale.





2.22.
            Maintenance





Costs
incurred for scheduled major maintaining the aircraft fuselage and engines are
capitalized and depreciated until the next maintenance. The depreciation rate is
determined on technical grounds, according to its use expressed based on cycles
and flight hours.





The
unscheduled maintenances of aircraft and engines are charged to income as
incurred.





2.23.
            Environment





Disbursements
related to environmental protection are charged to income when
incurred.




NOTE 3 - TRANSITION TO IFRS





3.1 Basis
of transition to IFRS





3.1.1
Application of IFRS 1





These
consolidated financial statements of the Company relate to the period ended
December 31, 2009 and were prepared in accordance with International Financial
Reporting Standards (IFRS). The Company has applied the provisions of IFRS 1 in
preparing its consolidated financial statements.





The
Company’s transition date is January 1, 2008, for which it has prepared its
opening consolidated statements of financial position under IFRS at that date.
The date of adoption of IFRS is January 1, 2009.





In
accordance with IFRS 1, all the obligatory exceptions and some of the optional
exemptions have been applied retroactively in the preparation of the
above-mentioned consolidated financial statements.





3.1.2
            Exemptions
      in the retroactive application chosen by Lan Airlines S.A. and
      Subsidiaries





(a)
            Business
      combinations





The
Company has applied the exemption contained in IFRS 1 for business combinations.
It has therefore re-expressed all business combinations beginning in
1997.


F-25
 Table of Contents





(b)
            Fair
      value or revaluation as deemed cost





The
Company has chosen to measure certain items of property, plant and equipment at
their fair value on the date of transition, January 1, 2008.





(c)
            Personnel
      benefits





The
Company has chosen to recognize all actuarial gains and losses accumulated at
January 1, 2008.





3.2.
            Reconciliation
      of IFRS and accounting principles generally accepted in
    Chile





The
reconciliations set out below show the quantification of the impact of the
transition to IFRS in the Company:





3.2.1
            Net
      equity as of December 31, 2008


3.2.2
            Net
      equity as of January 1, 2008


3.2.3
            Consolidated
      Income for the period ended December 31,
2008


3.2.4
            Statement
      of consolidated cash flows for the year ended December 31,
      2008





3.2.1
            Reconciliation
      of net equity as of December 31,
2008


ThUS$Chilean
      GAAP
                        
                        
                        1,117,978Lan
      Pass program
                        
                        
                        (91,945
                        )Fixed
      assets
                        
                        
                        38,122Financial
      debt
                        
                        
                        10,450Goodwill
                        
                        
                        30,598Japanese
      Operating Lease (“JOL”) Consolidation
                        
                        
                        (34,490
                        )Maintenance
                        
                        
                        14,723Deferred
      taxes complementary accounts
                        
                        
                        (8,169
                        )Reserve
      for derivative hedges
                        
                        
                        (301,813
                        )Minority
      holdings
                        
                        
                        6,829Translation
      adjustment
                        
                        
                        (6,192
                        )Others
                        
                        
                        (7,487
                        )Effect
      of transition to IFRS
                        
                        
                        (349,374
                        )Net
      equity according to IFRS
                        
                        
                        768,604


F-26
 Table of Contents





3.2.2
            Reconciliation
      of net equity as of January 1, 2008


ThUS$Chilean
      GAAP
                          
                          
                          988,052Lan
      Pass program
                          
                          
                          (83,245
                          )Fixed
      assets
                          
                          
                          51,082Financial
      debt
                          
                          
                          14,884Goodwill
                          
                          
                          27,580JOL
      consolidation
                          
                          
                          (44,454
                          )Maintenance
                          
                          
                          (477
                          )Deferred
      taxes complementary accounts
                          
                          
                          (8,645
                          )Reserve
      for derivative hedges
                          
                          
                          (45,425
                          )Minority
      holdings
                          
                          
                          5,189Others
                          
                          
                          (5,664
                          )Effect
      of transition to IFRS
                          
                          
                          (89,175
                          )Net
      equity according to IFRS
                          
                          
                          898,877





3.2.3
            Reconciliation
      of consolidated income for the year ended December 31,
  2008





ThUS$Chilean
      GAAP
                            
                            
                            335,739JOL
      consolidation
                            
                            
                            9,964Maintenance
                            
                            
                            15,200Fixed
      assets
                            
                            
                            (12,960
                            )Financial
      debt
                            
                            
                            (4,434
                            )Lan
      Pass program
                            
                            
                            (8,700
                            )Minority
      holdings
                            
                            
                            1,831Goodwill
                            
                            
                            3,018Others
                            
                            
                            (1,346
                            )Effect
      of transition to IFRS
                            
                            
                            2,573IFRS
      at the date of the last annual financial statements
                            
                            
                            338,312Other
      income and expenses credit/charge to net equity:Cash
      flow hedges
                            
                            
                            (308,901
                            )Translation
      adjustments
                            
                            
                            (7,371
                            )Income
      tax related to components of other income and expenses credit/charged to
      net equity
                            
                            
                            52,513Comprehensive
      income of the period under IFRS
                            
                            
                            74,553


F-27
 Table of Contents





The
following explain the different concepts included in the above
conciliations.





1.
            Lan
      Pass program





Under
Chilean GAAP, the accumulated kilometers were booked as a provision calculated
at their incremental cost. According to IFRS, the kilometers are booked as
deferred income according to their fair value, until the moment they are
flown.





2.
            Property,
      plant and equipment





For its
first adoption, the Company revalued some components of property, plant and
equipment, mainly buildings, land and other technical components. The
re-appraisal was carried out once only in accordance with IFRS 1 and the new
value corresponds to the initial cost of the assets at the transition date. The
book value of goods re-appraisaled to January 01, 2008 and December 31, 2008
amounts to ThUS$ 66,249 and ThUS$ 62,559 respectively. Financing costs become
part of the effective interest rate of the loan for financing fixed assets,
which is deducted from the capitalized value.





3.
            Financial
      liabilities





The
financing costs booked as property, plant and equipment under Chilean GAAP,
become part of the effective interest rate of the loan under IFRS. The
calculation of financial expenses is determined using the amortized cost
method.





4.
            Goodwill





Under
IFRS, the Company has considered goodwill as an intangible asset of indefinite
useful life. At least once a year, the cash-flow generating unit that originated
the goodwill is evaluated for possible impairment of its fair value. If there is
evidence of impairment, the goodwill is adjusted against income. For the
purposes of the first adoption, the Company decided to re-calculate the business
combinations occurred since 1997, so the amortization of goodwill has been
reversed since then. No other effects are generated from these
re-calculations.





5.
            JOL
      consolidation





The
Company operates 17 aircraft under a financing structure called Japanese
Operating Lease (JOL). This method involves the creation of a special purpose
entity that acquires aircraft with bank and third-party financing. Under Chilean
GAAP, the aircraft under this scheme are booked as operating leases, generating
a charge for aircraft leasing in the consolidated statement of income. Under
IFRS and therefore with SIC 12, these aircraft are shown in the consolidated
statement of financial position as part of Property, plant and equipment and the
corresponding debt is shown as a liability.





6.
            Maintenance





Under
Chilean GAAP, only own-fleet major maintenance is recognized as an asset, while
major maintenance on the leased fleet was recognized via provisions until the
next maintenance was carried out. Under IFRS, major maintenance of the whole
fleet is capitalized and amortized, recognizing the obligations in the beginning
for the fleet leased of the asset received.




F-28
 Table of Contents





7.
            Deferred
      tax complementary accounts





Under
Chilean GAAP, the Technical Bulletin No.60 of the Chilean Institute of
Accountants permitted booking the effect of the first application of this
regulation against an account in the consolidated statement of financial
position called “Complementary asset (liability) for deferred (assets)
liabilities. These complementary assets (liabilities) were amortized against
income in the period estimated for reversal of the temporary difference
originating it, except for complementary liabilities originated by the
accounting of assets for deferred taxes for tax losses, in which case the
amortization was made on the basis of the actual use of such losses. Under IFRS,
the complementary asset (liability) accounts were all reversed against retained
earnings on the first adoption.





On the
other hand, all the differences between Chilean GAAP and IFRS transition that
were booked, either in retained earnings or in other reserves, were subjected to
the calculation and booking of the corresponding deferred tax, which was booked
in the entry originating it. For the reconciliations presented at each of the
relevant dates, the differences due to the standards are therefore net of
deferred tax.





8.
            Reserve
      for derivative hedges





Under
IFRS, on a cash flow hedge, the gains and losses related to fuel or interest
rate hedges are shown in the consolidated statement of income within the line
item corresponding to the item being hedged (cost or financial expenses). In
addition, in a cash flow hedge under IFRS, the fair value of the derivative
contracts is deferred within an equity reserve account. This represents a change
with respect to fuel hedges as before, under Chilean GAAP, the gains or losses
related to them were recognized within the non-operating result, while the fair
value of both the fuel and interest-rate hedges was recognized within asset and
liability accounts.





9.
            Minority
      holdings





Under
IFRS, the Company’s net equity comprises both the holding corresponding to the
shareholders of the parent Company and the minority shareholders in its
affiliates. Under Chilean GAAP, the minority holding was classified within a
line item between long-term liabilities and net equity.





10.
            Translation
      adjustment





Under
IFRS, the cumulative translation adjustment of those companies whose functional
currency is other than the currency of presentation of the financial statements
is included in net equity. These companies correspond to subsidiaries whose
functional currencies are Chilean pesos and Argentine pesos.





3.2.4
            Reconciliation
      of consolidated statement of cash flows for the year ended December 31,
      2008





The
principal differences between Chilean GAAP and IFRS in the preparation of the
statement of cash flows are related to the classification of amounts paid for
financial leases (included as investment activities in Chilean GAAP and as
financing activities under IFRS),  interest paid (included as
operating activities under Chilean GAAP and as financing activities under IFRS)
and guarantees given for derivative contracts (included as financing activities
under Chilean GAAP and as operating activities under IFRS).


F-29
 Table of Contents





Operational
                
                
                Investment
                
                
                FinancingCash Flow
                
                
                CashFlow
                
                
                Cash FlowThUS$
                
                
                ThUS$
                
                
                ThUS$Chilean
      GAAP
                
                
                729,129
                
                
                
                (830,545
                )
                
                
                58,760Interest
      paid
                
                
                81,421
                
                
                
                -
                
                
                
                (81,421
                )Interest
      earned
                
                
                (2,743
                )
                
                
                2,743
                
                
                
                -Dividends
      paid by associated
                
                
                (813
                )
                
                
                813
                
                
                
                -Leasing
      fee payment
                
                
                -
                
                
                
                52,386
                
                
                
                (52,386
                )Guarantees
      derivative contracts
                
                
                (175,457
                )
                
                
                -
                
                
                
                175,457Effects
      of functional currency change
                
                
                (462
                )
                
                
                -
                
                
                
                -Effect
      of transition to IFRS
                
                
                (98,054
                )
                
                
                55,942
                
                
                
                41,650Cash
      flow under IFRS
                
                
                631,075
                
                
                
                (774,603
                )
                
                
                100,410





NOTE 4 - FINANCIAL RISK
MANAGEMENT





4.1.
            Financial
      risk factors





The
Company’s activities are exposed to different financial risks: (a) market risk,
(b) credit risk, and (c) liquidity risk. The Company’s global risk management
program is focused on uncertainty in the financial markets and tries to minimize
the potential adverse effects on the net margin. The Company uses derivatives to
hedge part of these risks.





(a)
            Market
      risk





Due to
the nature of its operations, the Company is exposed to market risks such as (i)
fuel-price risk, (ii) interest-rate risk, and (iii) local exchange-rate risk. In
order to fully or partially hedge all these risks, the Company operates with
derivative instruments to fix or limit rises in the underlying
assets.





(i)
            Fuel-price
      risk:





Fluctuations
in fuel prices largely depend on the global supply and demand for oil, decisions
taken by Organization of Petroleum Exporting Countries (OPEC), global refining
capacity, stock levels maintained, and weather and geopolitical
factors.





The
Company purchases an aircraft fuel called Jet Fuel grade 54. There is a
benchmark price in the international market for this underlying asset, which is
US Gulf Coast Jet 54. However, the future of this market has low liquidity index
as hedges in society performs West Texas Intermediate (WTI) crude, which has a
high correlation with Jet Fuel and is a highly liquid asset and therefore has
advantages in comparison  to the use of  index U.S. Gulf
Coast Jet 54.





During
2009, the Company booked losses of US$ 128,7 million on fuel hedging concepts.
In the same period of the prior year, it produced gains of US$
35,4  million for the same purpose.





At the
end of December 2009, the market value of its fuel positions amounted to US$
13,6  million (positive).  At the end of December 2008, this
market value was US$ 170.2 million (negative) and at January 01 2008, this
market value was US$ 4.4 million (positive). The following tables show the
notional value of the purchase positions together with the derivatives
contracted for the different periods:


F-30
 Table of Contents





Positions as of december 31,
2009


MaturitiesQ110
                        
                        
                        Q210
                        
                        
                        Q310
                        
                        
                        Q410
                        
                        
                        TotalVolume
      (thousands  of barrels WTI)
                        
                        
                        1,404
                        
                        
                        
                        1,371
                        
                        
                        
                        876
                        
                        
                        
                        738
                        
                        
                        
                        4,389Agreed
      future value (US$ por barril)(*)
                        
                        
                        84
                        
                        
                        
                        80
                        
                        
                        
                        79
                        
                        
                        
                        82
                        
                        
                        
                        81Total
      (ThUS$)
                        
                        
                        117,936
                        
                        
                        
                        109,680
                        
                        
                        
                        69,204
                        
                        
                        
                        60,516
                        
                        
                        
                        355,509Approximate
      percentage of hedge (of expected consumption value)
                        
                        
                        48
                        %
                        
                        
                        49
                        %
                        
                        
                        29
                        %
                        
                        
                        24
                        %
                        
                        
                        37
                        %





(*)Weighted
average between collars and asset options.





Positions as of December 31,
2008


MaturitiesQ109
                                  
                                  
                                  Q209
                                  
                                  
                                  Q309
                                  
                                  
                                  Q409
                                  
                                  
                                  Q110
                                  
                                  
                                  TotalVolume
      (thousands of barrels WTI)
                                  
                                  
                                  900
                                  
                                  
                                  
                                  1,170
                                  
                                  
                                  
                                  540
                                  
                                  
                                  
                                  570
                                  
                                  
                                  
                                  300
                                  
                                  
                                  
                                  3,480Agreed
      future value (US$ per barrel)(*)
                                  
                                  
                                  107
                                  
                                  
                                  
                                  104
                                  
                                  
                                  
                                  93
                                  
                                  
                                  
                                  92
                                  
                                  
                                  
                                  92
                                  
                                  
                                  
                                  98Total
      (ThUS$)
                                  
                                  
                                  96,300
                                  
                                  
                                  
                                  121,680
                                  
                                  
                                  
                                  50,220
                                  
                                  
                                  
                                  52,440
                                  
                                  
                                  
                                  27,600
                                  
                                  
                                  
                                  341,040Approximate
      percentage of hedge (of expected consumption volume)
                                  
                                  
                                  33
                                  %
                                  
                                  
                                  44
                                  %
                                  
                                  
                                  19
                                  %
                                  
                                  
                                  20
                                  %
                                  
                                  
                                  10
                                  %
                                  
                                  
                                  25
                                  %





(*)
Weighted average between collars and asset options.





Positions as of January 01
,2008


MaturitiesQ108
                                  
                                  
                                  Q208
                                  
                                  
                                  Q308
                                  
                                  
                                  Q408
                                  
                                  
                                  TotalVolumen
      (thousands of barrels WTI
                                  
                                  
                                  270
                                  
                                  
                                  
                                  331
                                  
                                  
                                  
                                  331
                                  
                                  
                                  
                                  270
                                  
                                  
                                  
                                  1,202Agreed
      future value (US$ per barrel)(*)
                                  
                                  
                                  91
                                  
                                  
                                  
                                  86
                                  
                                  
                                  
                                  87
                                  
                                  
                                  
                                  91
                                  
                                  
                                  
                                  89Total
      (ThUS$)
                                  
                                  
                                  24,570
                                  
                                  
                                  
                                  28,466
                                  
                                  
                                  
                                  28,797
                                  
                                  
                                  
                                  24,570
                                  
                                  
                                  
                                  106,978Approximate
      percentage of hedge (of expected consumption volume)
                                  
                                  
                                  10
                                  %
                                  
                                  
                                  12
                                  %
                                  
                                  
                                  12
                                  %
                                  
                                  
                                  9
                                  %
                                  
                                  
                                  10
                                  %





(*)Weighted
average between collars and asset options


F-31
 Table of Contents




Sensitivity
analysis





A drop in
fuel prices positively affects the Company through a reduction in costs.
However, this drop negatively affects contracted positions as these are to
protect the Company against the risk of a rise in prices. The policy therefore
is to maintain a hedge-free percentage in order to be competitive in the event
of a drop in prices.





As the
current positions do not represent changes in cash flows, but a variation in the
exposure to the market value, the current hedge positions have no impact on
income (they are booked as cash flow hedge contracts, so a variation in the fuel
price has an impact on the Company’s net equity).





The
following table shows the sensitivity analysis of the financial instruments
according to reasonable changes in the fuel price and their effect on equity.
The term of the projection was defined until the end of the last current fuel
hedge contract, being the last business day of 2010. The calculations were made
considering a parallel movement of US$ 5 per barrel in the curve of the WTI
crude futures benchmark price at the end of December 2009, 2008 and
2007.





Position as of December 31, 2009
                  
                  Position as of December 31, 2008
                  
                  Position as of January 01, de 2008WTI Benchmark price
                  
                  effect on equity
                  
                  effect on equity
                  
                  effect on equity(US$ per barrel)
                  
                  (millions of US$)
                  
                  (millions of US$)
                  
                  (millions of US$)+5
                  
                  +14,6
                  
                  +15,7
                  
                  +1,2-
      5
                  
                  -13,6
                  
                  -16,1
                  
                  -
      1,0





The
Company seeks to reduce the risk of fuel price rises to ensure it is not left at
a disadvantage compared to its competitors in the event of a sharp price fall.
The Company therefore uses hedge instruments like swaps, options and collars to
partially hedge the fuel volumes consumed.





According
to that required by IAS 39, during the periods presented, the company has not
recorded amounts for ineffectiveness in the consolidated income
statement.





Given the
fuel hedge structure to December 31, 2009, which considers a hedge-free portion,
a vertical fall by US$ 5 in the WTI benchmark price (the monthly daily average)
for each month would have meant a saving of approximately US$
31,6  million in the cost of total fuel consumption.





(ii)
            Cash
      flow interest-rate risk:





The
fluctuation in interest rates depends heavily on the state of the global
economy. An improvement in long-term economic prospects moves long-term rates
upward while a drop causes a decline through market effects. However, if we
consider government intervention in periods of economic recession, it is usual
to reduce interest rates to stimulate aggregate demand by making credit more
accessible and increasing production (in the same way interest rates are raised
at times of economic expansion). The present uncertainty about how the market
and governments will react, and thus how interest rates will change, creates a
risk related to the Company’s debt at floating interest rates and its
investments.





The risk
of debt interest rates equates to the risk of future cash flows of the financial
instruments due to the fluctuation in interest rates on the market. The
Company’s exposure to risks of changes in market interest rates is mainly
related to long-term obligations at floating rates.





In order
to reduce the risk of an eventual rise in interest rates, the Company has signed
interest-rate swap and call option contracts in order to eliminate more than 95%
of its exposure to interest-rate fluctuations. The Company is therefore exposed
to a small portion of the fluctuations in the 90 days London Inter Bank Offer
Rate (LIBOR) and the nominal Chilean Active Banking Rate (TAB) 180-day
rate.


F-32
 Table of Contents





The
following table shows the sensitivity of changes in financial obligations that
are not hedged against interest-rate variations.  These changes are
considered reasonably possible based on current market conditions.





Position as
                        
                        Position asof December 31, 2009
                        
                        of December 31, 2008Increase (decrease)
                        
                        effect on pre-tax earnings
                        
                        effect on pre-tax earningsin Libor
                        
                        (millions of US$)
                        
                        (millions of US$)+100
      basis points
                        
                        -0.87
                        
                        -0.65-100
      basis points
                        
                        +0.87
                        
                        +0.65





Changes
in market conditions produce a change in the valuation of current financial
instruments hedging interest rates, causing an effect on the Company’s equity
(because they are booked as cash-flow hedges). These changes are considered
reasonably possible based on current market conditions. The calculations were
made increasing (decreasing) vertically 100 basis points of the three-month
Libor futures curve.





Increase (decrease)
                
                Position as of December 31, 2009
                
                Position as of December 31, 2008
                
                Position as of January 01, de 2008in three-month Libor
                
                effect on equity
                
                effect on equity
                
                effect on equityfutures rate
                
                (millions of US$)
                
                (millions of US$)
                
                (millions of US$)+100
      puntos base
                
                49,64
                
                63,37
                
                59,2-100
      puntos base
                
                (53,23)
                
                (68,94)
                
                (64,2)





According
to that required by IAS 39, during the periods presented, the company has not
recorded amounts for ineffectiveness in the consolidated income
statement.





There are
limitations in the method used for the sensitivity analysis and relate to those
provided by the market. These are because the levels indicated by the futures
curves are not necessarily met and will change in each period.





(iii)
            Local
      exchange-rate risks:





The
functional currency used by the parent Company is the US dollar in terms of
setting prices for its services, the composition of its classified statements of
financial position and effects on its operating income. It sells most of its
services in US dollars or prices equivalent to the US dollar, and a large part
of its expenses are denominated in US dollars or equivalents of the US dollar,
particularly fuel costs, aeronautic charges, aircraft leases, insurance and
aircraft components and accessories. Remuneration expenses are denominated in
local currencies.





The
Company maintains its cargo and passenger business tariffs in US dollars. There
is a mix in the domestic markets as sales in Peru are in local currency but the
prices are indexed to the US dollar. In Chile and Argentina, tariffs are in
local currency without any kind of indexation. In the case of the domestic
business in Ecuador, both tariffs and sales are in dollars. The Company is
therefore exposed to fluctuations in the different currencies, mainly: Chilean
peso, Argentine peso, Uruguayan peso, Peruvian sol, Brazilian real, Australian
dollar and New Zealand dollar; of these, the largest exposure is in Chilean
pesos.


F-33
 Table of Contents





The
Company in the first half of 2009 obtained loans for the Chilean peso equivalent
of US$ 202 million from local banks, with a payment term of 3 years including 1
year with no capital payments. In order to reduce the risk of a possible rise in
the exchange rate, the Company has signed cross-currency swap contracts that fix
the payment of a significant portion of these loans in dollars.





(b)
            Credit
      risk





Credit
risk occurs when the counterparty does not meet its obligations with the Company
under a certain financial agreement or instrument, deriving from a fall in the
market value of a financial instrument (only financial assets; not
liabilities).





The
Company is exposed to credit risk due to its operative and financial activities,
including deposits with banks and financial institutions, investments in other
kinds of instruments, exchange-rate transactions and the contracting of
derivative instruments or options.





(i)
            Financial
      activities





Cash
surpluses that remain after the financing of assets necessary for the operation
are invested according to credit limits approved by the Company’s board, mainly
in time deposits with different financial institutions, short-term mutual funds,
and easily-liquidated corporate and sovereign bonds with short remaining
maturities. These investments are booked as cash and cash equivalents and as
investments held to maturity.





In order
to reduce counterparty risk and to ensure that the risk assumed is known and
managed by the Company, investments are diversified among different banking
institutions (both local and international). The Company evaluates the credit
standing of each counterparty and the levels of investment, based on (i) their
credit rating, (ii) the equity size of the counterparty, and (iii) investment
limits according to the Company’s level of liquidity. According to these three
parameters, the Company chooses the most restrictive parameter of these three
and based on this, establishes limits for operations with each
counterparty.





Due to
the delicate national and international financial situation, the Company changed
its credit-risk policy  was stricter at the beginning
of  2008, in order to invest only in financial institutions that have
a high market value and a local credit rating of over AA. This investment limit
with certain local financial institutions meant increasing the investment limits
for those institutions that qualified under this policy.





The
Company has no guarantees to mitigate this exposure.





(ii)
              Operational
      activities





The
Company has four large sales “clusters”: travel agencies, cargo agents, airlines
and credit-card administrators. The first three are governed by IATA
(International Air Transport Association), internacional organization comprising
most of the airlines that represent over 90% of scheduled commercial traffic and
one of its main objectives is to regulate the financial transactions between
airlines and travel agents and cargo.  When an agency or airline don
not pay your debt are  excluded from operating with IATA’s member
airlines. In the case of credit-card administrators, these are fully guaranteed
by the issuing institutions.





The
exposure consists of the term granted, and this fluctuates between 1 and 45
days.


One of
the tools the Company uses for reducing credit risk is to participate in global
entities related to the industry, such as IATA, BSP (Business Sales Processing),
CASS (CRC, Clearing House) and banks (credit cards). These institutions fulfill
the role of collectors and distributors between airlines and travel and cargo
agencies. In the case of the Clearing House, it acts as an offsetting entity
between airlines for the services provided between them. A reduction in term and
implementation of guarantees has been achieved through these
entities.


F-34
 Table of Contents




(c)
            Liquidity
      risk




Liquidity
risk represents the risk that the Company has no funds to meet its
obligations.





Because
of the cyclical nature of the business, the operation, and its investment and
financing needs related to the acquisition of new aircraft and renewal of its
fleet, plus the financing needs related to market-risk hedges, the Company
requires liquid funds to meet its payment obligations.





