TAM S.A. 20-F 2010
Documents found in this filing:
As filed with the Securities and Exchange Commission on June 8, 2010
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Av. Jurandir, 856, Lote 4, 1° andar
Federative Republic of Brazil
Securities registered or to be registered pursuant to Section 12(b) of the Act:
* Not for trading purposes, but only in connection with the trading on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.
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:
TAM Capital Inc. U.S.$300,000,000 7.375% Senior Guaranteed Notes due 2017,
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
59,791,955 Common Shares
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non‑accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b‑2 of the Exchange Act.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. x Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ¨ Yes x No
This amendment ("Amendment No. 2") to our annual report on Form 20-F for the fiscal year ended December 31, 2008, which was originally filed with the U.S. Securities and Exchange Commission on June 30, 2009 (our "Original 2008 20-F"), as amended on Form 20-F/A and filed with the U.S. Securities and Exchange Commission on September 30, 2009 ("Amendment No. 1" and together with the Original 2008 20-F, the "2008 20-F"), is being filed solely for the purposes of amending our 2008 20-F to reflect a restatement of our 2008 consolidated financial statements.
We are restating our 2008 consolidated financial statements because management concluded that an error existed with respect to (i) the accumulated depreciation recognized under "operating expenses" in our income statement after removing certain aircraft from our fleet in 2007 and (ii) the corresponding amount of accumulated depreciation reported on our balance sheet after that removal. Our management concluded that this error was material and required corrections to the consolidated financial statements as of and for the year ended December 31, 2008.
Separately, and considering that our 2008 consolidated financial statements required restatement due to the error described above, our management has also corrected other errors existing in those financial statements that were not considered material, individually or in the aggregate, as more fully described in Note 2.1(b) to our consolidated financial statements.
As a result of the material error, it was necessary (i) to revise the Report of Independent Public Accounting Firm to reflect that restatement and (ii) to restate our Management's Report on Internal Control over Financial Reporting to disclose that a material weakness in our internal control over financial reporting existed as of December 31, 2008 and that we did not maintain effective internal control over financial reporting as of December 31, 2008. The remedial action taken to remedy the identified material weakness is described in Item 15.
This Amendment No. 2 has not been updated except as required to reflect the revisions stated above. This Amendment No. 2 only amends and restates the items described below as required to reflect the revisions stated above and does not reflect events that have occurred after the June 30, 2009 filing date of the original Form 20-F, or modify or update other disclosures presented therein.
As a result of the revisions stated above, this Amendment No. 2 amends and restates the following items:
· Part I Item 3. Key Information A. Selected Financial Data;
· Part I Item 4. Information on the Company B. Business Overview Competitive Advantages;
· Part I Item 5. Operating and Financial Review and Prospects A. Operating Results Carrying value of flight equipment;
· Part I Item 5. Operating and Financial Review and Prospects B. Liquidity and Capital Resources;
· Part II Item 15. Controls and Procedures;
· Part III Item 18. Financial Statements;
· Part III Item 19. Exhibits; and
· Our consolidated financial statements beginning on page F-1.
While the items above have been reproduced in full as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, no changes have been made to those items, except to reflect the corrections stated above, or to any other items.
In addition, this Amendment No. 2 includes currently dated certifications by the Chief Executive Officer and the Chief Financial Officer as required by Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, attached as Exhibits 12.1 through 12.6 and 13.1 through 13.6, as well as a currently dated Consent of Engeval Engenharia de Avaliações S/C Ltda and a currently dated Consent of Independent Accounting Firm, attached as Exhibits 15.1 and 15.2 respectively.
In this annual report, "TAM S.A." refers to TAM S.A., a sociedade anônima de capital aberto organized under the laws of Brazil, "TAM Linhas Aéreas" AND "TLA" refer to TAM Linhas Aéreas S.A., a sociedade anônima de capital fechado organized under the laws of Brazil, "TAM Viagens" refers to Fidelidade Viagens e Turismo Ltda., a sociedade limitada organized under the laws of Brazil, "TAM Mercosur" refers to Transportes Aéreos Del Mercosur S.A., a sociedade anônima de capital fechado organized under the laws of Paraguay, "TAM Capital" refers to TAM Capital Inc., "TAM Financial 1" refers to Tam Financial Services 1 Ltda. and "TAM Financial 2" refers to Tam Financial Services 2 Ltda., each an exempted company incorporated with limited liability in the Cayman Islands. The terms "we," "our" and "us" refer to the TAM S.A., its consolidated subsidiaries and its controlled subsidiaries, the companies mentioned above. References to "preferred shares" and "ADSs" refer to the non‑voting preferred shares of TAM S.A. and the American depositary shares representing those preferred shares, respectively, except where the context otherwise requires.
In this annual report, the term "ANAC" refers to the National Civil Aviation Agency or Agência Nacional de Aviação Civil, the national aviation agency. The term "Brazil" refers to the Federative Republic of Brazil and the phrase "Brazilian government" refers to the federal government of Brazil (and includes ANAC). The term "Central Bank" refers to the Central Bank of Brazil. The terms "U.S. dollar" and "U.S. dollars" and the symbol "U.S.$" refer to the legal currency of the United States. The terms "real" and "reais" and the symbol "R$" refer to the legal currency of Brazil and the term "centavos" means the 100th part of the real.
This annual report contains terms relating to operating performance within the airline industry that are defined as follows:
· "ASK" means available seat kilometers, or the product of multiplying the number of seats available in all the aircraft by the distance the seats are flown in kilometers.
