Fitch: Lan Airlines Outlook to Positive from Stable; Affirmed at 'BBB-'.

NEW YORK -- Fitch Ratings has revised the Outlook on the senior unsecured foreign currency debt rating of Lan Airlines S.A. (Lan) and the rating on Lan's receivables-backed notes to Positive from Stable. Fitch has also affirmed the ratings at 'BBB-'. The ratings reflect Lan's strong business position in passenger and cargo operations, low-cost structure, fleet flexibility, and solid financial profile and liquidity. Fitch also maintains an 'A-' rating on Lan's Pelican series 1999-1 trust notes, which reflects a surety bond provided by Centre solutions Limited. The change in the Rating Outlook to Positive from Stable is supported by Lan's strong financial performance over the past 18 months across both passenger and cargo businesses. Further positive rating action is contingent on continuation of these favorable trends and the company's management and control of high fuel costs.

During 2004, the company achieved record financial results with revenue growth of 28% driven by new passenger routes, the recovery of domestic and international passenger traffic, and robust cargo growth. Revenue growth outpaced cost pressures, resulting in margin improvement despite historically high fuel prices. Notwithstanding an important increase in capacity, passenger load factors improved to 71.5% from 69.1% in 2003.

Over the past several years, Lan has demonstrated its ability to perform profitably under challenging industry conditions. The period from 2001-2004 was characterized by major stresses on the demand side (including the events of Sept. 11, the Argentine crisis of 2002, the devaluation of several regional currencies, weak regional economic growth, and political uncertainty), as well as on the cost side (higher fuels and insurance costs). Despite these significant pressures, the company's revenues and profit margins grew during this period. Lan's success is underpinned by a distinct business model that combines passenger and cargo operations. The company's strategy is focused on managing its route system efficiently by maximizing synergies between passenger and cargo operations, forming strategic alliances, and maintaining a modern fleet and flexible fleet plan. These advantages allow Lan to maintain a cost structure that is among the lowest in the industry.

In 2004, the company continued to focus on strengthening its position as a regional carrier. New passenger routes out of a new hub in Lima, Peru continued to enhance the rotation of aircraft on long-haul and short-haul routes and improve capacity utilization, a competitive advantage to Lan, compared with U.S. and European carriers. During the year, the company also gained market leadership in Peru's domestic market following the collapse of the Peruvian carrier Aerocontinente.

Fitch expects Lan to continue to expand regionally, supported by a favorable trend in traffic. Last March 11, 2005, the company announced the acquisition of an Argentine carrier whose main asset is an approved air operator certificate. During 2005, Lan plans to add to its passenger fleet three leased Boeing 767 and two owned Airbus 319 (this excludes capacity additions related to the new license in Argentina), targeting intraregional routes out of the new Lima hub and new routes to the U.S. and Europe. Cargo capacity is expected to increase with the addition of two Boeing 767 freighters.

Strong regional economic growth, domestic currencies, and international trade should continue to support robust passenger and cargo traffic in 2005. Uncertainty regarding the direction of fuel costs remains an important risk for Lan. The company has hedged approximately 20% of its total 2005 fuel needs. An estimated additional 40% is hedged with fuel surcharges on cargo, leaving approximately 40% exposed. Another risk is the addition of capacity by competitors, a threat more apparent from European carriers on passenger routes between the region and Europe. Competition in the domestic market will increase with the recent incorporation of a new carrier owned by the shareholders of Aerolineas Argentinas. Fitch believes that it will be difficult to compete domestically with Lan's dominance and financial strength. In the past, the entry of a third carrier in the domestic market has more severely affected the lower-end competitor. In cargo, the company's competitive position has improved in recent years because higher fuel costs have curtailed operations of weaker competitors.

The company has continued to improve its liquidity position, growing cash balances to $305 million at Dec. 31, 2004 from $219 million at the end of 2003 and $159 million at the end of 2002. On-balance-sheet debt of $639 million includes $352 million of long-term secured bank loans related to the purchase of aircraft and $231 million of capital leases. The debt profile also includes approximately $56 million outstanding in securitizations of ticket receivables originated in the U.S. Lan has a long-term concentration of debt and no significant upcoming maturities. As customary in the industry, the company has significant off-balance-sheet liabilities related to aircraft operating leases. Revenue growth, profitability improvements, and debt reduction contributed to the improvement of credit protection measures in 2004, with the fixed-charge coverage ratio measured as EBITDAR/interest plus rents improving to 2.2 times (x) from 1.8x in 2003 and the net debt/EBITDA ratio declining to 3.7x from 5x in 2003.

Lan operates domestic and international passenger and cargo operations with a fleet of 56 passenger and seven dedicated cargo aircraft. Lan is a member of the oneworld alliance. The company also maintains code-share alliances with passenger carriers such as American Airlines, Iberia, Qantas Airlines, Aeromexico and Mexicana, and a cargo commercial agreement with Lufthansa Cargo. Through these alliances and its own operations, Lan serves 15 destinations in Chile, 11 in Peru, two in Ecuador, 27 in other Latin American countries, 25 in North America, 10 in Europe, and four in the South Pacific. The company also offers cargo service between South America and the U.S. and Europe. In 2004, Lan had revenues of US$2.1 billion comprising international passenger (approximately 45%), cargo (40%), Chilean domestic passenger (10%), and others (5%).