The
Company therefore manages its cash and cash equivalents and its financial
assets, matching the term of investments with those of its obligations. Its
policy is that the average term of its investments may not exceed the average
term of its obligations. This cash and cash equivalents position is invested in
highly-liquid short-term instruments through first-class financial
entities.





The
Company maintains a liquidity policy that translates into a significant volume
of available cash. It has begun a financial strengthening plan that will enable
it to manage more liquidity than in previous years in order to be prepared to
face eventual falls in passenger and cargo traffic. The Company therefore
replaced approximately US$ 100 million it had as cash guarantees granted to
financial counterparties with stand-by letters of credit. The board also
authorized contracting loans or issuing debt in the domestic market through
bonds amounting to approximately US$ 250 million. At the end of June 2009, the
Company therefore had the equivalent of US$ 252 million contracted with local
banks with a repayment term of 3 years, including a one year with no capital
payments.





The
Company has future obligations related to financial leases, operating leases,
maturities of other bank borrowings, derivative contracts and aircraft purchase
contracts.


F-35
 Table of Contents


Class of
liability for the analysis of liquidity risk ordered by date of maturity as of
December 31, 2009





Up to
                                                                                                        
                                                                                                        One to
                                                                                                        
                                                                                                        Three to
                                                                                                        
                                                                                                        One to
                                                                                                        
                                                                                                        FiveClass of
                                                                                                        
                                                                                                        Debtor
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        one
                                                                                                        
                                                                                                        three
                                                                                                        
                                                                                                        twelve
                                                                                                        
                                                                                                        five
                                                                                                        
                                                                                                        years or
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        Effective
                                                                                                        
                                                                                                        Nominal
                                                                                                        
                                                                                                        Nominalliability
                                                                                                        
                                                                                                        tax No.
                                                                                                        
                                                                                                        Debtor
                                                                                                        
                                                                                                        Currency
                                                                                                        
                                                                                                        Creditor
                                                                                                        
                                                                                                        month
                                                                                                        
                                                                                                        months
                                                                                                        
                                                                                                        months
                                                                                                        
                                                                                                        years
                                                                                                        
                                                                                                        more
                                                                                                        
                                                                                                        Total
                                                                                                        
                                                                                                        Amortization
                                                                                                        
                                                                                                        rate
                                                                                                        
                                                                                                        value
                                                                                                        
                                                                                                        rateThUS$
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        %
                                                                                                        
                                                                                                        ThUS$
                                                                                                        
                                                                                                        %Guaranteed
      obligations
                                                                                                        
                                                                                                        89.862.200-2
                                                                                                        
                                                                                                        Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        ING
                                                                                                        
                                                                                                        4,859
                                                                                                        
                                                                                                        2,496
                                                                                                        
                                                                                                        22,153
                                                                                                        
                                                                                                        106,767
                                                                                                        
                                                                                                        116,885
                                                                                                        
                                                                                                        253,160
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        5.19
                                                                                                        
                                                                                                        201,409
                                                                                                        
                                                                                                        4.63Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        CALYON
                                                                                                        
                                                                                                        8,099
                                                                                                        
                                                                                                        12,779
                                                                                                        
                                                                                                        62,824
                                                                                                        
                                                                                                        234,215
                                                                                                        
                                                                                                        40,878
                                                                                                        
                                                                                                        358,795
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        5.01
                                                                                                        
                                                                                                        325,998
                                                                                                        
                                                                                                        5.01Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        PEFCO
                                                                                                        
                                                                                                        5,939
                                                                                                        
                                                                                                        13,891
                                                                                                        
                                                                                                        59,513
                                                                                                        
                                                                                                        317,409
                                                                                                        
                                                                                                        279,604
                                                                                                        
                                                                                                        676,356
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        5.14
                                                                                                        
                                                                                                        552,605
                                                                                                        
                                                                                                        4.58Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        BNP PARIBAS
                                                                                                        
                                                                                                        7,823
                                                                                                        
                                                                                                        16,304
                                                                                                        
                                                                                                        72,581
                                                                                                        
                                                                                                        393,180
                                                                                                        
                                                                                                        529,928
                                                                                                        
                                                                                                        1,019,816
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        3.86
                                                                                                        
                                                                                                        840,814
                                                                                                        
                                                                                                        3.72Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        RBS
                                                                                                        
                                                                                                        2,034
                                                                                                        
                                                                                                        4,049
                                                                                                        
                                                                                                        18,250
                                                                                                        
                                                                                                        97,334
                                                                                                        
                                                                                                        135,929
                                                                                                        
                                                                                                        257,596
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        6.40
                                                                                                        
                                                                                                        191,879
                                                                                                        
                                                                                                        5.67Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        WELLS FARGO
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        1,551
                                                                                                        
                                                                                                        5,637
                                                                                                        
                                                                                                        29,984
                                                                                                        
                                                                                                        52,100
                                                                                                        
                                                                                                        89,272
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        3.61
                                                                                                        
                                                                                                        72,770
                                                                                                        
                                                                                                        3.50Financial
      leases
                                                                                                        
                                                                                                        89.862.200-2
                                                                                                        
                                                                                                        Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        ING
                                                                                                        
                                                                                                        3,940
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        11,790
                                                                                                        
                                                                                                        82,666
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        98,396
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        4.45
                                                                                                        
                                                                                                        89,389
                                                                                                        
                                                                                                        3.98Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        CALYON
                                                                                                        
                                                                                                        550
                                                                                                        
                                                                                                        1,665
                                                                                                        
                                                                                                        6,659
                                                                                                        
                                                                                                        49,697
                                                                                                        
                                                                                                        41,394
                                                                                                        
                                                                                                        99,965
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        1.26
                                                                                                        
                                                                                                        95,036
                                                                                                        
                                                                                                        1.24Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        CITIBANK
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        1,585
                                                                                                        
                                                                                                        4,920
                                                                                                        
                                                                                                        33,656
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        40,161
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        1.10
                                                                                                        
                                                                                                        39,018
                                                                                                        
                                                                                                        1.03Lan
      Airlines S.A
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        S.
      CHARTERED
                                                                                                        
                                                                                                        4,232
                                                                                                        
                                                                                                        5,477
                                                                                                        
                                                                                                        19,053
                                                                                                        
                                                                                                        29,958
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        58,720
                                                                                                        
                                                                                                        Quarterly
                                                                                                        
                                                                                                        0.89
                                                                                                        
                                                                                                        58,247
                                                                                                        
                                                                                                        0.73Bank
      loans
                                                                                                        
                                                                                                        89.862.200-2
                                                                                                        
                                                                                                        Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        SANTANDER
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        930
                                                                                                        
                                                                                                        13,435
                                                                                                        
                                                                                                        52,335
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        66,700
                                                                                                        
                                                                                                        Semiannual
                                                                                                        
                                                                                                        3.77
                                                                                                        
                                                                                                        50,000
                                                                                                        
                                                                                                        3.68Lan
      Airlines S.S.
                                                                                                        
                                                                                                        CLP
                                                                                                        
                                                                                                        CORPBANCA
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        643
                                                                                                        
                                                                                                        11,993
                                                                                                        
                                                                                                        34,991
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        47,627
                                                                                                        
                                                                                                        Semiannual
                                                                                                        
                                                                                                        2.92
                                                                                                        
                                                                                                        45,356
                                                                                                        
                                                                                                        2.82Lan
      Airlines S.A
                                                                                                        
                                                                                                        CLP
                                                                                                        
                                                                                                        ITAU
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        10,348
                                                                                                        
                                                                                                        28,504
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        38,852
                                                                                                        
                                                                                                        Semiannual
                                                                                                        
                                                                                                        3.14
                                                                                                        
                                                                                                        36,876
                                                                                                        
                                                                                                        3.06Lan
      Airlines S.A
                                                                                                        
                                                                                                        CLP
                                                                                                        
                                                                                                        BCI
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        18,390
                                                                                                        
                                                                                                        50,287
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        68,677
                                                                                                        
                                                                                                        Semiannual
                                                                                                        
                                                                                                        3.38
                                                                                                        
                                                                                                        64,879
                                                                                                        
                                                                                                        3.30Lan
      Airlines S.A.
                                                                                                        
                                                                                                        CLP
                                                                                                        
                                                                                                        ESTADO
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        22,721
                                                                                                        
                                                                                                        62,520
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        85,241
                                                                                                        
                                                                                                        Semiannual
                                                                                                        
                                                                                                        3.12
                                                                                                        
                                                                                                        80,852
                                                                                                        
                                                                                                        3.06Derivatives
                                                                                                        
                                                                                                        89.862.200-2
                                                                                                        
                                                                                                        Lan
      Airlines S.A.
                                                                                                        
                                                                                                        US$
                                                                                                        
                                                                                                        OTHERS
                                                                                                        
                                                                                                        1,706
                                                                                                        
                                                                                                        3,412
                                                                                                        
                                                                                                        16,647
                                                                                                        
                                                                                                        51,200
                                                                                                        
                                                                                                        (2,279
                                                                                                        )
                                                                                                        70,686
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -Trade
      and other accounts payable
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        Lan
      Airlines S.A. and Subsidiaries
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        SUNDRY
                                                                                                        
                                                                                                        142,338
                                                                                                        
                                                                                                        235,100
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        72,000
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        449,438
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        -


F-36
 Table of Contents


Class of
liability for the analysis of liquidity risk ordered  by date of
maturity as of  December 31, 2008





Up to
                                                                                                  
                                                                                                  One to
                                                                                                  
                                                                                                  Three to
                                                                                                  
                                                                                                  One to
                                                                                                  
                                                                                                  FiveClass of
                                                                                                  
                                                                                                  Debtor
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  one
                                                                                                  
                                                                                                  three
                                                                                                  
                                                                                                  twelve
                                                                                                  
                                                                                                  five
                                                                                                  
                                                                                                  years or
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  Effective
                                                                                                  
                                                                                                  Nominal
                                                                                                  
                                                                                                  Nominalliability
                                                                                                  
                                                                                                  tax No.
                                                                                                  
                                                                                                  Debtor
                                                                                                  
                                                                                                  Currency
                                                                                                  
                                                                                                  Creditor
                                                                                                  
                                                                                                  month
                                                                                                  
                                                                                                  months
                                                                                                  
                                                                                                  months
                                                                                                  
                                                                                                  years
                                                                                                  
                                                                                                  more
                                                                                                  
                                                                                                  Total
                                                                                                  
                                                                                                  Amortization
                                                                                                  
                                                                                                  rate
                                                                                                  
                                                                                                  value
                                                                                                  
                                                                                                  rateThUS$
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  %
                                                                                                  
                                                                                                  ThUS$
                                                                                                  
                                                                                                  %Guaranteed
      obligations
                                                                                                  
                                                                                                  89.862.200-2
                                                                                                  
                                                                                                  Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  ING
                                                                                                  
                                                                                                  2,934
                                                                                                  
                                                                                                  2,521
                                                                                                  
                                                                                                  16,005
                                                                                                  
                                                                                                  80,577
                                                                                                  
                                                                                                  83,287
                                                                                                  
                                                                                                  185,324
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  5.34
                                                                                                  
                                                                                                  147,811
                                                                                                  
                                                                                                  4.86Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  CALYON
                                                                                                  
                                                                                                  9,359
                                                                                                  
                                                                                                  14,949
                                                                                                  
                                                                                                  69,166
                                                                                                  
                                                                                                  345,897
                                                                                                  
                                                                                                  142,471
                                                                                                  
                                                                                                  581,842
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  4.21
                                                                                                  
                                                                                                  493,629
                                                                                                  
                                                                                                  5.46Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  PEFCO
                                                                                                  
                                                                                                  5,939
                                                                                                  
                                                                                                  11,611
                                                                                                  
                                                                                                  52,665
                                                                                                  
                                                                                                  280,925
                                                                                                  
                                                                                                  349,840
                                                                                                  
                                                                                                  700,980
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  5.27
                                                                                                  
                                                                                                  554,927
                                                                                                  
                                                                                                  4.74Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  BNP PARIBAS
                                                                                                  
                                                                                                  6,670
                                                                                                  
                                                                                                  15,007
                                                                                                  
                                                                                                  63,104
                                                                                                  
                                                                                                  343,427
                                                                                                  
                                                                                                  517,761
                                                                                                  
                                                                                                  945,969
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  5.63
                                                                                                  
                                                                                                  732,412
                                                                                                  
                                                                                                  4.87Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  RBS
                                                                                                  
                                                                                                  2,034
                                                                                                  
                                                                                                  4,049
                                                                                                  
                                                                                                  18,250
                                                                                                  
                                                                                                  97,334
                                                                                                  
                                                                                                  160,263
                                                                                                  
                                                                                                  281,930
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  6.31
                                                                                                  
                                                                                                  204,689
                                                                                                  
                                                                                                  5.67Financial
      leases
                                                                                                  
                                                                                                  89.862.200-2
                                                                                                  
                                                                                                  Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  ING
                                                                                                  
                                                                                                  4,224
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  12,035
                                                                                                  
                                                                                                  63,899
                                                                                                  
                                                                                                  37,361
                                                                                                  
                                                                                                  117,519
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  5.58
                                                                                                  
                                                                                                  101,071
                                                                                                  
                                                                                                  5.18Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  CITIBANK
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  1,714
                                                                                                  
                                                                                                  4,951
                                                                                                  
                                                                                                  41,756
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  48,421
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  3.05
                                                                                                  
                                                                                                  44,741
                                                                                                  
                                                                                                  2.75Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  S. CHARTERED
                                                                                                  
                                                                                                  4,210
                                                                                                  
                                                                                                  5,498
                                                                                                  
                                                                                                  28,872
                                                                                                  
                                                                                                  62,132
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  100,712
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  1.59
                                                                                                  
                                                                                                  95,252
                                                                                                  
                                                                                                  2.72Bank
      loans
                                                                                                  
                                                                                                  89.862.200-2
                                                                                                  
                                                                                                  Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  OTHERS
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  3,465
                                                                                                  
                                                                                                  3,465
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  6,930
                                                                                                  
                                                                                                  Quarterly
                                                                                                  
                                                                                                  6.98
                                                                                                  
                                                                                                  6,752
                                                                                                  
                                                                                                  6.96Derivatives
                                                                                                  
                                                                                                  89.862.200-2
                                                                                                  
                                                                                                  Lan
      Airlines S.A.
                                                                                                  
                                                                                                  US$
                                                                                                  
                                                                                                  OTHERS
                                                                                                  
                                                                                                  19,576
                                                                                                  
                                                                                                  39,968
                                                                                                  
                                                                                                  119,696
                                                                                                  
                                                                                                  112,822
                                                                                                  
                                                                                                  55,562
                                                                                                  
                                                                                                  347,624
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -Trade
      and other accounts payable
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  Lan
      Airlines S.A. and Subsidiaries
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  SUNDRY
                                                                                                  
                                                                                                  94,889
                                                                                                  
                                                                                                  293,888
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  90,000
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  478,777
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  -


F-37
 Table of Contents


Class of
liability for the analysis of liquidity risk ordered by date of maturity as of
January 01, 2008





Up to
                                                                                                            
                                                                                                            On to
                                                                                                            
                                                                                                            three to
                                                                                                            
                                                                                                            One to
                                                                                                            
                                                                                                            FiveClass of
                                                                                                            
                                                                                                            Debtor
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            one
                                                                                                            
                                                                                                            three
                                                                                                            
                                                                                                            twelve
                                                                                                            
                                                                                                            five
                                                                                                            
                                                                                                            years or
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Effective
                                                                                                            
                                                                                                            Nominal
                                                                                                            
                                                                                                            Nominalliability
                                                                                                            
                                                                                                            Tax No.
                                                                                                            
                                                                                                            Detor
                                                                                                            
                                                                                                            Currency
                                                                                                            
                                                                                                            Creditor
                                                                                                            
                                                                                                            months
                                                                                                            
                                                                                                            months
                                                                                                            
                                                                                                            months
                                                                                                            
                                                                                                            years
                                                                                                            
                                                                                                            more
                                                                                                            
                                                                                                            Total
                                                                                                            
                                                                                                            Amortization
                                                                                                            
                                                                                                            rate
                                                                                                            
                                                                                                            Value
                                                                                                            
                                                                                                            rateThUS$
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            %
                                                                                                            
                                                                                                            ThUS$
                                                                                                            
                                                                                                            %Guaranteed
      obligations
                                                                                                            
                                                                                                            89.862.200-2
                                                                                                            
                                                                                                            Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            ING
                                                                                                            
                                                                                                            2,978
                                                                                                            
                                                                                                            593
                                                                                                            
                                                                                                            10,606
                                                                                                            
                                                                                                            55,801
                                                                                                            
                                                                                                            39,677
                                                                                                            
                                                                                                            109,655
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            5.42
                                                                                                            
                                                                                                            88,731
                                                                                                            
                                                                                                            5.23Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            CALYON
                                                                                                            
                                                                                                            9,621
                                                                                                            
                                                                                                            16,293
                                                                                                            
                                                                                                            76,143
                                                                                                            
                                                                                                            401,963
                                                                                                            
                                                                                                            204,287
                                                                                                            
                                                                                                            708,307
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            5.61
                                                                                                            
                                                                                                            561,753
                                                                                                            
                                                                                                            6.70Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            PEFCO
                                                                                                            
                                                                                                            5,939
                                                                                                            
                                                                                                            9,669
                                                                                                            
                                                                                                            46,841
                                                                                                            
                                                                                                            249,721
                                                                                                            
                                                                                                            361,582
                                                                                                            
                                                                                                            673,752
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            5.23
                                                                                                            
                                                                                                            525,519
                                                                                                            
                                                                                                            4.69Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            BNP PARIBAS
                                                                                                            
                                                                                                            1,605
                                                                                                            
                                                                                                            10,246
                                                                                                            
                                                                                                            35,315
                                                                                                            
                                                                                                            188,972
                                                                                                            
                                                                                                            297,305
                                                                                                            
                                                                                                            533,443
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            6.04
                                                                                                            
                                                                                                            395,698
                                                                                                            
                                                                                                            5.41Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            RBS
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            2,009
                                                                                                            
                                                                                                            6,028
                                                                                                            
                                                                                                            32,150
                                                                                                            
                                                                                                            56,263
                                                                                                            
                                                                                                            96,450
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            6.29
                                                                                                            
                                                                                                            69,397
                                                                                                            
                                                                                                            5.65Financial
      leases
                                                                                                            
                                                                                                            89.862.200-2
                                                                                                            
                                                                                                            Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            ING
                                                                                                            
                                                                                                            4,626
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            13,575
                                                                                                            
                                                                                                            68,345
                                                                                                            
                                                                                                            53,715
                                                                                                            
                                                                                                            140,261
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            5.76
                                                                                                            
                                                                                                            113,221
                                                                                                            
                                                                                                            5.49Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            CITIBANK
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            2,040
                                                                                                            
                                                                                                            5,947
                                                                                                            
                                                                                                            52,226
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            60,213
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            3.80
                                                                                                            
                                                                                                            50,103
                                                                                                            
                                                                                                            5.55Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            S. CHARTERED
                                                                                                            
                                                                                                            4,286
                                                                                                            
                                                                                                            5,975
                                                                                                            
                                                                                                            30,515
                                                                                                            
                                                                                                            102,234
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            143,010
                                                                                                            
                                                                                                            Quarterly
                                                                                                            
                                                                                                            2.76
                                                                                                            
                                                                                                            130,124
                                                                                                            
                                                                                                            5.27Derivatives
                                                                                                            
                                                                                                            89.862.200-2
                                                                                                            
                                                                                                            Lan
      Airlines S.A.
                                                                                                            
                                                                                                            US$
                                                                                                            
                                                                                                            OTHERS
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            284
                                                                                                            
                                                                                                            3,640
                                                                                                            
                                                                                                            46,344
                                                                                                            
                                                                                                            1,471
                                                                                                            
                                                                                                            51,739
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -Trade
      and other accounts payable
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Lan
      Airlines S.A. and Subsidiaries
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            SUNDRY
                                                                                                            
                                                                                                            89,433
                                                                                                            
                                                                                                            274,936
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            364,369
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            -


F-38
 Table of Contents


The
Company has fuel and interest rate hedging, strategies involving derivatives
contracts with different financial institutions. The Company has margin
facilities with each financial institution in order to regulate the mutual
exposure produced by changes in the market valuation of the derivatives. During
2008, with the fall in the fuel price, the Company was obliged to provide cash
guarantees for this concept.





At the
end of 2008, the Company had provided US$ 177,8  million in derivative
margin guarantees. At the end of December 31, 2009, it had recovered US$
175,4  million due to the expiry of fuel contracts, the rise in the
fuel price and rates, plus the replacement of cash guarantees with stand-by
letters of credit.





4.2.
            Capital
      risk management





The
Company’s objectives,  with respect to the management of capital, are
(i) to safeguard it in order to continue as an on-going business, (ii) to seek a
return for its shareholders, and (iii) to maintain an optimum capital structure
and reduce its cost.





In order
to maintain or adjust the capital structure, the Company could adjust the amount
of the dividends payable to shareholders, return capital to shareholders, issue
new shares or sell assets to reduce debt.





The
Company monitors the capital according to the leverage ratio, in line with
sector practice. This ratio is calculated as net adjusted debt to capital. Net
adjusted debt is total financial debt plus 8 times the operating lease payments
of the last 12 months, less total cash (measured as the sum of cash and cash
equivalents plus marketable securities). Capital is the amount of net equity
without the impact of the market value of derivatives, plus net adjusted
debt.





The
Company’s strategy in 2008 did not change as compared to 2007, and has consisted
of maintaining a leverage ratio of between 70% and 80% and an international
credit rating of higher than BBB- (the minimum required for being considered
investment grade). The leverage ratios as of December 31, 2009, December 31,
2008 and January 01, 2008 were as follows:





As of
                    
                    
                    As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Total
      loans
                    
                    
                    3,
      074,425
                    
                    
                    
                    2,
      657,200
                    
                    
                    
                    2,299,256Last
      twelve months Operating lease payment x 8
                    
                    
                    669,696
                    
                    
                    
                    564,216
                    
                    
                    
                    567,448Less:Cash
      and marketable securities
                    
                    
                    (791,912
                    )
                    
                    
                    (411,037
                    )
                    
                    
                    (467,022
                    )Total
      net adjusted debt
                    
                    
                    2,
      952,209
                    
                    
                    
                    2,
      810,379
                    
                    
                    
                    2,399,682Net
      equity
                    
                    
                    1,
      098,827
                    
                    
                    
                    761,775
                    
                    
                    
                    893,688Fair
      value of derivatives
                    
                    
                    92,230
                    
                    
                    
                    301,813
                    
                    
                    
                    45,425Total
      capital
                    
                    
                    4, 143,266
                    
                    
                    
                    3, 873,967
                    
                    
                    
                    3,338,795Leverage
      ratio
                    
                    
                    71,3
                    %
                    
                    
                    72.5
                    %
                    
                    
                    71,9
                    %


F-39
 Table of Contents





4.3.
Estimates of fair value





At
December 31, 2009, the Company maintained financial instruments that should be
recorded at fair value. These include:





(i)
Investments in short-term Mutual Funds (cash equivalent)


(ii)
Derivative contracts Interest Rate


(iii)
Fuel derivative contracts, and


(iv)
Currency derivatives contracts.





The
Company has classified the fair value measurement using a hierarchy that
reflects the level of information used in the assessment. This hierarchy
consists of 3 levels (I) fair value based on quoted in active markets for a
class of similar assets or liabilities, (II) fair value based on valuation
techniques that use information from market prices or market price similar
financial instruments (III) fair value based on valuation models that do not use
market information.





The fair
value of financial instruments traded in active markets, such as investments
acquired for trading, is based on quoted market prices at the close of the
period used the current price buyer. The fair value of financial assets not
traded in active markets (derivative contracts) is determined using valuation
techniques that maximize use of available market information. Valuation
techniques generally used by the Company are quoted market prices of similar
instruments and / or estimating the present value of future cash flows using
forward price curves of period-end market.





The
following table shows the classification of financial instruments at fair value
at 31 December 2009 depending on the level of information used in the
assessment:





Fair value
                
                
                Fair value measurementsAt December 31,
                
                
                Using values considered asDescription
                
                2009
                
                
                Level I
                
                
                Level II
                
                
                Level IIIThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$AssetsShort-term
      mutual funds
                
                
                175,537
                
                
                
                175,537
                
                
                
                -
                
                
                
                -Interest
      rate derivatives
                
                
                3,129
                
                
                
                -
                
                
                
                3,129
                
                
                
                -Fair
      value of fuel price derivatives
                
                
                14,448
                
                
                
                -
                
                
                
                14,448
                
                
                
                -Fair
      value of foreign currency derivatives
                
                
                25,472
                
                
                
                -
                
                
                
                25,472
                
                
                
                -LiabilitiesFair
      value interest rate derivatives
                
                
                69,433
                
                
                
                -
                
                
                
                69,433
                
                
                
                -Fair
      value of fuel price derivatives
                
                
                876
                
                
                
                -
                
                
                
                876
                
                
                
                -Fair
      value of foreign currency derivatives
                
                
                5,089
                
                
                
                -
                
                
                
                5,089
                
                
                
                -


F-40
 Table of Contents





Additionally,
at December 31, 2009, the Company has financial instruments which are not
recorded at fair value. In order to meet the disclosure requirements of fair
values the Company has valued these instruments as shown in the table
below:





As of December 31, 2009
                  
                  
                  As of December 31, 2008Book
                  
                  
                  Fair
                  
                  
                  Book
                  
                  
                  FairValue
                  
                  
                  value
                  
                  
                  Value
                  
                  
                  valueThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Cash
                  
                  
                  2,707
                  
                  
                  
                  2,707
                  
                  
                  
                  2,729
                  
                  
                  
                  2,729Bank
      balance
                  
                  
                  31,176
                  
                  
                  
                  31,176
                  
                  
                  
                  9,378
                  
                  
                  
                  9,378Time
      deposits
                  
                  
                  522,077
                  
                  
                  
                  522,077
                  
                  
                  
                  259,019
                  
                  
                  
                  259,019Other
      financial assets
                  
                  
                  60,415
                  
                  
                  
                  63,341
                  
                  
                  
                  10,065
                  
                  
                  
                  9,016Trade  and
      other accounts receivable
                  
                  
                  430,929
                  
                  
                  
                  430,929
                  
                  
                  
                  346,239
                  
                  
                  
                  346,239Accounts
      receivable from related entities
                  
                  
                  38
                  
                  
                  
                  38
                  
                  
                  
                  1,368
                  
                  
                  
                  1,368Financial
      liabilities
                  
                  
                  2,774,942
                  
                  
                  
                  2,900,232
                  
                  
                  
                  2,371,887
                  
                  
                  
                  2,706,668Others
      financial liabilities
                  
                  
                  307,318
                  
                  
                  
                  307,318
                  
                  
                  
                  286,658
                  
                  
                  
                  286,658Trade
      and other accounts payable
                  
                  
                  449,438
                  
                  
                  
                  449,438
                  
                  
                  
                  478,777
                  
                  
                  
                  478,777Accounts
      payable to related entities
                  
                  
                  297
                  
                  
                  
                  297
                  
                  
                  
                  302
                  
                  
                  
                  302





The book
value of accounts receivable and payable is assumed to approximate to their fair
values, due to the short-term nature of them .In the case of cash on hand, bank
balances, deposits and other financial liabilities, fair value approximates
their carrying value.





