UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F □ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR □ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File Number: 1-14728 Lan Airlines S.A. (Exactnameofregistrantasspecifiedinitscharter) Lan Airlines S.A. Republic of Chile (Translationofregistrant’snameintoEnglish) (Jurisdictionofincorporationororganization) Presidente Riesco 5711, 20th Floor Las Condes Santiago, Chile (Addressofprincipalexecutiveoffices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Titleofeachclass: Nameofeachexchangeonwhichregistered: AmericanDepositaryShares(asevidencedby NewYorkStockExchange AmericanDepositaryReceipts),eachrepresenting fivesharesofCommonStock,withoutparvalue Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicatethenumberofoutstandingsharesofeachoftheissuer’sclassesofcapitalorcommonstockasofthecloseof theperiodcoveredbytheannualreport: 318,909,090 Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinesinRule405oftheSecuritiesAct. (cid:2) □ Yes No Ifthisreportisanannualortransitionreport,indicatebycheckmarkiftheregistrantisnotrequiredtofilereports pursuanttoSection13or15(d)oftheSecuritiesExchangeActof1934. □ (cid:2) Yes No Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)ofthe SecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequired tofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days. (cid:2) □ Yes No Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,oranon-acceleratedfiler. Seedefinitionof‘‘acceleratedfilerandlargeacceleratedfiler’’inRule12b-2oftheExchangeAct.(Checkone): (cid:2) □ □ LargeAcceleratedfiler Acceleratedfiler Non-Acceleratedfiler Indicatebycheckmarkwhichfinancialstatementitemtheregistranthaselectedtofollow: □ (cid:2) Item17 Item18 Ifthisisanannualreport,indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2of theExchangeAct). □ (cid:2) Yes No TABLE OF CONTENTS PRESENTATION OF INFORMATION................................................. 1 FORWARD LOOKING STATEMENTS................................................. 2 GLOSSARY OF TERMS .............................................................. 3 PART I ITEM 1. Identity of Directors, Senior Management and Advisers....................... 5 ITEM 2. Offer Statistics and Expected Timetable..................................... 5 ITEM 3. Key Information ......................................................... 5 ITEM 4. Information on the Company.............................................. 19 ITEM 4A. Unresolved Staff Comments............................................... 51 ITEM 5. Operating and Financial Review and Prospects .............................. 52 ITEM 6. Directors, Senior Management and Employees............................... 72 ITEM 7. Controlling Shareholders and Related Party Transactions ..................... 81 ITEM 8. Financial Information..................................................... 82 ITEM 9. The Offer and Listing..................................................... 84 ITEM 10. Additional Information ................................................... 85 ITEM 11. Quantitative and Qualitative Disclosure about Market Risk ................... 104 ITEM 12. Description of Securities other than Equity Securities......................... 106 PART II ITEM 13. Defaults, Dividend Arrearages and Delinquencies............................ 107 ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds... 107 ITEM 15. Controls and Procedures .................................................. 107 ITEM 16. Reserved................................................................ 108 ITEM 16A. Audit Committee Financial Expert ......................................... 108 ITEM 16B. Code of Ethics........................................................... 108 ITEM 16C. Principal Accountant Fees and Services..................................... 108 ITEM 16D. Exemptions From The Listing Standards For Audit Committees ............... 109 ITEM 16E. Purchase Of Equity Securities By The Issuer And Affiliated Purchasers......... 109 PART III ITEM 17. Financial Statements...................................................... 110 ITEM 18. Financial Statements...................................................... 110 ITEM 19. Exhibits................................................................. 