· "Average tariff" means the quotient of dividing passenger transport revenue by the number of paying passengers transported.
· "BELF" means the break‑even load factor (or load factor in which revenue equals operating expenses).
· "Block hours" refers to the elapsed time between an aircraft's leaving an airport gate and arriving at an airport gate.
· "CASK" means cost per ASK, or quotient of dividing total operating expenses (excluding the fair value of fuel derivatives and revaluations of aircraft) by the number of available seat kilometers. The result is presented in this annual report in centavos per ASK.
· "Load factor" means the percentage of aircraft occupied on flights, or quotient between RPK and ASK.
· "RASK" means revenue per ASK, or quotient of dividing net revenue by the number of available seat kilometers. The result is presented in this annual report in centavos per ASK.
· "RPK" means revenue passenger kilometer corresponding to the product of multiplying the number of paying passengers transported by the number of kilometers flown by such passengers.
· "Yield" means the average amount paid per passenger to fly one kilometer.
PRESENTATION OF FINANCIAL AND OTHER DATA
We prepare our consolidated annual financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. These consolidated financial statements are the first TAM S.A. financial statements to be prepared in accordance with IFRS. IFRS 1 "First‑time Adoption of International Reporting Standards" has been applied in preparing these financial statements. The financial statements are prepared under the historical cost convention unless otherwise indicated, including, for example, in respect of revaluation of flight equipment and measurement of derivative financial instruments and certain financial assets at fair value. Until December 31, 2008, our consolidated financial statements were prepared in accordance with Generally Accepted Accounting Principles in Brazil (Brazilian GAAP). Brazilian GAAP differs in certain respects from IFRS. When preparing our 2008 consolidated IFRS financial statements, management has amended certain accounting, valuation and consolidation methods in the Brazilian GAAP financial statements to comply with IFRS. The comparative figures in respect of 2007 have been restated to reflect these adjustments. Reconciliations and descriptions of the effect of the transition from Brazilian GAAP to IFRS are given in Note 4 to the consolidated financial statements.
The last consolidated financial statements available under Brazilian GAAP which were filed with:
· the United States Securities and Exchange Commission were those for the year ended December 31, 2007; and with
· the Brazilian Securities regulators ("CVM") were those for the year ended December 31, 2008.
Our audited consolidated annual financial statements for the years ended December 31, 2008 and 2007, as included in this report, have been audited by our independent registered public accounting firm.
We maintain our books and records in reais.
All references in this annual report to numbers of our common and preferred shares reflect a share split which took place on May 16, 2005, pursuant to which holders of our existing shares received two shares of the same class and type for each share held.
For ease of presentation, certain financial information contained in this annual report has been presented in U.S. dollars. This annual report contains translations of various real amounts, before rounding, into U.S. dollars at specified rates solely for your convenience. You should not construe these translations as representations by us that the real amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated the real amounts using a rate of R$2.3370 to U.S.$1.00, the U.S. dollar selling rate published by the Central Bank on December 31, 2008. On June 26, 2009, the U.S. dollar selling rate published by the Central Bank was R$1.9396 to U.S.$1.00.
The information contained in this annual report relating to Brazil and the Brazilian economy is based on data published by the Central Bank, government agencies and other independent sources. Data and statistics regarding the Brazilian civil aviation markets are based on publicly available data published by ANAC. Data and statistics regarding the international civil aviation markets are based on publicly available data published by the International Civil Aviation Organization (ICAO) and the International Air Transport Association (IATA). We also make statements in this annual report about our competitive position and market share in, and the market size of, the Brazilian airline industry. We have made these statements on the basis of statistics and other information from third‑party sources that we believe are reliable. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect, we have not independently verified the competitive position, market share and market size or market growth data provided by third parties or by industry or general publications.
Certain figures in this document have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
This annual report includes certain forward‑looking statements (particularly in "Item 3. Key Information D. Risk Factors," "Item 4. Information on the Company B. Business Overview" and "Item 5. Operating and Financial Review and Prospects"). These forward‑looking statements are based principally on our current expectations and on projections of future events and financial trends that currently affect or might affect our business. In addition to the items discussed in other sections of this annual report, there are many significant factors that could cause our financial condition and results of operations to differ materially from those set out in our forward‑looking statements, including factors such as:
· economic and political developments in both Brazil and the principal international markets in which we operate;
· our management's expectations and estimates as to future financial performance, financial plans and the impact of competition on our business, including competitive pressures on pricing;
· our level of indebtedness and other payment obligations;
· our plans relating to investments and capital expenditures;
· variations in interest rates, inflation and the exchange rate relating to the real (with respect to both potential depreciation and appreciation of the real);
· existing and future regulations;
· increases in fuel expenses, maintenance expenses and insurance premiums;
· changes in market prices, preferences of consumers and competitive conditions;
· cyclical and seasonal variations in our results of operations;
· defects or other mechanical problems in our aircraft;
· developments in the Brazilian civil aviation infrastructure, including air traffic control, airspace and airport infrastructure;
· the implementation of our strategies and growth plans;
· our ability to obtain financing on commercially reasonable terms;
· changes in fiscal policy and tax laws; and
· other risk factors set forth in "Item 3. Key Information D. Risk Factors."