The fair
value of the financial debt, is estimated by discounting the future contractual
cash flows at the current market interest rate for similar financial
instruments.In the case
of other financial assets valuation was performed according to market price at
year end.





NOTE 5 - ACCOUNTING
ESTIMATES AND JUDGMENTS





The
Company has used estimates to value and book some of the assets, liabilities,
revenues, expenses and commitments; these basically refer to:





1.
            The
      evaluation of possible impairment loss for certain
  assets.


2.
            The
      useful life and residual value of fixed assets and intangible
      assets.


3.
            The
      criteria employed in the valuation of certain
  assets.


4.
            Air
      tickets sold that are not actually
used.


5.
            The
      calculation of deferred income at the period-end corresponding to the
      valuation of kilometers credited to holders of the Lan Pass loyalty card,
      pending their use.


6.
            The
      need for provisioning and, if required, the value of
  these


7.
            The
      recoverability of deferred tax
assets.





These
estimates are made on the basis of the best information available on the matters
analyzed.





In any
case, it is possible that events taking place in the future will force them to
be modified in the following periods, which would be carried out
prospectively.


F-41
 Table of Contents


NOTE 6 - INFORMATION BY
SEGMENTS





The
Company reports information by segments as established in IFRS 8 “Operative
segments”. This standard sets rules for the reporting of information by segments
in the financial statements, plus reporting about products and services,
geographical areas and principal customers. An operative segment is defined as a
component of an entity on which financial information is held separately and
which is evaluated regularly by the senior management in taking decisions with
respect to the assignment of resources and evaluation of results. The Company
believes that it has only one operative segment: air
transportation.


For the year endedDecember 31,2009
                      
                      
                      2008ThUS$
                      
                      
                      ThUS$Income
      from ordinary activities from external customers
                      
                      
                      3,655,513
                      
                      
                      
                      4,283,187Interest
      income
                      
                      
                      18,183
                      
                      
                      
                      18,480Interest
      expense
                      
                      
                      (153,109
                      )
                      
                      
                      (125,488
                      )Total
      Net  interest expense
                      
                      
                      (134,926
                      )
                      
                      
                      (107,008
                      )Depreciation
      and  amortization
                      
                      
                      (304,062
                      )
                      
                      
                      (256,499
                      )Segment
      profit to be reported on
                      
                      
                      231,126
                      
                      
                      
                      336,480Earnings
      on investments
                      
                      
                      315
                      
                      
                      
                      696Income
      tax
                      
                      
                      (44,487
                      )
                      
                      
                      (65,094
                      )Assets
      of segment
                      
                      
                      5.771,972
                      
                      
                      
                      5,196,866Investment
      in associates
                      
                      
                      1,236
                      
                      
                      
                      1,389Disbursements
      of non-monetary assets of the segment
                      
                      
                      555,279
                      
                      
                      
                      788,906





The
Company’s revenues by geographic area are as follows:


For the year endedDecember 31,2009
                
                
                2008Perú
                
                
                458,384
                
                
                
                432,979Argentina
                
                
                404,795
                
                
                
                437,759USA
                
                
                680,179
                
                
                
                946,235Europe
                
                
                343,819
                
                
                
                380,824Chile
                
                
                1,004,291
                
                
                
                1.149,084Others(*)
                
                
                764,045
                
                
                
                936,306Total
      (**)
                
                
                3,655,513
                
                
                
                4,283,187


F-42
 Table of Contents





The
Company allocates revenues by geographic area based on the point of sale of the
passenger ticket or cargo. The tangible assets mainly comprise aircraft and
aeronautical equipment, which are used throughout the different countries so it
is not possible to assign to a geographic area.





(*)
            Includes
      the rest of Latin America and Asia
Pacific.





(**)
              Includes
      operating revenues and other operating income, less interest income shown
      in Note 33.





NOTE 7 - CASH AND CASH
EQUIVALENTS





As of
                  
                  
                  As of
                  
                  
                  As of,December 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Cash
                  
                  
                  2,707
                  
                  
                  
                  2,729
                  
                  
                  
                  3,113Bank
      balances
                  
                  
                  31,176
                  
                  
                  
                  9,378
                  
                  
                  
                  8,361Time
      deposits
                  
                  
                  522,077
                  
                  
                  
                  259,019
                  
                  
                  
                  308,585Others
                  
                  
                  175,537
                  
                  
                  
                  129,846
                  
                  
                  
                  125,524Total
                  
                  
                  731,497
                  
                  
                  
                  400,972
                  
                  
                  
                  445,583





Cash and
cash equivalents are denominated in the following currencies at December 31,
2009, December 31, 2008 and January 01, 2008 are as follows:





As of
                  
                  
                  As of,
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$CurrencyArgentine
      peso
                  
                  
                  6,105
                  
                  
                  
                  8,235
                  
                  
                  
                  3,620Euro
                  
                  
                  13,255
                  
                  
                  
                  6,053
                  
                  
                  
                  2,299Brazilian
      real
                  
                  
                  3,041
                  
                  
                  
                  2,155
                  
                  
                  
                  322Chilean
      peso
                  
                  
                  435,514
                  (*)
                  
                  
                  124,932
                  
                  
                  
                  145,737US
      dollar
                  
                  
                  228,879
                  
                  
                  
                  212,721
                  
                  
                  
                  267,376Others
                  
                  
                  44,703
                  
                  
                  
                  46,876
                  
                  
                  
                  26,229Total
                  
                  
                  731,497
                  
                  
                  
                  400,972
                  
                  
                  
                  445,583





(*) The
company entered into currency derivative contracts (forward) by MUS $ 367,412,
for conversion of dollars from investments in pesos.





In
Venezuela, effective 2003, the authorities decreed that all remittances abroad
should be approved by the Currency Management Commission (CADIVI). Despite
having free availability of bolivars in Venezuela, the Company has certain
restrictions for freely remitting these funds outside Venezuela.  At
December 31, 2009 the amount subject to such restrictions in dollar terms is
ThUS$ 26,196 (ThUS$ 40,220 at 31 December 2008 and ThUS$ 25,316 as of January
01, 2008).





The
Company has no significant non-monetary transactions that should be reported nor
has it made acquisitions in companies in either period.


F-43
 Table of Contents


NOTE 8 - FINANCIAL
INSTRUMENTS





8.1.
              Financial
      instruments by category





December  31,
2009





Loans andHeld to
                
                
                accounts
                
                
                Hedging
                
                
                Held forAssets
                
                maturity
                
                
                receivable
                
                
                derivatives
                
                
                trading
                
                
                TotalThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Cash
      and cash equivalents
                
                
                -
                
                
                
                555,960
                
                
                
                -
                
                
                
                175,537
                
                
                
                731,497Others
      financial assets (*)
                
                
                60,923
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                60,923Trade
      and other accounts receivable
                
                
                -
                
                
                
                430,929
                
                
                
                -
                
                
                
                -
                
                
                
                430,929Accounts
      receivable from related entities
                
                
                -
                
                
                
                38
                
                
                
                -
                
                
                
                -
                
                
                
                38Hedge
      assets
                
                
                -
                
                
                
                -
                
                
                
                43,049
                
                
                
                -
                
                
                
                43,049Other
      assets
                
                
                -
                
                
                
                26,719
                
                
                
                -
                
                
                
                -
                
                
                
                26,719Total
                
                
                60,923
                
                
                
                1,013,646
                
                
                
                43,049
                
                
                
                175,537
                
                
                
                1,293,155





(*)
relate mostly to domestic and foreign bonds





Other financial
                
                
                Hedging
                
                
                Held forLiabilities
                
                liabilities
                
                
                derivatives
                
                
                trading
                
                
                TotalThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Interest-bearing
      loans
                
                
                2,774,942
                
                
                
                -
                
                
                
                -
                
                
                
                2,774,942Other
      financial debt
                
                
                299.483
                
                
                
                -
                
                
                
                7,835
                
                
                
                307,318Trade
      and other accounts payable
                
                
                449,438
                
                
                
                -
                
                
                
                -
                
                
                
                449,438Accounts
      payable to related entities
                
                
                297
                
                
                
                -
                
                
                
                -
                
                
                
                297Hedging
      liabilities
                
                
                -
                
                
                
                78,333
                
                
                
                -
                
                
                
                78,333Total
                
                
                3,524,160
                
                
                
                78,333
                
                
                
                7,835
                
                
                
                3,610,328





December
31, 2008


Loans andHeld to
                  
                  
                  accounts
                  
                  
                  Hedging
                  
                  
                  Held forAssets
                  
                  maturity
                  
                  
                  receivable
                  
                  
                  derivatives
                  
                  
                  trading
                  
                  
                  TotalThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Cash
      and cash equivalents
                  
                  
                  -
                  
                  
                  
                  271,126
                  
                  
                  
                  -
                  
                  
                  
                  129,846
                  
                  
                  
                  400,972Others
      financial assets (*)
                  
                  
                  10,571
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,571Trade
      and other accounts receivable
                  
                  
                  -
                  
                  
                  
                  346,239
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  346,239Accounts
      receivable from related entities
                  
                  
                  -
                  
                  
                  
                  1,368
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,368Hedge
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,345
                  
                  
                  
                  -
                  
                  
                  
                  3,345Other
      assets
                  
                  
                  -
                  
                  
                  
                  196,182
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  196,182Total
                  
                  
                  10,571
                  
                  
                  
                  814,915
                  
                  
                  
                  3,345
                  
                  
                  
                  129,846
                  
                  
                  
                  958,677





(*)
relate mostly to domestic and foreign bonds


F-44
 Table of Contents





Other financial
                
                
                Hedging
                
                
                Held forLiabilities
                
                liabilities
                
                
                derivatives
                
                
                trading
                
                
                TotalThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Interest-bearing
      loans
                
                
                2,371,887
                
                
                
                -
                
                
                
                -
                
                
                
                2,371,887Other
      financial debt
                
                
                285,313
                
                
                
                -
                
                
                
                1,345
                
                
                
                286,658Trade
      and other accounts payable
                
                
                478,777
                
                
                
                -
                
                
                
                
                
                
                
                478,777Accounts
      payable to related entities
                
                
                302
                
                
                
                -
                
                
                
                -
                
                
                
                302Hedging
      liabilities
                
                
                -
                
                
                
                348,498
                
                
                
                -
                
                
                
                348,498Total
                
                
                3,136,279
                
                
                
                348,498
                
                
                
                1,345
                
                
                
                3,486,122





January
01, 2008





Loans andHeld to
                  
                  
                  accounts
                  
                  
                  Hedging
                  
                  
                  Held forAssets
                  
                  maturity
                  
                  
                  receivable
                  
                  
                  derivatives
                  
                  
                  trading
                  
                  
                  TotalThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Cash
      and cash equivalents
                  
                  
                  -
                  
                  
                  
                  320,059
                  
                  
                  
                  -
                  
                  
                  
                  125,524
                  
                  
                  
                  445,583Others
      financial assets (*)
                  
                  
                  23,247
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,247Trade
      and other accounts receivable
                  
                  
                  -
                  
                  
                  
                  353,976
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  353,976Accounts
      receivable from related entities
                  
                  
                  -
                  
                  
                  
                  228
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  228Hedge
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,162
                  
                  
                  
                  -
                  
                  
                  
                  7,162Other
      assets
                  
                  
                  -
                  
                  
                  
                  22,277
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  22,277Total
                  
                  
                  23,247
                  
                  
                  
                  696,540
                  
                  
                  
                  7,162
                  
                  
                  
                  125,524
                  
                  
                  
                  852,473





(*)
relate mostly to domestic and foreign bonds





Other financial
                
                
                Hedging
                
                
                Held forLiabilities
                
                liabilities
                
                
                derivatives
                
                
                trading
                
                
                TotalThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Interest-bearing
      loans
                
                
                2,027,403
                
                
                
                -
                
                
                
                -
                
                
                
                2,027,403Other
      financial debt
                
                
                271,853
                
                
                
                -
                
                
                
                1,586
                
                
                
                273,439Trade
      and other accounts payable
                
                
                364,369
                
                
                
                -
                
                
                
                -
                
                
                
                364,369Accounts
      payable to related entities
                
                
                355
                
                
                
                -
                
                
                
                -
                
                
                
                355Hedging
      liabilities
                
                
                -
                
                
                
                54,751
                
                
                
                -
                
                
                
                54,751Total
                
                
                2,663,980
                
                
                
                54,751
                
                
                
                1,586
                
                
                
                2,720,317





8.2.
            Credit
      quality of financial assets





The
credit evaluation system used by the Company is that provided by IATA. Internal
systems are also used for particular evaluations or specific markets based on
trade reports available on the local market. The internal classification system
is complementary to the external one, i.e. for agencies or airlines not members
of IATA, the internal demands are greater. The bad-debt rate in the principal
countries where the Company has a presence is insignificant.


F-45
 Table of Contents





NOTE 9 - TRADE AND OTHER
ACCOUNTS RECEIVABLE





As of
                
                
                As of,
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Trade
      accounts receivable
                
                
                407,320
                
                
                
                297,603
                
                
                
                309,728Other
                
                
                47,426
                
                
                
                71,426
                
                
                
                66,194Total
      trade and other accounts receivable
                
                
                454,746
                
                
                
                369,029
                
                
                
                375,922Less:
      Allowance for impairment loss
                
                
                (23,817
                )
                
                
                (22,790
                )
                
                
                (21.946
                )Total
      trade and other accounts receivable net
                
                
                430,929
                
                
                
                346,239
                
                
                
                353,976Less:
      Non-current portion
                
                
                (7,190
                )
                
                
                (3,574
                )
                
                
                (4,543
                )Current
      trade and other  accounts receivable
                
                
                423,739
                
                
                
                342,665
                
                
                
                349,433





The fair
value of trade and other accounts receivable does not differ significantly from
their book value.





There are
overdue accounts receivable but that are not impaired. Maturity of these
accounts is as follows:


As of
                    
                    
                    As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Up
      to 3 months
                    
                    
                    10,094
                    
                    
                    
                    13,333
                    
                    
                    
                    14,178Between
      3 and 6 months
                    
                    
                    8,718
                    
                    
                    
                    20,578
                    
                    
                    
                    14,845Total
                    
                    
                    18,812
                    
                    
                    
                    33,911
                    
                    
                    
                    29,023





The amounts of impaired trade and other
accounts receivable are as follows:





As of
                
                
                As of
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Judicial
      and extra-judicial collection
                
                
                10,383
                
                
                
                8,749
                
                
                
                5,346Debtors
      under extra-judicial collection process
                
                
                5,031
                
                
                
                4,926
                
                
                
                4,917Total
                
                
                15,414
                
                
                
                13,675
                
                
                
                10,263




F-46
 Table of Contents





The book
values of the Company’s accounts receivable are denominated in the following
currencies:





As of
                
                
                As of
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$US
      dollar
                
                
                307,685
                
                
                
                191,749
                
                
                
                209,799Chilean
      peso
                
                
                59,252
                
                
                
                69,730
                
                
                
                66,982Euro
                
                
                17,496
                
                
                
                35,055
                
                
                
                18,445Argentine
      peso
                
                
                15,158
                
                
                
                16,445
                
                
                
                14,464Brazilian
      real
                
                
                11,190
                
                
                
                14,117
                
                
                
                15,963Australian
      dollar
                
                
                7,595
                
                
                
                6,745
                
                
                
                6,476Others
                
                
                12,553
                
                
                
                12,398
                
                
                
                21,847Total
                
                
                430,929
                
                
                
                346,239
                
                
                
                353,976





The
Company recorded allowances when there is evidence of impairment of trade
receivables. The impairment is by individual customer or market
signs.





Maturity
                      
                      ImpairmentOver
      1 year
                      
                      
                      100
                      %Between
      6 and 12 months
                      
                      
                      50
                      %Sensitivity
                      
                      Market
      CasesAssets
      under judicial collection
                      
                      
                      100
                      %





The
criteria used to determine whether there is objective evidence of loss through
impairment are:





-      Ageing
of the portfolio


-      Concrete
market signs, and


-      Concrete
evidence of impairment (default)





The
movement in the allowance for impairment loss of trade accounts and other
accounts receivables from January 01, 2008 and December 31, 2009 is as
follows:





ThUS$As
      of  January 01, 2008
                        
                        
                        (21,946
                        )Write-offs
                        
                        
                        4,797Increase
      in allowance
                        
                        
                        (5,641
                        )Balance
      as of December 31, 2008
                        
                        
                        (22,790
                        )As
      of  January 01, 2009
                        
                        
                        (22,790
                        )Write-offs
                        
                        
                        6,110Increase
      in allowance
                        
                        
                        (7,137
                        )Balance
      as of December 31, 2009
                        
                        
                        (23,817
                        )




F-47
 Table of Contents




Once
extra-judicial and judicial collection efforts are exhausted, the assets are
written off against the allowance. The Company only uses the allowance method
rather than direct write-off, to ensure control.





Historic
and current re-negotiations are not relevant and the policy is to analyze case
by case in order to classify them according to the existence of risk determining
whether it is appropriate to re-classify accounts as in pre-judicial recovery.
If such re-classification is justified, an allowance is made for the account,
whether overdue or falling due.


F-48
 Table of Contents


The
maximum credit-risk exposure at the date of presentation of the information is
the fair value of each one of the categories of accounts receivable indicated
above:





As of December 31, 2009
                  
                  
                  As of December 31, 2008
                  
                  
                  As of January 01, 2008Gross exposure
                  
                  
                  Gross
                  
                  
                  Exposure net
                  
                  
                  Gross exposure
                  
                  
                  Gross
                  
                  
                  Exposure net
                  
                  
                  Gross exposure
                  
                  
                  Gross
                  
                  
                  Exposure netaccording to
                  
                  
                  impaired
                  
                  
                  of risk
                  
                  
                  according to
                  
                  
                  impaired
                  
                  
                  of risk
                  
                  
                  according to
                  
                  
                  impaired
                  
                  
                  of riskbalance sheet
                  
                  
                  exposure
                  
                  
                  concentrations
                  
                  
                  balance sheet
                  
                  
                  exposure
                  
                  
                  concentrations
                  
                  
                  balance sheet
                  
                  
                  exposure
                  
                  
                  concentrationsThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Trade
      accounts receivable
                  
                  
                  407,320
                  
                  
                  
                  (23,817
                  )
                  
                  
                  383,503
                  
                  
                  
                  297,603
                  
                  
                  
                  (22,790
                  )
                  
                  
                  274,813
                  
                  
                  
                  309,728
                  
                  
                  
                  (21,946
                  )
                  
                  
                  287,782Other
                  
                  
                  47,426
                  
                  
                  
                  -
                  
                  
                  
                  47,426
                  
                  
                  
                  71,426
                  
                  
                  
                  -
                  
                  
                  
                  71,426
                  
                  
                  
                  66,194
                  
                  
                  
                  -
                  
                  
                  
                  66,194





There are
no relevant guarantees covering credit risk and these are valued when they are
liquidated; no materially important direct guarantees exist. Existing
guarantees, if appropriate, are made through IATA.


F-49
 Table of Contents


NOTE 10 - ACCOUNTS
RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES





The
accounts receivable from and payable to related entities as of December 31,
2009, December 31, 2008 and January 01, 2008 respectively, are as
follows:





a)
            Accounts
      Receivable


-
            Current





As of
                                                                
                                                                
                                                                As of
                                                                
                                                                
                                                                As ofCountry of
                                                                
                                                                December 31,
                                                                
                                                                
                                                                December 31,
                                                                
                                                                
                                                                January 01,
                                                                
                                                                Transaction
                                                                
                                                                Understanding the nature ofTAX No.
                                                                
                                                                Related party
                                                                
                                                                Relationship
                                                                
                                                                Origin
                                                                
                                                                2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2008
                                                                
                                                                Deadlines
                                                                
                                                                transaction settlementThUS$
                                                                
                                                                
                                                                ThUS$
                                                                
                                                                
                                                                ThUS$96.810.370-9
                                                                
                                                                Inversiones
      Costa Verde Ltda. y CPA.
                                                                
                                                                Controller
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                12
                                                                
                                                                
                                                                
                                                                6
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary96.778.310-2
                                                                
                                                                Concesionaria
      Chucumata S.A.
                                                                
                                                                Associate
                                                                
                                                                Chile
                                                                
                                                                
                                                                6
                                                                
                                                                
                                                                
                                                                3
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary9.259.640-0
                                                                
                                                                Claudia
      Urrutia U.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                139
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary56.080.790-2
                                                                
                                                                Asamblea
      de Comuneros deValle
      Escondido
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                55
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary74.501.400-3
                                                                
                                                                Club
      de Golf Valle Escondido
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                5
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary78.005.760-2
                                                                
                                                                Sociedad
      de Seguridad Aérea S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                905
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary87.752.000-5
                                                                
                                                                Granja
      Marina Tornagaleones S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                13
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary96.669.520-K
                                                                
                                                                Red
      de Televisión Chilevisión S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                3
                                                                
                                                                
                                                                
                                                                16
                                                                
                                                                
                                                                
                                                                121
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary96.718.470-5
                                                                
                                                                Valle
      Escondido
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                10
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary96.812.280-0
                                                                
                                                                San
      Alberto S.A. y Filiales
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                
                                                                29
                                                                
                                                                30
      to 45 Days
                                                                
                                                                Monetary96.969.680-0
                                                                
                                                                Lan
      Pax Group S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2
                                                                
                                                                30
      to 45 Days
                                                                
                                                                MonetaryTotal
      current assets
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                38
                                                                
                                                                
                                                                
                                                                1,117
                                                                
                                                                
                                                                
                                                                228





Non-Current





As
      of
                                                      
                                                      
                                                      As
      of
                                                      
                                                      
                                                      As
      ofCountry
      of
                                                      
                                                      December
      31,
                                                      
                                                      
                                                      December
      31,
                                                      
                                                      
                                                      January
      01,
                                                      
                                                      Transaction
                                                      
                                                      Understanding
      the nature ofTax
      No.
                                                      
                                                      Related
      party
                                                      
                                                      Relationship
                                                      
                                                      Origin
                                                      
                                                      2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2008
                                                      
                                                      Deadlines
                                                      
                                                      the
      transaction settlementThUS$
                                                      
                                                      
                                                      ThUS$
                                                      
                                                      
                                                      ThUS$9.259.640-0
                                                      
                                                      Claudia
      Urrutia U.
                                                      
                                                      Other
      related parties
                                                      
                                                      Chile
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      251
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      more
      than 1 year
                                                      
                                                      MonetaryTotal
      non-current assets
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      251
                                                      
                                                      
                                                      
                                                      -Total
      accounts receivable
                                                      
                                                      
                                                      38
                                                      
                                                      
                                                      
                                                      1,368
                                                      
                                                      
                                                      
                                                      228




For the
amounts involved were not made provisions for loan losses for the relevant
balances as at  December 31, 2009,  as of december 31, 2008
and January 01, 2008.




