UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 6-K

 

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

May 17, 2019

 

Commission File Number 1-14728

 

 

 

LATAM Airlines Group S.A.

(Translation of Registrant’s Name Into English)

 

 

 

Presidente Riesco 5711, 20th floor

Las Condes

Santiago, Chile

(Address of principal executive offices)

 

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F  ☒             Form 40-F  ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

 

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

FREE TRANSLATION

 

MARCH 31, 2019

 

CONTENTS

 

Interim Consolidated Statement of Financial Position  
Interim Consolidated Statement of Income by Function  
Interim Consolidated Statement of Comprehensive Income  
Interim Consolidated Statement of Changes in Equity  
Interim Consolidated Statement of Cash Flows - Direct Method  
Notes to the Interim Consolidated Financial Statements  

 

CLP - CHILEAN PESO
ARS - ARGENTINE PESO
US$ - united states dollar
THUS$ - THOUSANDS OF UNITED STATES DOLLARS
COP - COLOMBIAN PESO
brl/R$ - braZILIAN REAL
thr$ - Thousands of Brazilian reaL

 

 

 

 

Contents of the notes to the interim consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.

 

Notes Page
   
1 - General information 1
2 - Summary of significant accounting policies 5
2.1. Basis of Preparation 5
2.2. Basis of Consolidation 13
2.3. Foreign currency transactions 14
2.4. Property, plant and equipment 16
2.5. Intangible assets other than goodwill 16
2.6. Goodwill 17
2.7. Borrowing costs 17
2.8. Losses for impairment of non-financial assets 17
2.9. Financial assets 18
2.10. Derivative financial instruments and hedging activities 18
2.11. Inventories 20
2.12. Trade and other accounts receivable 20
2.13. Cash and cash equivalents 20
2.14. Capital 20
2.15. Trade and other accounts payables 20
2.16. Interest-bearing loans 21
2.17. Current and deferred taxes 21
2.18. Employee benefits 21
2.19. Provisions 22
2.20. Revenue recognition 22
2.21. Leases 23
2.22. Non-current assets (or disposal groups) classified as held for sale 25
2.23. Maintenance 25
2.24. Environmental costs 25
3 - Financial risk management 25
3.1. Financial risk factors 25
3.2. Capital risk management 39
3.3. Estimates of fair value 39
4 - Accounting estimates and judgments 42
5 - Segmental information 45
6 - Cash and cash equivalents 48
7 - Financial instruments 50
7.1. Financial instruments by category 50
7.2. Financial instruments by currency 52
8 - Trade, other accounts receivable and non-current accounts receivable 53
9 - Accounts receivable from/payable to related entities 56
10 - Inventories 57
11 - Other financial assets 58
12 - Other non-financial assets 59
13 - Non-current assets and disposal group classified as held for sale 60
14 - Investments in subsidiaries 61

 

 

 

 

15 - Intangible assets other than goodwill 64
16 - Goodwill 65
17 - Property, plant and equipment 67
18 - Current and deferred tax 72
19 - Other financial liabilities 77
20 - Trade and other accounts payables 86
21 - Other provisions 88
22 - Other non financial liabilities 90
23 - Employee benefits 92
24 - Accounts payable, non-current 94
25 - Equity 94
26 - Revenue 99
27 - Costs and expenses by nature 100
28 - Other income, by function 101
29 - Foreign currency and exchange rate differences 102
30 - Earnings per share 110
31 - Contingencies 111
32 - Commitments 124
33 - Transactions with related parties 126
34 - Share based payments 127
35 - Statement of cash flows 130
36 - The environment 132
37 - Events subsequent to the date of the financial statements 133

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

ASSETS                
       As of   As of   As of 
       March 31,   December 31,   January 1, 
   Note   2019   2018   2018 
       ThUS$   ThUS$   ThUS$ 
       Unaudited   Restated   Restated 
           Unaudited   Unaudited 
                 
Cash and cash equivalents                    
Cash and cash equivalents   6 - 7    1,124,326    1,081,642    1,142,004 
Other financial assets   7 - 11    486,401    383,984    559,919 
Other non-financial assets   12    259,085    290,476    244,778 
Trade and other accounts receivable   7 - 8    1,125,376    1,162,582    1,202,945 
Accounts receivable from related entities   7 - 9    6,549    2,931    2,582 
Inventories   10    301,659    279,344    236,666 
Current tax assets   18    64,013    69,134    77,987 
                     
Total current assets other than non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners        3,367,409    3,270,093    3,466,881 
                     
Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners   13    2,006    5,768    291,103 
                     
Total current assets        3,369,415    3,275,861    3,757,984 
                     
Non-current assets                    
Other financial assets   7 - 11    57,210    58,700    88,090 
Other non-financial assets   12    238,034    227,541    212,203 
Accounts receivable   7 - 8    5,348    5,381    6,891 
Intangible assets other than goodwill   15    1,434,324    1,441,072    1,617,247 
Goodwill   16    2,283,269    2,294,072    2,672,550 
Property, plant and equipment   17    12,565,500    12,501,809    12,930,652 
Current tax assets   18    757    757    17,532 
Deferred tax assets   18    271,650    273,529    370,564 
Total non-current assets        16,856,092    16,802,861    17,915,729 
Total assets        20,225,507    20,078,722    21,673,713 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

LIABILITIES AND EQUITY                
       As of   As of   As of 
       March 31,   December 31,   January 1, 
LIABILITIES  Note   2019   2018   2018 
       ThUS$   ThUS$   ThUS$ 
       Unaudited   Restated   Restated 
           Unaudited   Unaudited 
                 
Current liabilities                    
                     
Other financial liabilities   7 - 19    1,790,900    1,794,286    1,619,979 
Trade and other accounts payables   7 - 20    1,704,729    1,674,303    1,668,612 
Accounts payable to related entities   7 - 9    2,569    382    760 
Other provisions   21    5,210    4,794    2,783 
Current tax liabilities   18    3,699    3,738    3,511 
Other non-financial liabilities   22    2,293,634    2,454,746    2,901,603 
Total current liabilities other than non-current liabilities (or disposal groups) classified as held for sale        5,800,741    5,932,249    6,197,248 
Liabilities included in disposal groups classified as held for sale   13    -    -    15,546 
Total current liabilities        5,800,741    5,932,249    6,212,794 
                     
Non-current liabilities                    
Other financial liabilities   7 - 19    8,790,470    8,359,462    9,433,450 
Accounts payable   7 - 24    462,785    529,277    559,443 
Other provisions   21    312,641    303,495    374,593 
Deferred tax liabilities   18    778,951    786,571    877,748 
Employee benefits   23    89,416    82,365    101,087 
Other non-financial liabilities   22    628,236    644,702    158,305 
Total non-current liabilities        11,062,499    10,705,872    11,504,626 
Total liabilities        16,863,240    16,638,121    17,717,420 
                     
EQUITY                    
Share capital   25    3,146,265    3,146,265    3,146,265 
Retained earnings   25    158,897    218,971    (41,012)
Treasury Shares   25    (178)   (178)   (178)
Other reserves        (36,890)   (4,365)   760,761 
Parent's ownership interest        3,268,094    3,360,693    3,865,836 
Non-controlling interest   14    94,173    79,908    90,457 
Total equity        3,362,267    3,440,601    3,956,293 
Total liabilities and equity        20,225,507    20,078,722    21,673,713 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF INCOME BY FUNCTION

 

      For the period ended 
      March 31, 
   Note  2019   2018 
      ThUS$   ThUS$ 
      Unaudited   Restated 
          Unaudited 
            
Revenue  26   2,431,478    2,613,835 
Cost of sales      (2,021,555)   (1,975,978)
Gross margin      409,923    637,857 
Other income  28   93,790    116,701 
Distribution costs      (142,860)   (169,683)
Administrative expenses      (162,415)   (202,597)
Other expenses      (116,314)   (111,834)
Other gains/(losses)      (3,985)   (3,456)
Income from operation activities      78,139    266,988 
Financial income      5,891    12,187 
Financial costs  27   (138,446)   (133,355)
Foreign exchange gains/(losses)  29   8,949    811 
Result of indexation units      1,911    2,434 
Income (loss) before taxes      (43,556)   149,065 
Income tax expense / benefit  18   (13,041)   (43,213)
              
NET INCOME (LOSS) FOR THE PERIOD      (56,597)   105,852 
Income (loss) attributable to owners of the parent      (60,074)   92,169 
Income (loss) attributable to non-controlling interest  14   3,477    13,683 
              
Net income (loss) for the year      (56,597)   105,852 
              
EARNINGS PER SHARE             
Basic earnings (losses) per share (US$)  30   (0,09907)   0,15199 
Diluted earnings (losses) per share (US$)  30   (0,09907)   0,15199 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

      For the period ended 
      March 31, 
   Note  2019   2018 
      ThUS$   ThUS$ 
      Unaudited   Restated 
          Unaudited 
            
NET INCOME (LOSS)      (56,597)   105,852 
Components of other comprehensive income that will not be reclassified to income before taxes             
Other comprehensive income, before taxes, gains (losses) by new measurements on defined benefit plans  25   (2,395)   (2,098)
Total other comprehensive income that will not be reclassified to income before taxes      (2,395)   (2,098)
Components of other comprehensive income that will be reclassified to income before taxes             
Currency translation differences             
Gains (losses) on currency translation, before tax  29   (19,667)   (23,737)
Other comprehensive income, before taxes, currency translation differences      (19,667)   (23,737)
Cash flow hedges             
Gains (losses) on cash flow hedges before taxes  19   26,624    17,119 
Other comprehensive income (losses), before taxes, cash flow hedges      26,624    17,119 
Total other comprehensive income that will be reclassified to income before taxes      6,957    (6,618)
Other components of other comprehensive income (loss), before taxes      4,562    (8,716)
Income tax relating to other comprehensive income that will not be reclassified to income             
Income tax relating to new measurements on defined benefit plans  18   656    525 
Accumulate income tax relating to other comprehensive income that will not be reclassified to income      656    525 
Income tax relating to other comprehensive income that will be reclassified to income             
Income tax related to cash flow hedges in other comprehensive income      426    (527)
Income taxes related to components of other comprehensive income that will be reclassified to income      426    (527)
Total Other comprehensive income      5,644    (8,718)
Total comprehensive income (loss)      (50,953)   97,134 
Comprehensive income (loss) attributable to owners of the parent      (92,433)   84,693 
Comprehensive income (loss) attributable to non-controlling interests      41,480    12,441 
TOTAL COMPREHENSIVE INCOME (LOSS)      (50,953)   97,134 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