The words "believe," "expect," "continue," "understand," "hope," "estimate," "will," "may," "might," "should," "intend" and other similar expressions are intended to identify forward‑looking statements and estimates. Such statements refer only to the date on which they were expressed, and we assume no obligation to publicly update or revise any such estimates resulting from new information or any other events. As a result of the inherent risks and uncertainties involved, the forward‑looking statements included in this annual report may not be accurate and our future results of operations and performance may differ materially from those set out for a number of different reasons. No forward‑looking statement in this annual report is a guarantee of future performance and each estimate involves risks and uncertainties.
Investors are cautioned not to place undue reliance on any forward‑looking statements.
The tables below contain a summary of our financial data as of and for each of the periods indicated and were derived from our consolidated annual financial statements, prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The information set forth in this section should be read in conjunction with our consolidated annual financial statements (including the notes thereto) and "Presentation of Financial and Other Data" and "Item 5. Operating and Financial Review and Prospects."
The summary consolidated annual financial information as of December 31, 2007 and 2008 and for each of the two years ended December 31, 2007 and 2008, prepared in accordance with IFRS, is derived from our audited consolidated annual financial statements included elsewhere in this annual report audited by our independent registered public accounting firm. The summary consolidated annual financial information as of December 31, 2004, 2005 and 2006 and for each of the three years ended December 31, 2004, 2005 and 2006, prepared in accordance with Brazilian GAAP and U.S. GAAP, is derived from our audited consolidated annual financial statements included in our Annual Report on Form 20‑F for the year ended December 31, 2007, filed June 25, 2008, but do not contain any reconciliation of shareholders' equity or net income from Brazilian GAAP or U.S. GAAP to IFRS. Accordingly, you may not be able to directly compare the financial information as of and for the years ended December 31, 2008 and 2007 with the financial information as of and for the years ended December 31, 2004, 2005 and 2006.
For your convenience, the following tables also contain U.S. dollar translations of the real amounts presented at December 31, 2008, translated using the rate of R$1.9396 to U.S.$1.00, the U.S. dollar selling rate at June 26, 2009 published by the Central Bank on SISBACEN, using transaction PTAX 800, option 5.
The tables below entitled "Operating Data Computed Using Financial Information Under IFRS" and "Additional Operating Data" also include unaudited operational and other data indicative of performance utilized by certain investors in evaluating companies operating in the global air transportation sector. This unaudited operational data is not included in or derived from our consolidated annual financial statements. The data corresponding to years 2006 to 2004 presented in U.S. GAAP and Brazilian GAAP were derived from our previous 20‑F.
(1) Refers to the total balance of current liabilities plus long‑term liabilities.
(1) Refers to the total balance of current liabilities plus long‑term liabilities.
(1) Refers to the total balance of current liabilities plus long‑term liabilities.
(1) Except where indicated.
(2) In 2008 there was a conversion of common shares to preferred shares of a relevant shareholder.
(1) Except where indicated.
(2) A share split took place on May 16, 2005, pursuant to which all holders of our existing shares received two shares of the same class and type for each share held. All periods are presented considering the share split effects.
(1) Except where indicated.
(2) The data relating to both our preferred and common shares has been adjusted to reflect the share split which took place on May 16, 2005, pursuant to which all holders of our existing shares received two shares of the same class and type for each share held.
(3) The rights of preferred shareholders were altered on May 16, 2005. Previously, preferred shares had carried the rights to a dividend 10% higher than that distributed to holders of common shares. From May 16, 2005 however preferred shares carried the same dividend rights as common shares. The terms "Previous" and "Current" preferred shares used in the above table reflect this change in entitlement.
Until January 1999, there were two legal foreign exchange markets in Brazil, the commercial rate exchange market, or the Commercial Market, and the floating rate exchange market, or the Floating Market. The Commercial Market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad (including the payment of principal of and interest on loans, notes, bonds and other debt instruments denominated in foreign currencies and duly registered with the Central Bank). The Floating Market rate generally applied to specific transactions the Central Bank was not required to approve.
The Central Bank reported both the Commercial Market rate and the Floating Market rate on a daily basis. In January, 1999 the Brazilian government announced the unification of the exchange positions of the Brazilian financial institutions in the Commercial Market and the Floating Market, leading to a convergence in the pricing and liquidity of both markets.
On March 4, 2005, the Conselho Monetário Nacional issued Resolution No. 3,265 and Resolution No. 3,266 (each of which became effective on March 14, 2005), which introduced several changes in the Brazilian foreign exchange regime, including (i) the unification of the Commercial Market and the Floating Market, and (ii) the relaxation of rules for the acquisition of foreign currency by Brazilian residents. It is expected that the Central Bank will further regulate foreign exchange transactions, as well as to payments and/or transfers of Brazilian currency between Brazilian residents and non‑residents (such transfers being commonly known as International Transfers of Reais), including those made through so‑called non‑resident accounts (also known as CC5 accounts).
See "Item 3. Key Information D. Risk Factors Risks relating to Brazil Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares."
The following tables set forth the Commercial Market rate for the purchase of U.S. dollars expressed in reais per U.S. dollar for the periods and dates indicated:
(1) Represents the daily average rate during each of the relevant periods. Source: Central Bank.
(1) Source: Central Bank.
D. Risk Factors
Investing in the ADSs or our preferred shares involves a high degree of risk. Before making an investment decision, you should carefully consider the risks set forth below. Our business, financial condition and results of operations may be materially adversely affected by any of these risks. The trading price of the ADSs or our preferred shares may decrease due to any of these risks, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.