F-50
 Table of Contents




b)
            Accounts
      Payable





-
            Current




As of
                                                              
                                                              
                                                              As of
                                                              
                                                              
                                                              As ofCountry of
                                                              
                                                              December 31,
                                                              
                                                              
                                                              December 31,
                                                              
                                                              
                                                              January 01,
                                                              
                                                              Transaction
                                                              
                                                              Understanding the nature ofTax No.
                                                              
                                                              Related party
                                                              
                                                              Relationship
                                                              
                                                              Origin
                                                              
                                                              2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              2008
                                                              
                                                              Deadlines
                                                              
                                                              the transaction settlementThUS$
                                                              
                                                              
                                                              ThUS$
                                                              
                                                              
                                                              ThUS$96.778.310-2
                                                              
                                                              Concesionaria
      Chucumata S.A.
                                                              
                                                              Asociate
                                                              
                                                              Chile
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              3
                                                              
                                                              30
      to 45 Days
                                                              
                                                              Monetary96.847.880-K
                                                              
                                                              Lufthansa
      Lan TechnicalTraining
      S.A.
                                                              
                                                              Asociate
                                                              
                                                              Chile
                                                              
                                                              
                                                              246
                                                              
                                                              
                                                              
                                                              255
                                                              
                                                              
                                                              
                                                              259
                                                              
                                                              30
      to 45 Days
                                                              
                                                              Monetary96.921.070-3
                                                              
                                                              Austral
      Sociedad Concesionaria S.A.
                                                              
                                                              Asociate
                                                              
                                                              Chile
                                                              
                                                              
                                                              6
                                                              
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              33
                                                              
                                                              30
      to 45 Days
                                                              
                                                              Monetary87.752.000-5
                                                              
                                                              Granja
      Marina Tornagaleones S.A.
                                                              
                                                              Other
      related parties
                                                              
                                                              Chile
                                                              
                                                              
                                                              10
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              30
      to 45 Days
                                                              
                                                              Monetary96.888.630-4
                                                              
                                                              Sociedad
      ConcesionariaAero
      Sur S.A.
                                                              
                                                              Other
      related parties
                                                              
                                                              Chile
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              50
                                                              
                                                              30
      to 45 Days
                                                              
                                                              Monetary96.894.180-1
                                                              
                                                              Bancard
      Inversiones Ltda.
                                                              
                                                              Other
      related parties
                                                              
                                                              Chile
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              19
                                                              
                                                              
                                                              
                                                              10
                                                              
                                                              30
      to 45 Days
                                                              
                                                              MonetaryExtranjera
                                                              
                                                              Inversora
      Aeronáutica Argentina
                                                              
                                                              Other
      related parties
                                                              
                                                              Chile
                                                              
                                                              
                                                              35
                                                              
                                                              
                                                              
                                                              26
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              30
      to 45 Days
                                                              
                                                              MonetaryTotal
      current liabilities
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              297
                                                              
                                                              
                                                              
                                                              302
                                                              
                                                              
                                                              
                                                              355





Transactions
between related parties have been carried out on free-trade conditions between
interested and duly-informed parties.


F-51
 Table of Contents


NOTE 11 -
INVENTORIES





The
inventories at December 31, 2009, December 31, 2008 and January 01,2008
respectively, are detailed below:


As of
                
                
                As of
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Technical
      stock
                
                
                35,684
                
                
                
                35,798
                
                
                
                33,405Non-technical
      stock
                
                
                10,879
                
                
                
                10,152
                
                
                
                12,699Total
                
                
                46,563
                
                
                
                45,950
                
                
                
                46,104





The items
included in this heading are spare parts and materials that will be used mainly
in consumption in flight-services and maintenance services themselves and third
parties, these are valued at average acquisition cost, net of provision or
obsolescence that as of December 31, 2009 amounts to ThUS$ 808 (ThUS$ 567 as of
December 31, 2008 and ThUS$ 197 as of January 01, 2008). The resulting amounts
do not exceed the respective replacements values.





As of
December 31, 2009, the Company recorded ThUS$ 32,677 within the income
statement, mainly due to in-flight consumption and maintenance. This amount was
ThUS$ 35,147 as of December 31, 2008.





NOTE 12 - HEDGING
ASSETS





Hedging
assets as of December 31, 2009, December 31, 2008 and January 01, 2008, are as
follows:





As of
                
                
                As of
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$CurrentCash-flow
      hedge of interest-rate risk
                
                
                501
                
                
                
                612
                
                
                
                971Cash-flow
      hedge of currency risk
                
                
                23,691
                
                
                
                -
                
                
                
                -Cash-flow
      hedge of fuel-price risk
                
                
                14,448
                
                
                
                -
                
                
                
                4,385Total
                
                
                38,640
                
                
                
                612
                
                
                
                5,356Non-CurrentCash-flow
      hedge of interest-rate risk
                
                
                2,628
                
                
                
                2,733
                
                
                
                1,806Cash-flow
      hedge of currency risk
                
                
                1,781
                
                
                
                -
                
                
                
                -Total
                
                
                4,409
                
                
                
                2,733
                
                
                
                1,806Total
      hedging assets
                
                
                43,049
                
                
                
                3,345
                
                
                
                7,162





Foreign
currency derivatives are Cross Currency Swap contracts taken to cover the cash
flow of liabilities denominated in Chilean pesos and forward contracts to hedge
the fair value of investments in Chilean pesos





Detailed
disclosure of coverages (Note 27)


F-52
 Table of Contents


NOTE 13 - ADVANCE
PAYMENTS





Advance
payments as of December 31, 2009 as of December 31, 2008 and January 01, 2008
are as follows:





As of
                
                
                As of,
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Aircraft
      insurance and other
                
                
                5,978
                
                
                
                5,078
                
                
                
                4,133Aircraft
      leases
                
                
                6,204
                
                
                
                4,080
                
                
                
                5,333Others
                
                
                3,076
                
                
                
                2,360
                
                
                
                2,097Total
                
                
                15,258
                
                
                
                11,518
                
                
                
                11,563





NOTE 14 - OTHER
ASSETS





Other
assets as of December 31, 2009, as of December 31, 2008 and January 31, 2008,
are as follows:





As of
                
                
                As of,
                
                
                As ofDeccember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$CurrentDerivative
      margin guarantees
                
                
                2,400
                
                
                
                177,840
                
                
                
                -Deposits
      in guarantee (aircraft)
                
                
                308
                
                
                
                -
                
                
                
                3,634Other
      guarantees given
                
                
                8,904
                
                
                
                1,864
                
                
                
                2,121Others
                
                
                1,870
                
                
                
                2,018
                
                
                
                2,451Total
                
                
                13,482
                
                
                
                181,722
                
                
                
                8,206Non-CurrentDeposits
      in guarantee (aircraft)
                
                
                13,780
                
                
                
                13,680
                
                
                
                13,780Deferred
      expense for aircraft leasing
                
                
                7,328
                
                
                
                9,847
                
                
                
                15,253Other
      guarantees given
                
                
                1,327
                
                
                
                2,798
                
                
                
                2,742Others
                
                
                21,408
                
                
                
                15,876
                
                
                
                1,914Total
                
                
                43,843
                
                
                
                42,201
                
                
                
                33,689Total
      other assets
                
                
                57,325
                
                
                
                223,923
                
                
                
                41,895




F-53
 Table of Contents


NOTE 15 - NON-CURRENT ASSETS
AND DISPOSAL GROUPS HELD FOR SALE





Non-current
assets and disposal groups held for sale as of December 31, 2009, as of December
31, 2008 and January 31, 2008 are as follows:


As of
                
                
                As of,
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Engines
                
                
                4,180
                
                
                
                4,751
                
                
                
                -Inventories
      on consignment
                
                
                2,348
                
                
                
                4,564
                
                
                
                6,192Scrapped
      aircraft
                
                
                3,840
                
                
                
                911
                
                
                
                2,429Rotables
                
                
                551
                
                
                
                218
                
                
                
                2,163Total
                
                
                10,919
                
                
                
                10,444
                
                
                
                10,784





During
the financial year 2009 is made the sale of two aircraft, and eleven engines
(four and five respectively, during the same period of 2008), all Boeing 737
fleet. Also joined an aircraft, and an engine to item (three and five in
comparison to the year 2008), all Boeing 737 fleet.





Item
balances are presented net of provision that at December 31, 2009 amounting to
ThUS$ 4,179 (ThUS$ 2,155 al December 31, 2008 and ThUS$ 4,749 to January 01,
2008)





The
Company has no discontinued businesses as of December 31, 2009.





NOTE 16 - INVESTMENTS IN
SUBSIDIARIES





The
Company has investments in companies recognized as investments in subsidiaries.
All the companies defined as subsidiaries have been consolidated within the
financial statements of Lan Airlines S.A. and Subsidiaries. The consolidation
also includes specific-purpose companies.





The
following is a summary of financial information with respect to the sum of the
financial statements of subsidiary companies and specific-purpose
companies:





As of
December 31, 2009


Assets
                
                
                LiabilitiesThUS$
                
                
                ThUS$Current
                
                
                261,917
                
                
                
                359,230Non-current
                
                
                1,246,141
                
                
                
                757,164Total
                
                
                1,508,058
                
                
                
                1,116,394





As
      of December 31, 2008
                
                Assets
                
                
                LiabilitiesThUS$
                
                
                ThUS$Current
                
                
                261,128
                
                
                
                351,673Non-current
                
                
                1,298,674
                
                
                
                819,751Total
                
                
                1,559,802
                
                
                
                1,171,424




F-54
 Table of Contents





As of
January 01, 2008


Assets
                
                
                LiabilitesThUS$
                
                
                ThUS$Current
                
                
                262,474
                
                
                
                330,250Non-current
                
                
                1,417,520
                
                
                
                1,106,476Total
                
                
                1,679,994
                
                
                
                1,436,726




For
      the year endedDecember
      31,2009
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$Total
      operating revenues
                  
                  
                  1,567,503
                  
                  
                  
                  1,615,280Total
      expenses
                  
                  
                  (1,483,185
                  )
                  
                  
                  (1,747,050
                  )Total
      net income
                  
                  
                  84,318
                  
                  
                  
                  (131,770
                  )




F-55
 Table of Contents


Significant
subsidiaries detailed as of December 31, 2009





Nature and scope ofCountry
                              
                              
                              
                              
                              
                              significants restrictionsName of significant
                              
                              of
                              
                              Functional
                              
                              %
                              
                              on transferring fundssubsidiary
                              
                              incorporation
                              
                              Currency
                              
                              Ownership
                              
                              to controllerLan
      Perú S.A.
                              
                              Perú
                              
                              USD
                              
                              
                              70.00000
                              
                              Without
      significant restrictionsLan
      Cargo S.A.
                              
                              Chile
                              
                              USD
                              
                              
                              99.89804
                              
                              Without
      significant restrictionsLan
      Argentina S.A
                              
                              Argentina
                              
                              ARS
                              
                              
                              99.00000
                              
                              Without
      significant restrictionsTransporte
      Aéreo S.A.
                              
                              Chile
                              
                              USD
                              
                              
                              100.00000
                              
                              Without
      significant restrictionsAerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                              
                              Ecuador
                              
                              USD
                              
                              
                              71.916673
                              
                              Without
      significant
restrictions




Summary
financial information of significant subsidiaries as of December 31,
2009




For the year ended,December 31, 2009Amount
                  
                  
                  Amount
                  
                  
                  Amount
                  
                  
                  Amount
                  
                  
                  Amount
                  
                  
                  Amount
                  
                  
                  AmountAmountName
      of significant
                  
                  Total
                  
                  
                  Current
                  
                  
                  Non
      current
                  
                  
                  Total
                  
                  
                  Current
                  
                  
                  Non
      current
                  
                  
                  Operating
                  
                  
                  Netsubsidiary
                  
                  assets
                  
                  
                  assets
                  
                  
                  assets
                  
                  
                  liabilities
                  
                  
                  liabilities
                  
                  
                  liabilities
                  
                  
                  Revenue
                  
                  
                  IncomeThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Lan
      Perú S.A.
                  
                  
                  85,773
                  
                  
                  
                  75,886
                  
                  
                  
                  9,887
                  
                  
                  
                  75,221
                  
                  
                  
                  74,607
                  
                  
                  
                  614
                  
                  
                  
                  683,453
                  
                  
                  
                  4,830Lan
      Cargo S.A.
                  
                  
                  744,176
                  
                  
                  
                  174,147
                  
                  
                  
                  570,029
                  
                  
                  
                  374,378
                  
                  
                  
                  87,213
                  
                  
                  
                  287,165
                  
                  
                  
                  175,734
                  
                  
                  
                  97,186Lan
      Argentina S.A
                  
                  
                  96,720
                  
                  
                  
                  66,020
                  
                  
                  
                  30,700
                  
                  
                  
                  73,194
                  
                  
                  
                  72,521
                  
                  
                  
                  673
                  
                  
                  
                  316,859
                  
                  
                  
                  10,205Transporte
      Aéreo S.A.
                  
                  
                  319,340
                  
                  
                  
                  202,246
                  
                  
                  
                  117,094
                  
                  
                  
                  118,433
                  
                  
                  
                  21,256
                  
                  
                  
                  97,177
                  
                  
                  
                  251,398
                  
                  
                  
                  38,759Aerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                  
                  
                  43,638
                  
                  
                  
                  19,137
                  
                  
                  
                  24,501
                  
                  
                  
                  47,955
                  
                  
                  
                  34,953
                  
                  
                  
                  13,002
                  
                  
                  
                  195,718
                  
                  
                  
                  1,651




F-56
 Table of Contents




Significant
subsidiaries detailed as of December 31, 2008





Nature and scope ofCountry
                            
                            
                            
                            
                            
                            significants restrictionsName of significant
                            
                            of
                            
                            Functional
                            
                            %
                            
                            on transferring fundssubsidiary
                            
                            incorporation
                            
                            Currency
                            
                            Ownership
                            
                            to controllerLan
      Perú S.A.
                            
                            Perú
                            
                            USD
                            
                            
                            70.00000
                            
                            Without
      significant restrictionsLan
      Cargo S.A.
                            
                            Chile
                            
                            USD
                            
                            
                            99.89804
                            
                            Without
      significant restrictionsLan
      Argentina S.A
                            
                            Argentina
                            
                            ARS
                            
                            
                            99.00000
                            
                            Without
      significant restrictionsTransporte
      Aéreo S.A.
                            
                            Chile
                            
                            USD
                            
                            
                            100.00000
                            
                            Without
      significant restrictionsAerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                            
                            Ecuador
                            
                            USD
                            
                            
                            71.91673
                            
                            Without
      significant
restrictions




Summary
financial information of significant subsidiaries as of December 31,
2008




For the year ended,December 31, 2008Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                AmountName of significant
                
                Total
                
                
                Current
                
                
                Non current
                
                
                Total
                
                
                Current
                
                
                Non current
                
                
                Operating
                
                
                Netsubsidiary
                
                assets
                
                
                assets
                
                
                assets
                
                
                liabilities
                
                
                liabilities
                
                
                liabilities
                
                
                Revenue
                
                
                IncomeThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Lan
      Perú S.A.
                
                
                91,097
                
                
                
                80,409
                
                
                
                10,688
                
                
                
                84,333
                
                
                
                84,012
                
                
                
                321
                
                
                
                661,813
                
                
                
                748Lan
      Cargo S.A.
                
                
                741,869
                
                
                
                189,375
                
                
                
                552,494
                
                
                
                469,257
                
                
                
                145,647
                
                
                
                323,610
                
                
                
                228,091
                
                
                
                (60,452
                )Lan
      Argentina S.A
                
                
                98,327
                
                
                
                69,610
                
                
                
                28,717
                
                
                
                81,439
                
                
                
                60,300
                
                
                
                21,139
                
                
                
                287,794
                
                
                
                16,299Transporte
      Aéreo S.A.
                
                
                288,793
                
                
                
                160,470
                
                
                
                128,323
                
                
                
                126,645
                
                
                
                28,330
                
                
                
                98,315
                
                
                
                431,095
                
                
                
                66,708Aerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                
                
                36,965
                
                
                
                17,832
                
                
                
                19,133
                
                
                
                42,933
                
                
                
                30,242
                
                
                
                12,691
                
                
                
                193,950
                
                
                
                (3,585
                )




F-57
 Table of Contents




Significant
subsidiaries detailed as of January 01, 2008





Nature and scope ofCountry
                          
                          
                          
                          
                          
                          significants restrictionsName of significant
                          
                          of
                          
                          Functional
                          
                          %
                          
                          on transferring fundssubsidiary
                          
                          incorporation
                          
                          Currency
                          
                          Ownership
                          
                          to controllerLan
      Perú S.A.
                          
                          Perú
                          
                          USD
                          
                          
                          70.00000
                          
                          Without
      significant restrictionsLan
      Cargo S.A.
                          
                          Chile
                          
                          USD
                          
                          
                          99.89804
                          
                          Without
      significant restrictionsLan
      Argentina S.A
                          
                          Argentina
                          
                          ARS
                          
                          
                          99.00000
                          
                          Without
      significant restrictionsTransporte
      Aéreo S.A.
                          
                          Chile
                          
                          USD
                          
                          
                          100.00000
                          
                          Without
      significant restrictionsAerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                          
                          Ecuador
                          
                          USD
                          
                          
                          71.91673
                          
                          Without
      significant
restrictions





Summary
financial information of significant subsidiaries as of  January 01,
2008




Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                Amount
                
                
                AmountName of significant
                
                Total
                
                
                Current
                
                
                Non current
                
                
                Total
                
                
                Current
                
                
                Non currentsubsidiary
                
                assets
                
                
                assets
                
                
                assets
                
                
                liabilities
                
                
                liabilities
                
                
                liabilitiesThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$Lan
      Perú S.A.
                
                
                96,853
                
                
                
                87,569
                
                
                
                9,284
                
                
                
                89,448
                
                
                
                89,116
                
                
                
                332Lan
      Cargo S.A.
                
                
                749,449
                
                
                
                173,312
                
                
                
                576,137
                
                
                
                374,237
                
                
                
                73,158
                
                
                
                301,079Lan
      Argentina S.A
                
                
                63,940
                
                
                
                42,813
                
                
                
                21,127
                
                
                
                61,521
                
                
                
                61,521
                
                
                
                -Transporte
      Aéreo S.A.
                
                
                237,235
                
                
                
                101,246
                
                
                
                135,989
                
                
                
                141,795
                
                
                
                34,954
                
                
                
                106,841Aerolane
      Líneas AéreasNacionales
      de Ecuador S.A.
                
                
                29,868
                
                
                
                26,984
                
                
                
                2,884
                
                
                
                32,252
                
                
                
                24,638
                
                
                
                7,614




F-58
 Table of Contents


NOTE 17 - INVESTMENTS IN
ASSOCIATES





The
following summarized financial information is the sum of the financial
statements of the investees, corresponding to the statements of financial
position as of December 31, 2009 and December 31, 2008, and the statements of
income for the periods January 01 to December 31 2009, and January 01 to
December 31, 2008:


Assets
                  
                  
                  LiabilitiesThUS$
                  
                  
                  ThUS$As
      of December 31, 2009Current
                  
                  
                  5,338
                  
                  
                  
                  736Non-current
                  
                  
                  356
                  
                  
                  
                  -Total
                  
                  
                  5,694
                  
                  
                  
                  736





Assets
                  
                  
                  LiabilitiesThUS$
                  
                  
                  ThUS$As
      of December 31, 2008Current
                  
                  
                  3,831
                  
                  
                  
                  576Non-current
                  
                  
                  1,300
                  
                  
                  
                  238Total
                  
                  
                  5,131
                  
                  
                  
                  814





Assets
                  
                  
                  LiabilitiesThUS$
                  
                  
                  ThUS$As
      of January 01, 2008Current
                  
                  
                  4,221
                  
                  
                  
                  1,179Non-current
                  
                  
                  3,478
                  
                  
                  
                  215Total
                  
                  
                  7,699
                  
                  
                  
                  1,394





For the year endedDecember 31,2009
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$Total
      operating revenues
                        
                        
                        5,981
                        
                        
                        
                        5,972Total
      operating expenses
                        
                        
                        (4,486
                        )
                        
                        
                        (4,130
                        )Sum
      of net income
                        
                        
                        1,495
                        
                        
                        
                        1,842





The
Company has shown as investment in associates its holdings in the following
companies: Austral Sociedad Concesionaria S.A., Lufthansa Lan Technical Training
S.A. and Concesionaria Chucumata S.A. The Company made no investments in
associates during the year ended December 2009.


F-59
 Table of Contents




Country of
                                          
                                          FunctionalCompany
                                          
                                          incorporation
                                          
                                          Currency
                                          
                                          Percentage of ownership
                                          
                                          
                                          Cost of investmentAs of
                                          
                                          
                                          As of
                                          
                                          
                                          As of
                                          
                                          
                                          As of
                                          
                                          
                                          As of
                                          
                                          
                                          As ofDecember 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          January 01,
                                          
                                          
                                          December 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          January 01,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2008%
                                          
                                          
                                          %
                                          
                                          
                                          %
                                          
                                          
                                          ThUS$
                                          
                                          
                                          ThUS$
                                          
                                          
                                          ThUS$Austral
      Sociedad Concesionaria S.A.
                                          
                                          Chile
                                          
                                          CLP
                                          
                                          20.00
                                          
                                          
                                          20.00
                                          
                                          
                                          20.00
                                          
                                          
                                          661
                                          
                                          
                                          661
                                          
                                          
                                          661Lufthansa
      Lan Technical Training S.A.
                                          
                                          Chile
                                          
                                          CLP
                                          
                                          50.00
                                          
                                          
                                          50.00
                                          
                                          
                                          50.00
                                          
                                          
                                          702
                                          
                                          
                                          702
                                          
                                          
                                          702Concesionaria
      Chucumata S.A.
                                          
                                          Chile
                                          
                                          CLP
                                          
                                          16.70
                                          
                                          
                                          16.70
                                          
                                          
                                          16.70
                                          
                                          
                                          119
                                          
                                          
                                          119
                                          
                                          
                                          119





The
principal activities of these companies are as follows:





Austral
Sociedad Concesionaria S.A.: Construction, conservation, provision and
explotation of aeronautical services, exclusively for the Carlos Ibañez del
Campo Airport Passenger Terminal in Punta Arenas.





Lufthansa
Lan Technical Training S.A.: Provision of training services for the aeronautical
industry and other industries.





Concesionaria
Chucumata S.A.: Execution, construction, concession and provision of air
terminal services.





These
companies have not significant restrictions on the ability to transfer
funds.





The
movement of investments in associates for the periods January 01, 2008 and
December 31, 2009 is as follows:


ThUS$Opening
      balance as of January 1, 2008
                
                
                1,484Equity
      in earnings
                
                
                696Dividends
      received
                
                
                (791
                )Total
      changes in investments in associated entities
                
                
                (95
                )Closing
      balance as of December 31, 2008
                
                
                1,389





ThUS$Opening
      balance as of January 1, 2009
                
                
                1,389Equity
      in earnings
                
                
                315Participation
      in previous period items
                
                
                (54
                )Dividends
      received
                
                
                (414
                )Total
      changes in investments in associated entities
                
                
                (153
                )Closing
      balance as of December 31, 2009
                
                
                1,236





The
Company records the gain or loss on its investments in associates on a monthly
basis in the consolidated statement of income, using the equity method. The
Company has no investments in associates which are not accounted for by the
equity method





The
associates have not recognized in the periods reported changes directly in
equity that must be recognized by the Company.




F-60
 Table of Contents




NOTE 18 -INTANGIBLE
ASSETS





a)      Composition
and movement of intangible assets





Intangible
assets are as follows:


As of
                    
                    
                    As of,
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,Classes of intangible assets (net)
                    
                    2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Goodwill
      (net)
                    
                    
                    63,793
                    
                    
                    
                    62,927
                    
                    
                    
                    63,544Computer
      software (net)
                    
                    
                    34,087
                    
                    
                    
                    26,382
                    
                    
                    
                    24,348Other
      assets (net)
                    
                    
                    727
                    
                    
                    
                    1,065
                    
                    
                    
                    965Total
                    
                    
                    98,607
                    
                    
                    
                    90,374
                    
                    
                    
                    88,857





As
      of
                
                
                As
      of,
                
                
                As
      ofDecember
      31,
                
                
                December
      31,
                
                
                January
      01,Classes of intangible assets
      (gross)
                
                2009
                
                
                2008
                
                
                2008ThUS$
                
                
                ThUS$
                
                
                ThUS$Goodwill
      (gross)
                
                
                63,793
                
                
                
                62,927
                
                
                
                63,544Computer
      software (gross)
                
                
                63,585
                
                
                
                48,205
                
                
                
                40,526Other
      assets (gross)
                
                
                808
                
                
                
                1,184
                
                
                
                1,184Total
                
                
                128,186
                
                
                
                112,316
                
                
                
                105,254





The
movement of software and other assets from January 01, 2008 and December 31,
2009 is as follows:





Computer
                      
                      
                      Other
                      
                      
                      Totalsoftware net
                      
                      
                      assets net
                      
                      
                      netThUS$
                      
                      
                      ThUS$
                      
                      
                      ThUS$As
      of January l, 2008
                      
                      
                      24,348
                      
                      
                      
                      965
                      
                      
                      
                      25,313Additions
                      
                      
                      9,591
                      
                      
                      
                      1,170
                      
                      
                      
                      10,761Business
      disposals
                      
                      
                      -
                      
                      
                      
                      (961
                      )
                      
                      
                      (961
                      )Withdrawals
                      
                      
                      (875
                      )
                      
                      
                      -
                      
                      
                      
                      (875
                      )Amortization
                      
                      
                      (6,682
                      )
                      
                      
                      (109
                      )
                      
                      
                      (6,791
                      )Balances
      as of December 31, 2008
                      
                      
                      26,382
                      
                      
                      
                      1,065
                      
                      
                      
                      27,447




F-61
 Table of Contents


Computer
                  
                  
                  Other
                  
                  
                  Totalsoftware net
                  
                  
                  assets net
                  
                  
                  netThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$As
      of January 1, 2009
                  
                  
                  26,382
                  
                  
                  
                  1,065
                  
                  
                  
                  27,447Additions
                  
                  
                  14,881
                  
                  
                  
                  727
                  
                  
                  
                  15,608Withdrawals
                  
                  
                  (73
                  )
                  
                  
                  -
                  
                  
                  
                  (73
                  )Transfers
                  
                  
                  1,065
                  
                  
                  
                  (1,065
                  )
                  
                  
                  -Amortization
                  
                  
                  (8,168
                  )
                  
                  
                  -
                  
                  
                  
                  (8,168
                  )Balances
      as of December 31, 2009
                  
                  
                  34,087
                  
                  
                  
                  727
                  
                  
                  
                  34,814





Intangible
assets with a defined useful life comprise mainly computer software which has
all been acquired from third parties, for which the Company has defined useful
lives of between 4 and 7 years.





