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LETTER FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS MAURICIO ROLIM AMARO

Dear shareholders,

The year 2016 was characterized by a low growth period for the countries of Latin America and the Caribbean, which had a reduction of regional gross domestic product of the order of 1.1%, according to data from the Economic Commission for Latin America and the Caribbean (ECLAC). It should be noted that the region already came from a contraction of 0.4% in its economy.

South America was the most affected sub-region, with an expected decline of 2.5% of GDP in 2016. In the years 2015/2016 Brazil was responsible for the greatest negative impact on economic activity in the region. The country’s GDP fell 3.8% in 2015 – the biggest drop in history – and 3.6% in 2016, establishing the largest wealth loss in Brazil’s history.

Brazil is going through one of the biggest political crises in its history, with the consequences of the impeachment of the former President of the Republic amplified by an anti-corruption action, Lava Jato operation. As a result, the private sector has adopted defensive strategies, postponing investments, increasing unemployment and reducing stock replenishment in factories, which contributed sharply to the persistence of the recession in 2016.

Despite the poor performance of the Brazilian economy, it is important to note that government policies aimed at balancing public finances and structural reforms were initiated, not only approved by the markets, but have also revised their projections favorably for 2018.

Therefore, we can say that Brazil is emerging from a serious turbulence to have a more stable flight, which aims at a GDP growth that although still modest, has a highly positive effect on the economy of the whole continent.

One of the creative and renovating actions carried out by the Company during the year was the design of a new model to reduce the costs of passenger transportation. In it, customers can choose to fly by paying for additional services according to their needs. This initiative will put us in a more competitive position with any of our competitors, and may represent a 50% increase in the volume of passengers transported in the coming years.

In the area of sustainability, whose adherence and improvement are necessary conditions for competition in the market, we are rapidly advancing in new practices and the improvement of old ones, in order to maintain a leading position and create the bases for its permanence. A stimulating recognition was our inclusion in the Dow Jones Sustainability Index for the third consecutive year as one of the leading companies in sustainability, based on economic, social and environmental criteria.

Our long-term strategy has not changed. It can be mentioned in three cardinal points: a continent, a wide network of destinations and a brand. These three points are interconnected by common premises: being simpler, more efficient and more competitive.

In LATAM, constant attention to reducing costs to replace processes and equipment that have become costly and unproductive is an essential requirement. The restructuring of our fleet allowed a reduction of US$ 2.2 billion of our fleet assets projected for 2018 during the last 12 months. In Brazil, where we are implementing changes due to the intense importance of that market for the company, the reduction of flight capacity reached 12% in 2016, preparing the way for a market recovery.

All the setbacks that emerged in this very complex period for the economy of our continent, and in particular for the civil aviation sector, only reinforce my conviction that the union of TAM and LAN could not have been more successful. I am very proud to have participated in the construction of this great company, which represents a milestone in the history of aviation. I think it was the most important experience of my professional and business life. If not for the creation of LATAM, the wind of the crisis could have shaken the structure of the founding companies and divert them to other non-successful routes.

In LATAM, my story had a new beginning. Starting with my friends and partners, the Cueto family, followed by executives and professionals from different areas, from TAM and LAN, or those who later joined us. They were enriching relationships from all angles – business, work and affection. I have learned a lot. I think I collaborated a lot too. I will always collaborate. But for LATAM, renewal is the first word of our informal nature, our conviction as shareholders and managers, the principle that governs the philosophy of the Company.

Mauricio Rolim Amaro
Chairman of the Board of LATAM Airlines Group

 

LETTER FROM CEO ENRIQUE CUETO

Dear shareholders,

2016 will be remembered as one of the most challenging years in our company’s history, with us continuing to adapt to the volatile environment of recent years. We initiated big changes and major projects, so we can better deal with the evolving airline industry landscape and the slowdown of Latin American economies.

We seek to consolidate ourselves as the leading airlines group in the region, connecting the continent with an expansive network under a single brand. Guided by this long-term vision, we are proud to have successfully launched the unified brand LATAM, which combines the best of LAN and TAM and provides the client with a single image.

We have continued to strengthen our network – despite modest growth in the region – with the launch of 14 new routes in 2016 and the announcement of a further eight for this year; a record number for the group. Of these routes, we inaugurated four new destinations that improve connectivity both within the region and with the rest of the world: Puerto Natales, Jaén, Washington D.C., and Johannesburg. In doing so, we became the only Latin American airline to offer a direct service between Latin America and Africa.

Furthermore, as part of our commitment to further expand our network of flights and connections in South America, we continue to make progress towards achieving our ‘Joint Business Agreements’ with IAG (the holding company of British Airways and Iberia) and American Airlines, so we can connect more people in Latin America with the rest of the world. We are convinced that these agreements will strengthen the connectivity of our region and deliver access to a wider destination network, more flights, better connecting times and lower prices as well as contribute to the development of tourism in the region with the arrival of more travelers from the USA and Europe.

In 2016, we worked on one of the most significant changes for the company and our customers in our history with the renewal of the domestic flight model for the six countries in the region where we have national operations. The new model, which is already being gradually implemented in some markets, will give our customers the flexibility to choose how they want to fly, by only paying for the additional services they use. As a result, we will be able to offer fares up to 30% cheaper, allowing more people to choose flight as a means of transport as well as helping those who already fly, to do so more often. All of this will be supported by a new digital experience, where passengers can control their own flight experience using only their phone. In addition to the benefits for passengers, this change will allow us to better compete with the increasing number of low cost operators in the region. With the new travel model, we project to increase our passenger numbers for domestic flights by 50% by 2020, helping to consolidate flight as a widely-accessible means of transport in the region and boost economic growth in the markets where the company operates.

The last three years have been very challenging. However, thanks to the work over this time, we have seen a significant improvement in our profitability, achieving a 6% EBIT margin in 2016 and the first positive net profit in five years. This improvement in profitability in a tough year showcases the resilience of our business model and demonstrates that we are on the right path with the strategic initiatives we have put in place. These positive results, together with the restructuring of our fleet plan and the strengthening of our balance sheet, have also been recognized by the financial markets, as demonstrated by the 53% recovery of the LATAM share in 2016.

In conclusion, I would like to thank our teams for all their work this year. Without their commitment and dedication it would have not been possible to carry out these significant changes we are currently implementing. I would also like to especially thank our shareholders – both new and long-standing – for their patience during the challenges of recent years, for their support in this period of adjustment and for the faith they have placed in our project. Our challenge and what motivates us is to maintain our industry leadership, strengthen our financial position and secure our long-term sustainability. For this reason, I invite everyone in the LATAM family to maintain their trust in this project and to continue moving forward together towards these objectives.

Enrique Cueto
CEO, LATAM Airlines Group