      Attributable to owners of the parent         
              Change in other reserves                 
                      Actuarial gains                             
                      or losses on                             
              Currency   Cash flow   defined benefit   Shares based   Other   Total       Parent's   Non-     
      Share   Treasury   translation   hedging   plans   payments   sundry   other   Retained   ownership   controlling   Total 
   Note  capital   shares   reserve   reserve   reserve   reserve   reserve   reserve   earnings   interest   interest   equity 
      ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
                                                    
Equity as of January 1, 2019 Restated (Unaudited)      3,146,265    (178)   (2,656,644)   (9,333)   (15,178)   37,874    2,638,916    (4,365)   218,971    3,360,693    79,908    3,440,601 
Total increase (decrease) in equity                                                               
Comprehensive income                                                               
Gain (losses)  25   -    -    -    -    -    -    -    -    (60,074)   (60,074)   3,477    (56,597)
Other comprehensive income      -    -    (57,689)   27,069    (1,739)   -         (32,359)   -    (32,359)   38,003    5,644 
Total comprehensive income      -    -    (57,689)   27,069    (1,739)   -    -    (32,359)   (60,074)   (92,433)   41,480    (50,953)
Transactions with shareholders                                                               
Dividends  25   -    -    -    -    -    -    -    -    -    -    -    - 
Increase (decrease) through transfers and other changes, equity  25-34   -    -    -    -    -    (70)   (96)   (166)   -    (166)   (27,215)   (27,381)
Total transactions with shareholders      -    -    -    -    -    (70)   (96)   (166)   -    (166)   (27,215)   (27,381)
Closing balance as of March 31, 2019 (Unaudited)      3,146,265    (178)   (2,714,333)   17,736    (16,917)   37,804    2,638,820    (36,890)   158,897    3,268,094    94,173    3,362,267 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

      Attributable to owners of the parent         
              Change in other reserves                 
                      Actuarial gains                             
                      or losses on                             
              Currency   Cash flow   defined benefit   Shares based   Other   Total       Parent's   Non-     
      Share   Treasury   translation   hedging   plans   payments   sundry   other   Retained   ownership   controlling   Total 
   Note  capital   shares   reserve   reserve   reserve   reserve   reserve   reserve   earnings   interest   interest   equity 
      ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
                                                    
Equity as of January 1, 2018      3,146,265    (178)   (2,131,591)   18,140    (10,926)   39,481    2,639,780    554,884    475,118    4,176,089    91,147    4,267,236 
Increase (decrease) by application of new accounting standards  2 - 25   -    -    205,877    -    -    -    -    205,877    (516,130)   (310,253)   (690)   (310,943)
Initial balance Restated (Unaudited)      3,146,265    (178)   (1,925,714)   18,140    (10,926)   39,481    2,639,780    760,761    (41,012)   3,865,836    90,457    3,956,293 
Total increase (decrease) in equity                                                               
Comprehensive income                                                               
Gain (losses)  25   -    -    -    -    -    -    -    -    92,169    92,169    13,683    105,852 
Other comprehensive income      -    -    (22,571)   16,611    (1,516)   -    -    (7,476)   -    (7,476)   (1,242)   (8,718)
Total comprehensive income      -    -    (22,571)   16,611    (1,516)   -    -    (7,476)   92,169    84,693    12,441    97,134 
Transactions with shareholders                                                               
Dividends  25   -    -    -    -    -    -    -    -    (28,167)   (28,167)   -    (28,167)
Increase (decrease) through transfers and other changes, equity  25-34   -    -    -    -    -    (1,938)   5,783    3,845    -    3,845    (10,514)   (6,669)
Total transactions with shareholders      -    -    -    -    -    (1,938)   5,783    3,845    (28,167)   (24,322)   (10,514)   (34,836)
Closing balance as of March 31, 2018 Restated (Unaudited)      3,146,265    (178)   (1,948,285)   34,751    (12,442)   37,543    2,645,563    757,130    22,990    3,926,207    92,384    4,018,591 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD

 

      For the period ended 
      March 31, 
   Note  2019   2018 
      ThUS$   ThUS$ 
          Restated 
      Unaudited   Unaudited 
            
Cash flows from operating activities             
Cash collection from operating activities             
Proceeds from sales of goods and services      2,536,205    2,698,081 
Other cash receipts from operating activities      27,027    25,539 
Payments for operating activities             
Payments to suppliers for goods and services      (1,739,695)   (1,605,394)
Payments to and on behalf of employees      (504,940)   (559,714)
Other payments for operating activities      (51,345)   (76,643)
Income taxes refunded (paid)      (12,719)   (11,796)
Other cash inflows (outflows)  35   (27,988)   (6,322)
Net cash flows from operating activities      226,545    463,751 
Other cash receipts from sales of equity or debt  instruments of other entities      728,847    903,496 
Other payments to acquire equity  or debt instruments of other entities      (824,446)   (1,083,699)
Amounts raised from sale of property, plant and equipment      274    107,129 
Purchases of property, plant and equipment      (181,826)   (178,566)
Purchases of intangible assets      (18,504)   (19,911)
Interest received      7,730    3,790 
Other cash inflows (outflows)  35   (597)   11,731 
Net cash flow from (used in) investing activities      (288,522)   (256,030)
Cash flows from (used in) financing activities  35          
Amounts raised from long-term loans      594,354    5,004 
Amounts raised from short-term loans      -    80,000 
Loans repayments      (306,081)   (384,985)
Payments of lease liabilities      (94,136)   (91,416)
Dividends paid      -    (9,716)
Interest paid      (100,919)   (107,005)
Other cash inflows (outflows)      27,246    (2,449)
Net cash flows from (used in) financing activities      120,464    (510,567)
Net increase (decrease) in cash and cash equivalents before effect of exchanges rate change      58,487    (302,846)
Effects of variation in the exchange rate on cash and cash equivalents      (15,803)   (24,928)
Net increase (decrease) in cash and cash equivalents      42,684    (327,774)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD  6   1,081,642    1,142,004 
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD  6   1,124,326    814,230 

 

The accompanying Notes 1 to 37 form an integral part of these interim consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF MARCH 31, 2019 (UNAUDITED)

 

NOTE 1 - GENERAL INFORMATION

 

LATAM Airlines Group S.A. (the "Company") is a public limited company registered with the Commission for the Financial Market under No. 306, whose shares are listed in Chile on the Electronic Stock Exchange of Chile - Stock Exchange and the Santiago Stock Exchange - Stock Exchange, besides being listed in the United States of America on the New York Stock Exchange ("NYSE"), in the form of American Depositary Receipts ("ADRs").

 

Its main business is the air transport of passengers and cargo, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil, as well as in a series of regional and international routes in America, Europe and Oceania. These businesses are developed directly or by its subsidiaries in Ecuador, Peru, Brazil, Colombia, Argentina and Paraguay different countries. In addition, the Company has subsidiaries that operate in the cargo business in Chile, Brazil and Colombia.

 

The Company is located in Chile, in the city of Santiago, on Avenida Americo Vespucio Sur No. 901, Renca commune.

 

As of March 31, 2019 the statutory capital of the Company is represented by 606,874,525 shares, all ordinary, without par value, which is divided into: (a) 606,407,693 subscribed and paid shares; and (b) 466,832 shares pending subscription and payment, which correspond to the balance of shares pending placement of the last capital increase approved at the extraordinary shareholders meeting of August 18, 2016.

 

The controller of the Company is the Cueto Group, which through the companies Costa Verde Aeronáutica S.A., Costa Verde Aeronáutica SpA, Costa Verde Aeronáutica Tres SpA, Inversiones Nueva Costa Verde Aeronáutica Ltda., Inversiones Priesca Dos y Cía. Ltda., Inversiones Caravia Dos y Cía. Ltda., Inversiones El Fano Dos y Cía. Ltda., Inversiones La Espasa Dos S.A. and Inversiones La Espasa Dos y Cía. Ltda., Owns 27.91% of the shares issued by the Company, so it is the controller of the Company in accordance with the provisions of letter b) of Article 97 and Article 99 of the Market Law of Values, taken care of that it influences decisively in the administration of this one.

 

As of March 31, 2019, the Company had a total of 1,429 shareholders in its registry. At that date, approximately 2.55% of the Company's property was in the form of ADRs.

 

For the period ended March 31, 2019, the company had an average of 40,925 employees, ending this period with a total number of 40,746 people, distributed in 6,470 Administration employees, 4,955 in Maintenance, 12,945 in Operations, 9,216 Cabin Crew , 4,217 Cockpit Crew and 2,943 in Sales.

