Below we provide a brief reference about the important effects of aeronautic regulations, free competition and other type of regulations that apply in Chile.
Chile’s aeronautic regulations
Both the General Bureau of Civil Aviation (DGAC, in its Spanish acronym) as well as the Civil Aeronautics Board (JAC, in its Spanish acronym) supervise and regulate Chile’s aviation industry. The DGAC reports directly to the Chilean Air Force and is responsible for ensuring compliance of the country’s laws and regulations governing aviation. The JAC is Chile’s civil aviation authority.
Primarily by virtue of Executive Order N° 2,564, that governs civil aviation, the JAC regulates the allocation of domestic and international routes and the DGAC regulates flight operations, which include personnel, aircraft, security levels, air traffic control and airport management.
We obtained and continue to have the authorization that is required by the Chilean Government to perform flight operations, including the JAC certificates and the DGAC operative and technical certificates, whose period of effectiveness are subject to the continuous compliance with the statutes, rules and regulations that govern the aeronautic industry, including any rule or regulation to be issued in the future.
Chile is a signatory state as well as a permanent member of the International Civil Aviation Organization (ICAO), a United Nations organization established in 1947 aimed at assisting in the planning and development of international air transport.
The ICAO establishes the international aeronautic industry’s technical guidelines; which, in turn, have been incorporated into our country’s laws and regulations by the Chilean authorities.
In the absence of an applicable Chilean standard related to security or maintenance matters, the DGAC has incorporated most of OACI’s technical guidelines by way of references. We are certain to comply with all relevant technical guidelines.
- National routes
Chilean Airlines are not required to obtain permits to transport passengers or cargo on domestic routes, but only to comply with the technical and insurance requirements established by the DGAC and the JAC, respectively. Nevertheless, there are no regulatory barriers preventing foreign airlines to create a Chilean subsidiary company and enter the country’s domestic market via such subsidiary. On January 18, 2012, Chile’s Transportation Ministry and Economics Ministry announced that the country was adopting a unilateral open skies policy. The foregoing was subsequently confirmed on November 2013 and remains in effect to this date.
- International routes
As an airline that provides services in international routes, LATAM Airlines is also subject to a number of bilateral international civil transportation agreements that establish reciprocal air traffic rights between Chile and several other countries. Since there is no guarantee whatsoever that such currently existing bilateral agreements between Chile and those foreign governments will remain in effect, a modification, suspension or revocation of one or more of such international agreements could damage our operations and financial results.
International route rights, as well as their corresponding landing rights, are derived from a number of international transport agreements negotiated between Chile and other foreign governments. By virtue of such agreements, the government of one of such countries grants another government the right to assign the operation of scheduled flight services between certain destinations of that country to one or more of its domestic airlines.
When Chile opens routes to and from foreign cities, any airline that meets the necessary requirements may bid for their use. If there is more than one bidder for a given route, then, the JAC awards it for a 5-year period via a public contest. The JAC awards grants the use of routes under the condition that the awarded bidding airline operate them continuously. Were an airline to cease to operate a given route during a 6-month period or more, the JAC is entitled to revoke its rights over such route. International routes can transfer their use without cost. In the past, generally, we have only paid nominal amounts for the right to use international routes awarded via public contests in which we were the only bidder.
INTERNATIONAL RATE-FIXING POLICY
Chilean airlines are free to fix their own domestic and international rates without any government regulation whatsoever.
In 1997, Resolution N° 496 issued by the Hon. Resolutory Commission (predecessor of the Hon. Free Competition Tribunal) approved a self-regulating tariff plan submitted by LATAM for its domestic operations in Chile. Said plan was submitted in compliance with what was ordered in 1995 by Resolution N° 445 of the Hon. Resolutory Commission. In general terms, according to this plan, we must ensure that the yields of routes classified as “non-competitive” by Resolution N° 445 do not exceed the yields of routes of a similar distance defined as “competitive” by the same resolution, and inform the JAC about tariff reductions or increases in “non-competitive” and “competitive” routes, in the manner and within the deadlines indicated in the referred self-regulation plan.