Risks relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions have a direct impact on our business, financial condition, results of operations and prospects as well as the trading price of the notes.
The Brazilian economy has been characterized by the significant involvement of the Brazilian government, which often changes monetary, credit, fiscal and other policies to influence Brazil's economy. The Brazilian government's actions to control inflation and effect other policies have involved wage and price controls, depreciation of the real, controls over remittance of funds abroad, intervention by the Central Bank to affect base interest rates, and other measures. We have no control over, and cannot predict, what measures or policies the Brazilian government may take in the future. Our business, financial condition, results of operations and prospects and the trading price of the notes may be adversely affected by changes in Brazilian government policies, as well as general economic factors, including, without limitation:
· Brazilian economic growth;
· interest rates;
· variations in exchange rates;
· exchange control policies;
· fiscal policy and changes in tax laws;
· liquidity of domestic capital and lending markets;
· government control of production activities and oil refining; and
· other political, diplomatic, social and economic developments in or affecting Brazil.
We cannot predict what future fiscal, monetary, social security and other policies will be adopted by current or future Brazilian governments, or whether these policies will result in adverse consequences to the Brazilian economy, to our business, results of operations, financial condition or prospects, or to the trading prices of our ADSs and preferred shares.
In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of securities issued by Brazilian companies.
Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares.
As a result of inflationary pressures, the Brazilian currency has depreciated frequently over the past decade. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini‑devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long‑term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. In 2002, the real fell 34.3% against the U.S. dollar, caused in part by political uncertainties involving the presidential election in Brazil and the global economic recession. Notwithstanding the fact that the real has appreciated 13.4%, 9.5% and 17.2% against the U.S. dollar in 2005, 2006 and 2007 respectively and as a result of the ongoing global financial crisis, since mid-2008 the real has depreciated 31.9% against the U.S. Dollar over 2008 as reported by the Central Bank. On December 31, 2008 was R$2.337 per U.S. dollar and on June 26, 2009 was R$1.9396 per U.S. dollar. We cannot assure you that the real will not continue to depreciate substantially or appreciate against the U.S. dollar in the future.
The majority of our revenues are denominated in reais, and a significant portion of our operating expenses (such as fuel, aircraft and engine maintenance, aircraft leasing and insurance payments, parts and engines) are denominated in or linked to the U.S. dollar or other foreign currencies. In the event that we are unable to adjust our prices or to obtain protection through hedging transactions, a depreciation in the real would reduce our profit margins and/or cause operating losses as a result of increased expenses, or having obligations denominated in or linked to the U.S. dollar (or other foreign currencies that we have not entered into hedging transactions). Devaluations in the real against the U.S. dollar or other foreign currencies also create inflationary pressures, which can restrict our access to external financial markets and lead to government intervention (including the implementation of recessionary policies to curb aggregate demand), adversely affecting us. Exchange rate instability may adversely affect our business, financial condition, results of operations and the trading price of our ADSs and preferred shares.
Inflation and certain measures by the Brazilian government to curb inflation have historically adversely affected the Brazilian economy and Brazilian securities market, and high levels of inflation in the future would adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares.
Brazil has historically experienced extremely high rates of inflation. Inflation and some of the Brazilian government's measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to contain inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian securities market.
Since the introduction of the real in 1994, Brazil's inflation rate has been substantially lower than in previous periods. However, inflationary pressures persist. According to the General Price Index (Índice Geral de Preços‑Mercado, or IGP‑M), Brazilian general price inflation rates were 1.2%, 3.8%, 7.7% and 9.8% in 2005, 2006, 2007 and 2008 respectively. According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), Brazilian price inflation rates were 5.7%, 3.1%, 4.5% and 5.9% in 2005, 2006, 2007 and 2008 respectively.
Brazil may experience high levels of inflation in the future. Inflationary pressures may lead to the Brazilian Government intervening in the economy and introducing policies that could adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares.
In the event that Brazil experiences high inflation in the future, we may not be able to adjust the prices we charge our passengers to offset the impact of inflation on our expenses, leading to decreased net income. Inflationary pressures may also adversely affect our ability to access foreign financial markets, leading to adverse effects on our capital expenditure plans.
Developments and the perceptions of risks in other countries, including other emerging markets and the United States, may adversely affect the Brazilian economy, our business, financial condition, results of operations and prospects and the market price of Brazilian securities, including the trading price of our ADSs and preferred shares.
The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, and the United States. Although economic conditions are different in each country, the reaction of investors to developments in one country may have a material adverse effect on the market value of securities of Brazilian companies. Crises in another emerging market country or the United States could decrease investor demand for Brazilian securities, including our notes and preferred shares. This may adversely affect the trading value of our ADSs and preferred shares, and any decline in trading value would impede our access to capital markets and financing for our future operations.
The recent global financial crisis has had significant consequences worldwide and in Brazil, causing stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates and inflationary pressure, which may adversely affect the market price of Brazilian securities, including our ADSs and preferred shares.
Although the countries of Latin America fared comparatively well at the beginning of the global financial crisis, as of late 2008, and continuing into 2009, many of the countries we serve, including Brazil, are experiencing either economic slowdowns or recessions, which may cause a weakening in demand for our services and an adverse effect on our business in the future. If the Brazilian economy experiences a sustained recession, or if Brazil experiences significant political disruptions, our business, financial condition and results of operations could be materially and adversely affected.
Variations in interest rates may have adverse effects on our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares.