 

 

 

 

The main subsidiaries included in these consolidated financial statements are as follows:

 

a)Participation rate

 

            As March 31, 2019   As December 31, 2018 
      Country  Functional                        
Tax No.  Company  of origin  Currency  Direct   Indirect   Total   Direct   Indirect   Total 
            %   %   %   %   %   % 
            Unaudited             
96.518.860-6  Latam Travel Chile  S.A. and Subsidiary  Chile  US$   99.9900    0.0100    100.0000    99.9900    0.0100    100.0000 
96.969.680-0  Lan Pax Group S.A. and Subsidiaries  Chile  US$   99.8361    0.1639    100.0000    99.8361    0.1639    100.0000 
Foreign  Lan Perú S.A.  Peru  US$   49.0000    21.0000    70.0000    49.0000    21.0000    70.0000 
93.383.000-4  Lan Cargo S.A.  Chile  US$   99.8939    0.0041    99.8980    99.8939    0.0041    99.8980 
Foreign  Connecta Corporation  U.S.A.  US$   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
Foreign  Prime Airport Services Inc. and Subsidiary  U.S.A.  US$   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
96.951.280-7  Transporte Aéreo S.A.  Chile  US$   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
96.631.520-2  Fast Air Almacenes de Carga S.A.  Chile  CLP   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
Foreign  Laser Cargo S.R.L.  Argentina  ARS   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
Foreign  Lan Cargo Overseas Limited and Subsidiaries  Bahamas  US$   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
96.969.690-8  Lan Cargo Inversiones S.A. and Subsidiary  Chile  US$   0.0000    100.0000    100.0000    0.0000    100.0000    100.0000 
96.575.810-0  Inversiones Lan S.A. and Subsidiaries  Chile  US$   99.7100    0.2900    100.0000    99.7100    0.2900    100.0000 
96.847.880-K  Technical Training LATAM S.A.  Chile  CLP   99.8300    0.1700    100.0000    99.8300    0.1700    100.0000 
Foreign  Latam Finance Limited  Cayman Insland  US$   100.0000    0.0000    100.0000    100.0000    0.0000    100.0000 
Foreign  Peuco Finance Limited  Cayman Insland  US$   100.0000    0.0000    100.0000    100.0000    0.0000    100.0000 
Foreign  Professional Airline Services INC.  U.S.A.  US$   100.0000    0.0000    100.0000    100.0000    0.0000    100.0000 
Foreign  Jarletul S.A.  Uruguay  US$   99.0000    1.0000    100.0000    99.0000    1.0000    100.0000 
Foreign  TAM S.A. and Subsidiaries (*)  Brazil  BRL   63.0901    36.9099    100.0000    63.0901    36.9099    100.0000 

 

(*)          As of March 31, 2019, the indirect participation percentage over TAM S.A. and Subsidiaries comes from Holdco I S.A., a company over which LATAM Airlines Group S.A. it has a 99.9983% share on economic rights and 51.04% of political rights its percentage arise as a result of the provisional measure No. 863 of the Brazilian government implemented in December 2018 that allows foreign capital to have up to 100% of the property.

 

 2 

 

 

b)Financial Information

 

      Statement of financial position   Net Income 
                              For the period ended 
      As of March 31, 2019   As of December 31, 2018   March 31, 
                              2019   2018 
Tax No.  Company  Assets   Liabilities   Equity   Assets   Liabilities   Equity   Gain /(loss) 
      ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
                  Restated   Restated 
      Unaudited   Unaudited   Unaudited 
96.518.860-6  Latam Travel Chile  S.A. and Subsidary   11,391    4,232    7,159    10,841    3,909    6,932    227    708 
96.969.680-0  Lan Pax Group S.A. and Subsidiaries (*)   485,156    1,268,326    (797,728)   526,017    1,281,800    (751,960)   1,943    (22,059)
Foreign  Lan Perú S.A.   348,683    347,032    1,651    419,325    409,221    10,104    (6,664)   11,806 
93.383.000-4  Lan Cargo S.A.   654,634    476,696    177,938    513,367    336,715    176,652    1,341    (118)
Foreign  Connecta Corporation   73,080    26,170    46,910    66,593    28,183    38,410    8,500    2,131 
Foreign  Prime Airport Services Inc. and Subsidary (*)   17,881    20,325    (2,444)   15,817    17,654    (1,837)   (608)   183 
96.951.280-7  Transporte Aéreo S.A.   352,229    148,121    204,108    331,496    129,233    202,263    1,903    6,044 
96.631.520-2  Fast Air Almacenes de Carga S.A.   17,694    10,293    7,401    17,057    9,614    7,443    (248)   (81)
Foreign  Laser Cargo S.R.L.   (13)   -    (13)   26    13    13    -    - 
Foreign  Lan Cargo Overseas Limited and Subsidiaries (*)   58,737    21,852    36,629    53,326    13,040    40,028    (3,400)   3,191 
96.969.690-8  Lan Cargo Inversiones S.A. and Subsidary (*)   191,987    208,211    (14,459)   181,522    192,059    (9,614)   (4,845)   490 
96.575.810-0  Inversiones Lan S.A. and Subsidiaries (*)   1,397    51    1,346    1,383    50    1,333    13    837 
96.847.880-K  Technical Trainning LATAM S.A.   3,002    1,462    1,540    2,879    1,031    1,848    (192)   (384)
Foreign  Latam Finance Limited   1,225,973    1,320,857    (94,884)   679,034    756,774    (77,740)   (17,144)   (11,893)
Foreign  Peuco Finance Limited   664,458    664,458    -    608,191    608,191    -    -    - 
Foreign  Profesional Airline  Services INC.   1,633    6,114    (4,481)   2,430    1,967    463    (4,944)   56 
Foreign  Jarletul S.A.   214    306    (92)   18    125    (107)   (92)   - 
Foreign  TAM S.A. and Subsidiaries (*)   4,370,696    3,283,500    1,012,585    4,420,546    3,256,017    1,095,695    (98,911)   69,601 

 

(*)The Equity reported corresponds to Equity attributable to owners of the parent, it does not include Non-controlling interest.

 

Additionally, we have proceeded to consolidate the following special purpose entities: 1. Chercán Leasing Limited created to finance the pre-delivery payments on aircraft; 2. Guanay Finance Limited created to issue a bond collateralized with future credit card receivables; 3. Private investment funds. These companies have been consolidated as required by IFRS 10.

 

All controlled entities have been included in the consolidation.

 

 3 

 

 

The changes that occurred in the consolidation perimeter between January 1, 2018 and March 31, 2019, are detailed below:

 

(1)Incorporation or acquisition of companies

 

-On January 22, 2018, Lan Pax Group S.A., purchased 17,717 shares of Laser Cargo SRL. to Andes Airport Service S.A., consequently Lan Pax Group S.A. ownership is 3.77922% and Lan Cargo S.A. with a 96.22078% share of Laser Cargo SRL.

 

-On March 13, 2018, the company Jarletul S.A., was create. The company ownership is 99% of LATAM Airlines Group S.A. and a 1% is from Inversiones Lan S. A.. The company main activity is a Travel Agency.

 

-As of December 31, 2018, Inversiones LAN S.A., subsidiary of LATAM Airlines Group S.A., acquired 5,319 shares of Aerovías de Integración Regional Aires S.A. a non-controlling shareholder, consequently, the indirect participation of LATAM Airlines Group S.A. correspond to 99.2012%

 

(2)Disposition of companies.

 

-On May 7, 2018 LATAM Airlines Group S.A. and its subsidiaries Inversiones LAN S.A. and LAN Pax Group S.A., sold, assigned and transferred to the Spanish companies Acciona Airport Services, S.A. and Acciona Aeropuertos, S.L., 100% of its shares in the subsidiary Andes Airport Services S.A.

 

The sale value of Andes Airport Services S.A. it was ThUS$ 39,108

 

-On November 30, 2018, Mas Investment Limited, a subsidiary of LATAM Airlines Group S.A., sold to Puente Aéreo Corporación S.A. de C.V. his participation in the companies Air Transportes Mas de Carga S.A. de C.V. and Promotora Aérea Latino Americana S.A. de C.V.

 

The sale value of this transaction was ThUS$ 29,466.

 

 4 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements.

 

2.1.Basis of Preparation

 

The consolidated financial statements of LATAM Airlines Group S.A. for the period ended March 31, 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting.

 

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 4 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.

 

The consolidated interim financial statements have been prepared in accordance with the accounting policies used by the Company for the consolidated financial statements 2018, except for the standards and interpretations adopted as of January 1, 2019.

 

 5 

 

 

(a) Accounting pronouncements with implementation effective from January 1, 2019:

 

  Date of issue Effective Date:
(i)    Rules and amendments    
     
IFRS 16: Leases. january 2016 01/01/2019
     
Amendment to IFRS 9: Financial instruments october 2017 01/01/2019
     
Amendment to IAS 28: Investments in associates and joint ventures october 2017 01/01/2019
     
Amendment to IAS 19: Benefits to employees february  2018 01/01/2019
     
(ii)    Improvements    
     
Improvements to International Financial Reporting Standards (cycle 2015-2017) IFRS 3: Business combination; IAS 12: Income tax; IFRS 11: Joint agreements and IAS 23 Costs for loans. december 2017 01/01/2019
     
(iii)    Interpretations    
     
IFRIC 23: Uncertain tax positions june 2017 01/01/2019

 

During the reporting period, the Company has recognized the changes, in the consolidated financial statements, as a result of the adoption of IFRS 16 retrospectively; restating the comparative figures, in accordance with the provisions of IAS 8 Accounting policies, changes in accounting estimates and errors.

 

The Company has modified the initial balances corresponding to January 1, 2018. The disclosures corresponding to the initial application of IFRS 9 and IFRS 15, which also originated changes, have been maintained in the consolidated financial statements.

 

 6 

 

 

The impacts of the adoption of IFRS 9 Financial Instruments, IFRS 15 Revenue from contracts with customers and IFRS 16 Leases are as follows:

 

Consolidated statement of financial position (extract)

 

a) As of January 1, 2018:

 

       As of  Adoption   As of   Adoption   As of 
       December 31,  effect   January 1   effect   January 1, 
   Note  2017   IFRS 9   IFRS 15   2018   IFRS 16   2018 
      ThUS$   THUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
          Unaudited   Unaudited   Unaudited   Unaudited   Restated 
                          Unaudited 
Current assets                                 
Other non-financial assets, current  12   221,188    -    54,361(4)   275,549    (30,772)(9)   244,777 
Trade debtors and other accounts receivable, current  7 - 8   1,214,050    (11,105)(1)   -    1,202,945    -    1,202,945 
                                  
Non-current assets                                 
Other non-financial assets, non current  12   220,807    -    -    220,807    (8,603)(9)   212,204 
Properties, plants and equipment  17   10,065,335    -    -    10,065,335    2,865,317(9)   12,930,652 
Deferred tax assets  18   364,021    89(2)   6,005(7)   370,115    449(10)   370,564 
                                  
Current liabilities                                 
Other current financial liabilities  7 - 19   1,300,949    -    -    1,300,949    319,030(11)   1,619,979 
Trade and other accounts payables  7 - 20   1,695,202    -    (22,192)(5)   1,673,010    (4,398)(9)   1,668,612 
Other non-financial liabilities, current  22   2,823,963    -    77,640(6)   2,901,603    -    2,901,603 
                                  
