Fitch Affirms LanChile at 'BBB-'; Changes Outlook to Stable from Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 11, 2004

Fitch Ratings has affirmed the senior unsecured foreign currency debt rating at 'BBB-' for LanChile S.A. (LanChile). Fitch also maintains an 'A-' rating on LanChile's Pelican Series 1999-1 trust notes, which reflects a surety bond provided by Centre solutions Limited, and a 'BBB-' rating on LanChile's receivables-backed notes. Fitch has changed the Rating Outlook to Stable from Negative.

The rating action is supported by LanChile's solid business position in both passenger and cargo routes, its fleet flexibility, a solid financial profile and strong liquidity. Despite challenging industry conditions and weak demand in Chile and abroad over the past few years, LanChile has performed profitably by successfully managing capacity, costs and aircraft utilization.

During 2003, revenues grew by 13% driven by the launch of new passenger routes, the recovery of demand in international routes and lower competitive pressures, all of which boosted international passenger traffic during the second half of the year. Cargo operations also recovered during the second half of the year. During the year, passenger load factors increased to 69.1% from 64.6% in 2002 and despite significant capacity growth, revenues per ASK (Available Seat Kilometer) also increased.

Profitability improved driven by cost efficiencies in route management and higher aircraft utilization, continued operating cost cuts and higher load-factors. High fuel costs during the year off-set part of the margin gains but the company was able to recover most of the higher fuel expense through hedging and the use of a fuel surcharge in cargo operations.

During the year the EBIT margin reached 6.8% up from 4.3% in 2002 and 3.5% in 2001. Revenue growth and profitability gains strengthened credit protection measures with the coverage ratio measured as EBITDAR/Interest improving to 1.8 times (x) in 2003 from 1.4x in 2002 and the Net Debt/EBITDAR declining to 4.9x from 6.5x. Credit protection measures are consistent with the rating category.

In recent months, LanChile has strengthened its regional network and consolidated its international presence. The company launched new inter-Latin America routes from Lima and Quito/Guayaquil, also adding capacity from these cities to the U.S. and Europe. The new routes have allowed the company to increase the rotation of planes on long haul and short haul routes, and to achieve improvements in capacity utilization, a competitive advantage versus U.S. and European competitors. The increase in international capacity has been supported by the withdrawal of routes and frequency cuts by U.S. and European carriers and loss of market share by other regional carriers due to financial difficulties. The competitive environment has also improved in the domestic market -- where LanChile recovered approximately 5 percentage points of market share from its only competitor Sky and ended the year with a market share of 85% -- and in the cargo business, where several carriers withdrew or cut regional operations.

During 2004, LanChile is planning to add to its fleet four Boeing 767 and three Airbus A319, increasing capacity by approximately 13%. Most of the added capacity will be used for intra-regional routes and to Europe. Capacity in the cargo business will remain stable. Strong traffic and revenue trends should continue into 2004 supported by the recovery of regional economies, lower competition and the introduction of new regional passenger routes. New routes out of Lima introduced during February 2004 will bring further upgrades to the regional network (LanChile, LanPeru, LanEcuador), which LanChile is planning to unite under a main brand. The new routes will continue to maximize the utilization of short-haul aircraft and efficiency. Profitability should continue to improve due to lower aircraft lease expense and fuel efficiency gains on new planes; EBITDAR/Interest for the full year 2004 is expected to further improve to above 2x.

LanChile has continued to improve its liquidity position. The company had cash balances of US$219 million at December 31, 2003, up from US$159 million in 2002 and US$73 million in 2001. On-balance sheet debt (US$702 million at December 31, 2003) is mostly long term and related to the purchase of aircraft, with an average term of 15 years. LanChile has no significant upcoming maturities. The debt profile also includes off-balance sheet aircraft leases. Lease expense was US$140 million during 2003, down from US$160 million in 2002 as the company renewed expiring leases at lower market rates.

LanChile continues to face industry-related risks, including revenue volatility, high operating leverage, fuel price volatility and competitive threats. Strong regional traffic may lure existing or potential competitors to eventually add capacity.

LanChile operates domestic and international passenger and cargo operations with a fleet of 46 passenger aircraft and 7 cargo aircraft. LanChile is a member of the OneWorld alliance. Together with is code-share agreements and affiliates, LanChile serves 15 destinations in Chile, 7 in Peru, 2 in Ecuador, 18 in other Latin America, 25 in North America, 10 in Europe and 4 in the South Pacific. LanChile also offers cargo service primarily between South America and the United States with a dedicated cargo fleet and passenger aircraft belly space. LanChile had annual revenues of US$1.6 billion in 2003 comprised of international passenger (approximately 40%), cargo (40%), domestic passenger (15%) and other (5%).