111 i PRESENTATION OF INFORMATION In this annual report on Form 20-F, unless the context otherwise requires, references to ‘‘Lan Airlines’’ are to Lan Airlines S.A., the unconsolidated operating entity, and references to ‘‘LAN,’’ ‘‘we,’’ ‘‘us’’ or the ‘‘Company’’ are to Lan Airlines S.A. and its consolidated subsidiaries. All references to ‘‘Chile’’ are references to the Republic of Chile. This annual report contains conversions of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These conversions should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless we specify otherwise, all references to ‘‘$’’, ‘‘US$’’, ‘‘U.S. dollars’’ or ‘‘dollars’’ are to United States dollars, references to ‘‘pesos’’, ‘‘Chilean pesos’’ or ‘‘Ch$’’ are to Chilean pesos and references to ‘‘UF’’ are to Unidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that takes into account the effect of the Chilean inflation rate. Unless we indicate otherwise, the U.S. dollar equivalent for information in Chilean pesos is based on the ‘‘dólar observado’’ or ‘‘observed’’ exchange rate published by Banco Central de Chile (which we refer to as the Central Bank of Chile) on December 31, 2006, which was Ch$534.43=US$1.00. The observed exchange rate on May 4, 2007 was 523.54=US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. See ‘‘Key Information—Exchange Rates’’ under Item 3. Lan Airlines and the majority of our subsidiaries (including our main cargo subsidiary Lan Cargo S.A., or Lan Cargo) maintain their accounting records and prepare their financial statements in U.S. dollars. Some of our other subsidiaries, however, maintain their accounting records and prepare their financial statements in Chilean pesos. Our consolidated financial statements include the results of these subsidiaries translated into U.S. dollars. Generally accepted accounting principles in Chile, or Chilean GAAP, require monetary assets and liabilities to be translated at period-end exchange rates, non-monetary assets and liabilities to be translated at historical rates of exchange as of the date of acquisition or incurrence and revenue and expense accounts to be translated at the average monthly exchange rate for the month in which they are recognized. As required by Chilean GAAP, the financial statements of our subsidiaries that report in Chilean pesos are adjusted to reflect changes in the purchasing power of the Chilean peso due to inflation. These changes are based on the consumer price index published by the Chilean National Institute of Statistics. Our consolidated financial statements are prepared in accordance with Chilean GAAP, which differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. For a description of certain significant differences between Chilean GAAP and U.S. GAAP as they relate to us, together with a reconciliation of our net income and shareholders’ equity to U.S. GAAP, see Note 26 to our audited consolidated financial statements. We have rounded percentages and certain U.S. dollar and Chilean peso amounts contained in this annual report for ease of presentation. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding. This annual report contains certain terms that may be unfamiliar to some readers. You can find a glossary of these terms on page 3 of this annual report. 1 FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements. Such statements may include words such as ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘believe’’ or other similar expressions. Forward-looking statements are statements that are not historical facts, including statements about our beliefs and expectations. These statements are based on current plans, estimates and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. These factors include, but are not limited to: • our ability to service our debt and fund our working capital requirements; • future demand for passenger and cargo air service in Chile, other countries in Latin America and the rest of the world; • the maintenance of relationships with customers; • the state of the Chilean, Latin American and world economies and their impact on the airline industry; • the effects on us from competition; • future terrorist incidents or related activities affecting the airline industry; • the relative value of the Chilean peso compared to other currencies; • inflation; • competitive pressures on pricing; • our capital expenditure plans; • changes in labor costs, maintenance costs, fuel costs and insurance premiums; • cyclical and seasonal fluctuations in our operating results; • defects or mechanical problems with our aircraft; • our ability to successfully implement our growth strategy; • increases in interest rates; and • changes in regulations, including regulations related to access to routes in which we operate. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them, whether in light of new information, future events or otherwise. You should also read carefully the risk factors described in ‘‘Key Information—Risk Factors’’ under Item 3. 2 GLOSSARY OF TERMS The following terms, as used in this annual report, have the meanings set forth below. Capacity Measurements: ‘‘available seat kilometers’’ or ‘‘ASKs’’ The number of seats made available for sale multiplied by the kilometers flown. ‘‘available ton kilometers’’ or ‘‘ATKs’’ The number of tons available for the transportation of revenue load (cargo) multiplied by the kilometers flown. ‘‘systems available ton kilometers’’ or The number of total tons capacity for the transportation of ‘‘systems ATKs’’ revenue load (passenger and cargo) multiplied by the kilometers flown. Traffic Measurements: ‘‘revenue passenger kilometers’’ or The number of passengers multiplied by the number of ‘‘RPKs’’ kilometers flown. ‘‘revenue ton kilometers’’ or ‘‘RTKs’’ The load (cargo) in tons multiplied by the kilometers flown. ‘‘systems revenue ton kilometers’’ or The load (passenger and/or cargo) in tons multiplied by ‘‘systems RTKs’’ the kilometers flown. ‘‘traffic revenue’’ Revenue from passenger and cargo operations. Yield Measurements: ‘‘cargo yield’’ Revenue from cargo operations divided by RTKs. ‘‘overall yield’’ Revenue from airline operations (passenger and cargo) divided by system RTKs (passenger and cargo). ‘‘passenger yield’’ Revenue from passenger operations divided by RPKs. Load Factors: ‘‘cargo load factor’’ RTKs (cargo) expressed as a percentage of ATKs (cargo). ‘‘overall break-even load factor’’ Total costs (operating expenses plus net interest expense less other revenue) per system ATK divided by overall yield. ‘‘overall load factor’’ RTKs (passenger and cargo) expressed as a percentage of ATKs (passenger and cargo). ‘‘passenger break-even load factor’’ Total costs attributable to passenger operations per ASK divided by passenger yield. ‘‘passenger load factor’’ RPKs expressed as a percentage of ASKs. 3 Other: ‘‘ACMI leases’’ A type of aircraft leasing contract, under which the lessor provides the aircraft, crew, maintenance and insurance on a per hour basis. Also referred to as a ‘‘wet lease’’. ‘‘block hours’’ The elapsed time between an aircraft leaving an airport gate and arriving at an airport gate. ‘‘ton’’ A metric ton, equivalent to 2,204.6 pounds. ‘‘utilization rates’’ The actual number of flight hours per aircraft per operating day. 4 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION Selected Financial Data The following table presents our summary financial and other information for each of the last five fiscal years in the period ended December 31, 2006. The summary financial information for the three fiscal years in the period ended December 31, 2006 has been derived from our audited consolidated financial statements included in this report. You should read the information below in conjunction with our audited consolidated financial statements and the notes thereto, as well as ‘‘Presentation of Information’’ and ‘‘Operating and Financial Review and Prospects’’. 5 Annual Financial Information YearendedDecember31, 2002 2003 2004 2005 2006 (inUS$millions,exceptpershareandcapitalstockdata) The Company(1)(5) Statement of Income Data: Chilean GAAP Operating revenues Passenger............................... 803.7 918.4 1,169.0 1,460.6 1,813.4 Cargo.................................. 520.8 602.0 799.7 910.5 1,072.7 Other.................................. 127.9 118.4 124.2 135.3 147.9 Total operating revenues ................. 1,452.4 1,638.8 2,092.9 2,506.4 3,034.0 Operating expenses(2)...................... 1,390.4 1,527.1 1,920.8 2,364.7 2,731.3 Operating income ......................... 62.1 111.7 172.1 141.6 302.6 Other income (expense) Interest income ......................... 3.8 6.3 10.8 12.4 7.9 Interest expense......................... (40.8) (39.4) (36.5) (39.2) (60.7) Other income-net(2)...................... 13.2 24.1 45.2 58.2 37.1 Total other income (expense) ............. (23.8) (9.0) 19.5 31.5 (15.7) Minority interest ........................ (0.4) (0.9) 0.2 1.8 1.2 Income before income taxes ............ 37.8 101.9 191.8 174.9 288.1 Income taxes............................ (7.0) (18.3) (28.3) (28.3) (46.8) Net income............................... 30.8 83.6 163.6 146.6 241.3 Net income per common share(3)............ 0.10 0.26 0.51 0.46 0.76 Net income per ADS(3) .................... 0.48 1.31 2.56 2.30 3.78 Operational Data Computed Using Financial Information Under Chilean GAAP ASKs (million)............................ 17,066.8 18,323.9 21,147.4 23,687.3 26,400.0 RPKs (million)............................ 11,139.5 12,671.0 15,125.3 17,490.8 19,495.5 ATKs (million)............................ 2,731.0 2,848.7 3,288.4 3,607.0 3,861.3 RTKs (million)............................ 1,833.8 1,911.9 2,259.4 2,392.3 2,579.2 System ATKs (million)..................... 4,281.8 4,539.2 5,256.2 5,810.8 6,349.9 U.S. GAAP(6) Operating revenues........................ 1,452.4 1,638.8 2,092.9 2,506.4 3,034.0 Operating income ......................... 56.6 122.9 218.6 150.9 295.7 Net income............................... 34.2 87.9 164.7 156.3 209.7 Basic and diluted earnings per share(3)....... 0.11 0.28 0.52 0.49 0.66 Net income per ADS(3) .................... 0.54 1.38 2.58 2.45 3.29 (table and footnotes continue on next page) 6 AtDecember31, 2002 2003 2004 2005 2006 (inUS$millions,exceptpershareandcapitalstockdata) Balance Sheet Data: Chilean GAAP Cash, time deposits and marketable securities .............................. 159.4 219.0 304.6 159.2 218.6 Miscellaneous current assets(4) .............. 256.4 280.2 347.8 417.8 487.7 Property and equipment.................... 1,026.4 1,009.5 979.0 1,252.3 1,876.0 Total other assets.......................... 143.2 132.3 197.9 314.3 346.5 Total assets............................... 1,585.4 1,641.0 1,829.3 2,143.6 2,928.8 Long-term liabilities ....................... 