Non-current liabilities                                 
Other  non current financial liabilities  7-19   6,605,508    -    -    6,605,508    2,827,942(11)   9,433,450 
Accounts payable commercial and other  7 - 24   498,832    -    -    498,832    60,611(9)   559,443 
Deferred tax liability  18   949,697    (1,021)(2)   4,472(5)   953,148    (75,400)(10)   877,748 
                                  
Equity                                 
Equity attributable to the owners of the parent                                 
Accumulated earnings  25   475,118    (9,995)(3)   446(8)   465,569    (506,581)(12)   (41,012)
Other reserves  25   554,885    -    -    554,885    205,877(12)   760,762 
Non-controlling interest  14   91,147    -    -    91,147    (690)(12)   90,457 

 

 7 

 

 

b) As of December 31, 2018:

 

      As of   Adoption   As of                         
      December 31,   effect   December 31,                         
   Note  2018   IFRS 16   2018                         
      ThUS$   ThUS$   ThUS$                         
          Unaudited   Restated                         
              Unaudited                         
Current assets                                          
Other non-financial assets, current  12   320,977    (30,501)(9)   290,476                         
                                           
Non-current assets                                          
Other non-financial assets, non current  12   233,741    (6,200)(9)   227,541                         
Properties, plants and equipment  17   9,953,365    2,548,444(9)   12,501,809                         
Deferred tax assets  18   273,327    201(10)   273,528                         
                                           
Current liabilities                                          
Other current financial liabilities  7 - 19   1,430,789    363,497(11)   1,794,286                         
                                           
Non-current liabilities                                          
Other  non current financial liabilities  7-19   5,864,910    2,494,552(11)   8,359,462                         
Accounts payable commercial and other  7 - 24   483,656    45,621(10)   529,277                         
Deferred tax liability  18   872,121    (85,550)(9)   786,571                         
                                           
Equity                                          
Equity attributable to the owners of the parent                                          
Accumulated earnings  25   597,675    (378,705)(12)   218,970                         
Other reserves  25   (76,926)   72,561(12)   (4,365)                        
Non-controlling interest  14   79,940    (32)(12)   79,908                         

 

- Effects of adopting IFRS 9

 

(1)Expected credit losses: The Company modified the calculation of the impairment provision to comply with the expected credit loss model, established in IFRS 9 Financial Instruments, which replaces the current loss impairment model incurred. To the calculate percentage of credit losses, a risk matrix was used, grouping the portfolio, according to similar characteristics of risk and maturity. This change resulted in the recognition of an increase in the provision for impairment losses of US $ (11.1) million.

 

This standard also includes requirements related to the classification and measurement of financial assets and liabilities and an expected credit loss model that replaces the current loss impairment model incurred.

 

 8 

 

 

As of January 1, 2018, the calculation of the impairment losses provision are as follows:

 

   Portfolio maturity 
           Up to   Up to   More than     
       Up to   91 to   181 to   360     
   Up to date   90 days   180 days   360 days   days   Total 
   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
                         
Expected loss rate   1%   21%   46%   67%   94%   8%
Gross book value   1,046,909    36,241    12,001    14,623    66,022    1,175,796 
Impairment provision   (13,570)   (7,774)   (5,499)   (9,803)   (61,787)   (98,433)

 

(2) Deferred tax adjustments originated by the application of IFRS 9.

 

(3) Net effect on accumulated results of the adjustments indicated above.

 

In addition to the impacts on the consolidated statement of financial position, the application of IFRS 9: Financial Instruments requires the classification of financial instruments according to the business model, to determine the form of measurement of financial instruments, after their initial recognition.

 

The Company analyzed the business models and classified its financial assets and liabilities according to the following:

 

   Classification IAS 39   Classification IFRS 9     
               Initial             
Assets  Loans   Hedge   Held   as fair value       At fair value     
   and   and   for   through profit   Cost   with changes     
   receivables   derivatives   trading   and loss   amortized   in results   Total 
   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$ 
                             
Balance as of December 31, 2017   2,446,864    62,867    1,915    501,890    -    -    3,013,536 
                                    
Cash and cash equivalents   (1,112,346)   -    -    (29,658)   1,112,346    29,658    - 
Other financial assets, current   (23,918)   -    (1,421)   (472,232)   23,918    473,653    - 
Trade debtors and other accounts receivable, current   (1,214,050)   -    -    -    1,214,050    -    - 
Accounts receivable from entities related, current   (2,582)   -    -    -    2,582    -    - 
Other financial assets, non-current   (87,077)   -    (494)   -    87,077    494    - 
Accounts receivable, non-current   (6,891)   -    -    -    6,891    -    - 
                                    
Balance as of January 1, 2018   -    62,867    -    -    2,446,864    503,805    3,013,536 

 

 9 

 

 

   Classification IAS 39   Classification IFRS 9     
Liabilities  Others   Held        
   financial   hedge   Cost     
   liabilities   derivatives   amortized   Total 
   ThUS$   ThUS$   ThUS$   ThUS$ 
                 
Balance as of December 31, 2017   10,086,434    14,817    -    10,101,251 
                     
Other current financial liabilities   (1,288,749)   -    1,288,749    - 
Trade accounts payable and other accounts payable, current   (1,695,202)   -    1,695,202    - 
Accounts payable to related entities, current   (760)   -    760    - 
Other financial liabilities, not current   (6,602,891)   -    6,602,891    - 
Accounts payable, not current   (498,832)   -    498,832    - 
Balance as of January 1, 2018 (*)   -    14,817    10,086,434    10,101,251 

 

(*) Balances as of January 1, 2018 do not contain the re-expression effects originated by IFRS 16.

 

- Effects of adopting IFRS 15

 

(4) Contract costs: The Company has capitalized the costs related to the revenues from air transport of passengers, corresponding to: the commissions charged by the credit card administrators for US$ 22.0 million and the air ticket booking services through the system general distribution (GDS) for US$ 15.6 million. Additionally, there is a reclassification of commissions from travel agencies for US$ 16.8 million, which previously were presented, according IAS 18, net of the liability to fly in other non-financial liabilities.

 

(5) Contract liabilities: The Company has adjusted certain concepts that were recorded as obligations with suppliers and customers, which must now be treated as contract liabilities; therefore they must be deferred until the benefit of the service have been rendered. These concepts are mainly related to the ground transportation service for US $ 15.6 million and traveler's checks for US $ 6.6 million.

 

(6) Performance Obligations: The Company analyzed the moment in which the performance obligations identified in the contracts with customers must be recognized in the consolidated result. During this analysis, some concepts were identified which must be deferred until the moment of service provision, mainly related to land transportation services, charges for modifications to the initial contract in the sale of tickets and redeem of some products associated with loyalty programs for US$ 60.8 million. Additionally, there is the reclassification detailed in numeral (4) for US$ 16.8 million.

 

(7) Deferred tax adjustments originated by the application of IFRS 15.

 

(8) Net effect on accumulated results of the adjustments indicated above.

 

Additionally, the Company concluded that, in the rendering of certain services, it acted as agent in the provision of these services, therefore some reclassifications were made in the consolidated income statement to reflect the corresponding commission.

 

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(9) Company recognized under Property, plant and equipment right of use assets for US $ 2,865.3 million as of January 1, 2018 and US $ 2,548.4 as of December 31, 2018, associated with contracts that meet the definition of lease (note 2.21 & 17).

 

The Company decrease other financial assets related to advance payments for leases for US $ 39.4 million as of January 1, 2018 and US $ 36.7 as of December 31, 2018, since with the application of the standard these amounts are considered in the initial measurement of the right of use asset.

 

The Company increased the cost of restoration associated with the return of aircraft and engines for US $ 56.2 million as of January 1, 2018 and US $ 45.6 million as of December 31, 2018. With the application of the standard, the net present value of this cost was included in the asset for right of use and its counterpart in the line of accounts payable, current or non-current, depending on the return date of the aircraft or engines.

 

(10) Deferred taxes: adjustments originated by the application of IFRS 16.

 

(11) Lease liabilities: The Company recognized within the Other financial liabilities for lease for US $ 3,147.0 million as of January 1, 2018 and US $ 2,858.0 million as of December 31, 2018, associated with contracts that meet the definition of lease (note 2.21 & 19).

 

(12) The effect of the recognition of the leases under IFRS 16 generated a decrease in retained earnings of US $ 506.6 million as of January 1, 2018 (US $ 378.7 million as of December 31, 2018). The increase in Other reserves of US $ 205.9 millions as of January 1, 2018 ( decrease of US $72,5 millions as of December 31, 2018), was caused by the Cumulative translation adjustment of those subsidiaries with functional currencies other than the US dollar. The application of IFRS 16 also affected non-controlling interests.

 

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The effects of the changes recognized in the application of IFRS 15 and IFRS 16 as of March 31, 2018 are presented in the consolidated income statement:

 

       For the period ended March 31, 2018 
Reconciliation Revenue               Adjustments for reconciliation    
                           
       Results  Adoption  Results     Deferred     Results 
       under  Effect  under  Contract  revenues     under 
   Nota   IFRS 15  IFRS16  IFRS 15  costs (4 )  recognition [(5), (6 )]  Reclassifications  IAS 18 
       ThUS$  ThUS$  ThUS$  ThUS$  ThUS$  ThUS$  ThUS$ 
       Published     Restated             
       Restated     IFRS 16             
                Unaudited          
                           
Revenue  26    2,613,835   -   2,613,835   -   30,273   4,830   2,648,938 
Cost of sales       (2,019,583)  43,605   (1,975,978)  -   (10,732)       (1,986,710)
Gross margin       594,252   43,605   637,857   -   19,541   4,830   662,228 
                                  
Other income  28    116,701   -   116,701   -   -   18,774   135,475 
Distribution costs       (170,635)  952   (169,683)   964   -   (4,698)  (173,417)
Administrative expenses       (199,015)  (3,582)  (202,597)  3,381   -   (18,906)  (218,122) 
Other expenses       (112,767)  933   (111,834)  -   -   -   (111,834)
Other gains (losses)       (3,456)  -   (3,456)  -   -   -   (3,456)
Income from operation activities       225,080   41,908   266,988   4,345   19,541   -   290,874 
                                  
Financial income       12,187   -   12,187   -   -   -   12,187 
Financial costs  27    (86,217)  (47,138)  (133,355)  -   -   -   (133,355)
Foreign exchange gains (losses)  29    811   -   811   -   -   -   811 
Result of indexation units       2,434   -   2,434   -   -   -   2,434 
Income (loss) before taxes       154,295   (5,230)   149,065   4,345   19,541   -   172,951 
Income (loss) tax expense / benefit  18    (46,723)  3,510   (43,213)  (1,240)  (6,007)  -   (50,460)
NET INCOME (LOSS) FOR THE PERIOD       107,572   (1,720)   105,852   3,105   13,534   -   122,491 
                                  
Income (loss) attributable to owners of the parent       93,889   (1,720)   92,169   3,105   13,534   -   108,808 
Income (loss) attributable to non- controlling interest  14    13,683   -   13,683   -   -   -   13,683 
Net income (loss) for the period       107,572   (1,720)   105,852   3,105   13,534   -   122,491 

 

In the income statement, with the implementation of the IFRS16 standard, restated were made in the following lines:

 

-Cost of sale, distribution costs, administrative expenses: net effect of derecognized of rental cost and recognition of the depreciation of the right of use.

