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LAN And TAM Announce New Synergy Estimate For LATAM Airlines Group

LAN Airlines S.A. (“LAN”) and TAM S.A. (“TAM”) today announced a revised estimate of the synergies expected to be achieved through the merger of the two airlines to create LATAM Airlines Group S.A. (“LATAM Group”). LAN and TAM estimate that the combined synergies arising from the proposed combination could increase LATAM Group’s annual operating income over time by between US$600 million and US$700 million, before depreciation and taxes, beginning four years after completion of the transaction. This represents a 50% to 75% increase over the initial synergy estimate of US$400 million per year, which the companies announced in August 2010.

The new estimate, which is based on work performed by the companies together with consultants McKinsey & Company and Bain & Company over the past ten weeks, reflects further revisions and updates of the expected combined cost savings and revenue generating opportunities arising from the proposed combination and includes best practice sharing benefits that have been identified in certain areas. Of the total expected annual pre-tax synergies, between US$170 million and US$200 million may be achieved within the first year after completion of the transaction.

Approximately 40% of the total potential synergies will be generated from increased revenues from the passenger business, 20% will be generated from increased revenues from the cargo business and the remaining 40% of the potential synergies will be generated by cost savings. Beginning four years after the completion of the proposed combination, the breakdown of expected annual pre-tax synergies is estimated to be as follows:

  • between US$225 million and US$260 million is expected to derive from increased revenues resulting from the combination of LAN’s and TAM’s passenger networks and the addition of new flights;
  • between US$120 million and US$125 million is expected to derive from increased revenues attributable to new services and best practice sharing in the cargo business;
  • between $15 million and US$25 million is expected to derive from the consolidation of, and best practice sharing in, the frequent flyer programs of both companies;
  • between US$100 million and US$135 million is expected to derive from cost savings relating to the coordination of airport and procurement activities which should allow LATAM Group to leverage economies of scope and scale;
  • between US$20 million and US$25 million is expected to derive from cost savings resulting from the coordination and improved efficiency of maintenance operations which should allow LATAM Group to leverage economies of scale; and
  • between US$120 million and US$130 million is expected to derive from cost savings resulting from the convergence of LAN’s and TAM’s information technology systems, the increased efficiency of combined sales and distribution processes, and the increased efficiency in corporate overhead costs.

The estimated revenues and cost savings expected to result from the synergies and best practice sharing described above do not include any implementation costs. LAN and TAM expect that the one-time merger costs, including banking, consulting and legal advisory fees, to be incurred during 2012 and the investments required over the term of the synergy capture period to achieve the above-mentioned synergies will be between US$170 million and US$200 million in the aggregate. Finally, LAN and TAM expect reduced investments from avoided engine and spare part purchases of approximately US$150 million, which are expected to occur over the synergy capture period.

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