813.5 765.4 809.0 955.3 1,421.9 Shareholders’ equity....................... 308.9 352.6 434.6 502.7 626.3 U.S. GAAP(6) Total assets............................... 1,545.4 1,610.5 1,830.0 2,149.0 2,906.1 Long-term liabilities ....................... 821.6 748.9 796.5 938.7 1,431.9 Shareholders’ equity....................... 258.9 351.7 447.8 526.8 592.7 Capital stock (millions of shares)............ 318.9 318.9 318.9 318.9 318.9 (1) Formoreinformationonthesubsidiariesincludedinthisconsolidatedaccount,seeNote2(b)toourauditedconsolidated financialstatements. (2) Toreflectoperationalresultsmoreclearly,fuelhedginggainsorlosseshavebeenreclassifiedasanon-operationalitemin theotherincome-netlineineachof2002,2003,2004,2005and2006.WerecordedaUS$5.5millionfuelhedgelossin 2002,aUS$12.3millionfuelhedgelossin2003,aUS$46.5millionfuelhedgegainin2004,aUS$51.5millionfuelhedge gainin2005andaUS$12.9millionfuelhedgegainin2006. (3) Wehad318,909,090commonsharesoutstandingineachoftheperiodsindicated,whichisequivalentto63,781,818ADSs. (4) Totalcurrentassetslessthesumofcash,timedepositsandmarketablesecurities. (5) Thesumsoftheitemsmaydifferfromthetotalamountduetorounding. (6) In2006,theCompanyimplementedachangeinitsaccountingpolicyregardingitsmethodofaccountingforheavyaircraft andenginemaintenancecosts.ForUSGAAPpurposes,theCompanyhasretroactivelyappliedthenewmethodologyto financialstatementsforperiodspriorto2006.Formoreinformationonthechangeinaccountingpolicy,see‘‘Operating andFinancialReviewandProspects—CriticalAccountingPolicies—Maintenance’’underItem5andNotes2(p)and3to ourauditedconsolidatedfinancialstatements. Although most of our revenues and expenses are denominated in U.S. dollars, some are denominated in different currencies, such as the Chilean peso. Fluctuations in foreign exchange rates could lead to changes in the value of these items in U.S. dollars. Nevertheless, the impact on our results stemming from any such fluctuations is significantly mitigated by the fact that 86% of our revenues and 78% of our operating expenses are denominated in U.S. dollars. In accordance with the Chilean Corporation Law, we must pay annual cash dividends equal to at least 30% of our annual consolidated distributable net income each year (calculated in accordance with Chilean GAAP), subject to limited exceptions. As of April 13, 2007, we had declared aggregate dividends of US$13.8 million with respect to income for 2002, US$41.8 million with respect to income for 2003, US$81.8 million with respect to income for 2004, US$73.3 million with respect to income for 2005 and US$168.9 million with respect to income for 2006. Dividends for 2006 include two interim dividends paid in August 2006 and January 2007 and a final dividend paid in April 2007. The table below sets forth the cash dividends per common share and per ADS, as well as the number of common shares entitled to such dividends, for the years indicated. Dividends per common share amounts have not been adjusted for inflation and reflect common share amounts outstanding immediately prior to the distribution of such dividend. 7 Numberof Cash common dividend Cash shares per dividend Totaldividend entitledto common per Dividendforyear: Paymentdate(s) payment dividend share ADS (U.S.dollars) (inmillions) (U.S.dollars) (U.S.dollars) 2002 ............... January 16, 2003 8,961,000 318.91 0.02809 0.14045 May 12, 2003 4,853,590 318.91 0.01521 0.07605 2003 ............... August 25, 2003 11,583,459 318.91 0.03632 0.18160 November 27, 2003 23,415,897 318.91 0.07343 0.36715 May 13, 2004 6,776,018 318.91 0.02124 0.10620 2004 ............... August 30, 2004 39,786,605 318.91 0.12475 0.62375 December 29, 2004 35,000,000 318.91 0.10974 0.54870 May 18, 2005 6,992,865 318.91 0.02193 0.10965 2005 ............... September 2, 2005 36,452,425 318.91 0.11430 0.57150 March 1, 2006 35,000,000 318.91 0.10975 0.54875 May 17, 2006 1,849,186 318.91 0.00578 0.02890 2006 ............... August 24, 2006 48,061,644 318.91 0.15071 0.75355 January 18, 2007 67,787,211 318.91 0.21256 1.06280 April 25, 2007 53,059,893 318.91 0.16638 0.83190 Our board of directors has the authority to declare interim dividends. Year-end dividends, if any, are declared by our shareholders at our annual meeting. For a description of our dividend policy, see ‘‘Financial Information—Other Financial Information—Dividend Policy’’ under Item 8. We declare cash dividends in U.S. dollars, but make dividend payments in Chilean pesos, converted from U.S. dollars at the observed exchange rate two days prior to the day we first make payment to shareholders. Payments of cash dividends to holders of American Depositary Receipts, or ADRs, if any, are made in Chilean pesos to the custodian, which converts those Chilean pesos into U.S. dollars and delivers U.S. dollars to the depositary for distribution to holders. In the event that the custodian is unable to convert immediately the Chilean currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by a devaluation of the Chilean currency that may occur before such dividends are converted and remitted. 8