 

-Financial Costs: interest expense corresponding to the lease liability.

 

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(b)          Accounting pronouncements not yet in force for financial years beginning on January 1, 2019 and which has not been effected early adoption

 

(i) Rules and amendments

Date of issue

Effective Date 

     

IFRS 17: Insurance contracts

May 2017 January 1, 2021
     
Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures. September 2014 To be determined
     
Amendment to IFRS 3: Business combination October 2018 January 1, 2020
     
Amendment to IAS 1: Presentation of financial statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors October 2018 January 1, 2020

  

The Company's management believes that the adoption of the standards, amendments and interpretations described above will not have a significant impact on the consolidated financial statements of the Company in the exercise of its first application.

 

2.2.Basis of 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 exercisable or convertible at the date of the consolidated financial statements are considered. 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 results and flows are incorporated from the date of acquisition.

 

Balances, transactions 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.

 

To account for and identify the financial information revealed when carrying out a business combination, such as the acquisition of an entity by the Company, is apply the acquisition method provided for in IFRS 3: Business combination.

 

(b)Transactions with non-controlling interests

 

The Group applies the policy of considering transactions with non-controlling interests, when not related to loss of control, as equity transactions without an effect on income.

 

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(c)Sales of subsidiaries

 

When a subsidiary is sold and a percentage of participation is not retained, the Company derecognizes assets and liabilities of the subsidiary, the non-controlling and other components of equity related to the subsidiary. Any gain or loss resulting from the loss of control is recognized in the consolidated income statement in Other gains (losses).

 

If LATAM Airlines Group S.A. and Subsidiaries retain an ownership of participation in the sold subsidiary, and does not represent control, this is recognized at fair value on the date that control is lost, the amounts previously recognized in Other comprehensive income are accounted as if the Company had disposed directly from the assets and related liabilities, which can cause these amounts are reclassified to profit or loss. The percentage retained valued at fair value is subsequently accounted using the equity method.

 

(d)Investees or associates

 

Investees or associates are all entities over which LATAM Airlines Group S.A. and Subsidiaries have significant influence but have no control. This usually arises from holding between 20% and 50% of the voting rights. Investments in associates are booked using the equity method and are initially recognized at their cost.

 

2.3.Foreign currency transactions

 

(a)Presentation and functional currencies

 

The items included in the financial statements of each of the entities of LATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.

 

(b)Transactions and balances

 

Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation at the closing exchange rates of the monetary assets and liabilities denominated in foreign currency are shown in the consolidated statement of income by function except when deferred in Other comprehensive income as qualifying cash flow hedges.

 

(c)Adjustment due to hyperinflation

 

After July 1, 2018, the Argentine economy was considered, for purposes of IFRS, hyperinflationary. The financial statements of the subsidiaries whose functional currency is the Argentine Peso have been restated.

 

The non-monetary items of the statement of financial position as well as the income statement, comprehensive incomes and cash flows of the group's entities, whose functional currency corresponds to a hyperinflationary economy, are adjusted for inflation and re-expressed in accordance with the variation of the consumer price index ("CPI"), at each presentation date of its financial statements. The re-expression of non-monetary items is made from the date of initial recognition in the statements of financial position and considering that the financial statements are prepared under the historical cost criterion.

 

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Net losses or gains arising from the re-expression of non-monetary items and income and costs are recognized in the consolidated income statement under "Result of indexation units".

 

Net gains and losses on the re-expression of opening balances due to the initial application of IAS 29 are recognized in the consolidated retained earnings.

 

Re-expression due to hyperinflation will be recorded until the period in which the economy of the entity ceases to be considered as a hyperinflationary economy, at that time, the adjustments made by hyperinflation will be part of the cost of non-monetary assets and liabilities.

 

The comparative amounts in the Consolidated financial statements of the Company are presented in a stable currency and are not adjusted for subsequent changes in the price level or exchange rates.

 

(d)Group entities

 

The results and the financial situation of the Group's entities, whose functional currency is different from the presentation currency of the consolidated financial statements, of LATAM Airlines Group S.A., which does not correspond to the currency of a hyperinflationary economy, are converted into the currency of presentation as follows:

 

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

 

(ii)         The revenues and expenses of each income statement account are translated at the exchange rates prevailing on the transaction dates, and

 

(iii)        All the resultant exchange differences by conversion are shown as a separate component in other comprehensive income.

 

For those subsidiaries of the group whose functional currency is different from the presentation currency and, moreover, corresponds to the currency of a hyperinflationary economy; its restated results, cash flow and financial situation are converted to the presentation currency at the closing exchange rate on the date of the consolidated financial statements.

 

The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar.

 

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 closing exchange rate or period informed, restated when the currency came from the functional entity of the foreign entity corresponds to that of a hyperinflationary economy, the adjustments for the restatement of goodwill are recognized in the consolidated equity.

 

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2.4.Property, plant and equipment

 

The land of LATAM Airlines Group S.A. and Subsidiaries, are recognized at cost less any accumulated impairment loss. The rest of the Properties, plants and equipment are recorded, both in their initial recognition and in their subsequent measurement, at their historical cost, restated for inflation when appropriate, less the corresponding depreciation and any loss due to deterioration.

 

The amounts of advances paid to the aircraft manufacturers are activated by the Company under Construction in progress until they are received.

 

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

 

The depreciation of the properties, plants and equipment is calculated using the linear method over their estimated technical 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 the useful life of the assets are reviewed and adjusted, if necessary, once a year. 

 

When the value of an asset exceeds its estimated recoverable amount, its value is immediately reduced to its recoverable amount (Note 2.8).

 

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

 

2.5.Intangible assets other than goodwill

 

(a)Airport slots and Loyalty program

 

Airport slots and the Coalition and Loyalty program are intangible assets of indefinite useful life and are subject to impairment tests annually as an integral part of each CGU, in accordance with the premises that are applicable, included as follows:

 

Airport slots – Air transport CGU

Loyalty program – Coalition and loyalty program Multiplus CGU

(See Note 16)

The airport slots correspond to an administrative authorization to carry out operations of arrival and departure of aircraft at a specific airport, within a specified period.

 

The Loyalty program corresponds to the system of accumulation and redemption of points that has developed Multiplus S.A., subsidiary of TAM S.A.

 

The Brands, airport Slots and Loyalty program were recognized in fair values determined in accordance with IFRS 3, as a consequence of the business combination with TAM and Subsidiaries.

 

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(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, for which the Company has been defined useful lives between 3 and 10 years.

 

Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. The personnel costs and others costs directly related to the production of unique and identifiable computer software controlled by the Company, are shown as intangible Assets others than Goodwill when they have met all the criteria for capitalization.

 

(c)Brands

 

The Brands were acquired in the business combination with TAM S.A. And Subsidiaries and recognized at fair value under IFRS. During the year 2016, the estimated useful life of the brands change from an indefinite useful life to a five-year period, the period in which the value of the brands will be amortized (See Note 15).

 

2.6.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 acquisition of subsidiaries is not amortized but tested for impairment annually or each time that there is evidence of impairment. Gains and losses on the sale of an entity include the book amount of the goodwill related to the entity sold.

 

2.7.Borrowing 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.

 

2.8.Losses for impairment of non-financial assets

 

Intangible assets that have an indefinite useful life, and developing IT projects, are not subject to amortization and are subject to annual testing for impairment. 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 amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and 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 reviewed if there are indicators of reverse losses at each reporting date.

 

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2.9.Financial assets

 

As of January 1, 2018, the Company classifies its financial assets in the following categories: at fair value (either through other comprehensive income, or through gains or losses), and at amortized cost. The classification depends on the business model of the entity to manage the financial assets and the contractual terms of the cash flows.

 

The group reclassifies debt investments when, and only when, it changes its business model to manage those assets.

 

In the initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset classified at amortized cost, the transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets accounted for at fair value through profit or loss are recorded as expenses in the income statement.

 

(a) Debt instruments

 

The subsequent measurement of debt instruments depends on the group's business model to manage the asset and cash flow characteristics of the asset. The Company has two measurement categories in which the group classifies its debt instruments:

 

Amortized cost: the assets held for the collection of contractual cash flows where those cash flows represent only payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in income when the asset is derecognized or impaired. Interest income from these financial assets is included in financial income using the effective interest rate method.

 

Fair value through profit or loss: assets that do not meet the criteria of amortized cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognized in profit or loss and is presented net in the income statement within other gains / (losses) in the period in which it arises.

 

(b) Equity instruments

 

Changes in the fair value of financial assets at fair value through profit or loss are recognized in other gains / (losses) in the statement of income as appropriate.

The Company evaluates in advance the expected credit losses associated with its debt instruments recorded at amortized cost. The applied impairment methodology depends on whether there has been a significant increase in credit risk.

 

2.10.Derivative financial instruments and hedging activities

 

Derivatives are recognized, in accordance with IAS 39 for hedge accounting and IFRS 9 for derivatives not qualify as hedge accounting, initially at fair value on the date on which the derivative contract was made and are subsequently valued at their fair value. The method to recognize the resulting loss or gain depends on whether the derivative has been designated as a hedging instrument and, if so, the nature of the item being hedged. The Company designates certain derivatives as:

 

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

 

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(b)Hedge of an identified 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 transactions. 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 Other non-current financial asset or liability if the remaining maturity of the item hedged is over 12 months, and as an other current financial asset or liability if the remaining term of the item hedged is less than 12 months.
Derivatives not booked as hedges are classified as Other financial assets or liabilities.