The
Company shows its intangible assets at cost and amortization is made on a
straight-line basis over their estimated useful lives. The amortization of each
period is shown in the consolidated statement of results in administrative
expenses. The accumulated amortization of computer programs as of December 31,
2009 amounts to ThUS$ 29,498 (ThUS$ 21,823 as of December 31, 2008 and ThUS$
16,397 as of January 01, 2008). The accumulated amortization of other
identifiable intangible assets as of December 31, 2009 amounts to ThUS$ 81
(ThUS$ 119 as of December 31, 2008 and ThUS$ 0 as of January 01,
2008).





b)
            Goodwill





With
respect to impairment losses of intangible assets, the management has no showns
signs of impairment with respect to goodwill and the Company has no other
intangible assets with an indefinite useful life.





The
movement of goodwill from January 01, 2008 and December 31, 2009 is as
follows:





Movement
of goodwill


ThUS$Opening
      balance as of January 1, 2008
                
                
                63,544Disposal
      of business
                
                
                (618
                )Increase
      due to exchange rate differences
                
                
                1Balances
      as of December 31, 2008
                
                
                62,927Opening
      balance as of January 1, 2009
                
                
                62,927Additions
                
                
                920Decrease
      due to exchange rate differences
                
                
                (54
                )Closing
      balance as of June 30, 2009
                
                
                63,793




F-62
 Table of Contents


NOTE 19 - PROPERTY, PLANT
AND EQUIPMENT





a)
            The
      detail and movement of the different categories of property, plant and
      equipment are shown below:





Gross value
                  
                  
                  Accumulated depreciation
                  
                  
                  Net valueAs of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  January 01,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Construction
      in progress
                  
                  
                  264.259
                  
                  
                  
                  267.844
                  
                  
                  
                  424.747
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  264.259
                  
                  
                  
                  267.844
                  
                  
                  
                  424.747Land
                  
                  
                  35.538
                  
                  
                  
                  35.538
                  
                  
                  
                  23.564
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  35.538
                  
                  
                  
                  35.538
                  
                  
                  
                  23.564Buildings
                  
                  
                  100.662
                  
                  
                  
                  94.792
                  
                  
                  
                  94.523
                  
                  
                  
                  (18.696
                  )
                  
                  
                  (16.582
                  )
                  
                  
                  (14.464
                  )
                  
                  
                  81.966
                  
                  
                  
                  78.210
                  
                  
                  
                  80.059Plant
      and equipment
                  
                  
                  4.051.718
                  
                  
                  
                  3.779.640
                  
                  
                  
                  3.001.377
                  
                  
                  
                  (820.036
                  )
                  
                  
                  (699.729
                  )
                  
                  
                  (583.069
                  )
                  
                  
                  3.231.682
                  
                  
                  
                  3.079.911
                  
                  
                  
                  2.418.308Information  technology
      equipment
                  
                  
                  75.185
                  
                  
                  
                  75.756
                  
                  
                  
                  73.930
                  
                  
                  
                  (60.142
                  )
                  
                  
                  (59.420
                  )
                  
                  
                  (56.668
                  )
                  
                  
                  15.043
                  
                  
                  
                  16.336
                  
                  
                  
                  17.262Fixed
      installations and accessories
                  
                  
                  45.526
                  
                  
                  
                  40.118
                  
                  
                  
                  40.058
                  
                  
                  
                  (21.867
                  )
                  
                  
                  (18.091
                  )
                  
                  
                  (16.697
                  )
                  
                  
                  23.659
                  
                  
                  
                  22.027
                  
                  
                  
                  23.361Motor
      vehicles
                  
                  
                  2.853
                  
                  
                  
                  2.654
                  
                  
                  
                  2.855
                  
                  
                  
                  (1.902
                  )
                  
                  
                  (1.845
                  )
                  
                  
                  (1.870
                  )
                  
                  
                  951
                  
                  
                  
                  809
                  
                  
                  
                  985Improvements
      to leased assets
                  
                  
                  76.536
                  
                  
                  
                  59.428
                  
                  
                  
                  27.515
                  
                  
                  
                  (26.250
                  )
                  
                  
                  (12.879
                  )
                  
                  
                  (6.895
                  )
                  
                  
                  50.286
                  
                  
                  
                  46.549
                  
                  
                  
                  20.620Other  property,
      plants and equipment
                  
                  
                  863.620
                  
                  
                  
                  709.116
                  
                  
                  
                  709.697
                  
                  
                  
                  (370.448
                  )
                  
                  
                  (290.277
                  )
                  
                  
                  (269.155
                  )
                  
                  
                  493.172
                  
                  
                  
                  418.839
                  
                  
                  
                  440.542Total
                  
                  
                  5.515.897
                  
                  
                  
                  5.064.886
                  
                  
                  
                  4.398.266
                  
                  
                  
                  (1.319.341
                  )
                  
                  
                  (1.098.823
                  )
                  
                  
                  (948.818
                  )
                  
                  
                  4.196.556
                  
                  
                  
                  3.966.063
                  
                  
                  
                  3.449.448




F-63
 Table of Contents


b)      As of December 31,
2008


Fixed
                          
                          
                          
                          
                          
                          Improvements
                          
                          
                          Other
                          
                          
                          Property,Plant
      and
                          
                          
                          Information
                          
                          
                          installations
      and
                          
                          
                          Motor
                          
                          
                          to
      leased
                          
                          
                          property,
                          
                          
                          plant
      andConstruction
                          
                          
                          
                          
                          
                          Buildings
                          
                          
                          equipment
                          
                          
                          technology
                          
                          
                          accessories
                          
                          
                          vehicles
                          
                          
                          assets
                          
                          
                          plant
      and
                          
                          
                          equipmentin
      progress
                          
                          
                          Land
                          
                          
                          net
                          
                          
                          net
                          
                          
                          equipment
                          
                          
                          net
                          
                          
                          net
                          
                          
                          net
                          
                          
                          equipment
      net
                          
                          
                          netThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$
                          
                          
                          ThUS$Opening
      balance as of January 01, 2008
                          
                          
                          424.747
                          
                          
                          
                          23.564
                          
                          
                          
                          80.059
                          
                          
                          
                          2.418.308
                          
                          
                          
                          17.262
                          
                          
                          
                          23.361
                          
                          
                          
                          985
                          
                          
                          
                          20.620
                          
                          
                          
                          440.542
                          
                          
                          
                          3.449.448Additions
                          
                          
                          5.430
                          
                          
                          
                          11.974
                          
                          
                          
                          238
                          
                          
                          
                          873.329
                          
                          
                          
                          5.381
                          
                          
                          
                          1.942
                          
                          
                          
                          62
                          
                          
                          
                          -
                          
                          
                          
                          17.912
                          
                          
                          
                          916.268Disposals
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (225
                          )
                          
                          
                          (1
                          )
                          
                          
                          -
                          
                          
                          
                          (2
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (228
                          )Transfers
      to (from) non current assets and groups
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (16.384
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (16.384
                          )Business
      disposals
                          
                          
                          (12
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (100
                          )
                          
                          
                          (256
                          )
                          
                          
                          (1.687
                          )
                          
                          
                          (17
                          )
                          
                          
                          -
                          
                          
                          
                          (74
                          )
                          
                          
                          (2.146
                          )Asset
      retirement
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (3.155
                          )
                          
                          
                          (41
                          )
                          
                          
                          -
                          
                          
                          
                          (16
                          )
                          
                          
                          -
                          
                          
                          
                          (692
                          )
                          
                          
                          (3.904
                          )Depreciation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2.118
                          )
                          
                          
                          (171.471
                          )
                          
                          
                          (5.717
                          )
                          
                          
                          (3.434
                          )
                          
                          
                          (206
                          )
                          
                          
                          (5.983
                          )
                          
                          
                          (34.068
                          )
                          
                          
                          (222.997
                          )Increases
      (decreases) due to exhanges differences
                          
                          
                          (11
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (633
                          )
                          
                          
                          (296
                          )
                          
                          
                          (620
                          )
                          
                          
                          (8
                          )
                          
                          
                          -
                          
                          
                          
                          (66
                          )
                          
                          
                          (1.634
                          )Other
      increases (decreases)
                          
                          
                          (162.310
                          )
                          
                          
                          -
                          
                          
                          
                          31
                          
                          
                          
                          (19.758
                          )
                          
                          
                          4
                          
                          
                          
                          2.465
                          
                          
                          
                          11
                          
                          
                          
                          31.912
                          
                          
                          
                          (4.715
                          )
                          
                          
                          (152.360
                          )Changes,
      total
                          
                          
                          (156.903
                          )
                          
                          
                          11.974
                          
                          
                          
                          (1.849
                          )
                          
                          
                          661.603
                          
                          
                          
                          (926
                          )
                          
                          
                          (1.334
                          )
                          
                          
                          (176
                          )
                          
                          
                          25.929
                          
                          
                          
                          (21.703
                          )
                          
                          
                          516.615Closing
      balance as of December 31, 2008
                          
                          
                          267.844
                          
                          
                          
                          35.538
                          
                          
                          
                          78.210
                          
                          
                          
                          3.079.911
                          
                          
                          
                          16.336
                          
                          
                          
                          22.027
                          
                          
                          
                          809
                          
                          
                          
                          46.549
                          
                          
                          
                          418.839
                          
                          
                          
                          3.966.063





c)      As
of December 31, 2009


Fixed
                  
                  
                  
                  
                  
                  Improvements
                  
                  
                  Other
                  
                  
                  Property,Plant
      and
                  
                  
                  Information
                  
                  
                  installations
      and
                  
                  
                  Motor
                  
                  
                  to
      leased
                  
                  
                  property,
                  
                  
                  plant
      andConstruction
                  
                  
                  
                  
                  
                  Buildings
                  
                  
                  equipment
                  
                  
                  technology
                  
                  
                  accessories
                  
                  
                  vehicles
                  
                  
                  assets
                  
                  
                  plant
      and
                  
                  
                  equipmentin
      progress
                  
                  
                  Land
                  
                  
                  net
                  
                  
                  net
                  
                  
                  equipment
                  
                  
                  net
                  
                  
                  net
                  
                  
                  net
                  
                  
                  equipment net
                  
                  
                  netThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Opening
      balance as of December 31, 2009
                  
                  
                  267.844
                  
                  
                  
                  35.538
                  
                  
                  
                  78.210
                  
                  
                  
                  3.079.911
                  
                  
                  
                  16.336
                  
                  
                  
                  22.027
                  
                  
                  
                  809
                  
                  
                  
                  46.549
                  
                  
                  
                  418.839
                  
                  
                  
                  3.966.063Additions
                  
                  
                  15.232
                  
                  
                  
                  -
                  
                  
                  
                  20
                  
                  
                  
                  531.038
                  
                  
                  
                  4.025
                  
                  
                  
                  2.109
                  
                  
                  
                  341
                  
                  
                  
                  863
                  
                  
                  
                  12.951
                  
                  
                  
                  566.579Disposals
                  
                  
                  (7
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (6.047
                  )
                  
                  
                  -
                  
                  
                  
                  (16
                  )
                  
                  
                  (25
                  )
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  (6.096
                  )Transfers
      to (from) non current assets and groups
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4.029
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4.029
                  )Asset
      retirement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2.299
                  )
                  
                  
                  (22
                  )
                  
                  
                  (5
                  )
                  
                  
                  (2
                  )
                  
                  
                  -
                  
                  
                  
                  (864
                  )
                  
                  
                  (3.192
                  )Depreciation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2.114
                  )
                  
                  
                  (199.673
                  )
                  
                  
                  (5.672
                  )
                  
                  
                  (3.777
                  )
                  
                  
                  (179
                  )
                  
                  
                  (13.371
                  )
                  
                  
                  (42.069
                  )
                  
                  
                  (266.855
                  )Increases
      (decreases) due to exhanges differences
                  
                  
                  (49
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2.034
                  )
                  
                  
                  278
                  
                  
                  
                  284
                  
                  
                  
                  (2
                  )
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  (1.518
                  )Other
      increases (decreases)
                  
                  
                  (18.761
                  )
                  
                  
                  -
                  
                  
                  
                  5.850
                  
                  
                  
                  (165.185
                  )
                  
                  
                  98
                  
                  
                  
                  3.037
                  
                  
                  
                  9
                  
                  
                  
                  16.245
                  
                  
                  
                  104.311
                  
                  
                  
                  (54.396
                  )Changes,
      total
                  
                  
                  (3.585
                  )
                  
                  
                  -
                  
                  
                  
                  3.756
                  
                  
                  
                  151.771
                  
                  
                  
                  (1.293
                  )
                  
                  
                  1.632
                  
                  
                  
                  142
                  
                  
                  
                  3.737
                  
                  
                  
                  74.333
                  
                  
                  
                  230.493Closing balance as of December 31,
      2009
                  
                  
                  264.259
                  
                  
                  
                  35.538
                  
                  
                  
                  81.966
                  
                  
                  
                  3.231.682
                  
                  
                  
                  15.043
                  
                  
                  
                  23.659
                  
                  
                  
                  951
                  
                  
                  
                  50.286
                  
                  
                  
                  493.172
                  
                  
                  
                  4.196.556




F-64
 Table of Contents


d)      Composition
of the fleet.





Aircraft
included in the Company’s property, plant and equipment:





As of
                                    
                                    
                                    As of
                                    
                                    
                                    As ofDecember 31,
                                    
                                    
                                    December 31,
                                    
                                    
                                    January 01,Aircraft
                                    
                                    Model
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2008Boeing 737
                                    
                                    200ADV
      (*)
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    5
                                    
                                    
                                    
                                    6Boeing
      767
                                    
                                    300ER
                                    
                                    
                                    
                                    17
                                    
                                    
                                    
                                    14
                                    
                                    
                                    
                                    10Boeing
      767
                                    
                                    300F
                                    
                                    
                                    
                                    8
                                    
                                    
                                    
                                    8
                                    
                                    
                                    
                                    8Boeing
      767
                                    
                                    200ER
      (**)
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1Airbus
      A318
                                    
                                    100
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    5Airbus
      A319
                                    
                                    100
                                    
                                    
                                    
                                    20
                                    
                                    
                                    
                                    17
                                    
                                    
                                    
                                    15Airbus
      A320
                                    
                                    200
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    14Airbus
      A340
                                    
                                    300
                                    
                                    
                                    
                                    4
                                    
                                    
                                    
                                    4
                                    
                                    
                                    
                                    4Total
                                    
                                    
                                    
                                    
                                    
                                    83
                                    
                                    
                                    
                                    80
                                    
                                    
                                    
                                    63





(*)
            Leased
      to Sky Service S.A.


(**)
            Leased
      to Aerovías de Mexico S.A.




Operating
leases:


As of
                                    
                                    
                                    As of
                                    
                                    
                                    As ofDecember 31,
                                    
                                    
                                    December 31,
                                    
                                    
                                    January 01,Aircraft
                                    
                                    Model
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2008Boeing
      737
                                    
                                    200ADV
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6Boeing
      767
                                    
                                    300ER
                                    
                                    
                                    
                                    10
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    12Boeing
      767
                                    
                                    300F
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1Boeing
      777
                                    
                                    Freighter
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Airbus
      A320
                                    
                                    200
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    3Airbus
      A340
                                    
                                    300
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1Total
                                    
                                    
                                    
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    23Total
      fleet
                                    
                                    
                                    
                                    
                                    
                                    
                                    99
                                    
                                    
                                    
                                    96
                                    
                                    
                                    
                                    86




F-65
 Table of Contents





e)      Method
used for the depreciation of property, plant and equipment:


Useful lifeMethod
                    
                    minimum
                    
                    
                    maximumBuildings
                    Straight
      line without residual value
                    
                    
                    20
                    
                    
                    
                    50Plant
      and equipment
                    Straight
      line with residual value of 20% in the Airbus fleet and 36% in the Boeing
      fleet
                    
                    
                    5
                    
                    
                    
                    20Information
      technology equipment
                    Straight
      line without residual value
                    
                    
                    5
                    
                    
                    
                    10Fixed
      installations and accessories
                    Straight
      line without residual value
                    
                    
                    10
                    
                    
                    
                    10Motor
      vehicles
                    Straight
      line without residual value
                    
                    
                    10
                    
                    
                    
                    10Improvements
      to leased assets
                    Straight
      line without residual value
                    
                    
                    5
                    
                    
                    
                    5Other
      property, plant and equipment
                    Straight
      line with residual value of 20% in theAirbus
      fleet and 36% in the Boeing fleet
                    
                    
                    3
                    
                    
                    
                    20





Depreciation
charged to income in the period, included in the consolidated statement of
income, amounts to ThUS$ 266,855 (ThUS$ 222,997 as of December 31, 2008).
Depreciation charges for the year are recognized in the areas of Cost of Sales
and Administrative Expenses in the consolidated statement of
income.





f)
            Additional
      information property, plant and
equipment:





i)      Property,
plant and equipment pledged as guarantee:





For the
year ended December 31, 2009, the Company sold its participation in the
permanent establishment Linnet Leasing Limited holder of four Airbus A320 ́s.
Moreover, direct guarantees are added  three Airbus
A319 ́s  and three Boeing 767 - 300 that joined the fleet, and two
spare engines for Boeing 767 fleet that were refinanced.





Description
of property, plant and equipment pledged as guarantee:





As of December 31,
                                                  
                                                  
                                                  As of December 31,
                                                  
                                                  
                                                  As of January 01,2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2008Creditor of
                                                  
                                                  Assets
                                                  
                                                  
                                                  
                                                  Existing
                                                  
                                                  
                                                  Book
                                                  
                                                  
                                                  Existing
                                                  
                                                  
                                                  Book
                                                  
                                                  
                                                  Existing
                                                  
                                                  
                                                  Bookguarantee
                                                  
                                                  committed
                                                  
                                                  Fleet
                                                  
                                                  debt
                                                  
                                                  
                                                  Value
                                                  
                                                  
                                                  debt
                                                  
                                                  
                                                  Value
                                                  
                                                  
                                                  debt
                                                  
                                                  
                                                  ValueThUS$
                                                  
                                                  
                                                  ThUS$
                                                  
                                                  
                                                  ThUS$
                                                  
                                                  
                                                  ThUS$
                                                  
                                                  
                                                  ThUS$
                                                  
                                                  
                                                  ThUS$Wilmington Trust
      Company
                                                  
                                                  Aircraft
      and engines
                                                  
                                                  Boeing
      767
                                                  
                                                  
                                                  1.069.077
                                                  
                                                  
                                                  
                                                  1.289.471
                                                  
                                                  
                                                  
                                                  913.447
                                                  
                                                  
                                                  
                                                  1.058.606
                                                  
                                                  
                                                  
                                                  618.341
                                                  
                                                  
                                                  
                                                  714.002BNP
      Paribas
                                                  
                                                  Aircraft
      and engines
                                                  
                                                  Airbus
      A319
                                                  
                                                  
                                                  324.584
                                                  
                                                  
                                                  
                                                  389.071
                                                  
                                                  
                                                  
                                                  258.430
                                                  
                                                  
                                                  
                                                  302.998
                                                  
                                                  
                                                  
                                                  212.719
                                                  
                                                  
                                                  
                                                  250.606Airbus
      A318
                                                  
                                                  
                                                  323.947
                                                  
                                                  
                                                  
                                                  380.928
                                                  
                                                  
                                                  
                                                  349.155
                                                  
                                                  
                                                  
                                                  401.610
                                                  
                                                  
                                                  
                                                  118.059
                                                  
                                                  
                                                  
                                                  138.061Airbus
      A320
                                                  
                                                  
                                                  119.567
                                                  
                                                  
                                                  
                                                  140.501
                                                  
                                                  
                                                  
                                                  128.729
                                                  
                                                  
                                                  
                                                  148.125
                                                  
                                                  
                                                  
                                                  66.747
                                                  
                                                  
                                                  
                                                  77.627Calyon
                                                  
                                                  Aircraft
      and engines
                                                  
                                                  Airbus
      A319
                                                  
                                                  
                                                  48.157
                                                  
                                                  
                                                  
                                                  53.998
                                                  
                                                  
                                                  
                                                  53.407
                                                  
                                                  
                                                  
                                                  57.904
                                                  
                                                  
                                                  
                                                  58.087
                                                  
                                                  
                                                  
                                                  62.137Airbus
      A320
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  103.026
                                                  
                                                  
                                                  
                                                  105.939
                                                  
                                                  
                                                  
                                                  110.551
                                                  
                                                  
                                                  
                                                  110.719Total
      direct guarantee
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  1.885.332
                                                  
                                                  
                                                  
                                                  2.253.969
                                                  
                                                  
                                                  
                                                  1.806.194
                                                  
                                                  
                                                  
                                                  2.075.182
                                                  
                                                  
                                                  
                                                  1.184.504
                                                  
                                                  
                                                  
                                                  1.353.152




F-66
 Table of Contents




The
amounts of existing debt are presented at nominal value. Book value corresponds
for the goods provided as guarantees.





Additionally,
there are indirect guarantees related to  assets recorded in property,
plant and equipment whose total debt at  December 31,2009 amounting to
ThUS $ 281,691 (ThUS $ 242,541 at  December 31, 2008 and ThUS $
299,228 at  January 01, 2008).





ii) Commitments and
others.





Assets
fully depreciated and commitments for future purchases are as
follows:





As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Gross
      value of property, plants and equipment fully depreciated still in use
      (1)
                  
                  
                  53,417
                  
                  
                  
                  49,046
                  
                  
                  
                  35,050Commitments
      for the acquisition of aircraft
                  
                  
                  8,880,000
                  
                  
                  
                  7,390,000
                  
                  
                  
                  7,090,000





(1)
            The
      amounts shown relate mainly to land support equipment and computer
      equipment and tools.





In
December 2009 it signed a purchase commitment with Airbus for the purchase of
another 30 aircraft of the A320 family with deliveries between 2011 and 2016.
The approximate amount, according to the manufacturer's list price, is ThUS$
1,972,000.





With the
above, as of December 31, 2009, and as a result of different aircraft purchase
contracts signed with Airbus S.A.S., there remain 45 Airbus aircraft of the A320
family to be delivered between 2010 and 2016. The approximate amount is ThUS$
2,970,000, according to the manufacturer’s price list.





As
December, 2009, and as a result of different aircraft purchase contracts signed
with The Boeing Company, there remain 7 B767-300ER aircraft to be delivered by
December 2012, 1 B777 – Freighter aircraft for delivery in 2012 and
26  B787  Dreamliner aircraft for delivery between the years 2015 and
2019. The approximate amount is ThUS$ 5,910,000, according to the manufacturer’s
price list. In addition, the Company has purchase options over 2 B767-300ER and
15 B787 Dreamliner aircraft.





iii)
            Capitalized
      interest costs with respect to property, plant and
    equipment.





As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Rate
      of capitalization of capitalized interest costs
                    
                    %
                    
                    
                    4.33
                    
                    
                    
                    5.26Costs
      of capitalized interest
                    
                    ThUS$
                    
                    
                    9,943
                    
                    
                    
                    18,821




F-67
 Table of Contents





iv)
            Financial
      leases





The
detail of the main financial leases is as follows:




As of
                      
                      
                      As of
                      
                      
                      As ofDecember 31,
                      
                      
                      December 31,
                      
                      
                      January 01Lessor
                      
                      Aircraft
                      
                      2009
                      
                      
                      2008
                      
                      
                      2008Condor
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      2Condor
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      1Bluebird
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      2Eagle
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      1Eagle
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      1Seagull
      Leasing LLC
                      
                      Boeing
      767
                      
                      
                      1
                      
                      
                      
                      1
                      
                      
                      
                      1Linnet
      Leasing Limited
                      
                      Airbus
      320
                      
                      
                      4
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      12
                      
                      
                      
                      8
                      
                      
                      
                      8





Leasing
contracts where the lessee acts as the parent company of aircraft set a duration
of 12 years and quarterly payments of obligations. Additionally, the tenant will
hire and have outstanding obligations of insurance coverage for the aircraft,
perform maintenance on them to update their own cost and airworthiness
certificates.





Fixed
assets acquired under financial leases are classified as Other fixed assets in
Property, plant and equipment. As of December 31, 2009, the Company has 12
aircraft and 1 spare engine recorded as financial leases (8 aircraft and 1 spare
engine as of December 31, 2008, and 8 aircraft and 1 spare engines as of January
01, 2008). As a result of the sale of its holding in the permanent establishment
Linnet Leasing Limited in March 2009, the parent Company increased its number of
leased aircraft by 4 Airbus A320 with respect to December 31, 2008.





The net
value of assets under financial leases as of December 31, 2009 amounts to ThUS$
458,417 (ThUS$ 382,530 as of December 31, 2008 and ThUS$ 397,423 as of
January 01, 2008).