The Chilean Aeronautics code (CAC, in its Spanish acronym) governs the registration of aircraft in Chile. In order for an aircraft to be registered or remain registered in Chile, its owner must be:
- A natural person of Chilean nationality.
- A juridical person incorporated in Chile whose main legal domicile and its real and effective headquarters are in Chile, and whose majority capital is owned by natural or juridical Chilean persons, among other requirements established in article 38 of the CAC.
- The Aeronautic Code expressly entitles the DGAC to permit registering aircraft whose property owners are not natural or juridical Chilean persons, provided that they have a permanent commercial domicile in Chile. Aircraft owned by foreigners, but that are operated by Chileans or by an airline affiliated to a Chilean aviation entity may, likewise, be registered in Chile. The registration of any aircraft can be revoked in case of failure to comply with the registration requirements and, particularly, in the following cases:
- If its property ownership requirements are not met.
- It the aircraft does not meet any of the applicable safety requirements established by the DGAC.
The DGAC requires that any aircraft operated by a Chilean airline is registered before the DGAC or before another equivalent entity empowered as supervisor in another country. Every aircraft must have its own airworthiness certificate; whether issued by the DGAC or by another equivalent non-Chilean entity with supervising powers. Moreover, the DGAC does not issue a maintenance permit to a Chilean airline until the DGAC has evaluated that airline’s capacity to perform such maintenance.
The DGAC renews maintenance permits annually and has indeed approved our maintenance operations. Only such maintenance facilities certified by the DGAC or by an equivalent non-Chilean entity with supervising powers in the country in which the aircraft is registered may perform maintenance and repair work to aircraft operating in Chile.
Likewise, aircraft maintenance personnel working at such facilities must be certified by the DGAC or by an equivalent non-Chilean entity with supervising powers before assuming any aircraft maintenance position.
The DGAC establishes and supervises the execution of safety standards and regulations in Chile’s commercial aeronautic industry.
Such standards and regulations are based on the standards developed by international commercial aeronautic organizations. Each of Chile’s airlines and airports must submit before the DGAC an air safety manual describing the safety procedures that they execute in their daily commercial aviation operations, as well as their personnel training procedures with respect to safety. LATAM has already submitted its air safety manual to the DGAC. Chilean airlines operating international routes must adopt safety measures pursuant to the applicable requirements of international bilateral agreements.
The DGAC supervises and manages Chile’s domestic airports, including takeoff and landing charges. The DGAC proposes airport costs to be approved by the JAC, and the same are subsequently applied to all airports nationwide.
Ever since the mid 90’s, a number of Chilean airports have been privatized, including Santiago’s Arturo Merino Benítez International Airport. Airport Managers manage private airport facilities under the supervision of the DGAC and the JAC.
ENVIRONMENTAL AND NOISE REGULATIONS
There are no significant environmental standards or controls imposed on airlines applicable to aircraft nor that would affect us within Chile, except for the environmental laws and standards of general application. Currently, neither are there noise restriction standards applicable to aircraft within Chile. Nevertheless, Chilean authorities intend to issue environmental noise regulations to govern aircraft flying toward and within the country.
The regulation that has been proposed will require such aircraft to meet specific noise restrictions, which the market nowadays refers to as Stage 3 Standards.
Most of LATAM’s fleet already meets the proposed restrictions; therefore, we consider that issuing such standards will not impose a significant burden to our operations.
Chile’s antitrust authority, to which we refer to as the Free Competition Defense Tribunal (formerly, the Antitrust Commission, and heretofore the “TDLC”), oversees antitrust affairs governed by Executive Order N° 211 of 1973 and its eventual subsequent amendments, or the Antitrust Law. The Antitrust Law forbids any entity to impede, restrict or distort free competition in any market or any sector of any market.
The Antitrust Law forbids, additionally, any company having a dominant position in any market or that has dominates a substantial part of any market, to abuse its position.
Any damaged person is entitled to file suit for damages resulting from the non-compliance of the Antitrust Law and/or to file a claim before the Antitrust Tribunal so that the latter orders putting an end to such Antitrust Law infringement.
