LAN Airlines second-quarter profit fell 38 percent from the same period last year, as it combatted the impact of higher fuel costs with surcharges.

LAN second-quarter profit was $16.5 million, including a one-time charge to cover lay-offs, compared with $26.6 million in the year-ago quarter.

The full details:

LAN Airlines reported its consolidated financial results for the second quarter and six-month period ended on June 30, 2006. “LAN” or “the Company” makes reference to the consolidated entity, which includes several passenger and cargo airlines in Latin America.

HIGHLIGHTS

—LAN reported net income of US$16.5 million for the second quarter of 2006. Excluding a US$6.4 million pre-tax one-time charge due to severance payments, net income for the quarter amounted to US$21.8 million compared to US$26.6 million in 2005.

—Operating income for the quarter increased 60.6% to US$25.4 million despite US$36.4 million in additional costs due to higher fuel prices.

—Operating margin improved 0.9 points to 3.7% as revenue growth of 21.0% outpaced a 19.8% growth in operating costs.

—Total revenues for the quarter reached US$690.0 million due to a 23.1% increase in passenger revenues and a 19.7% rise in cargo revenues. Passenger and cargo revenues accounted for 56% and 39% of total revenues, respectively.

—In June, LAN incorporated a new Boeing 767-300ER passenger aircraft into its fleet. This aircraft, which features LAN’s new premium business and economy classes, will be followed by two additional Boeing 767-300ER aircraft, eight new Airbus A319 aircraft and one Boeing 767-300F freighter.

—During the second quarter, the Company completed a comprehensive review of its personnel requirements based on the impact of process simplification initiatives, new technological platforms and fleet modernization plans. Based on this assessment, the Company implemented adjustments that generated a US$6.4 million severance payment charge and that are estimated to result in US$15 million in annual savings.

—In June, oneworld announced the future incorporation of three new partners: JAL, Malev and Royal Jordanian. The incorporation of these new airlines will significantly enhance the alliance’s global coverage.

—In May, LAN was designated as the Best Airline in Central, South America and the Caribbean by the Official Airline Guide. In July, the Company was selected as Chile’s Most Admired Company in a survey by La Segunda/Adimark.

LAN reported net income of $16.5 million in the second quarter of 2006. This result includes a US$6.4 million one-time, non-operating charge for severance payments. As a consequence, net income excluding extraordinary items amounted to US$21.8 million, compared to US$26.6 million in 2005. The Company’s profitability was impacted mainly by lower non-operating results, as operating profits rose 60.6% to US$25.4 million. This underscores LAN’s ability to adapt to challenging conditions by rapidly adjusting its operations and deploying cost containment measures. Furthermore, during the quarter LAN advanced on a number of initiatives aimed at reinforcing the Company’s competitiveness, supporting future expansion plans and raising profitability.

LAN recorded a solid operating performance during the second quarter, which is usually the weakest due to seasonality in South America. Specifically, total revenues increased 21.0% while operating margin improved 0.9 points to 3.7%. This represents a major accomplishment for the Company as it faced US$36.4 million in additional costs due high fuel prices and absorbed a US$9.4 million loss in the Argentine domestic market in the same period. Operating performance was further impacted by the costs necessary to prepare the Company for an aggressive fleet expansion in the second half of the year. LAN mitigated these factors by continuing to apply fuel-pass through mechanisms, proactively managing capacity, and implementing efficiency enhancements.

Passenger revenues grew 23.1% due to a 6.8% expansion in capacity and a 15.3% improvement in revenues per ASK. The latter resulted from a 16.4% improvement in yield while load-factors decreased 0.7 points during the quarter. During the second quarter, the Company managed capacity to respond to demand growth and market opportunities. As a consequence, capacity grew on routes to Europe, the South Pacific and within South America, while it decreased on segments to the Caribbean. Capacity in the Chilean domestic market grew moderately, while it decreased slightly in the Peruvian domestic market. Capacity in the Argentine domestic market grew significantly given a low comparison base as these operations began only in June 2005. Load-factor was impacted mainly by higher yield, which rose principally due to improved segmentation and the usage of fuel cost pass-through mechanisms. Yield rose further due to the appreciation of the Chilean Peso.