 

(a)Fair value hedges

 

Changes in the fair value of designated derivatives 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 the statement of other comprehensive income. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under other gains (losses). Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.

 

In case of variable interest-rate hedges, the amounts recognized in the statement of other comprehensive income are reclassified to results within financial costs at the same time the associated debts accrue interest.

 

For fuel price hedges, the amounts shown in the statement of other comprehensive income are reclassified to results under the line item Cost of sales to the extent that the fuel subject to the hedge is used.

 

For foreign currency hedges, the amounts recognized in the statement of other comprehensive income are reclassified to income as deferred revenue resulting from the use of points, are recognized as Income.

 

When hedging instrument mature, is sold or fails to meet the requirements to be accounted for as hedges, any gain or loss accumulated in the statement of Other comprehensive income until that moment, remains in the statement of other comprehensive income and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in the statement of other comprehensive income is taken immediately to the consolidated statement of income as “Other gains (losses)”.

  

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(c)Derivatives 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 gains (losses)”.

 

2.11.Inventories

 

Inventories, detailed in Note 10, are shown at the lower of cost and their net realizable value. The cost is determined on the basis of the weighted average cost method (WAC). The net realizable value is the estimated selling price in the normal course of business, less estimated costs necessary to make the sale.

 

2.12.Trade and other accounts receivable

 

Commercial accounts receivable are initially recognized at their fair value and subsequently at their amortized cost in accordance with the effective rate method, less the provision for impairment according to the model of the expected credit losses. The company applies the simplified approach permitted by IFRS 9, which requires that expected lifetime losses be recognized upon initial recognition of accounts receivable.

 

The existence of significant financial difficulties on the part of the debtor, the probability that the debtor goes bankrupt or financial reorganization are considered indicators of a significant increase in credit risk.

 

The carrying amount of the asset is reduced as the provision account is used and the loss is recognized in the consolidated income statement under "Cost of sales". When an account receivable is written off, it is regularized against the provision account for the account receivable.

 

2.13.Cash and cash equivalents

 

Cash and cash equivalents include cash and bank balances, time deposits in financial institutions, and other short-term and highly liquid investments.

 

2.14.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 from the proceeds received from the placement of shares.

 

2.15.Trade and other accounts payables

 

Trade payables and other accounts payable are initially recognized at fair value and subsequently at amortized cost.

 

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2.16.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.

 

2.17.Current and deferred taxes

 

The expense by tax is comprised of income and deferred taxes.

 

The charge for current tax is calculated based on tax laws in force on the date of statement of financial position, in the countries in which the subsidiaries and associates operate and generate taxable income.

 

Deferred taxes are calculated using the liability method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences 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 at the consolidated financial statements close, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability 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.

 

The tax (current and deferred) is recognized in income by function, unless it relates to an item recognized in other comprehensive income, directly in equity or from business combination. In that case the tax is also recognized in other comprehensive income, directly in income by function or goodwill, respectively.

 

2.18.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 based on the shares of the Company are recognized in the consolidated financial statements in accordance with IFRS 2: Share-based payments, for plans based on the granting of options, the effect of fair value is recorded in equity with a charge to remuneration in a linear manner between the date of grant of said options and the date on which they become irrevocable, for the plans considered as cash settled award the fair value, updated as of the closing date of each reporting period, is recorded as a liability with charge to remuneration.

 

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(c)Post-employment and other long-term benefits

 

Provisions are made for these obligations by applying the method of the projected unit credit method, and taking 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 other comprehensive income.

 

(d)Incentives

 

The Company has 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 amount estimated for distribution.         

 

2.19.Provisions

 

Provisions are recognized when:

 

(i)The Company has a present legal or implicit obligation as a result of past events;

 

(ii)It is probable that payment is going to be necessary to settle an obligation; and

 

(iii)The amount has been reliably estimated.

 

2.20.Revenue from contracts with customers

 

(a) Transportation of passengers and cargo

 

The Company recognizes the sale for the transportation service as a deferred income liability, which is recognized as income when the transportation service has been lent or expired. In the case of air transport services sold by the Company and that will be made by other airlines, the liability is reduced when they are remitted to said airlines. The Company periodically reviews whether it is necessary to make an adjustment to deferred income liabilities, mainly related to returns, changes, among others.

 

Compensations granted to clients for changes in the levels of services or billing of additional services such as additional baggage, change of seat, among others, are considered modifications of the initial contract, therefore, they are deferred until the corresponding service is provided.

 

(b) Expiration of air tickets

 

The Company estimates in a monthly basis the probability of expiration of air tickets, with refund clauses, based on the history of use of the same. Air tickets without refund clause are expired on the date of the flight in case the passenger does not show up.

 

(c) Costs associated with the contract

 

The costs related to the sale of air tickets are activated and deferred until the corresponding service is provided. These assets are included under Other non-financial assets in the Consolidated Classified Statement of Financial Position.

 

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(d) Frequent passenger program

 

The Company maintains the following loyalty programs: LATAM Pass, LATAM Fidelidade and Multiplus, whose objective is loyalty through the delivery of miles or points.

 

Members of these programs accumulate miles when flying with LATAM Airlines Group or any other member airline of the oneworld® program, as well as using the services of the associated entities.

 

When the miles and points are exchanged for products and services other than the services provided by the Company, the income is immediately recognized. When the exchange is made through air tickets of an airline of LATAM Airlines Group S.A. and subsidiaries, the income is deferred until the transportation service are rendered or expiration for non-use.

 

In addition, the Company has contracts with certain non-airline companies for the sale of miles or points. These contracts include some performance obligations in addition to the sale of the mile or point, such as marketing, advertising and other benefits. The income associated with these concepts is recognized in the income statement to the extent that the miles are accredited.

 

The calculation of the deferred income by loyalty programs at the end of the period corresponds to the valuation of the miles and points awarded to the holders of the loyalty programs, pending use, weighted by the probability of their exchange.

 

The miles and points that the Company estimates will not be exchanged, the proportionally associated value is recognized during the period in which it is expected that the remaining miles and points will be exchanged. The Company uses statistical models to estimate the exchange probability, which is based on historical patterns and projections.

 

(e) Dividend income

 

Dividend income is recognized when the right to receive payment is established.

 

2.21.Leases

 

The Company recognizes contracts that meet the definition of a lease, as a right of use asset and a lease liability on the date when the underlying asset is available for use.

 

Assets for right of use are measured at cost including the following:

 

-The amount of the initial measurement of the lease liability;
-Lease payment made at or before commencement date;
-Initial direct costs, and
-Restoration costs.

 

The assets by right of use are recognized in the statement of financial position in Properties, Plants and equipment (See Note 17).

 

Lease liabilities include the net present value of the following payments:

 

-Fixed payments including in sustance fixed payment.

 

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-Variable lease payments that depend on an index or a rate;
-The exercise price of a purchase options, if is reasonably certain to exercise that option.

 

The Company determines the present value of the lease payments using the implicit rates for the aircraft leasing contracts and for the rest of the underlying assets, uses the incremental borrowing rate.

 

Lease liabilities are recognized in the statement of financial position under Other financial liabilities, current or non-current (See Note 19).

 

Interest accrued on financial liabilities is recognized in the consolidated statement of income in "Financial costs".

 

Principal and inters is presented in the consolidated cash flow as “Payments of lease liability” and “Interest paid”, respectively in cash flows use in financing activities.

 

Payments associated with short-term leases without purchase options and leases of low-value assets are recognized on a straight-line basis in profit or loss at the time of accrual. Those payments are presented in cash flows use in operation activities.

 

The company analyzes the financing agreements of aircrafts, mainly considering characteristics such as:

 

(a) that the company initially acquired the aircraft or took an important part in the process of direct acquisition with the manufacturers,

 

(b) Due to the contractual conditions, it is virtually certain that the company will execute the purchase option of the aircraft at the end of the lease term.

 

Since these financing agreements are "substantially purchases" and not leases, the related liability is considered as a financial debt classified under IFRS 9 and continue to be presented within the "other financial liabilities" described in note 19. On the other hand, aircraft are presented in Property, Plants and Equipment as described in note 17, as "own aircrafts".

 

The Group qualifies as sale and leaseback transactions, operations which lead to a sale according to IFRS 15. More specifically, a sale is considered as such if there is no repurchase option on the goods at the end of the lease term.

 

- Sale according to IFRS 15

 

If the sale by the vendor-lessee is qualified as a sale according to IFRS 15, the vendor-lessee must: (i) derecognize the underlying asset, (ii) recognize a right-of-use asset equal to the retained portion of the net carrying amount of the asset.

 

- Not a sale according to IFRS 15

 

If the sale by the vendor-lessee is not qualified as a sale according to IFRS 15, the vendor-lessee keeps maintains the goods transferred on its balance sheet recognizes a financial liability equal to the disposal price (received from the buyer-lessor).

 

 24 

 

 

2.22.Non-current assets or disposal groups classified as held for sale

 

Non-current assets (or disposal groups) classified as assets held for sale are shown at the lesser of their book value and the fair value less costs to sell.

 

2.23.Maintenance

 

The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in terms of cycles and flight hours.

 

In case of aircraft include in property, plant and equipment, these maintenance cost are capitalized as Property, plant and equipment, while in the case of aircraft on right of use, a liability is accrued based on the use of the main components is recognized, since a contractual obligation with the lessor to return the aircraft on agreed terms of maintenance levels exists. These are recognized as Cost of sales.

 

Additionally, some contracts that comply with the definition of lease establish the obligation of the lessee to make deposits to the lessor as a guarantee of compliance with maintenance and return conditions. These deposits, often called maintenance reserves, accumulate until a major maintenance is performed, once made, the recovery is requested to the lessor. At the end of the contract period, there is comparison between the reserves that have been paid and required return conditions, and compensation between the parties are made if applicable.

 

The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.

 

2.24.Environmental costs

 

Disbursements related to environmental protection are charged to results when incurred.