The Antitrust Tribunal is empowered to impose a variety of sanctions to Antitrust Law violations, including the termination of contracts that infringe the Antitrust Law, the dissolution of companies and the imposition of penalties and daily sanctions to companies. The courts of justice may order the payment of indemnity for damages, as well as other relief measures (such as injunction) whenever appropriate. In October 1997, the Antitrust Tribunal approved our self-regulating tariff plan.
Ever since October 1997, LAN Airlines S.A. and LAN Express abide by a self-regulating plan that was amended and approved by the Free Competition Tribunal in July 2005 and also in September 2011.
In February 2010, the National Economic Affairs Investigation Bureau (FNE, in its Spanish Acronym) completed the investigation initiated in 2007 with respect to our compliance with our self-regulating plan and no further observations were made.
By virtue of Resolution N° 37/2011, issued on September 21, 2011 (the “Resolution”), Chile’s Hon. Free Competition Defense Tribunal approved the association between LAN and TAM, imposing 14 mitigation measures to LATAM, whose scope and regulation is established in the Resolution, as summarized below by way of reference:
- To exchange 4 pairs of daily slots at the Guarulhos Airport in Sao Paulo, to be used exclusively for servicing non-stop flights along the SCL-GRU route.
- To extend for a 5-year period its frequent flyer program to those airlines that operate (or state their interest in operating) the Santiago-Sao Paulo, Santiago-Río de Janeiro, Santiago-Montevideo and Santiago-Asunción routes, that apply to LATAM for an extension of the referred program for such route(s).
- To execute inter-line agreements along the Santiago-Sao Paulo, Santiago-Río de Janeiro, and/or Santiago-Asunción routes, with those airlines interested in operating such routes and that so request it.
- To adhere to certain temporary capacity and supply restrictions along the Santiago-Sao Paulo route.
- To introduce and execute certain amendments into LATAM’s Self-regulatory Tariff Plan, applicable to its domestic operations.
- To renounce, before June 22, 2014, to one of the two worldwide alliances that LAN and TAM belonged to prior to the date of the Resolution.
- To adhere to certain restrictions in the execution and maintenance of code-sharing agreements (without prior consultation with the Free Competition Defense Tribunal) along certain routes and with member airlines or associates of an alliance other than that to which LATAM belongs.
- To adhere to certain restrictions, in their future bidding contest bids, regarding 3rd, 4th and 5th freedom rights between Santiago and Lima; and to renounce to four 5th freedom frequencies to Lima.
- To express before air transport authorities their favorable opinion regarding Chile’s unilateral open skies policy for domestic air traffic by airlines of other States, without requiring reciprocity.
- To commit, in all pertinent matters, to promote the growth and normal operations of the airports of Guarulhos in São Paulo and Arturo Merino Benítez in Santiago.
- To adhere to certain guidelines in the granting of incentives to travel agencies.
- To temporarily maintain, except in cases of force majeure: i) at least 12 non-stop round-trip flights per week, directly operated by LATAM, in the routes between Chile and the United States; and, ii) at least 7 non-stop round-trip flights per week, directly operated by LATAM, in the routes between Chile and Europe.
- To adhere to certain restrictions: in the average price of passenger transport airfares, corresponding to the Santiago-Sao Paulo and Santiago Río de Janeiro routes; and in the rates in effect and published, as of the date of the Resolution, for the transport of cargo in each of the routes between Chile and Brazil.
- To hire an independent consultant, so that such third party provides advice to the FNE for a 3-year period in the supervision of LATAM’s compliance with the Resolution.
Brazil’s Administrative Council for Economic Defense (CADE, in its Portuguese acronym) unanimously approved the association between LAN and TAM at its meeting on December 14, 2011, subject to the following conditions: (1) The new group (LATAM) must renounce to one of the two worldwide alliances in which it heretofore participated (Star Alliance or OneWorld); and, it must offer to exchange 2 pairs of slots at the Gaurulhos International Airport for them to be used by a third-party interested in offering direct non-stop flights between Sao Paulo and Santiago, Chile. The aforementioned conditions are consistent with the mitigation measures adopted in Chile by the TDLC.
Additionally, the association between LAN and TAM was submitted before the free competition authorities of Germany, Italy and Spain. All these jurisdictions granted their unconditional approval of this operation.