We are exposed to the risk of interest rate variations, principally in relation to the Long Term Interest Rate (Taxa de Juros de Longo Prazo, or TJLP) and the Interbank Deposit Rate, or DI Rate, (in respect of loans denominated in reais) and the London Interbank Offer Rate, or LIBOR, (in respect of operating and finance leases denominated in U.S. dollars).
Beginning in 2003, as inflationary pressures eased, the Conselho Monetário Nacional, the highest monetary regulatory body in the Brazilian government, decreased the TJLP. The TJLP at December 31, 2007 was 6.25%, where it remained until as through December 31, 2008. However, any increase in inflation or other macroeconomic pressures may lead the Conselho Monetário Nacional to increase the TJLP.
In addition, our repayments under many of our operating and finance leases are linked to LIBOR, and we are exposed to the risk of variations in LIBOR. At December 31, 2008, the estimated future payments due on our operating and finance lease contracts linked to LIBOR amounted to U.S.$3,840 million.
If TJLP, the DI rate or LIBOR was to increase, our loan repayments would increase, and we might not be able to adjust the prices we charge to offset any such increased payments. If we are unable to adequately adjust our prices, our revenues would not offset the increased loan expenses, adversely affecting our results of operations. Accordingly, interest rate increases may adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares.
Risks Relating to our Business and the Brazilian Aviation Industry
The airline industry is particularly sensitive to changes in economic conditions and continued negative economic conditions that would likely continue to negatively impact our results of operations and our ability to obtain financing on acceptable terms.
Our operations and the airline industry in general are particularly sensitive to changes in economic conditions. Unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market and increased business operating expenses, can reduce spending for both leisure and business travel. Unfavorable economic conditions can also impact our ability to raise fares to counteract increased fuel, labor, and other expenses. An increasingly unfavorable economic environment would likely negatively impact our results of operations. We continue to be cautious of current domestic economic conditions.
Factors such as continued unfavorable economic conditions, a significant decline in demand for air travel, or continued instability of the credit and capital markets could result in pressure on our borrowing costs, operating results and financial condition and would affect our growth and investment plans. These factors could also negatively impact our ability to obtain financing on acceptable terms and our liquidity generally.
The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations.
Scheduled air transportation services are considered public utilities in Brazil and are subject to extensive regulation by the Brazilian government. The Brazilian regulatory authorities have also taken a more proactive role in monitoring the development of the Brazilian civil aviation market. For example, in an effort to prevent excess supply, the authorities have established more rigorous criteria for air transport companies to follow when creating new routes or increasing flight frequencies. Various legislative initiatives have taken place, including the drafting of a bill to replace Law No. 7,565 of December 19, 1986, or the Brazilian Aeronautics Code, the submission of a new public policy regulation for civil aviation to the Ministry of Defense for approval and the establishment of ANAC, the national aviation agency that has replaced the Departamento de Aviação Civil, or DAC, as the principal regulatory body for Brazilian civil aviation. See "Item 4. Information on the Company B. Business Overview Regulation of the Brazilian Civil Aviation Industry Rights to Operate Air Routes Future legislation."
Operation of air transportation services as well as airport infrastructure is exclusive to the Brazilian government which may provide these services directly or through third parties by means of concessions or permits. Our concession to operate scheduled and public passenger and cargo air transportation was obtained on December 9, 1996, and is valid until December 9, 2011. We cannot assure you that we will be able to automatically renew our concession. See "Item 4. Information on the Company B. Business Overview Regulation of the Brazilian Civil Aviation Industry Overview Air transportation services concession."
Our growth plans include expanding into new markets, increasing flight frequency and expanding our fleet, which currently consists of 132 aircraft. ANAC has actively monitored the developments of Brazil's airline market and has taken restrictive measures to help restore (greater) stability in the industry. Accordingly, our capacity to grow is dependent on receiving the necessary authorizations from ANAC and the Bureau of International Relations (Superintendência de Relações Internacionais, or SRI). We cannot assure you that we will obtain all necessary authorizations in future and any failure to do so would require us to re‑evaluate our strategies.
The Brazilian civil aviation structure may change significantly in the future and we may not be able to anticipate or evaluate how this change will affect our business and results of operations. We cannot assure you that these or other changes in Brazilian civil aviation regulations will not have an adverse effect on our business or results of operations. Any change that requires us to focus a significant level of resources on compliance with new aviation regulations, for example, would result in additional expenditure on compliance, consequently adversely affecting our results of operations.
In addition, our ability to increase prices to offset an increase in our fixed expenses may be adversely affected in the event that the Brazilian civil aviation authorities impose any price control restrictions on air transportation services. If we are unable to increase prices sufficiently to offset such increases in fixed expenses, this would adversely affect our results of operations. Changes in the regulations issued by the Brazilian government or the occurrence of any of the above factors may increase our expenses, limit our capacity to expand the number of our routes or adversely affect our business and results of operations.
Competition in both the domestic and international civil aviation markets is increasing, and the Brazilian government may intervene in the domestic market.