 

NOTE 3 - FINANCIAL RISK MANAGEMENT

 

3.1.Financial risk factors

 

The Company is exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The program overall risk management of the Company aims to minimize the adverse effects of financial risks affecting the company.

 

(a)Market risk

 

Due to the nature of its operations, the Company is exposed to market factors such as: (i) fuel-price risk, (ii) exchange -rate risk, and (iii) interest -rate risk.

 

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The Company has developed policies and procedures for managing market risk, which aim to identify, quantify, monitor and mitigate the adverse effects of changes in market factors mentioned above.

 

For this, the Administration monitors the evolution of price levels, exchange rates and interest rates, and quantifies their risk exposures (Value at Risk), and develops and implements hedging strategies.

 

(i)Fuel-price risk:

 

Exposition:

 

For the execution of its operations the Company purchases a fuel called Jet Fuel grade 54 USGC, which is subject to the fluctuations of international fuel prices.

 

Mitigation:

 

To cover the risk exposure fuel, the Company operates with derivative instruments (swaps and options) whose underlying assets may be different from Jet Fuel, being possible use West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and greater liquidity.

 

Fuel Hedging Results:

 

During the period ended March 31, 2019, the Company recognized gains of US$ 8.9 million for fuel coverage net of premium. During the same period of 2018, the Company recognized gains of US$ 6.5 million for the same concept.

 

As of March 31, 2019, the market value of fuel positions amounted to US$ 6.3 million (negative). At the end of December 2018, this market value was US$ 15.8 million (negative).

 

The following tables show the level of hedge for different periods:

 

Positions as of  March 31, 2019 (*)   Maturities       
    Q219   Q319   Q419   Total       
Percentage of coverage over the expected volume of consumption 65% 42% 20%  45%      

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

Positions as of  December 31, 2018 (*)  Maturities 
   Q119   Q219   Q319   Q419  Total 
                         
Percentage of coverage over the expected volume of consumption   66%   58%   40%   15%  45%

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

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Sensitivity analysis

 

A drop in fuel price positively affects the Company through a reduction in costs. However, also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price.

 

The current hedge positions 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 the fourth quarter of 2019.

 

The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of March 2019 and the end of December, 2018.

 

    Positions as of March 31, 2019   Positions as of December 31, 2018
Benchmark price   effect on equity   effect on equity
(US$ per barrel)   (millions of US$)   (millions of US$)
         
 +5    +10.8    +7.4
 -5    - 9.5    - 5.5

 

Given the structure of fuel coverage during 2019, considers a hedge-free portion, a vertical drop of 5 dollars in the JET reference price (considered as the monthly average), would have meant an approximate impact US $ 33.0 million of lower fuel costs. For the same period, a vertical rise of $ 5 in the JET reference price (considered as the monthly average) would have meant an impact of approximately US $ 30.5 million of higher fuel costs.

 

(ii)Foreign exchange rate risk:

 

Exposition:

 

The functional and presentation currency of the Financial Statements of the Parent Company is the US dollar, so that the risk of the Transactional and Conversion exchange rate arises mainly from the Company's business, strategic and accounting operating activities that are expressed in a monetary unit other than the functional currency.

 

The subsidiaries of LATAM are also exposed to foreign exchange risk whose impact affects the Company's Consolidated Income.

 

The largest operational exposure to LATAM's exchange risk comes from the concentration of businesses in Brazil, which are mostly denominated in Brazilian Real (BRL), and are actively managed by the company.

 

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At a lower concentration, the Company is also exposed to the fluctuation of other currencies, such as: Euro, Pound sterling, Australian dollar, Colombian peso, Chilean peso, Argentine peso, Paraguayan guarani, Mexican peso, Peruvian nuevo sol and New Zealand dollar.

 

Mitigation:

 

The Company mitigates currency risk exposures by contracting derivative instruments or through natural hedges or execution of internal operations.

 

FX Hedging Results:

 

With the objective of reducing exposure to the exchange rate risk in the operational cash flows of 2019, and securing the operating margin, LATAM makes hedges using FX derivatives.

 

As of March 31, 2019 and the end of December 2018, the Company does not maintain hedge FX derivatives.

 

During the period ended March 31, 2019, the Company did not recognize results due to FX coverage. During the same period of 2018, the company recognized gains of US$ 0.8 million.

 

As of March 31, 2019, and for the year end at December 2018, the company has not subscribed FX derivatives.

 

As of March 31, 2019 the company has contracted FX derivatives which have not been recorded under hedge accounting. The market value of these positions amounts to US$ 17.4 million (positive). The premium associated with the contracting of this derivative is accrued linearly during the months elapsed until the expiration of the instrument. The Company registered the derivative as fair value through profits and loss. For the period ended March 31, 2019, the loss recognized in results amounts to US $ 8.1 million including premiums.

 

Sensitivity analysis:

 

A depreciation of the R$/US$ exchange rate, negatively affects the Company's operating cash flows, however, also positively affects the value of the positions of derivatives contracted.

 

FX derivatives are recorded as cash flow hedge contracts; therefore, a variation in the exchange rate has an impact on the market value of the derivatives, the changes of which affect the Company's net equity.

 

As of March 31, 2019, the Company does not have FX derivatives in its portfolio.

 

During 2017, the Company contracted derivative currency swaps to hedge debt issued the same year for a notional UF 8.7 million. As of March 31, 2019, the market value of derivative positions of currency swaps amounted to US$ 20.3 million (positive).

 

In the case of TAM S.A, whose functional currency is the Brazilian real, a large part of its liabilities are expressed in US dollars. Therefore, when converting financial assets and liabilities, from dollars to reals, they have an impact on the result of TAM S.A., which is consolidated in the Company's Income Statement.

 

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With the objective of reducing the impact on the Company's results caused by appreciations or depreciations of R$/US $, the Company has executed internal operations to reduce the net exposure in US$ for TAM S.A.

 

The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:

 

Appreciation (depreciation)   Effect at March 31, 2019   Effect at March 31, 2018
of R$/US$(*)   Millions of US$   Millions of US$
         
-10%   +34.3   +28.5
+10%   -34.3    -28.5

 

(*) Appreciation (depreciation) of US$ regard to the covered currencies.

 

Effects of exchange rate derivatives in the Financial Statements

 

The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 19).

 

Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in other comprehensive income.

 

The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$:

 

Appreciation (depreciation)   Effect at March 31, 2019   Effect at December 31, 2018
of R$/US$   Millions of US$   Millions of US$
         
-10%   +360.82   +384.73
+10%   -360.82   -314.78

 

(iii)Interest -rate risk:

 

Exposition:

 

The Company is exposed to fluctuations in interest rates affecting the markets future cash flows of the assets, and current and future financial liabilities.

 

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The Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) and other interest rates of less relevance are Brazilian Interbank Deposit Certificate ("ILC").

 

Mitigation:

 

In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contracts. Currently a 63% (60% at December 31, 2018) of the debt is fixed to fluctuations in interest rate.

 

Rate Hedging Results:

 

As of March 31, 2019, the market value of the derivative positions of interest rates amounted to US $ 1.7 million (negative). At the end of December 2018, this market value was US $ 2.2 million (negative).

 

Sensitivity analysis:

 

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 each date.

 

Increase (decrease)   Positions as of March 31, 2019   Positions as of December 31, 2018
futures curve   effect on profit or loss before tax   effect on profit or loss before tax
in libor 3 months   (millions of US$)   (millions of US$)
         
+100 basis points    -28.24    -28.50
-100 basis points   +28.24   +28.50

 

Much of the current rate derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity.

 

The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve, being both reasonably possible scenarios according to historical market conditions.

 

Increase (decrease)   Positions as of March 31, 2019   Positions as of December 31, 2018
futures curve   effect on equity   effect on equity
in libor 3 months   (millions of US$)   (millions of US$)
         
+100  basis points   +0.50   +0.70
-100   basis points   -0.51   -0.71

 

The assumptions of sensitivity calculation must assume that forward curves of interest rates do not necessarily reflect the real value of the compensation flows. Moreover, the structure of interest rates is dynamic over time.

 

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During the periods presented, the Company has no registered amounts by ineffectiveness in consolidated statement of income for this kind of hedging.

 

(b)Credit risk

 

Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in 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.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents).

 

As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the Company has established maximum limits for investments which are monitored regularly.

 

(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, private investment funds, 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 other current financial assets.

 

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 the previous three and based on this, establishes limits for operations with each counterparty.

 

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 International Air Transport Association, international (“IATA”) 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 does not pay their debt, they are excluded from operating with IATA’s member airlines. In the case of credit-card administrators, they are fully guaranteed by 100% by the issuing institutions.

 

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The exposure consists of the term granted, which 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, Business Sales Processing (“BSP”), Cargo Account Settlement Systems (“CASS”), IATA Clearing House (“ICH”) 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. Currently the sales invoicing of TAM Linhas Aéreas S.A. related with travel agents and cargo agents for domestic transportation in Brazil is done directly by TAM Linhas Aéreas S.A.

 

Credit quality of financial assets

 

The external credit evaluation system used by the Company is 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.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities of TAM Linhas Aéreas S.A. with travel agents).The bad-debt rate in the principal countries where the Company has a presence is insignificant.

 

(c)Liquidity risk

 

Liquidity risk represents the risk that the Company has no sufficient 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, the Company requires liquid funds, defined as cash and cash equivalents plus other short term financial assets, to meet its payment obligations.

 

The liquid funds, the future cash generation and the capacity to obtain additional funding, through bond issuance and banking loans, will allow the Company to obtain sufficient alternatives to face its investment and financing future commitments.

 

At March 31, 2019 is US$ 1,544 million (US$ 1,404 million at December 31, 2018), invested in short term instruments through financial high credit rating levels entities.

 

In addition to the balance of liquid funds, the Company has access to short-term credit lines. As of March 31, 2019, LATAM has credit lines for working capital that are not committed to several banks and additionally has an unused committed line of US$ 575 million (US$ 600 million as of December 31, 2018) subject to availability of collateral.