The
minimum payments under financial leases are as follows:





As of
December 31, 2009


Gross
                    
                    
                    
                    
                    
                    Presentvalue
                    
                    
                    Interest
                    
                    
                    valueThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$No
      later than one year
                    
                    
                    54,473
                    
                    
                    
                    4,846
                    
                    
                    
                    49,627Between
      one and five years
                    
                    
                    185,952
                    
                    
                    
                    9,584
                    
                    
                    
                    176,367Over
      five years
                    
                    
                    41,266
                    
                    
                    
                    129
                    
                    
                    
                    41,137Total
                    
                    
                    281,691
                    
                    
                    
                    14,559
                    
                    
                    
                    267,131




F-68
 Table of Contents





As of
December 31, 2008


Gross
                    
                    
                    
                    
                    
                    Presentvalue
                    
                    
                    Interest
                    
                    
                    valueThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$No
      later than one year
                    
                    
                    64,300
                    
                    
                    
                    7,355
                    
                    
                    
                    56,945Between
      one and five years
                    
                    
                    208,608
                    
                    
                    
                    18,736
                    
                    
                    
                    189,872Total
                    
                    
                    272,908
                    
                    
                    
                    26,091
                    
                    
                    
                    246,817





As of
January 01, 2008


Gross
                    
                    
                    
                    
                    
                    Presentvalue
                    
                    
                    Interest
                    
                    
                    valueThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$No
      later than one year
                    
                    
                    66,964
                    
                    
                    
                    9,677
                    
                    
                    
                    57,287Between
      one and five years
                    
                    
                    222,804
                    
                    
                    
                    29,310
                    
                    
                    
                    193,494Over
      five years
                    
                    
                    53,715
                    
                    
                    
                    3,030
                    
                    
                    
                    50,685Total
                    
                    
                    343,483
                    
                    
                    
                    42,017
                    
                    
                    
                    301,466





NOTE 20 – TAXES
AND  DEFERRED TAXES





Deferred
tax assets and liabilities are offset if there is a legal right to offset assets
and liabilities for income tax and the deferred taxes refer to the same fiscal
authority. The balances of deferred taxes are as follows:





Assets
                  
                  
                  LiabilitiesAs of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  January 01,Concept
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Depreciation
                  
                  
                  (476
                  )
                  
                  
                  (442
                  )
                  
                  
                  (289
                  )
                  
                  
                  221,712
                  
                  
                  
                  166,528
                  
                  
                  
                  141,939Amortization
                  
                  
                  2,103
                  
                  
                  
                  27
                  
                  
                  
                  320
                  
                  
                  
                  24,556
                  
                  
                  
                  29,858
                  
                  
                  
                  17,978Provisions
                  
                  
                  2,995
                  
                  
                  
                  1,858
                  
                  
                  
                  1,981
                  
                  
                  
                  5,097
                  
                  
                  
                  (2,224
                  )
                  
                  
                  15,928Post-employment
      benefit obligations
                  
                  
                  333
                  
                  
                  
                  194
                  
                  
                  
                  141
                  
                  
                  
                  (850
                  )
                  
                  
                  (659
                  )
                  
                  
                  (694
                  )Reevaluation
      of  financial instruments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18,891
                  )
                  
                  
                  (61,817
                  )
                  
                  
                  (9,304
                  )Tax
      losses
                  
                  
                  5,013
                  
                  
                  
                  10,182
                  
                  
                  
                  14,615
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Others
                  
                  
                  684
                  
                  
                  
                  766
                  
                  
                  
                  3,610
                  
                  
                  
                  8,995
                  
                  
                  
                  35,686
                  
                  
                  
                  5,199Total
                  
                  
                  10,652
                  
                  
                  
                  12,585
                  
                  
                  
                  20,378
                  
                  
                  
                  240,619
                  
                  
                  
                  167,372
                  
                  
                  
                  171,046




F-69
 Table of Contents


Deferred
tax assets not recognized:


As of
                        
                        
                        As of
                        
                        
                        As ofDecember 31,
                        
                        
                        December 31,
                        
                        
                        January 01,2009
                        
                        
                        2008
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$
                        
                        
                        ThUS$Temporary
      differences
                        
                        
                        2,152
                        
                        
                        
                        2,152
                        
                        
                        
                        6,402Tax
      losses
                        
                        
                        3,629
                        
                        
                        
                        1,972
                        
                        
                        
                        11,859Total
      deferred tax assets not recognized
                        
                        
                        5,781
                        
                        
                        
                        4,124
                        
                        
                        
                        18,261





Deferred
income tax assets are recognized for tax loss carry-forwards to the extend that
the realization of the related tax benefit through future taxable profits is
probable. The group did not recognize deferred income tax assets of Th US$ 3,629
in respect of losses amounting to ThUS$ 11,456   that can be
carried against future taxable income





Expense
(income) for deferred taxes and income tax for the years ended at December 31,
2009 and 2008 respectively, are attributable to the following:


For the year endedDecember 31,2009
                                              
                                              
                                              2008ThUS$
                                              
                                              
                                              ThUS$Expense
      for current income taxCurrent
      tax expense
                                              
                                              
                                              8,323
                                              
                                              
                                              
                                              10,306Adjustment
      to previous year’scurrent
      tax
                                              
                                              
                                              (2,177
                                              )
                                              
                                              
                                              (1,254
                                              )Other
      current tax expense
                                              
                                              
                                              5,556
                                              
                                              
                                              
                                              (959
                                              )Current
      tax expense, net, total
                                              
                                              
                                              11,702
                                              
                                              
                                              
                                              8,093Expense
      for deferred income taxesDeferred
      expense (income) for taxes related to the creationand
      reversal of temporary differences
                                              
                                              
                                              31,128
                                              
                                              
                                              
                                              70,598Increases
      (reduction) in value of deferred tax assets
                                              
                                              
                                              1,657
                                              
                                              
                                              
                                              (13,835
                                              )Other
      deferred tax expense
                                              
                                              
                                              -
                                              
                                              
                                              
                                              238Deferred
      tax expense, net, total
                                              
                                              
                                              32,785
                                              
                                              
                                              
                                              57,001Income
      tax expense
                                              
                                              
                                              44,487
                                              
                                              
                                              
                                              65,094




F-70
 Table of Contents


Composition
of income tax expense (income):





For the year endedDecember 31,2009
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$Current
      tax expense, net, foreign
                  
                  
                  2,185
                  
                  
                  
                  818Current
      tax expense, net, Chile
                  
                  
                  9,517
                  
                  
                  
                  7,275Current
      tax expense, net, total
                  
                  
                  11,702
                  
                  
                  
                  8,093Deferred
      tax expense, net, foreign
                  
                  
                  2,024
                  
                  
                  
                  7,664Deferred
      tax expense, net, Chile
                  
                  
                  30,761
                  
                  
                  
                  49,337Deferred
      tax expense, net, total
                  
                  
                  32,785
                  
                  
                  
                  57,001Income
      tax expense
                  
                  
                  44,487
                  
                  
                  
                  65,094





Reconciliation
of tax expense using the legal rate to the tax expense using the effective
rate:





For
      the year endedDecember
      31,2009
                          
                          
                          2008ThUS$
                          
                          
                          ThUS$Tax
      expense using the legal rate
                          
                          
                          46,854
                          
                          
                          
                          68,268Tax
      effect of rates in other jurisdictions
                          
                          
                          6,792
                          
                          
                          
                          7,684Tax
      effect of non-taxable operating revenues
                          
                          
                          (10,556
                          )
                          
                          
                          (8,225
                          )Tax
      effect of disallowable expenses
                          
                          
                          836
                          
                          
                          
                          11,252Tax
      effect of use of tax losses not previously recognized
                          
                          
                          1,801
                          
                          
                          
                          (14,137
                          )Other
      increases (decreases) in legal taxes charge
                          
                          
                          (1,240
                          )
                          
                          
                          252Total
      adjustments to tax expense using the legal rate
                          
                          
                          (2,367
                          )
                          
                          
                          (3,174
                          )Tax
      expense using the effective rate
                          
                          
                          44,487
                          
                          
                          
                          65,094




F-71
 Table of Contents





Reconciliation
of legal tax rate to effective tax rate:


For the year endedDecember 31,2009
                      
                      
                      2008%
                      
                      
                      %Legal
      tax rate
                      
                      
                      17.00
                      
                      
                      
                      17.00Effect
      of tax rates in other jurisdictions
                      
                      
                      2.46
                      
                      
                      
                      1.91Effect
      of tax rate on non-taxable operating revenues
                      
                      
                      (3.83
                      )
                      
                      
                      (2.05
                      )Effect
      of tax rate on disallowable expenses
                      
                      
                      0.30
                      
                      
                      
                      2.80Effect
      of tax rate on use of not-previously recognized tax losses
                      
                      
                      0.66
                      
                      
                      
                      (3.51
                      )Other
      increase (decrease) in legal tax rate
                      
                      
                      (0.45
                      )
                      
                      
                      0.06Total
      adjustment to the legal tax rate
                      
                      
                      (0.86
                      )
                      
                      
                      (0.79
                      )Total
      effective rate
                      
                      
                      16.14
                      
                      
                      
                      16.21





Deferred
taxes related to items charged to net equity:


As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Aggregate
      deferred taxation related to  items charged to net
      equity
                  
                  
                  (42,425
                  )
                  
                  
                  52,513
                  
                  
                  
                  9,304Total
      deferred taxes related to item charged to net equity
                  
                  
                  (42,425
                  )
                  
                  
                  52,513
                  
                  
                  
                  9,304





Effects
on deferred taxes of the components of other comprehensive income:





As of December 31, 2009AmountAmount before
                  
                  
                  Income tax
                  
                  
                  aftertaxes
                  
                  
                  expense (income)
                  
                  
                  taxesThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Cash-flow
      hedges
                  
                  
                  (252,508
                  )
                  
                  
                  42,925
                  
                  
                  
                  (209,583
                  )Translation
      adjustment
                  
                  
                  5,929
                  
                  
                  
                  (1,008
                  )
                  
                  
                  4,92141,917





As of December 31, 2008AmountAmount before
                    
                    
                    Income tax
                    
                    
                    aftertaxes
                    
                    
                    expense (income)
                    
                    
                    taxesThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Cash-flow
      hedges
                    
                    
                    308,901
                    
                    
                    
                    (52,513
                    )
                    
                    
                    256,388




F-72
 Table of Contents





As of January 31, 2008AmountAmount before
                      
                      
                      Income tax
                      
                      
                      aftertaxes
                      
                      
                      expense (income)
                      
                      
                      taxesThUS$
                      
                      
                      ThUS$
                      
                      
                      ThUS$Cash-flow
      hedges
                      
                      
                      54,729
                      
                      
                      
                      (9,304
                      )
                      
                      
                      45,425





NOTE 21 - INTEREST-BEARING
LOANS





Obligations
with credit institutions and debt instruments:





As of
                            
                            
                            As of
                            
                            
                            As ofDecember 31,
                            
                            
                            December 31,
                            
                            
                            January 01,2009
                            
                            
                            2008
                            
                            
                            2008ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$CurrentBank
      loans
                            
                            
                            71,124
                            
                            
                            
                            6,752
                            
                            
                            
                            12,826Guaranteed
      obligations
                            
                            
                            245,717
                            
                            
                            
                            214,031
                            
                            
                            
                            161,563Financial
      leases
                            
                            
                            68,076
                            
                            
                            
                            63,212
                            
                            
                            
                            61,546Other
      loans
                            
                            
                            504
                            
                            
                            
                            33
                            
                            
                            
                            -Total
      current
                            
                            
                            385,421
                            
                            
                            
                            284,028
                            
                            
                            
                            235,935Non-currentBank
      loans
                            
                            
                            207,657
                            
                            
                            
                            -
                            
                            
                            
                            6,753Guaranteed
      obligations
                            
                            
                            1,933,607
                            
                            
                            
                            1,898,070
                            
                            
                            
                            1,544,795Financial
      leases
                            
                            
                            213,733
                            
                            
                            
                            183,607
                            
                            
                            
                            239,920Other
      loans
                            
                            
                            34,524
                            
                            
                            
                            6,182
                            
                            
                            
                            -Total
      non-current
                            
                            
                            2,389,521
                            
                            
                            
                            2,087,859
                            
                            
                            
                            1,791,468Total
      obligations with financial institutions
                            
                            
                            2,774,942
                            
                            
                            
                            2,371,887
                            
                            
                            
                            2,027,403





All
interest-bearing liabilities are recorded according to the effective rate
method. Under IFRS rules for the case of loans with fixed interest rate, given
the effective rate does not vary throughout the loan, while loans with variable
interest rate, the effective rate changes to the date of each repricing debt.
This involves periodically re-estimating future cash flows so that they reflect
movements in market interest rates so as to obtain the new effective rate. The
methodology used by the Company to estimate the effective rate is to compute the
Internal Rate of Return (IRR) of the loan assuming a constant principal payment
and the payment of future interest rates using LIBOR 3-month futures reflect
market movements. For its part, the nominal rate is estimated as the spot Libor
rate plus margin (spread) of the loan. This methodology can result in effective
interest rates lower than nominal interest rates because interest accruals under
both methodologies are different throughout the loan and will depend on the
slope of the curve of future LIBOR rates.




F-73
 Table of Contents





The book
value of financial liabilities is denominated in the following
currencies:





As of
                    
                    
                    As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$US
      dollar
                    
                    
                    2,546,411
                    
                    
                    
                    2,371,887
                    
                    
                    
                    2,027,403Chilean
      peso
                    
                    
                    228,531
                    (*)
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    2,774,942
                    
                    
                    
                    2,371,887
                    
                    
                    
                    2,027,403





(*) The
company entered into currency swap contracts (cross currency swap), fixing the
payment of ThUS$ 170,741 of debt, in dollars.





NOTE 22 - OTHER FINANCIAL
DEBT





The
detail of other financial debt as of December 31, 2009, December 31, 2008 and
January 01, 2008, respectively, is as follows:


As of
                            
                            
                            As of
                            
                            
                            As ofDecember 31,
                            
                            
                            December 31,
                            
                            
                            January 01,2009
                            
                            
                            2008
                            
                            
                            2008ThUS$
                            
                            
                            ThUS$
                            
                            
                            ThUS$CurrentInterest
      rate derivative
                            
                            
                            2,031
                            
                            
                            
                            -
                            
                            
                            
                            -Currency
      derivative
                            
                            
                            -
                            
                            
                            
                            1,345
                            
                            
                            
                            1,586Total
      currente
                            
                            
                            2,031
                            
                            
                            
                            1,345
                            
                            
                            
                            1,586Non-currentFleet
      financing (JOL)
                            
                            
                            299,483
                            
                            
                            
                            285,313
                            
                            
                            
                            271,853Interest
      rate derivative
                            
                            
                            5,804
                            
                            
                            
                            -
                            
                            
                            
                            -Total
      non currente
                            
                            
                            305,287
                            
                            
                            
                            285,313
                            
                            
                            
                            271,853Total
      Other financial liabilities
                            
                            
                            307,318
                            
                            
                            
                            286,658
                            
                            
                            
                            273,439





F-74
 Table of Contents





NOTE 23- TRADE AND OTHER
ACCOUNTS PAYABLE





Trade and
other accounts payable as of December 31, 2009, December 31, 2008 and January
01, 2008 are as follows:


As of
                        
                        
                        As of
                        
                        
                        As ofDecember 31,
                        
                        
                        December 31,
                        
                        
                        January 01,2009
                        
                        
                        2008
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$
                        
                        
                        ThUS$CurrentTrade
      creditors
                        
                        
                        311,441
                        
                        
                        
                        298,067
                        
                        
                        
                        271,709Leasing
      obligations
                        
                        
                        9,441
                        
                        
                        
                        7,808
                        
                        
                        
                        7,931Other
      accounts payable
                        
                        
                        56,556
                        (*)
                        
                        
                        82,902
                        (*)
                        
                        
                        84,729Total
      current
                        
                        
                        377,438
                        
                        
                        
                        388,777
                        
                        
                        
                        364,369Non-currentOther
      accounts payable
                        
                        
                        72,000
                        (*)
                        
                        
                        90,000
                        (*)
                        
                        
                        -Total
      non-current
                        
                        
                        72,000
                        
                        
                        
                        90,000
                        
                        
                        
                        -Total
      trade and other accounts payable
                        
                        
                        449,438
                        
                        
                        
                        478,777
                        
                        
                        
                        364,369





(*)
Includes agreement entitled "Plea Agreement" with the Department of Justice of
the United Statesof America  for the periods enden  December
31, 2009 and 2008, respectively. See detail in note 24.





Below is
opening by way of trade payables and other payables:


As of
                    
                    
                    As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Baording
      Fee
                    
                    
                    72,291
                    
                    
                    
                    67,682
                    
                    
                    
                    48,823Aircraft
      fuel
                    
                    
                    71,881
                    
                    
                    
                    69,396
                    
                    
                    
                    103,133Landing
      fees
                    
                    
                    34,321
                    
                    
                    
                    31,183
                    
                    
                    
                    26,687Handling
      and ground handling
                    
                    
                    25,885
                    
                    
                    
                    23,476
                    
                    
                    
                    20,051Providers
      of technical buying
                    
                    
                    24,784
                    
                    
                    
                    58,390
                    
                    
                    
                    39,300Professional
      service and advice
                    
                    
                    18,536
                    
                    
                    
                    17,126
                    
                    
                    
                    10,263Other
      personal expenses
                    
                    
                    16,938
                    
                    
                    
                    37,072
                    
                    
                    
                    31,947Achievement
      of objectives
                    
                    
                    13,228
                    
                    
                    
                    18,246
                    
                    
                    
                    17,998Maintenance
                    
                    
                    15,821
                    
                    
                    
                    18,316
                    
                    
                    
                    17,782Marketing
                    
                    
                    11,624
                    
                    
                    
                    9,876
                    
                    
                    
                    10,592In-flight
      services
                    
                    
                    10,253
                    
                    
                    
                    8,824
                    
                    
                    
                    12,314Aircraft
      and engines lease
                    
                    
                    9,441
                    
                    
                    
                    7,808
                    
                    
                    
                    10,366U.S.A
      Department of Justice (*)
                    
                    
                    90,000
                    
                    
                    
                    109,000
                    
                    
                    
                    -Others
                    
                    
                    34,435
                    
                    
                    
                    2,382
                    
                    
                    
                    15,113Total
      trade and other accounts payable
                    
                    
                    449,438
                    
                    
                    
                    478,777
                    
                    
                    
                    364,369


F-75
 Table of Contents





(*)
Includes agreement entitled "Plea Agreement" with the Department of Justice of
the United States of America  for the periods
ended  December 31, 2009 and December 31,2008. See detail in note
24.





NOTE 24 -
PROVISIONS





The
detail of provisions as of December 31, 2009, December 31, 2008 and January 01,
2008 is as follows:


As of
                        
                        
                        As of
                        
                        
                        As ofDecember 31,
                        
                        
                        December 31,
                        
                        
                        January 01,2009
                        
                        
                        2008
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$
                        
                        
                        ThUS$Current
      provisionsProvision
      for legal claims (1)
                        
                        
                        970
                        
                        
                        
                        2,217
                        
                        
                        
                        -Total
      current
                        
                        
                        970
                        
                        
                        
                        2,217
                        
                        
                        
                        -Non-current
      provisionsProvision
      for legal claims (1)
                        
                        
                        1,834
                        
                        
                        
                        1,344
                        
                        
                        
                        399Provision
      for European Commission investigation (2)
                        
                        
                        25,000
                        
                        
                        
                        25,000
                        
                        
                        
                        25,000Total
      non-current
                        
                        
                        26,834
                        
                        
                        
                        26,344
                        
                        
                        
                        25,399Total
      provisions
                        
                        
                        27,804
                        
                        
                        
                        28,561
                        
                        
                        
                        25,399





(1)
            The
      amount represents a provision for certain demands made against the Company
      by former employees, regulatory agencies and others. The charge for the
      provision is shown in the consolidated statement of income in
      Administrative expenses. It is expected that the current balance as of
      December 31, 2009 will be applied during the next 12
    months.





(2)
              Provision
      made for proceedings brought by the European Commission for possible
      breaches of free competition in the freight
  market.





The
movement of provisions from January 01, 2008 and December 31, 2009 is as
follows:





U.S.A
                  
                  
                  EuropeanLegal
                  
                  
                  Justice
                  
                  
                  Commissionclaims
                  
                  
                  Department
                  
                  
                  Investigation
                  
                  
                  TotalThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$As
      of January 1, 2008
                  
                  
                  399
                  
                  
                  
                  -
                  
                  
                  
                  25,000
                  
                  
                  
                  25,399Increase
      in provisions
                  
                  
                  3,248
                  
                  
                  
                  109,000
                  
                  
                  
                  -
                  
                  
                  
                  112,248Provision
      used
                  
                  
                  (28
                  )
                  
                  
                  (109,000
                  )
                  
                  
                  -
                  
                  
                  
                  (109,028
                  )Exchange
      difference
                  
                  
                  (58
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (58
                  )Balance
      as of December 31, 2008
                  
                  
                  3,561
                  
                  
                  
                  -
                  
                  
                  
                  25,000
                  
                  
                  
                  28,561




F-76
 Table of Contents





U.S.A
                  
                  
                  EuropeanLegal
                  
                  
                  Justice
                  
                  
                  Commissionclaims
                  
                  
                  Department
                  
                  
                  Investigation
                  
                  
                  TotalThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$As
      of January 1, 2009
                  
                  
                  3,561
                  
                  
                  
                  -
                  
                  
                  
                  25,000
                  
                  
                  
                  28,561Increase
      in provisions
                  
                  
                  1,607
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,607Provision
      used
                  
                  
                  (2,679
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,679
                  )Exchange
      difference
                  
                  
                  315
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  315Balance
      as of December 31, 2009
                  
                  
                  2,804
                  
                  
                  
                  -
                  
                  
                  
                  25,000
                  
                  
                  
                  27,804





European Commission
Provision:  (a) This provision was established because of the
investigation begun by the Directorate General for Competition of the European
Commission of more than 25 cargo airlines, including Lan Cargo S.A., as part of
a global investigation begun in 2006 regarding possible unfair competition on
the air cargo market.  This was a joint investigation by the European
and U.S.A. authorities.  The start of the investigation was disclosed
through a material event notice given December 27, 2007.  The U.S.A.
portion of the global investigation concluded with respect to Lan Cargo S.A. and
its subsidiary, Aerolíneas Brasileiras S.A. (“ABSA”) by the signature of a Plea Agreement with the
U.S.A.  Department of Justice, as disclosed in a material event notice
on January 21, 2009; (b) There is no specific information on the date when the
Directorate General for Competition of the European Commission will render a
decision on this investigation, but it is expected to be during 2010 at the
latest.  The decision by the Directorate General can be appealed to
the Court of First Instance in Luxembourg and the decision on that appeal can be
further appealed to the Court of Justice of the European Union; (c) Although Lan
Cargo S.A. is a participant in the European Commission’s Leniency Program
because of its collaboration in that investigation, which will result in
significant discounts on the fine set by that authority, there are different
variables that make it impossible to predict the fine with any
certainty.  In the opinion of our outside attorneys in Brussels,
Belgium, in view of the directives of the European Commission on the matter and
taking into account the inherent uncertainties of the fine range, the Company
decided to make a provision for ThUS$25,000 (twenty-five million dollars of the
United States of America).  The EC’s decision may stipulate that Lan
Cargo S.A. and its parent company, Lan Airlines S.A., are both liable for the
payment of any fine.




F-77
 Table of Contents





NOTE 25 - OTHER
LIABILITIES





Other
liabilities as of December 31, 2009, December 31, 2008 and January 01, 2008 are
as follows:





As of
                      
                      
                      As of
                      
                      
                      As ofDecember 31,
                      
                      
                      December 31,
                      
                      
                      January 01,2009
                      
                      
                      2008
                      
                      
                      2008ThUS$
                      
                      
                      ThUS$
                      
                      
                      ThUS$CurrentDividends
      payable
                      
                      
                      70,387
                      
                      
                      
                      105,330
                      
                      
                      
                      120.074Other
      guarantees received
                      
                      
                      2,102
                      
                      
                      
                      1,620
                      
                      
                      
                      891Other
      sundry liabilities
                      
                      
                      935
                      
                      
                      
                      2,814
                      
                      
                      
                      672Total
      current
                      
                      
                      73,424
                      
                      
                      
                      109,764
                      
                      
                      
                      121,637Non-currentAircraft
      and engine maintenance
                      
                      
                      46,644
                      
                      
                      
                      37,007
                      
                      
                      
                      43,988Provision
      for vacations and bonuses
                      
                      
                      6,212
                      
                      
                      
                      6,699
                      
                      
                      
                      8,485Other
      sundry liabilities
                      
                      
                      2,182
                      
                      
                      
                      3,958
                      
                      
                      
                      9,113Total
      non- current
                      
                      
                      55,038
                      
                      
                      
                      47,664
                      
                      
                      
                      61,586Total
      other liabilities
                      
                      
                      128,462
                      
                      
                      
                      157,428
                      
                      
                      
                      183,223





NOTE 26 -OBLIGATIONS FOR LONG-TERM
AND POST-EMPLOYMENT BENEFITS





The
obligations for long term and post employment benefits from January 01, 2008 and
December 31, 2009, respectively, is as follows:


As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Non-currentPension
      payments
                  
                  
                  2,588
                  
                  
                  
                  2,121
                  
                  
                  
                  1,737Termination
      payments
                  
                  
                  1,053
                  
                  
                  
                  863
                  
                  
                  
                  1,438Other
      obligations
                  
                  
                  1,914
                  
                  
                  
                  881
                  
                  
                  
                  907Total
      non-current
                  
                  
                  5,555
                  
                  
                  
                  3,865
                  
                  
                  
                  4,082




F-78
 Table of Contents





(a) 
The movement in payments for pensions, termination and other obligations from
January 01, 2008 and December 31, 2009 is as follows:


ThUS$As
      of January 1, 2008
                            
                            
                            4,082Cost
      of current services
                            
                            
                            548Benefits
      paid
                            
                            
                            (765
                            )Balance
      as of December 31, 2008
                            
                            
                            3,865As
      of January 1, 2009
                            
                            
                            3,865Cost
      of current services
                            
                            
                            3,705Benefits
      paid
                            
                            
                            (2,015
                            )Balance
      as of June 30, 2009
                            
                            
                            5,555





(b) 
The provision for short-term benefits from January 01, 2008 and December 31,
2009 respectively, is detailed below:





As of
                    
                    
                    As of
                    
                    
                    As ofDecember 31,
                    
                    
                    December 31,
                    
                    
                    January 01,2009
                    
                    
                    2008
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$
                    
                    
                    ThUS$Profit-sharing
      and bonuses
                    
                    
                    29,596
                    
                    
                    
                    39,014
                    
                    
                    
                    29,696





The
participation in profits and bonuses are annual incentives plan for achievement
the objectives.