We face intense competition in both the domestic and international markets. The Brazilian government has the power to authorize or deny the entry of new participants into the domestic market in which we operate, as well as the power to assume air transportation operations. Accordingly, we face greater competition from current or new participants including new low cost carries on some of our routes in the Brazilian civil aviation market. The air transportation sector is highly sensitive to price discounting, particularly as a result of the arrival of low‑cost airlines or airlines that have adopted predatory pricing policies. Other factors, such as flight frequency, schedule availability, brand recognition, and quality of services offered (such as loyalty programs, VIP airport lounges, in‑flight entertainment and other amenities) also have a significant impact on competitiveness in the market. In addition, the acquisition of airline concessions in Brazil does not require significant financial investment and, as a result, the barriers to entering the domestic market are low. We cannot assure you that the Brazilian government will not assume air transport operations or that current or new competitors in our markets will not offer prices lower than ours, offer more attractive services than ours or increase the capacity of their routes in an effort to obtain greater market share. In the event that any of the foregoing events occur, we cannot assure you that the price of our fares, passenger traffic or our profit margins will not be negatively affected. Any negative impact on our fares would lead to decreased net revenues and may require us to focus on cost-saving programs.
Substantial fluctuations in fuel prices or decreased availability of sufficient quantities of fuel may harm the Brazilian civil aviation market and our businesses in the events that cost increases cannot be passed on to passengers through our fares and our fuel hedging arrangements become more expensive.
Fuel expenses represent a significant portion of operating expenses for airlines in general, and fuel prices have risen significantly in recent periods. For the year ended December 31, 2008, fuel expenses represented 39.7% of our operating expenses.
Historically, fuel prices in Brazil have been subject to significant variations in international prices, which in turn vary as a result of global political issues and global supply and demand. The availability of fuel is also subject to periods of market scarcity and surplus and is affected by the demand for gasoline and other petroleum derivatives. It is therefore not possible to predict the cost and availability of fuel in the future with any degree of certainty. In the event that the supply of fuel is reduced for any reason, we may need to increase our prices or reduce our scheduled services, which would adversely affect our net revenues.
Fuel prices reached record levels during the middle of 2008, but decreased substantially in the second half of 2008. Jet fuel expenses have been subject to wide fluctuations as a result of increases in demand, sudden disruptions in global supply, as well as market speculation. In addition, some of our competitors may be able to obtain fuel on better terms (with respect to both price and quality). Significant increases in fuel expenses (or in the relative price we pay for fuel compared to our competitors) may harm our financial condition and results of operations in the event that it is not possible for us to pass on price increases to passengers through our fares (or in the event that competitors can decrease their prices relative to ours and take market share from us).
Although we routinely hedge between 30% and 80% of our future fuel requirements (over rolling 24‑month periods), there can be no assurance that, at any given point in time, our hedge contracts will provide any particular level of protection against increased fuel costs (or that our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty's bankruptcy). Additionally, a deterioration in our financial condition could negatively affect our ability to enter into new hedge contracts in the future.
By contrast, the declines in fuel prices in the second half of 2008 also had the effect of increasing the costs associated with our fuel hedging arrangements such that we recorded a liability of R$1.1 billion at December 31, 2008 as a result of those arrangements. Due to market conditions in 2009, we also agreed to post approximately R$240 million in collateral to cover potential amounts owed with respect to fuel hedging arrangements that have not yet settled.
Our fuel hedging transactions and adjustments to our price margins are might not be sufficient to protect us from fuel price variations, in which case our results of operations could be significantly adversely effected.
Airlines have significant fixed expenses that may harm our ability to attain our strategic goals.
As is the case with other airlines, we have high fixed expenses (arising principally from aircraft lease agreements). We expect to incur additional fixed expenses and contractual debt as we lease or acquire new aircraft and other equipment to implement our growth strategy. As of December 31, 2008, we had firm commitments to purchase 85 aircraft, with an aggregate manufacturer's list price of approximately $8.4 billion. We will require substantial capital from external sources to meet our future financial commitments. The continued credit crisis and related turmoil in the global financial system has increased and may continue to increase the costs of such financing.
As a function of our fixed expenses, we may (i) have limited ability to obtain additional financing for working capital and other purposes, (ii) be required to dedicate a significant part of our cash flow to fixed expenses resulting from operating and finance leases for aircraft, (iii) incur higher interest or leasing expenses in the event that interest rates increase, or (iv) have limited ability to plan for or react to changes in our businesses, the civil aviation sector generally and general macroeconomic conditions.
We depend significantly on automated systems and any breakdown in these systems may harm our business and results of operations.
We depend on automated systems to operate our businesses, including our e‑TAM portal, automated seat reservation system, fleet and network management system, telecommunications system and website. Significant or repeated breakdowns of our systems may impede access to our products and services by passengers and travel agencies, which may in turn lead them to purchase tickets from other airlines, adversely affecting our net revenues. Any interruption in our systems may result in the loss of important information and increase our expenses, which may cause a negative public perception of our airline and reduced demand for our services.
A failure to implement our growth strategy may harm our results of operations and the trading price of our ADSs and preferred shares.
Our growth strategy in the domestic and international markets and the consolidation of our leadership in both the domestic and international markets includes, among other objectives, increasing the number of markets we serve and increasing the frequency of the flights we provide. These objectives are dependent on approvals for routes in the appropriate geographic areas and obtaining adequate access at the airports. Guarulhos airport in São Paulo and Juscelino Kubitschek airport in Brasília are highly congested, and passenger utilization is near or at maximum capacity. In addition, Congonhas Airport in São Paulo and Santos Dumont airport in Rio de Janeiro are subject to slot restrictions that limit both the number of landings and take‑offs and the times at which landings and take‑offs can take place. Other airports may reach maximum passenger capacity in the future or impose slot restrictions, which would adversely affect our growth strategy. Any factor preventing or delaying our access to airports or routes which are vital to our growth strategy (including any inability to maintain our current slots and obtain additional slots at certain airports) may restrict the expansion of our operations and, consequently, adversely affect our growth objectives.