Cargo revenues rose 19.7% as capacity rose 6.0% and unit cargo revenues increased 12.9%. Higher revenues per ATK resulted from an 11.4% improvement in yield, as well as a 0.9 points rise in load factors. Conditions in the cargo business remain challenging given the imbalance caused by weak exports and strong imports into Latin America. In response to these conditions, LAN has adjusted its aircraft rotations in order to support northbound flights with stop-overs in various export markets. Additionally, the Company is also using its fleet of Boeing 767 freighters to provide most of its dedicated cargo capacity, leveraging their low operating costs and their ability to adequately serve key destinations. Yield rose due to careful route selection, fuel-cost pass through mechanisms and fare increase.

Operating expenses rose 19.8% compared to second quarter of 2005 as capacity increased 6.7%. This led to a 14.0% rise in total cost per ATK (which include net financial expenses). Excluding the impact of higher fuel prices, which generated US$36.4 million in additional costs for the quarter, unit costs rose 7.5%. Ex-fuel, unit costs rose due to increased headcount, a stronger Chilean Peso, the effect of higher unit revenues over commercial costs and the expansion of incentive programs on certain cargo markets. These factors were partially offset by efficiency gains on fleet related expenses, maintenance costs, and fuel consumption.

Weaker non-operating results had a dramatic impact on profitability. The Company recorded a US$8.8 million loss in 2006 compared to a US$16.4 million gain in 2005. In June 2006, LAN recorded a one-time US$6.4 million charge due to severance payments. Additionally, fuel hedging gains decreased by US$6.1 million to US$10.4 million, while foreign exchange gains moved from a US$3.5 million profit in 2005 to a negligible gain in 2006.

LAN continues to maintain a solid financial position, with ample liquidity and a sound financing structure. By the end of the quarter LAN had US$185 million in cash, cash equivalents and committed credit lines. Additionally, the Company’s long-term debt only finances aircraft, has 12 to 18-year repayment profiles and features very competitive interest rates.

Continued positive results and a solid balance sheet have enabled LAN to continue advancing on a number of long-term initiatives. These plans, which encompass all levels and business units, are aimed at improving LAN’s long-term strategic position by enabling the Company to address opportunities, strengthen its market position and raise competitiveness.

As part of these plans, LAN continues to expand its fleet and improve its customers’ travel experience. In June the Company incorporated a new Boeing 767-300ER featuring its recently-launched Premium Business Class and upgraded Economy Class. This was the second Boeing 767-300ER delivery of 2006 and will be followed by a third aircraft in late July and a fourth in November. The Company will also incorporate eight Airbus A319 aircraft between August and September and a Boeing 767-300F freighter in October.

Meanwhile, LAN Argentina has advanced on a number of key projects aimed at strengthening its operations. In June, the airline incorporated its first Airbus A320 aircraft as part of its plan to replace its Boeing 737-200s. Utilization of A320s is expected to enable LAN Argentina to improve its customer appeal, raise reliability standards and enhance efficiency.

During the quarter, LAN completed a thorough analysis of all of its support areas. This evaluation aimed to identify potential efficiency gains arising from the utilization of new information technology platforms and systems, as well as from the implementation of process simplification and outsourcing initiatives. Based on the results of this process, the Company reduced staffing levels. This generated a US$6.4 million one-time severance charge to results for the second quarter and the Company estimates it will generate approximately US$15 million in annual savings.

LAN’s alliance network received a boost in July after oneworld announced the upcoming incorporation of three new members: JAL from Japan, Malev from Hungary, and Royal Jordanian from Jordan. The incorporation of these new members, planned for 2007, will expand oneworld’s passenger capacity by more than 20% and strengthens the alliance’s position in Asia, Central Europe and the Middle East.

These actions mentioned above are part of a broad set of initiatives aimed at reinforcing LAN’s future performance. The Company’s strong second quarter operating performance, which was impacted by losses in new ventures, provides a solid base for long-term growth and profitability. As a consequence, LAN is in position to plan for capacity expansion in response to growth opportunities, while leveraging opportunities to improve its cost performance. Combined, these elements will enable LAN to consolidate its position as Latin America’s leading international carrier.