The
movement in the classes of employment expenses is the following:





For the year endedDecember 31,2009
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$Salaries
      and wages
                    
                    
                    476,404
                    
                    
                    
                    456,599Short-term
      employee benefits
                    
                    
                    58,530
                    
                    
                    
                    54,148Termination
      benefits
                    
                    
                    17,408
                    
                    
                    
                    13,757Other
      personnel expenses
                    
                    
                    84,329
                    
                    
                    
                    83,433Total
                    
                    
                    636,671
                    
                    
                    
                    607,937




F-79
 Table of Contents





NOTE 27 - HEDGING
LIABILITIES





Hedging
liabilities as of December 31, 2009, December 31, 2008 and January 01, 2008 as
follows:





As of
                              
                              
                              As of
                              
                              
                              As ofDecember 31,
                              
                              
                              December 31,
                              
                              
                              January 01,2009
                              
                              
                              2008
                              
                              
                              2008ThUS$
                              
                              
                              ThUS$
                              
                              
                              ThUS$CurrentInterest
      accrued since last payment dateSwap
      rates
                              
                              
                              2,935
                              
                              
                              
                              873
                              
                              
                              
                              -Cash-flow
      hedge of interest-rate risk
                              
                              
                              21,580
                              
                              
                              
                              19,491
                              
                              
                              
                              6,936Cash-flow
      hedge of foreign-currency risk
                              
                              
                              5,089
                              
                              
                              
                              -
                              
                              
                              
                              -Cash-flow
      hedge of fuel-price risk
                              
                              
                              876
                              
                              
                              
                              159,749
                              
                              
                              
                              -Total
                              
                              
                              30,480
                              
                              
                              
                              180,113
                              
                              
                              
                              6,936Non-currentCash-flow
      hedge of interest-rate risk
                              
                              
                              47,853
                              
                              
                              
                              157,872
                              
                              
                              
                              47,815Cash-flow
      hedge of fuel-price risk
                              
                              
                              -
                              
                              
                              
                              10,513
                              
                              
                              
                              -Total
                              
                              
                              47,853
                              
                              
                              
                              168,385
                              
                              
                              
                              47,815Total
                              
                              
                              78,333
                              
                              
                              
                              348,498
                              
                              
                              
                              54,751





The
foreign currency derivatives correspond to forward contracts to hedge the fair
value of investments in Chilean pesos





Hedging
operation





The fair
values by type of derivative contracts registered under the methodology of
coverage, are presented below:


As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Forward starting swaps
      (FSS) (1)
                  
                  
                  (31,928
                  )
                  
                  
                  (140,462
                  )
                  
                  
                  (46,416
                  )Interet
      rate options (2)
                  
                  
                  3,129
                  
                  
                  
                  3,344
                  
                  
                  
                  2,777Interest
      rate Swaps (3)
                  
                  
                  (37,506
                  )
                  
                  
                  (36,900
                  )
                  
                  
                  (8,335
                  )Cross currency swaps
      (CCIRS) (4)
                  
                  
                  19,706
                  
                  
                  
                  -
                  
                  
                  
                  -Fuel
      collars (5)
                  
                  
                  5,329
                  
                  
                  
                  (170,262
                  )
                  
                  
                  4,385Fuel
      Swap (6)
                  
                  
                  8,244
                  
                  
                  
                  -
                  
                  
                  
                  -Currency
      Forward
      (7)
                  
                  
                  677
                  
                  
                  
                  -
                  
                  
                  
                  -





(1)       
Covers the significant variations in cash flows associated with market risk
implicit in the changes in the interest rate 3-month Libor for long-term loans
incurred in the acquisition of aircraft to be produced from the future date the
contract. These contracts are recorded as contracts cash flow
hedges.




F-80
 Table of Contents


(2)       
Covers the significant variations in cash flows associated with market risk
implicit in the changes in the interest rate 3-month Libor for long-term loans
incurred in the acquisition of aircraft. These contracts are recorded as
contracts cash flow hedges.


(3)       
Covers the significant variations in cash flows associated with market risk
implicit in the increases in the Libor interest rate of 3 and 6 months for
long-term loans incurred in the acquisition of aircraft and bank loans. These
contracts are recorded as contracts cash flow hedges.


(4)       
Covers the significant variations in cash flows associated with market risk
implicit in the changes in the interest rate TAB 180 days and the dollar
exchange rate - Chilean peso bank loans.


(5)       
Covers significant variations in cash flows associated with market risk implicit
in the changes in the price of fuel for future purchases.


(6)       
Covers the significant variations in cash flows associated with market risk
implicit in the changes in the price of fuel for future purchases.


(7)       
Covers investments denominated in Chilean pesos to changes in the dollar
exchange rate - Chilean peso, with the aim of ensuring investment in
dollars.





During
the periods presented, the Company only maintains cash flow hedges. In the case
of fuel hedges, cash flow hedges subjects will occur and will impact results
from 1 to 9 months from the consolidated statement of financial position date,
whereas in the case of interest rate hedging, they will occur and will impact
results over the life of the related loans, which are valid for 12 years.
Regarding coverage rate and currency, the impact on outcomes will occur
continuously throughout the life of the contract (3 years), while flows will
occur quarterly. Finally, the results will impact investment hedges steadily
over the life of the investment (up to 3 months), while the flow occur at the
maturity of the investment.





During
the periods presented have not occurred hedging highly probable future
transactions that have not been made.





During
the periods presented, there has been no hedge ineffectiveness in the
consolidated statement of income





Since
none of the coverage resulted in the recognition of a nonfinancial asset, any
portion of the result of the derivatives recognized in equity was transferred to
the initial value of such assets.





The
amounts recognized in comprehensive income and transferred from net equity to
income during the exercise, are as follows:


As of
                        
                        
                        As ofDecember 31,
                        
                        
                        December 31,2009
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$Debit
      (credit) recognized in comprehensiveIncome
      during the exercise
                        
                        
                        252,508
                        
                        
                        
                        (308,901
                        )Debit
      (credit) transferred from net equity toIncome
      during the exercise
                        
                        
                        (193,534
                        )
                        
                        
                        (25,964
                        )




F-81
 Table of Contents





NOTE 28 - LIABILITIES
ACCRUED AT THE DATE OF THE REPORT





The
liabilities accrued as of December 31, 2009, December 31, 2008 and January 01,
2008 is as follows:





As of
                      
                      
                      As of
                      
                      
                      As ofDecember 31,
                      
                      
                      December 31,
                      
                      
                      January 01,2009
                      
                      
                      2008
                      
                      
                      2008ThUS$
                      
                      
                      ThUS$
                      
                      
                      ThUS$Aircraft
      and engine maintenance
                      
                      
                      29,055
                      
                      
                      
                      43,463
                      
                      
                      
                      55,630Accounts
      payable to personnel
                      
                      
                      33,890
                      
                      
                      
                      43,825
                      
                      
                      
                      38,939Accrued
      personnel expenses
                      
                      
                      24,576
                      
                      
                      
                      19,581
                      
                      
                      
                      19,930Others
      liabilities accrued
                      
                      
                      11,638
                      
                      
                      
                      23,806
                      
                      
                      
                      -Total
                      
                      
                      99,159
                      
                      
                      
                      130,675
                      
                      
                      
                      114,499





NOTE 29 -
EQUITY





a)      Capital





The
capital of the company is in the following form:





The
Company’s objective is to maintain an appropriate level of capitalization that
enables it to ensure access to the financial markets for carrying out its medium
and long-term objectives, optimizing the return for its shareholders and
maintaining a solid financial position.





The
capital of the Company at the end of each period amounts to ThUS$ 453,444,
divided into 338,790,909 common stock of a same series, of ordinary character,no
par value. There are no special series of shares and no privileges. The form of
its stock certificates and their issuance, exchange, disuse, loss, replacement
and other circumstances, and the transfer of the shares, is governed by the
provisions of Corporations Law and its regulations.





b)      Subscribed
and paid shares





As of
December 31, 2009, December 31, 2008, and January 01, 2008, the total number of
authorized common shares is 341 million shares of no par value. Of the total
shares subscribed, 338,790,909 shares have been fully paid, leaving 2,209,091
shares reserved for issuance under option contracts.




F-82
 Table of Contents


c)      Other
reserves





The
movement of other reserves from January 01, 2008 and December 31, 2009 is as
follows:





Hedge
                
                
                StockTranslation
                
                
                transactions
                
                
                option
                
                
                Otherreserve
                
                
                reserve
                
                
                plans
                
                
                reserves
                
                
                TotalThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$
                
                
                ThUS$As
      of January 1, 2008
                
                
                -
                
                
                
                (45,425
                )
                
                
                -
                
                
                
                (52
                )
                
                
                (45,477
                )Derivatives
      valuation losses
                
                
                -
                
                
                
                (308,901
                )
                
                
                -
                
                
                
                -
                
                
                
                (308,901
                )Deferred
      tax
                
                
                -
                
                
                
                52,513
                
                
                
                -
                
                
                
                -
                
                
                
                52,513Translation
      differences subsidiaries
                
                
                (6,192
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,192
                )Stock
      option plans
                
                
                -
                
                
                
                -
                
                
                
                1,801
                
                
                
                -
                
                
                
                1,801Balances
      as of December 31, 2008
                
                
                (6,192
                )
                
                
                (301,813
                )
                
                
                1,801
                
                
                
                (52
                )
                
                
                (306,256
                )





Hedge
                  
                  
                  StockTranslation
                  
                  
                  transactions
                  
                  
                  option
                  
                  
                  Otherreserve
                  
                  
                  reserve
                  
                  
                  plans
                  
                  
                  reserves
                  
                  
                  TotalThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$As
      of January 1, 2009
                  
                  
                  (6,192
                  )
                  
                  
                  (301,813
                  )
                  
                  
                  1,801
                  
                  
                  
                  (52
                  )
                  
                  
                  (306,256
                  )Derivatives
      valuation gains
                  
                  
                  -
                  
                  
                  
                  252,508
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  252,508Deferred
      tax
                  
                  
                  1,009
                  
                  
                  
                  (42,925
                  )
                  
                  
                  (507
                  )
                  
                  
                  -
                  
                  
                  
                  (42,423
                  )Translation
      differences subsidiaries
                  
                  
                  259
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  259Stock
      option plans
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,183
                  
                  
                  
                  -
                  
                  
                  
                  1,183Legal
      reserves
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  65
                  
                  
                  
                  65Others
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  (2,657
                  )
                  
                  
                  (2,657
                  )Balances
      as of December 31, 2009
                  
                  
                  (4,924
                  )
                  
                  
                  (92,230
                  )
                  
                  
                  2,477
                  
                  
                  
                  (2,644
                  )
                  
                  
                  (97,321
                  )





(c.1)        Translation
reserves





These
originate from exchange differences arising on the translation of any investment
in foreign entities (or Chilean with a functional currency different to that of
the parent), and of loans and other instruments in foreign currency designated
as hedges for such investments, are taken to equity. When the investment (all or
part) is sold or disposed of, these reserves are shown in the consolidated
statement of income as part of the loss or gain on the sale or
disposal.





(c.2)        Reserves
for hedging transactions





These
originate from the valuation at fair value at the end of each period of the
outstanding derivative contracts that have been defined as hedges. As and when
these contracts expire, these reserves should be adjusted and the corresponding
results shown.





(c.3)        Reserves
for stock option plans





These
reserves are related to the share-based payments explained in Note
39.


F-83
 Table of Contents


(c.4)        Other
sundry reserves





The
balance of other sundry reserves comprises the following:





As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Reserve
      for the adjustment of thevalue
      of fixed assets (1)
                  
                  
                  2,620
                  
                  
                  
                  2,620
                  
                  
                  
                  2,620Share
      issuance and placement costs (2)
                  
                  
                  (2,672
                  )
                  
                  
                  (2,672
                  )
                  
                  
                  (2,672
                  )Purchase
      minority investments
                  
                  
                  (2,657
                  )
                  
                  
                  -
                  
                  
                  
                  -Others
                  
                  
                  65
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  (2,644
                  )
                  
                  
                  (52
                  )
                  
                  
                  (52
                  )





(1)
            Corresponds
      to the technical revaluation of fixed assets authorized by the
      Superintendency of Securities and Insurance in 1979, in Circular No.
      1529.  The revaluation was optional and could be taken only
      once, the reserve is not distributable and can only be
      capitalized.





(2)
            As
      established in Circular 1,736 of the Superintendency of Securities and
      Insurance, the next extraordinary shareholders meeting to be held by the
      parent Company should approve that the share issuance and placement costs
      be deducted from the paid capital.





d)
            Retained
      earnings





The
movement in the retained earnings reserve from January 01, 2008 and December 31,
2009 is as follows:


ThUS$As
      of January 1, 2008
                  
                  
                  485,721Result
      for the period
                  
                  
                  336,480Dividends
                  
                  
                  (207,614
                  )Balance
      as of December 31, 2008
                  
                  
                  614,587





ThUS$As
      of January 1, 2009
                    
                    
                    614,587Result
      for the period
                    
                    
                    231,126Other
      increases
                    
                    
                    1,613Dividends
                    
                    
                    (104,622
                    )Balance
      as of December 31, 2009
                    
                    
                    742,704




F-84
 Table of Contents




e)      Dividends
per share





As of
December 31, 2009


Interim
                  
                  
                  Interimdividend
                  
                  
                  dividendDescription
                  
                  2009
                  
                  
                  2009Date
      of dividend
                  
                  
                  28-07-2009
                  
                  
                  
                  29-12-2009Amount
      of the dividend (ThUS$)
                  
                  
                  34,621
                  
                  
                  
                  70,001Number
      of shares among which thedividend
      is distributed
                  
                  
                  338,790,909
                  
                  
                  
                  338,790,909Dividend
      per share (US$)
                  
                  
                  0.10219
                  
                  
                  
                  0.20662





As of
December 31, 2008:





Final
                  
                  
                  Interim
                  
                  
                  Interimdividend
                  
                  
                  dividend
                  
                  
                  dividendDescription
                  
                  2007
                  
                  
                  2008
                  
                  
                  2008Date
      of dividend
                  
                  
                  10-04-2008
                  
                  
                  
                  29-07-2008
                  
                  
                  
                  23-12-2008Amount
      of the dividend (ThUS$)
                  
                  
                  5,827
                  
                  
                  
                  96,786
                  
                  
                  
                  105,001Number
      of shares among which thedividend
      is distributed
                  
                  
                  338,790,909
                  
                  
                  
                  338,790,909
                  
                  
                  
                  338,790,909Dividend
      per share (US$)
                  
                  
                  0.01720
                  
                  
                  
                  0.28568
                  
                  
                  
                  0.30993





The
Company’s dividend policy is that these be equal to the minimum required by law,
i.e. 30% of the net income according to current regulations. This does not
conflict with, if any dividends on the mandatory minimum and attending to the
specific factual circumstances that may be received during the course of the
year.





At 31
December 31, 2009 are provisors dividends declared for the 45.3% of the profits
of the financial year 2009.





NOTE 30 - OPERATING
REVENUES





The
detail of operating revenues as of December 31, 2009 and 2008 is as
follows:





For
      the year endedDecember
      31,2009
                
                
                2008ThUS$
                
                
                ThUS$Passengers
                
                
                2,623,608
                
                
                
                2,820,830Cargo
                
                
                895,554
                
                
                
                1,319,415Total
                
                
                3,519,162
                
                
                
                4,140,245




F-85
 Table of Contents


NOTE 31 – COSTS AND EXPENSES
BY NATURE





a) Costs and
operating expenses





The main
operating costs and administrative expenses are detailed below:


For the year endedDecember 31,2009
                
                
                2008ThUS$
                
                
                ThUS$Other
      rentals and landing fees
                
                
                490,921
                
                
                
                544,247Aircraft
      Fuel
                
                
                959,608
                
                
                
                1,388,826Comissions
                
                
                143,900
                
                
                
                190,224Other
      operating expenses
                
                
                387,106
                
                
                
                413,972Aircraft
      rentals
                
                
                83,712
                
                
                
                70,527Aircraft
      maintenance
                
                
                121,037
                
                
                
                105,920Passenger
      service
                
                
                92,796
                
                
                
                85,257Total
                
                
                2,279,080
                
                
                
                2,798,973





b) Depreciation
and amortization





Depreciation
and amortization are detailed below:


For the year endedDecember 31,2009
                
                
                2008ThUS$
                
                
                ThUS$Depreciation
      (*)
                
                
                295,894
                
                
                
                249,708Amortization
                
                
                8,168
                
                
                
                6,791Total
                
                
                304,062
                
                
                
                256,499





(*)
Includes the depreciation of property, plant and equipment and the maintenance
cost of operating leased aircraft.





c) Personnel
expenses





The costs
for this concept are disclosed in Note obligations Post-employment benefits
(Note 26).


F-86
 Table of Contents




d) Financial
costs





The
detail of financial costs is as follows:


For the year endedDecember 31,2009
                
                
                2008ThUS$
                
                
                ThUS$Bank
      loan interest
                
                
                113,827
                
                
                
                102,768Financial
      leases
                
                
                4,406
                
                
                
                10,042Other
      financial instruments
                
                
                34,876
                
                
                
                12,678Total
                
                
                153,109
                
                
                
                125,488





Costs and
expenses by nature presented in this note are equivalent to the sum of cost of
sales, marketing costs, distribution costs, and administrative expenses, other
expenses of operating and financial costs presented in the consolidated
statement income by function.





NOTE 32 - GAINS (LOSSES) ON
SALES OF NON-CURRENT ASSETS NOT HELD FOR SALE





The gains
(losses) on sales of non-current assets not held for sale as of December 31,
2009 and 2008 are as follows:


For the year endedDecember 31,2009
                    
                    
                    2008ThUS$
                    
                    
                    ThUS$Property,
      plant and equipment
                    
                    
                    4,278
                    
                    
                    
                    2,546Investments
      in companies, associates andjoint
      businesses
                    
                    
                    (2
                    )
                    
                    
                    3,664Total
                    
                    
                    4,276
                    
                    
                    
                    6,210





The gain
(loss) on sales of the period is presented in other operating
income.


F-87
 Table of Contents


NOTE 33 - OTHER OPERATING
INCOME





Other operating incomes are as follows:
                
                For the year endedDecember 31,2009
                
                
                2008ThUS$
                
                
                ThUS$Duty
      Free
                
                
                9,593
                
                
                
                15,668Aircraft
      leasing
                
                
                20,696
                
                
                
                41,417Logistics
      and courier
                
                
                33,132
                
                
                
                32,161Customs
      and warehousing
                
                
                18,682
                
                
                
                25,375Tours
                
                
                31,088
                
                
                
                3,187Interest
      income
                
                
                18,183
                
                
                
                18,480Other
      miscellaneous income
                
                
                23,160
                
                
                
                25,134Total
                
                
                154,534
                
                
                
                161,422





NOTE 34 -
EXCHANGE  RATE DIFFERENCES





Exchange
rate differences shown in income, except for financial instruments at fair value
through profit and loss, accumulated to December 31, 2009 and 2008 generated a
credit of ThUS$ 23,443 and a charge of ThUS$ 11,237 respectively.





Exchange
rate differences shown in equity as translation reserves for the ended December
31, 2009 and 2008 represented a credit of ThUS$ 1,442 and a charge of ThUS$
7,371 respectively.





The
following shows the current exchange rates for the US dollar at the end of each
period:





As of
                
                
                As of
                
                
                As ofDecember 31,
                
                
                December 31,
                
                
                January 01,2009
                
                
                2008
                
                
                2008Chilean
      peso
                
                
                507.10
                
                
                
                636.45
                
                
                
                496.89Argentine
      peso
                
                
                3.80
                
                
                
                3.45
                
                
                
                3.15Brazilian
      real
                
                
                1.74
                
                
                
                2.34
                
                
                
                1.77Peruvian
      sol
                
                
                2.89
                
                
                
                3.14
                
                
                
                2.99Australian
      dollar
                
                
                1.12
                
                
                
                1.45
                
                
                
                1.15Strong
      bolivar
                
                
                2.14
                
                
                
                2.14
                
                
                
                2.14Boliviano
                
                
                7.00
                
                
                
                6.97
                
                
                
                7.53Uruguayan
      peso
                
                
                19.45
                
                
                
                24.25
                
                
                
                21.45Mexican
      peso
                
                
                13.06
                
                
                
                13.82
                
                
                
                10.90Colombian
      peso
                
                
                2,043.07
                
                
                
                2,246.16
                
                
                
                2,009.00New
      Zealand dollar
                
                
                1.39
                
                
                
                1.73
                
                
                
                1.30Euro
                
                
                0.70
                
                
                
                0.71
                
                
                
                0.68




F-88
 Table of Contents


NOTE 35 - EARNINGS PER
SHARE


For the year endedDecember, 312009
                  
                  
                  2008Earnings
      attributable to controlling company’sequity
      holders (ThUS$)
                  
                  
                  231,126
                  
                  
                  
                  336,480Weighted
      average number of shares, basic
                  
                  
                  338,790,909
                  
                  
                  
                  338,790,909Basic
      and diluted earnings per share (US$)
                  
                  
                  0.68
                  
                  
                  
                  0.99





The
Company has considered the effect of stock options contracts have on earnings
per share, concluding that not diluted because the average share value in the
market during the period is below the exercise price options.


F-89
 Table of Contents


NOTE 36 -CONTINGENCIES





a)      Lawsuits





a1)    Actions
brought by Lan Airlines S.A. and Subsidiaries





Stage and level
                                                                    
                                                                    AmountsCompany
                                                                    
                                                                    Court
                                                                    
                                                                    Case No.
                                                                    
                                                                    Origin
                                                                    
                                                                    of proceedings
                                                                    
                                                                    involvedThUS$Atlantic Aviation Investments
                                                                    
                                                                    Supreme Court of the
                                                                    
                                                                    07-6022920
                                                                    
                                                                    Atlantic Aviation Investments LLC., an
                                                                    
                                                                    Stage of execution in Switzerland of judgment
                                                                    
                                                                    
                                                                    17,100LLC  (AAI)
                                                                    
                                                                    State of New York
                                                                    
                                                                    
                                                                    
                                                                    indirect subsidiary of Lan Airlines S.A. constituted
                                                                    
                                                                    condemning Variglog to repay the principal
                                                                    
                                                                    plus interestCounty of New York
                                                                    
                                                                    
                                                                    
                                                                    under the laws of the state of Delaware, sued
                                                                    
                                                                    in favor of AAI. Regarding interest and
                                                                    
                                                                    and costsVarig  Logística S.A. (“Variglog”) for the non-
                                                                    
                                                                    costs, the final determination is awaited ofpayment of four loans under loan
                                                                    
                                                                    the amounts by the court in New York inagreements governed by the law of New
                                                                    
                                                                    order to proceed with execution in Switzerland.York. These agreements provide for the
                                                                    
                                                                    An embargo is held over the bank account ofacceleration of the loans in the event of sale
                                                                    
                                                                    Variglog in Switzerland by AAI. Varilog isof the original debtor, VRG Linhas Aéreas S.A.
                                                                    
                                                                    seeking recovery through the courts in BrazilAtlantic Aviation Investments
                                                                    
                                                                    Supreme Court of the
                                                                    
                                                                    602286-09
                                                                    
                                                                    Atlantic Aviation Investments LLC. Sued Matlin
                                                                    
                                                                    the respondents filed a motion to dismiss
                                                                    
                                                                    
                                                                    17.100LLC
                                                                    
                                                                    State of New York
                                                                    
                                                                    
                                                                    
                                                                    Patterson Global Advisers LLC, Matlin
                                                                    
                                                                    that is pending before the court.
                                                                    
                                                                    plus interest,County of New York
                                                                    
                                                                    
                                                                    
                                                                    Patterson Global Opportunities Partners II LP,
                                                                    
                                                                    In the interim, the court authorized the
                                                                    
                                                                    costs andMatlin Patterson Global Opportunities Partners
                                                                    
                                                                    commencement of the discovery
                                                                    
                                                                    damages(Cayman) II LP y Volo Logistics LLC (a) as alter
                                                                    
                                                                    stageegos for Variglog, for failure top ay the four loansindicated in the previous note; and (b) for a defaulton  their obligations of guarantors and other obligationsunder the Memorandum of Understanding signed bythe parties on September 29, 2006Aerolane, Líneas Aéreas
                                                                    
                                                                    Tax Tribunal of
                                                                    
                                                                    6319-4064-05
                                                                    
                                                                    Against the regional director of the Guayaquil
                                                                    
                                                                    Ready to pronounce judgment
                                                                    
                                                                    
                                                                    4,210Nacionales del Ecuador S.A.
                                                                    
                                                                    Guayaquil
                                                                    
                                                                    
                                                                    
                                                                    Internal Revenue Service for payment ofVAT creditLan Airlines S.A.
                                                                    
                                                                    Tax Tribunal of Quito
                                                                    
                                                                    23493-A
                                                                    
                                                                    Against the regional director of the Quito
                                                                    
                                                                    About to request judgment
                                                                    
                                                                    
                                                                    3,958Internal Revenue Service for payment ofVAT creditLan Argentina S.A.
                                                                    
                                                                    15th National Court of
                                                                    
                                                                    10587/09
                                                                    
                                                                    Request for bankruptcy of Southern Winds S.A.
                                                                    
                                                                    Direct negotiations are being held with
                                                                    
                                                                    
                                                                    3,200first instance commercial,
                                                                    
                                                                    
                                                                    
                                                                    for various unpaid loans
                                                                    
                                                                    the debtor, proceeding to transfer the requestBuenos Aires.
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    for bankruptcy if these do not succeed




F-90
 Table of Contents




a2)    Lawsuits
against Lan Airlines S.A. and Subsidiaries





Stage and level
                                        
                                        AmountsCompany
                                        
                                        Court
                                        
                                        Case No.
                                        
                                        Origin
                                        
                                        of proceedings
                                        
                                        involvedThUS$Aerolinhas Brasileiras S.A.
                                        
                                        Secretary of Finance of
                                        
                                        2003
                                        
                                        The administrative authority of Río de Janeiro,
                                        
                                        Pending resolution of the revision group
                                        
                                        
                                        3,000State of Río de Janeiro
                                        
                                        
                                        
                                        Brazil, notified breach action or fine for
                                        
                                        to annul the fine.alleged non-payment of ICMS (VAT) onimport of Boeing-767 aircraft registered No.PR-ABB.Lan Airlines S.A.
                                        
                                        Labor, Buenos Aires,
                                        
                                        34187/07
                                        
                                        Labor complaint brought by ex customs
                                        
                                        The first-instance decisión was in favor
                                        
                                        
                                        567Argentina
                                        
                                        
                                        
                                        agent alleging labor relationship with
                                        
                                        of  Lan. A final decisión by the chamberLan Airlines S.A.
                                        
                                        is pendingLan Airlines S.A
                                        
                                        2nd Labor Court of
                                        
                                        354-2008
                                        
                                        Complaint brought by the Union of Aviation
                                        
                                        Decision in favor of Lan. An aapeal
                                        
                                        UndeterminedSantiago, Chile
                                        
                                        
                                        
                                        Workers of Lan Airlines S.A.
                                        
                                        by other party is pending(maintenance), for remuneration differences due,alleging non-compliance with clause of thecollective agreement regulating the incomeleveling system.Lan Airlines S.A. and
                                        
                                        European Commission,
                                        
                                        -
                                        
                                        Investigation of possible breaches of free
                                        
                                        The European Commission notification
                                        
                                        UndeterminedLan Cargo S.A
                                        
                                        Canada, New Zealand
                                        
                                        
                                        
                                        Competition of cargo airlines, especially the
                                        
                                        was answered on April 14, 2008.and South Korea.
                                        
                                        
                                        
                                        fuel surcharge.On December 26, 2007, the DirectorGeneral for Competition of the European Commissionnotified Lan Cargo S.A.and Lan Airlines S.A. of theinstruction of a process against twenty-five cargoairlines, including Lan Cargo S.A.,for alleged breaches of free competition in theEuropean air cargot market, especially the intendedfixing of a surcharge for fuel andcargo. According to the present state of theproceedings and as reported by theexternal lawyers in Europe, it is not possibleto foresee the result of the proceedings.