Our Insurance expenses may increase significantly as a result of a terrorist attack, harming our financial condition and results of operations.
Insurance companies may significantly increase insurance premiums for airlines and reduce the amount of insurance coverage available to airlines for civil liability in respect of damage resulting from acts of terrorism, war, or similar events, as was the case following the terrorist attacks of September 11, 2001 in the United States.
In response to substantial increases in insurance premiums to cover risks related to terrorist attacks following the events of September 11, 2001 in the United States, the Brazilian government enacted legislation, authorizing the Brazilian government to assume civil liability to third parties for any injury to persons or goods on the ground caused by terrorist attacks or acts of war against Brazilian airlines operating in Brazil or abroad. However, the Brazilian government may, at its sole discretion, suspend the assumption of liability at any time, provided that it gives seven days' notice of the suspension. If the Brazilian government suspended the assumption of liability, the Brazilian airlines are required to reassume the liability and contract for insurance in the market.
Airline insurers may reduce their coverage or increase their premiums in case of terrorist attack, seizures, aircraft accident and the end of the assumption of liability by the Brazilian government or other events affecting civil aviation in Brazil or abroad. If there are significant reductions in insurance coverage, our potential liability would increase substantially. If there are significant increases in insurance premiums, our operating expenses would increase, adversely affecting our results of operations.
We may not succeed in obtaining all aircraft and parts on time, which may result in a suspension of the operations of certain of our aircraft because of unscheduled or unplanned maintenance.
At December 31, 2008, we had firm orders outstanding with Airbus for an additional 53 Airbus A320 family aircraft, four Airbus A330 family aircraft, and 22 Airbus A350 aircraft together with an additional ten options for Airbus A350 aircraft. We also had firm orders outstanding with Boeing for six Boeing 777 aircraft. Any disruption or change in the manufacturers' delivery schedules for these new aircraft will affect our operations and would negatively affect our financial condition and results of operations because we would not be able to accommodate demand from additional passengers. Our ability to obtain these new aircraft from Airbus or Boeing may be affected by several factors, including (i) the fact that Airbus or Boeing may refuse to, or be financially limited in its ability to, fulfill the obligations it assumed under the aircraft delivery contract, (ii) the occurrence of a fire, strike or other events affecting Airbus' or Boeing's ability to fulfill its contractual obligations in a complete and timely fashion, and (iii) any inability on our part to obtain aircraft financing or any refusal by Airbus or Boeing to provide financial support. Our operations may also be affected by any failure or inability of Airbus or Boeing (or other suppliers) to supply sufficient replacement parts in a timely fashion, which may cause the suspension of operations of certain aircraft because of unscheduled or unplanned maintenance. Any such suspension of operations would decrease passenger revenue and adversely affect our financial condition.
The reputation and financial results of airlines may be harmed by any accident or incident involving their aircraft.
Any accident or incident involving the aircraft of any airline may require repair or replacement of the damaged aircraft and temporary or permanent loss of service, in addition to significant expenses arising from indemnities payable to injured passengers and third parties. On July 17, 2007, TAM flight 3054 from Porto Alegre to São PauloCongonhas had an accident during landing at Congonhas airport. There were no survivors aboard the aircraft and there were additional fatalities in a TAM cargo facility where the aircraft crashed. We believe that the level of insurance we have contracted for accidents is consistent with market practice. However, we may incur losses in the event that our insurance is insufficient to cover the damage from an accident. Any requirement to pay amounts not covered by our insurance may harm our business and results of operations. Any accident or incident involving one of our aircraft, even if completely covered by insurance, may affect our image and generate a public perception that we are less safe or reliable than other airlines, which would harm consumer demand, our revenues and our market position. In addition, any accident or incident relating to an aircraft operated by another airline and which involves one of the same models of aircraft as we have in our fleet may generate a public perception that the particular model of aircraft is unsafe, which may also harm demand for our services, revenues and, consequently, our results of operations.
Our business may be adversely affected by downturns in the airline industry caused by terrorist attacks, war or outbreak of disease, which may alter travel behavior or increase expenses.
Demand for air transportation may be adversely affected by terrorist attacks, war or political or social instability, epidemics, natural disasters and other similar events that are out of our control. Any of these events in the markets in which we operate could have a material impact on our business, financial condition and results of operations. Furthermore, such events could have a prolonged effect on air transportation and on certain expenses including insurance and airport fees.
For example, the terrorist attacks in the United States on September 11, 2001 severely adversely impacted the worldwide airline industry. Airline traffic in the United States fell dramatically after the attacks and decreased albeit less severely, throughout Latin America. Our revenues depend on the number of passengers traveling on our flights. Therefore, any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations or otherwise and any related economic impact could result in decreased passenger traffic and materially and negatively affect our business, financial condition and results of operations.
In addition, the escalation of military activity in the Middle East and the public concerns about the possibility of an outbreak of disease (such as the H1N1 virus) could negatively impact the public's willingness to travel by air. We cannot determine if and when such will occur and whether they will decrease demand for air travel, and thus materially and negatively affecting our business, financial condition and results of operations.
Our operations are often affected by factors beyond our control, including airport congestion, weather conditions and increased safety measures.