Consolidated Second Quarter Results

Net income for the second quarter of 2006 amounted to US$16.5 million compared to US$26.6 million for the same period of 2005. Net income excluding extraordinary items amounted to US$21.8 million. Net margin decreased 2.3 points from 4.7% in 2005 to 2.4% in 2006. Excluding extraordinary items, net margin amounted to 3.2%.

Operating income amounted to US$25.4 million compared to US$15.8 million in 2005. Operating margin for the quarter increased 0.9 points to 3.7%.

Total operating revenues increased 21.0% year-on-year to US$690.0 million. This reflected a:

—23.1 increase in passenger revenues to US$386.0 million,

—19.7% increase in cargo revenues to US$267.8 million, and a

—9.5% increase in other revenues to US$36.2 million.

Passenger and cargo revenues accounted for 56% and 39% of total revenues for the quarter, respectively.

Passenger revenues grew driven by a 5.7% increase in traffic and a 16.4% increase in yields. Load factor decreased 0.7 points to 67.8% as a 6.8% increase in capacity offset the traffic increase. Overall, revenues per ASK increased 15.3%. Traffic grew as a result of a 4.2% increase in Chilean domestic traffic and a 5.9% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 88% of total passenger traffic during the quarter. Yields grew mainly due to cost pass-through initiatives and improved segmentation.

Cargo revenues grew due to a 7.5% increase in traffic and an 11.4% improvement in yield. Yield rose primarily due to higher southbound rates and cost-based rate increases. Traffic growth outpaced a 6.0% increase in capacity and led to a 0.9 point rise in load factors rose to 67.3%.As a consequence, revenues per ATK rose 12.9%.

Other revenues increased 9.5% as increased on-board sales, handling and courier revenues offset lower maintenance revenues.

Total operating expenses increased 19.8% during the quarter as capacity, measured in system ATKs, increased 6.7%. As a consequence, unit (ATK) costs increased 14.0%. Excluding the impact of higher fuel prices that led to US$36.4 million in additional expenses, unit costs increased 7.5%. Changes in operating expenses were driven by:

—Wages and benefits increased 24.9% mainly due to the appreciation of the Chilean peso and increases in headcount.

—Fuel costs rose 30.8% due to a 23.7% increase in prices and a 5.8% increase in consumption.

—Commissions to agents rose 26.3% as a 20.6% increase in traffic (passenger and cargo) revenues was offset by a 0.6 point increase in average commissions due to higher average cargo commissions.

—Depreciation and amortization increased 49.8% mainly due to the incorporation of six new aircraft (two Boeing 767 passenger aircraft, two Boeing 767 freighters, and two new Airbus A319 passenger aircraft), and to the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.

—Other rental and landing fees increased 4.4% as the impact from increased operations was mitigated by a reduction in ACMI rental expenses.

—Passenger service expenses increased 16.3% mainly due to a 7.2% rise in the number of passengers transported.

—Aircraft rentals increased 6.6% mainly because of the incorporation of additional Boeing 737 aircraft.

—Maintenance expenses decreased 17.6% as increased costs due to capacity growth were compensated by efficiency gains related to fleet renewal programs, the renegotiation of maintenance contracts with third parties, and the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.

—Other operating expenses rose 15.8% mainly to due to growth in sales and operations, as well as increased outsourcing expenses.

Non-operating results for the second quarter of 2006 amounted to a US$8.8 million loss compared to a US$16.4 million gain in 2005. Interest income decreased 61.7% due to lower average cash balances. Interest expenses increased 56.3% due to increased average long-term debt. In the miscellaneous-net item, the Company recorded a US$3.7 million gain compared to a US$21.7 million gain in 2005. In 2006, this included a US$10.4 million fuel hedging gain (compared to a US$16.5 million gain in 2005) as well as a negligible foreign-exchange loss (compared to a US$3.5 million gain in 2005).