F-91
 Table of Contents





Stage and level
                                                    
                                                    AmountsCompany
                                                    
                                                    Court
                                                    
                                                    Case No.
                                                    
                                                    Origin
                                                    
                                                    of proceedings
                                                    
                                                    involvedThUS$Lan Cargo S.A. and
                                                    
                                                    Competent tribunal of
                                                    
                                                    -
                                                    
                                                    As a consequence of the investigation into alleged
                                                    
                                                    Class action were filed
                                                    
                                                    
                                                    UndeterminedLan Airlines S.A
                                                    
                                                    the United States and
                                                    
                                                    
                                                    
                                                    breaches of free competition of cargoCanada to hear class actions
                                                    
                                                    
                                                    
                                                    airlines, especially fuel surchargeLan Logistics, Corp
                                                    
                                                    Federal Court, Florida,
                                                    
                                                    -
                                                    
                                                    In mid June 2008 a demand was
                                                    
                                                    This case is scheduled for
                                                    
                                                    
                                                    UndeterminedUnited States
                                                    
                                                    
                                                    
                                                    presented for purchase option right
                                                    
                                                    trial in february 2010.for sale of LanBox.Aerolinhas Brasileiras S.A.
                                                    
                                                    Competent court of
                                                    
                                                    -
                                                    
                                                    As a consequence of the investigation into alleged
                                                    
                                                    Investigation pending.
                                                    
                                                    
                                                    UndeterminedUnited States for hearing
                                                    
                                                    
                                                    
                                                    breaches of free competition of cargoclass actions
                                                    
                                                    
                                                    
                                                    airlines, especially fuel surchargeAerolinhas Brasileiras S.A.
                                                    
                                                    Conselho Administrativo
                                                    
                                                    -
                                                    
                                                    Investigation of alleged breaches of free
                                                    
                                                    Investigation pending.
                                                    
                                                    
                                                    Undeterminedde Defensa Económica,
                                                    
                                                    
                                                    
                                                    competition of cargo airlines, especiallyBrasil
                                                    
                                                    
                                                    
                                                    fuel surcharge.





Of the
cases mentioned above, in view of the state of the proceedings and/or the
improbable event of obtaining adverse sentences in these, as of December 31,
2009 it has been estimated in each case that it is not necessary to make any
provision, despite a provision of US$ 25 million related to the present global
investigation carried out in the European Union on a possible breach of
competition regulations regarding the setting of fuel surcharges and other
charges, which involves a large number of international cargo airlines,
including Lan Cargo S.A., the cargo subsidiary of Lan Airlines S.A., in the
European air cargo markets.


F-92
 Table of Contents


NOTE 37 -COMMITMENTS





(a)    Loan
covenants





With
respect to various loans signed by the Company for the financing of Boeing 767
aircraft, which carry the guarantee of the United States Export–Import Bank,
limits have been set on some of the parent Company’s financial indicators on a
consolidated basis. Restrictions are also in place on the Company’s management
in terms of its ownership and disposal of assets. These same restrictions also
exist with respect to several contracts signed by its subsidiary Lan Cargo S.A.
for the financing of Boeing 767 aircraft with the guarantee of the US
Export–Import Bank, this time applied to both the parent Company and its
subsidiary Lan Cargo S.A. Regarding the various contracts of the Company for the
financing of Airbus A320 aircraft, which are guaranteed by European export
credit agencies, limits have been established on some of the Company’s financial
indicators, together with management restrictions in terms of its ownership and
asset disposals.  In connection with the financing of spare engines
for its fleet Boeing 767 and 777, which are guaranteed by the Export - Import
Bank of the United States, have placed restrictions on the shareholding of its
guarantors and their legal successor in case of merger.





In
relation to credit agreements entered into by the Company, local banks, for the
present year, have set limits to some financial indicators of the parent company
on a consolidated basis. At 31 December 2009, the Company is in compliance with
these covenants.





(b)    Commitments
under operative leases as lessee





Details
of the main operating leases are as follows:


As
      of
                            
                            
                            As
      of
                            
                            
                            As
      ofDecember
      31,
                            
                            
                            December
      31,
                            
                            
                            January
      01,Lessor
                            
                            Aircraft
                            
                            2009
                            
                            
                            2008
                            
                            
                            2008International
      Lease Finance Corporation
                            
                            Boeing
      767
                            
                            
                            8
                            
                            
                            
                            8
                            
                            
                            
                            8Orix
      Aviation SystemsLimited
                            
                            Airbus
      320
                            
                            
                            2
                            
                            
                            
                            2
                            
                            
                            
                            2Celestial
      Aviation Trading 35 Limited
                            
                            Boeing
      767
                            
                            
                            1
                            
                            
                            
                            1
                            
                            
                            
                            1MSN
      167 Leasing Limited
                            
                            Airbus
      340
                            
                            
                            1
                            
                            
                            
                            1
                            
                            
                            
                            1Celestial
      Aviation Trading 16 Limited
                            
                            Boeing
      767
                            
                            
                            1
                            
                            
                            
                            1
                            
                            
                            
                            1Nordea
      Finance Sweden PLC
                            
                            Boeing
      767
                            
                            
                            -
                            
                            
                            
                            1
                            
                            
                            
                            1CIT
      Aerospace International
                            
                            Boeing
      767
                            
                            
                            1
                            
                            
                            
                            1
                            
                            
                            
                            1The
      Boeing Company
                            
                            Boeing
      767
                            
                            
                            -
                            
                            
                            
                            1
                            
                            
                            
                            -Celestial
      Aviation Trading 39 Ltd. -GECAS
      (WFBN)
                            
                            Boeing
      777
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -Celestial
      Aviation Trading 23 Ltd. -GECAS
      (WFBN)
                            
                            Boeing
      777
                            
                            
                            1
                            
                            
                            
                            -
                            
                            
                            
                            -ADL
      Leasing LLC
                            
                            Boeing
      737
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5ACL
      Aviation Ltd.
                            
                            Boeing
      737
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1ACS
      2007 - 1 Limited (WFBN)
                            
                            Boeing
      767
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1Aircastle
      Investment Holdings 2 Limited (WFBN)
                            
                            Airbus
      320
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1Total
                            
                            
                            
                            
                            16
                            
                            
                            
                            16
                            
                            
                            
                            23





The
rentals are shown in income according as they are earned.


F-93
 Table of Contents


The
minimum future lease payments not yet payable are the following:





As of
                  
                  
                  As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,
                  
                  
                  January 01,2009
                  
                  
                  2008
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$
                  
                  
                  ThUS$Up
      to one year
                  
                  
                  90,731
                  
                  
                  
                  58,988
                  
                  
                  
                  67,328One
      to five years
                  
                  
                  273,055
                  
                  
                  
                  139,291
                  
                  
                  
                  111,582Over
      five years
                  
                  
                  80,165
                  
                  
                  
                  8,266
                  
                  
                  
                  8,169Total
                  
                  
                  443,951
                  
                  
                  
                  206,545
                  
                  
                  
                  187,079





The
minimum lease payments charged to income are the following:





As of
                  
                  
                  As ofDecember 31,
                  
                  
                  December 31,2009
                  
                  
                  2008ThUS$
                  
                  
                  ThUS$Minimum
      operating lease payments
                  
                  
                  81,425
                  
                  
                  
                  67,781Total
                  
                  
                  81,425
                  
                  
                  
                  67,781





In April
2009, the first B777-Freighter aircraft was incorporated and in May 2009 the
second of these aircraft arrived. In September 2009 the leasing of the Boeing
767 – 300, registration CC-CGN, will end, aircraft was returned in October
2009.





From
October 2009 were modified lease terms of 7 Boeing 767-300ER aircraft. Five
aircraft were extended from three to seven years and two aircraft were reduced
by two to three years.





The
operating lease agreements signed by the Company and its subsidiaries state that
maintenance of the aircraft should be done according to the manufacturer’s
technical instructions and within the margins agreed in the leasing agreements,
a cost that must be assumed by the lessee. The lessee should also contract
insurance for each aircraft to cover associated risks and the amounts of these
assets. Regarding rental payments, these are unrestricted and may not be netted
against other accounts receivable or payable between the lessor and
lessee.


F-94
 Table of Contents


c)      Other
commitments





At December 31, 2009 the Company has
existing letters of credit and guarantee ballots, as
follows:Amount Release





Creditor Guaranteed
                                
                                Debtor
                                
                                Type
                                
                                ThUS$
                                
                                DateDeutsche Bank A.G.
                                
                                Lan Airlines S.A
                                
                                Two letters of credit
                                
                                
                                20,000
                                
                                30-Jan-10The Royal Bank of Scotland plc
                                
                                Lan Airlines S.A
                                
                                Two Letter of credit
                                
                                
                                18,000
                                
                                08-Jan-10Dirección General de aeronaúticacivil de Chile
                                
                                Lan Airlies S.A.
                                
                                44 guarantee ballots
                                
                                
                                3,000
                                
                                27-Jan-10Dirección Seccional de Aduanas
                                
                                Línea Aérea Carguera
                                
                                Two guarantee insurancede Bogotá
                                
                                de Colombia S.A.
                                
                                policies
                                
                                
                                2,430
                                
                                07-Apr-14Whasington International Insurance
                                
                                Lan Airlines S.A.
                                
                                Four Letter of credit
                                
                                
                                1,900
                                
                                05-Apr-10Metropolitan Dade County
                                
                                Lan Airlines S.A.
                                
                                Five letters of credit
                                
                                
                                1,504
                                
                                31-May-10


F-95
 Table of Contents


NOTE 38 -TRANSACTIONS WITH RELATED
PARTIES





a)      Transactions
with related parties for the period ended December 31, 2009





Other information on
                                                                              
                                                                              
                                                                              
                                                                              Amount ofTax No.
                                                                              
                                                                              Related party
                                                                              
                                                                              Relationship
                                                                              
                                                                              Country of origin
                                                                              
                                                                              related party
                                                                              
                                                                              Transaction
                                                                              
                                                                              transactionThUS$96.810.370-9
                                                                              
                                                                              Inversiones CostaVerde Ltda. y CPA
                                                                              
                                                                              ControllingShareholder
                                                                              
                                                                              Chile
                                                                              
                                                                              Investments
                                                                              
                                                                              Property rental granted
                                                                              
                                                                              
                                                                              65Passenger services provided
                                                                              
                                                                              
                                                                              1596.847.880-K
                                                                              
                                                                              Lufthansa Lan TechnicalTraining S.A.
                                                                              
                                                                              Associate
                                                                              
                                                                              Chile
                                                                              
                                                                              Training center
                                                                              
                                                                              Building rental
                                                                              
                                                                              
                                                                              17Training received
                                                                              
                                                                              
                                                                              1,103Assignment of debt granted
                                                                              
                                                                              
                                                                              2Other payments on account
                                                                              
                                                                              
                                                                              13796.921.070-3
                                                                              
                                                                              Austral SociedadConcesionaria S.A.
                                                                              
                                                                              Associate
                                                                              
                                                                              Chile
                                                                              
                                                                              Concessionaire
                                                                              
                                                                              Aviation rates received
                                                                              
                                                                              
                                                                              93Basic consumptions received
                                                                              
                                                                              
                                                                              11Aeronautical concession received
                                                                              
                                                                              
                                                                              29778.005.760-2
                                                                              
                                                                              Sociedad de SeguridadAerea  S.A.
                                                                              
                                                                              Other related parties
                                                                              
                                                                              Chile
                                                                              
                                                                              Safety services
                                                                              
                                                                              Safety service received
                                                                              
                                                                              
                                                                              575Other payments on account
                                                                              
                                                                              
                                                                              1,01887.752.000-5
                                                                              
                                                                              Granja MarinaTornagaleones S.A.
                                                                              
                                                                              Other related parties
                                                                              
                                                                              Chile
                                                                              
                                                                              Fish farming
                                                                              
                                                                              Passenger services provided
                                                                              
                                                                              
                                                                              2996.669.520-K
                                                                              
                                                                              Red de TelevisiónChilevisión S.A.
                                                                              
                                                                              Other related parties
                                                                              
                                                                              Chile
                                                                              
                                                                              Television
                                                                              
                                                                              Passenger services provided
                                                                              
                                                                              
                                                                              623Publicity services received
                                                                              
                                                                              
                                                                              949




F-96
 Table of Contents





Other information on
                                                
                                                
                                                
                                                Amount ofTax No.
                                                
                                                Related party
                                                
                                                Relationship
                                                
                                                Country of origin
                                                
                                                related party
                                                
                                                Transaction
                                                
                                                transactionThUS$96.894.180-1
                                                
                                                Bancard Inversiones Ltda.
                                                
                                                Other related parties
                                                
                                                Chile
                                                
                                                Professional advice
                                                
                                                Professional advice received
                                                
                                                
                                                82Other payments on account
                                                
                                                
                                                12Foreign
                                                
                                                Inversora AeronáuticaArgentina
                                                
                                                Other related parties
                                                
                                                Argentina
                                                
                                                Investments
                                                
                                                Building rental received
                                                
                                                
                                                386




F-97
 Table of Contents





b)  Transactions
with related parties for the period ended December 31, 2008





Tax No.
                                                                                    
                                                                                    Related party
                                                                                    
                                                                                    Relationship
                                                                                    
                                                                                    Country of origin
                                                                                    
                                                                                    Other information onrelated party
                                                                                    
                                                                                    Transaction
                                                                                    
                                                                                    Amount oftransactionThUS$96.810.370-9
                                                                                    
                                                                                    Inversiones
      CostaVerde
      Ltda. y CPA
                                                                                    
                                                                                    ControllingShareholder
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Investments
                                                                                    
                                                                                    Property
      rental granted
                                                                                    
                                                                                    68Passenger
      services provided
                                                                                    
                                                                                    1496.778.310-2
                                                                                    
                                                                                    ConcesionariaChucumata
      S.A.
                                                                                    
                                                                                    Associate
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Concessionaire
                                                                                    
                                                                                    Aviation
      rates received
                                                                                    
                                                                                    5Basic
      consumptions received
                                                                                    
                                                                                    90Aeronautical
      concession received
                                                                                    
                                                                                    18Dividend
      distribution
                                                                                    
                                                                                    10896.847.880-K
                                                                                    
                                                                                    Lufthansa
      Lan TechnicalTraining
      S.A.
                                                                                    
                                                                                    Associate
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Training
      center
                                                                                    
                                                                                    Training
      received
                                                                                    
                                                                                    1,073Debt
      assignment granted
                                                                                    
                                                                                    14Other
      payment on account
                                                                                    
                                                                                    38Building
      rental
                                                                                    
                                                                                    17Dividend
      distribution
                                                                                    
                                                                                    22196.921.070-3
                                                                                    
                                                                                    Austral
      SociedadConcesionaria
      S.A.
                                                                                    
                                                                                    Associate
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Concessionaire
                                                                                    
                                                                                    Aviation
      rates received
                                                                                    
                                                                                    58Basic
      consumptions received
                                                                                    
                                                                                    15Aeronautical
      concession received
                                                                                    
                                                                                    250Dividend
      distribution
                                                                                    
                                                                                    4299.259.640-0
                                                                                    
                                                                                    Claudia
      Urrutia
                                                                                    
                                                                                    Other
      related parties
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Others
                                                                                    
                                                                                    Sale
      Segaer Society
                                                                                    
                                                                                    38256.080.790-2
                                                                                    
                                                                                    Asamblea
      de ComunerosDe
      Valle Escondido
                                                                                    
                                                                                    Other
      related parties
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Others
                                                                                    
                                                                                    Other
      services provided
                                                                                    
                                                                                    7878.005.760-2
                                                                                    
                                                                                    Sociedad
      de SeguridadAéra
      S.A
                                                                                    
                                                                                    Other
      related parties
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Security
      services
                                                                                    
                                                                                    Other
      payment on account
                                                                                    
                                                                                    1,493Security
      services received
                                                                                    
                                                                                    1,84287.752.000-5
                                                                                    
                                                                                    Granja
      MarinaTornagaleones
      S.A.
                                                                                    
                                                                                    Other
      related parties
                                                                                    
                                                                                    Chile
                                                                                    
                                                                                    Fish
      Farming
                                                                                    
                                                                                    Passenger
      services provided
                                                                                    
                                                                                    43


F-98
 Table of Contents




Tax No.
                                                                
                                                                Related party
                                                                
                                                                Relationship
                                                                
                                                                Country of origin
                                                                
                                                                Other information onrelated party
                                                                
                                                                Transaction
                                                                
                                                                Amount oftransactionThUS$96.669.520-K
                                                                
                                                                Red
      de TelevisiónChilevisión
      S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                Television
                                                                
                                                                Passenger
      services provided
                                                                
                                                                589Publicity
      services received
                                                                
                                                                65096.787.990-8
                                                                
                                                                Inmobiliaria
      ParqueSan
      Luis 1 S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                Real
      State
                                                                
                                                                Purcharse
      of fixed assets
                                                                
                                                                11,89596.888.630-4
                                                                
                                                                Sociedad
      ConcesionariaAerosur
      S.A.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                Concessionaire
                                                                
                                                                Aviation
      rates received
                                                                
                                                                29Aeronautical
      concession received
                                                                
                                                                258Basic
      consumptions received
                                                                
                                                                896.894.180-1
                                                                
                                                                Bancard
      Inversiones Ltda.
                                                                
                                                                Other
      related parties
                                                                
                                                                Chile
                                                                
                                                                Professional
      consultancy
                                                                
                                                                Professional
      advice received
                                                                
                                                                72Foreign
                                                                
                                                                Inversora
      AeronáuticaArgentina
                                                                
                                                                Other
      related parties
                                                                
                                                                Argentina
                                                                
                                                                Investments
                                                                
                                                                Building
      rental received
                                                                
                                                                294




F-99
 Table of Contents





c)      Compensation
of key management





The
Company has defined for these purposes that key management personnel are the
executives who define the Company’s policies and major guidelines and who
directly affect the results of the business, considering the levels of
vice-presidents, chief executives and directors.





For the year endedDecember 31,2009
                        
                        
                        2008ThUS$
                        
                        
                        ThUS$Remuneration
                        
                        
                        6,226
                        
                        
                        
                        4,980Management
      fees
                        
                        
                        131
                        
                        
                        
                        132Corrections
      of value and non-monetary benefits
                        
                        
                        340
                        
                        
                        
                        335Short-term
      benefits
                        
                        
                        4,480
                        
                        
                        
                        3,990Share-based
      payments
                        
                        
                        1,183
                        
                        
                        
                        1,801Others
                        
                        
                        780
                        
                        
                        
                        -Total
                        
                        
                        13,140
                        
                        
                        
                        11,238





NOTE 39 - SHARE-BASED
PAYMENTS





The
compensation plans implemented through the granting of options to subscribe and
pay for shares, which have been granted since the last quarter of 2007, are
shown in the consolidated statements of  financial position in
accordance with IFRS 2 “Share-based payments”, booking the effect of the fair
value of the options granted as a charge to remuneration on a straight-line
basis between the date of granting the options and the date on which these
become vested.





This
benefit has been formalized through the signing of option contracts for the
subscription of shares according to the proportions shown in the accrual
schedule and which are related to the permanence of the executive on those dates
for exercising the options:





Percentage
                        
                        Period30%
                        
                        From
      July 01, 2009 to September 30, 201130%
                        
                        From
      July 01, 2010 to September 30, 201140%
                        
                        From
      July 01, 2011 to September 30,
2011





These
options have been valued and booked at their fair value on the grant date,
determined using the “Black-Scholes-Merton” method.





All
options expire on September 30, 2011.


F-100
 Table of Contents





Number of shareoptionsStock
      options under a share-based payment agreement balance as of January 1,
      2009
                            
                            
                            1,604,000Stock
      options conceded
                            
                            
                            19,000Stock
      options annulled
                            
                            
                            (312,000
                            )Stock
      options under a share-based payment agreement balance as of December 31 ,
      2009
                            
                            
                            1,311,000





Entry
data of valuation model of options used for stock options conceded during the
period.





Weighted average
                              
                              
                              Exercise
                              
                              
                              Expected
                              
                              Life of
                              
                              Dividends
                              
                              
                              Risk-freeshare price
                              
                              
                              price
                              
                              
                              volatility
                              
                              option
                              
                              expected
                              
                              
                              interestUS$
                              8.27
                              
                              
                              US$
                              16.1
                              
                              
                              
                              40.7
                              %
                              2.5
      years
                              
                              
                              70
                              %
                              
                              
                              1.12
                              %





NOTE 40 - THE
ENVIRONMENT





In
accordance with the Environmental Bases Law issued in Chile and its
complementary legislation, contain no provisions that affect the air transport
service industry.





NOTE 41 -
SANCTIONS





a)      By
the Superintendency of Securities and Insurance





By
Resolution 306 of July 6, 2007, the Superintendency of Securities and Insurance
(SVS) charged Juan José Cueto Plaza, a director of Lan Airlines S.A., with a
fine of 1,620 Unidades de Fomento by concluding that, having bought shares in
Lan Airlines S.A. in the knowledge of the financial statements as of June 30,
2006 and prior to their publication, this constituted a breach of the final part
of the first paragraph of article 165 of Law 18,045. The SVS communicated that
that entity had discarded the use of privileged information and the knowledge of
this was not the reason for the purchase. The claim against this resolution,
before the 27th Civil Court of Santiago, which rejected it by resolution dated
January 8, 2009, notified the same day. The defense of Juan José Cueto lodged
proceedings of cassation in the form and an appeal against the sentence, which
proceedings were conceded and are pending.





No other
sanctions have been applied to the Company and its subsidiaries, its directors
or managers by the SVS during the period ended December 31, 2009.





b)      By
other administrative authorities





No
significant sanctions have been applied to the Company and its subsidiaries, its
directors or managers by other administrative authorities as of December 31,
2009.


F-101
 Table of Contents


NOTE 42 - SUBSEQUENT
EVENTS





The
consolidated financial statements of Lan Airlines SA and Subsidiaries as of
December 31, 2009 have been approved by the special board meeting held on
February 17, 2010, which was attended by the following directors:





Jorge
Awad Mehech


José Cox
Donoso


Juan José
Cueto Plaza


Ramón
Eblen Kadis


Andrés
Navarro Haeussler





The
Company has no knowledge of any other subsequent events that would have a
significant effect on the balance or interpretation of these financial
statements between December 31, 2009 and the date of issuance of these financial
statements.