 

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Class of liability for the analysis of liquidity risk ordered by date of maturity as of March 31, 2019 (Unaudited)

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                More than   More than   More than                        
            Up to   90 days   one to   three to   More than                    
      Creditor     90   to one   three   five   five       Nominal      Effective   Nominal 
Tax No.  Creditor  country  Currency  days   year   years   years   years   Total   value   Amortization  rate   rate 
            ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$      %   % 
                                                 
Loans to exporters                                                     
                                                          
97.032.000-8  BBVA  Chile  US$   76,275    38,697    -    -    -    114,972    113,000   At Expiration   3.48    3.48 
97.032.000-8  BBVA  Chile  UF   865    52,881    -    -    -    53,746    52,001   At Expiration   4.11    3.31 
97.036.000-K  BANCO DO BRASIL  Chile  US$   201,803    -    -    -    -    201,803    200,000   At Expiration   3.60    3.60 
97.003.000-K  HSBC  Chile  US$   12,095    -    -    -    -    12,095    12,000   At Expiration   3.15    3.15 
                                                          
Bank loans                                                     
                                                          
97.023.000-9  CORPBANCA  Chile  UF   5,879    17,348    11,328    -    -    34,555    33,553   Quarterly   3.35    3.35 
0-E  BLADEX  U.S.A.  US$   8,012    7,756    -    -    -    15,768    15,000   Semiannual   6.75    6.75 
97.036.000-K  SANTANDER  Chile  US$   540    48    51,283    -    -    51,871    51,283   Quarterly   5.40    5.40 
76.362.099-9  BTG PACTUAL  CHILE  Chile  UF   523    1,568    70,575    -    -    72,666    67,439   At Expiration   3.10    3.10 
                                                          
Obligations with the public                                                     
                                                          
97.030.000-7  ESTADO  Chile  UF   9,720    9,720    38,879    201,684    218,215    478,218    353,444   At Expiration   5.50    5.50 
0-E  BANK OF NEW YORK  U.S.A.  US$   42,188    86,521    698,375    180,250    1,408,063    2,415,397    1,800,000   At Expiration   7.33    7.02 
                                                          
Guaranteed obligations                                                     
                                                          
0-E  CREDIT AGRICOLE  France  US$   739    2,189    5,654    1,384    -    9,966    9,422   Quarterly   4.32    3.23 
0-E  BNP PARIBAS  U.S.A.  US$   20,316    56,157    151,315    143,516    237,514    608,818    501,147   Quarterly   4.42    4.41 
0-E  WILMINGTON TRUST COMPANY  U.S.A.  US$   36,141    106,003    267,521    291,259    508,443    1,209,367    932,069   Semiannual   4.47    4.47 
0-E  CITIBANK  U.S.A.  US$   12,777    38,168    101,305    70,622    59,468    282,340    258,590   Quarterly   3.85    2.96 
0-E  NATIXIS  France  US$   13,940    41,316    108,275    87,289    112,733    363,553    314,256   Quarterly   4.56    4.56 
0-E  INVESTEC  England  US$   3,985    9,682    27,057    22,646    -    63,370    52,560   Quarterly   7.23    7.23 
                                                          
Otras obligaciones garantizadas                                                     
                                                          
0-E  CREDIT AGRICOLE  France  US$   2,763    8,441    270,298    -    -    281,502    253,962   At Expiration   4.54    4.54 
0-E  DVB BANK SE  Germany  US$   27,760    81,686    208,628    101,296    15,157    434,527    398,648   Quarterly   4.23    4.23 
                                                          
Other guaranteed obligations                                                     
                                                          
0-E  ING  U.S.A.  US$   4,025    12,075    8,108    -    -    24,208    23,143   Quarterly   5.70    5.01 
0-E  CREDIT AGRICOLE  France  US$   12,747    16,808    14,708    -    -    44,263    43,231   Monthly   3.71    3.33 
0-E  CITIBANK  U.S.A.  US$   14,828    42,224    78,212    33,468    -    168,732    158,949   Quarterly   4.32    3.73 
0-E  PEFCO  U.S.A.  US$   5,779    9,711    1,950    -    -    17,440    16,921   Quarterly   5.64    5.02 
0-E  BNP PARIBAS  U.S.A.  US$   8,441    27,887    16,837    -    -    53,165    51,640   Quarterly   4.08    3.77 
0-E  WELLS FARGO  U.S.A.  US$   35,450    106,176    278,336    231,559    74,953    726,474    687,667   Quarterly   2.80    2.11 
97.036.000-K  SANTANDER  Chile  US$   6,332    18,794    49,193    20,529    -    94,848    89,447   Quarterly   3.77    3.23 
0-E  RRPF ENGINE  England  US$   1,164    3,468    9,069    8,790    3,787    26,278    22,183   Quarterly   4.01    4.01 
0-E  APPLE BANK  U.S.A.  US$   1,725    5,105    13,365    12,367    -    32,562    30,099   Monthly   4.14    3.54 
0-E  BTMU  U.S.A.  US$   3,480    10,332    27,044    24,238    -    65,094    60,255   Quarterly   4.05    3.46 
0-E  NATIXIS  France  US$   3,739    5,290    4,641    -    -    13,670    13,106   Quarterly   4.19    4.00 
0-E  KFW IPEX-BANK  Germany  US$   1,825    5,442    3,610    -    -    10,877    10,517   Quarterly   4.23    4.23 
0-E  AIRBUS FINANCIAL  U.S.A.  US$   2,065    6,151    5,750    -    -    13,966    13,501   Monthly   4.05    4.05 
0-E  US BANK  U.S.A.  US$   18,747    55,955    147,422    145,181    68,133    435,438    396,178   Quarterly   4.00    2.82 
0-E  PK AIRFINANCE  U.S.A.  US$   2,593    7,917    26,359    -    -    36,869    35,295   Quarterly   4.18    4.18 
                                                          
Other loans                                                     
                                                          
0-E  BOEING  U.S.A.  US$   917    1,371    83,592    -    -    85,880    83,592   Quarterly   4.29    4.29 
0-E  CITIBANK (*)  U.S.A.  US$   25,612    77,832    77,599    -    -    181,043    173,042   Monthly   6.00    6.00 
                                                          
Hedge derivative                                                     
                                                          
-  OTHERS  -  US$   2,749    1,768    7,473    -    -    11,990    (4,790)  -   0.00    0.00 
                                                          
   Total         628,539    972,487    2,863,761    1,576,078    2,706,466    8,747,331    7,322,350              

 

(*) Bonus securitized with the future flows of credit card sales in the United States and Canada.

 

 33 

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of March 31, 2019 (Unaudited)

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                More than   More than   More than                        
            Up to   90 days   one to   three to   More than                    
      Creditor     90   to one   three   five   five       Nominal      Effective   Nominal 
Tax No.  Creditor  country  Currency  days   year   years   years   years   Total   value   Amortization  rate   rate 
            ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$      %   % 
                                                 
Bank loans                                                     
                                                          
0-E  NCM  Holland  US$   175    499    1,221    -    -    1,895    1,714   Monthly   6.01    6.01 
                                                          
Financial leases                                                     
                                                          
0-E  NATIXIS  France  US$   2,440    9,428    64,458    20,534    -    96,860    92,746   Quarterly / Semiannual   6.87    6.87 
0-E  WACAPOU LEASING S.A.  Luxembourg  US$   835    2,440    5,727    -    -    9,002    8,498   Quarterly   4.81    4.81 
0-E  SOCIÉTÉ GÉNÉRALE  MILAN BRANCH  Italy  US$   11,519    32,247    151,047    -    -    194,813    198,802   Quarterly   5.88    5.82 
0-E  GA Telesis LLC  U.S.A.  US$   679    1,753    4,675    4,675    12,234    24,016    14,403   Monthly   15.62    15.62 
   Total         15,648    46,367    227,128    25,209    12,234    326,586    316,163              

 

 34 

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of March 31, 2019 (Unaudited)

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                More than   More than   More than                        
            Up to   90 days   one to   three to   More than                    
      Creditor     90   to one   three   five   five       Nominal      Effective   Nominal 
Tax No.  Creditor  country  Currency  days   year   years   years   years   Total   value   Amortization  rate   rate 
            ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$   ThUS$      %   % 
                                                 
Lease Liability                                                     
-  AIRCRAFT  OTHERS  US$   124,800    369,560    896,995    740,491    1,179,090    3,310,936    2,893,323   -   -    - 
-  OTHER ASSETS  OTHERS  US$   3,193    8,696    18,235    16,380    18,959    65,463    65,463   -   -    - 
         CLP   3    172    -    -    -    175    175   -   -    - 
         UF   1,579    1,447    598    17    -    3,641    3,641   -   -    - 
         COP   69    37    39    16    -    161    161   -   -    - 
         EUR   257    262    191    -    -    710    710   -   -    - 
         GBP   46    113    13    -    -    172    172   -        - 
         MXN   33    92    241    100    -    466    466   -   -    - 
         PEN   152    354    42    -    -    548    548   -   -    - 
                                                          
Trade and other accounts payables                                                     
                                                          
-  OTHERS  OTHERS  US$   406,424    9,464    -    -    -    415,888    415,888   -   -    - 
         CLP   133,179    14,269    -    -    -    147,448    147,448   -   -    - 
         BRL   221,510    693    -    -    -    222,203    222,203   -   -    - 
         Other currencies   536,167    3,606    -    -    -    539,773    539,773   -   -    - 
Accounts payable to related parties currents                                      
Foreign  Inversora Aeronáutica Argentina S.A.  Argentina  ARS   -    -    -    -    -    -    -   -   -    - 
78.591.370-1  Bethia S.A. y Filiales  Chile  CLP   2,553    -    -    -    -    2,553    2,553   -   -    - 
Extranjera  TAM Aviação Executiva e Taxi Aéreo S.A.  Brazil  BRL   16    -    -    -    -    16    16   -   -    - 
                                                          
   Total         1,429,981    408,765    916,354    757,004    1,198,049    4,710,153    4,292,540              
                                                          
   Total  consolidated         2,074,168    1,427,619    4,007,243    2,358,291    3,916,749    13,784,070    11,931,053              

 

 35 

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2018 Restated (Unaudited)

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                More than   More than   More than                        
            Up to   90 days   one to   three to   More than                    
      Creditor     90   to one   three   five   five       Nominal      Effective   Nominal 
Tax No.  Creditor  country  Currency  days   year   years   years   years   Total   value   Amortization  rate   rate