Consolidated First Half Results

Net income for the first half of 2006 amounted to US$96.1 million compared to US$72.9 million for 2005. Net margin increased 0.6 points from 6.2% in 2005 to 6.8% in 2006. Excluding extraordinary items, net income decreased 7.0% to US$ 67.8 million and net margins amounted to 4.8%.

Operating income for the first half of 2006 was US$94.1 million compared to US$72.4 million in 2005. Operating margin for the first half increased 0.5 points to 6.6%.

Total operating revenues amounted to US$1.4 billion in the first half of 2006, a 20.4% increase compared with the first half of 2005. This reflected a:

—20.4% increase in passenger revenues to US$823.0 million,

—20.3% increase in cargo revenues to US$522.7 million, and a

—21.4% increase in other revenues to US$72.4 million.

Passenger and cargo revenues accounted for 58% and 37% of total revenues for 2006, respectively.

Passenger revenues were driven by a 5.3% increase in traffic and an 14.3% increase in yields. Load factor decreased 1.1 points to 71.5%, as a 6.9% capacity increase outpaced traffic growth. Overall, revenues per ASK rose 12.6%. Traffic grew due to a 0.7% increase in Chilean domestic traffic and a 6.0% increase in international traffic (including domestic operations in Peru and Argentina). International traffic accounted for 86% of total passenger traffic during 2006. Yields grew mainly as a result of the implementation of cost pass-through initiatives, improved segmentation, and higher premium traffic.

Cargo revenues grew due to a 8.3% increase in traffic and a 11.0% improvement in yields, measured in RTKs. Yields rose primarily due to improvements in southbound rates and cost driven rates increases. A 8.6% increase in capacity outpaced the growth in cargo traffic, resulting in a 0.1-point decrease in cargo load factors to 65.8%. As a consequence, revenues per ATK rose 10.8%.

Other revenues grew 21.4% as higher revenues from on-board sales, handling activities and courier operations.

Total operating expenses increased 19.8% in 2006 compared to 2005, as capacity, measured in system ATKs, increased 7.2%. As a consequence, unit (ATK) costs increased 12.4%. Excluding the impact of higher fuel prices, which led to $74.0 million in additional expenses, unit costs increased 5.9%. The changes in operating expenses were driven by:

—Wages and benefits increased 23.2% mainly due to increases in headcount and a stronger Chilean peso.

—Fuel costs increased 32.3% due to a 25.1% increase in prices and a 5.8% increase in consumption.

—Commissions to agents rose 23.8% driven primarily by a 19.3% increase in traffic (passenger and cargo) revenues. As a percentage of traffic revenues, commissions rose 0.4 points to 14.5% as lower average passenger commissions offset higher cargo commissions.

—Depreciation and amortization increased 51.2%, mainly due to the incorporation of new six aircraft (two Boeing 767 passenger aircraft, two Boeing 767 freighters and two new Airbus A319 aircraft) and the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.

—Other rental and landing fees increased 5.5% as the impact of increased operations on both landing fees and ground-handling expenses was partially offset by a reduction in ACMI leases.

—Passenger service expenses increased 7.2%, mainly due to a 7.0% increase in the number of passengers transported.

—Aircraft rentals increased 6.6% mainly due to the incorporation of additional Boeing 767, Airbus A320 and Boeing 737 aircraft.

—Maintenance expenses decreased 11.8% as the effect of increased operations was offset by efficiency gains arising from the renegotiation of third-party maintenance contracts, fleet renewal programs and the reclassification of certain expenses due to the change in maintenance accounting policies in January 2006.

—Other operating expenses grew 16.6% due to increases in booking expenses, cost of goods sold on-board, and sales related costs and taxes.

Non-operating results for the first half 2006 amounted to a US$19.4 million gain compared to a US$14.7 million gain in 2005. Interest income decreased 45.7% due to lower average cash balances. Interest expenses increased 44.7% due to an increase in average debt. In the miscellaneous-net item, the Company recorded a US$41.9 million gain compared to a US$25.9 million gain in the same period of 2005. In the first half 2006 this included a US$7.5 million fuel hedging gain (compared to a US$25.4 million gain in 2005) as well as a US$0.9 million foreign-exchange loss (compared to a US$0.2 million gain in 2005).
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