Like other airlines, we are subject to delays caused by factors beyond our control, including airport congestion, adverse weather conditions and increased safety measures. Delays have the effects of leaving passengers dissatisfied, reducing aircraft utilization (the average number of hours per day an aircraft is in operation) and increasing expenses, which may affect our profitability. Adverse weather conditions may cause cancellations of, or significant delays in, our flights. Cancellations or delays resulting from airport congestion, adverse weather conditions and safety related measures may decrease our revenues and harm our reputation as a punctual airline, which could lead to decreased demand for our services.
Problems with air traffic control systems or other technical failures could interrupt our operations and materially affect our business.
Our operations, including our ability to deliver customer service, are dependent on the effective operation of our equipment, including our aircraft, maintenance systems and reservation systems. Our operations are also dependent on the effective operation of domestic and international air traffic control systems and the air traffic control infrastructure in the markets in which we operate. Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our operations and financial results and our reputation.
Technical and operational problems in the Brazilian air traffic control systems since the last quarter of 2006 have led to extensive flight delays, higher than usual flight cancellations and increased airport congestion. This negatively affected our punctuality and operating results. The Brazilian government and air traffic control authorities have taken measures to improve the Brazilian air traffic control systems, but if the changes undertaken by the Brazilian government and regulatory authorities do not prove successful, these air traffic control‑related difficulties might recur or worsen, which might have a material adverse effect on our business, our results of operations and our growth strategy.
The successful execution of our strategy is partly dependent on us maintaining a high daily aircraft utilization rate, making us especially vulnerable to delays.
In order to successfully execute our strategy, we need to maintain a high daily aircraft utilization rate, which is a measure of the number of block hours that we use our aircraft per day. Achieving a high daily aircraft utilization rate allows us to maximize the amount of revenue that we generate from each aircraft and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to fly more hours on average per day. Our aircraft utilization rate could be adversely affected by a number of factors that we cannot control, including air traffic and airport congestion, interruptions in the service provided by air traffic controllers, adverse weather conditions and delays by third‑party service providers in respect of matters such as fueling and ground handling. In addition, high aircraft utilization rates increase the risk that, if an aircraft falls behind schedule, it could remain behind schedule for up to two days. Such delays could result in a disruption in our operating performance, leading to customer dissatisfaction due to any resulting delays or missed connections.
Risks Relating to our ADSs and Preferred Shares
We have a stable group of principal shareholders with the power to manage our business, and the interests of these persons may conflict with those of other shareholders.
Our principal shareholders TEP and Nova Fronteira collectively control 89.42% of our common stock and have the power to, among other things, (i) elect the majority of our directors, and (ii) control the results of any proposal requiring shareholder approval (including transactions with related parties, corporate re‑organization, sales of assets and the timing and conditions of payment of any future dividends, subject to the minimum mandatory dividend distribution requirements under Brazilian corporation law). Our principal shareholders have the power to approve transactions that might not be in the interests of other shareholders and may prevent or frustrate any attempts to remove our current directors or executive officers.
Our preferred shares do not carry general voting rights.
Our preferred shares and, consequently, our ADSs do not carry general voting rights except in relation to certain specific matters and under specific circumstances. See "Item 10. Additional Information B. Memorandum and Articles of Association." Our principal shareholders, who hold the majority of common shares with voting rights and control us, are therefore able to approve corporate measures without the approval of holders of our preferred shares.
Accordingly, you will not have control over the approval of corporate measures such as appointment of directors, approval of significant transactions or changes in our capital structure.
The economic value of your investment may be diluted.
In the event that we need to obtain capital for our operations by issuing new shares, any such issuance may be made at a value below the book value of our preferred shares on the relevant date. In that event, the then holders of our ADSs and preferred shares would suffer an immediate and significant dilution of their investment.
The sale of significant quantities of ADSs or preferred shares may cause the stock market price of our ADSs and preferred shares to decline.
In the event that we or our shareholders elect to sell a significant number of our ADSs or preferred shares, or in the event that the market perceives that we have the intention of any such sale, the stock market price of our preferred shares or ADSs could decline significantly unless there are high levels of demand to purchase our ADSs or preferred shares.
Brazilian securities markets are relatively volatile and illiquid. Therefore you may not be able to sell the preferred shares underlying the ADSs at the price and time you desire.
Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid and can be more volatile than major securities markets in the United States. There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depository at any time, you may not be able to sell the preferred shares underlying the ADSs at the price and time you wish.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our preferred shares or ADSs.
Law No. 10,833 of December 29, 2003 provides that the disposition of assets located in Brazil by a non‑resident to either a Brazilian resident or a non‑resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposition of our preferred shares by a non‑resident of Brazil to another non‑resident of Brazil. There is no judicial guidance as to the application of Law No. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non‑residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would result in the imposition of withholding taxes on the disposition of our ADSs by a non‑resident of Brazil to another non‑resident of Brazil.
Because any gain or loss recognized by a U.S. Holder (as defined in "Item 10. Additional Information E. Taxation United States") will generally be treated as a U.S. source gain or loss unless such credit can be applied (subject to applicable limitations) against tax due on the other income treated as derived from foreign sources, such U.S. Holder would not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our preferred shares.
The Brazilian government may impose exchange controls and significant restrictions on remittances of reais abroad, which would adversely affect your ability to convert and remit dividends, distributions or the proceeds from the sale of our preferred shares and our capacity to make dividend payments to non‑Brazilian investors and would reduce the market price of our preferred shares or ADSs.
The Brazilian government may restrict the remittance abroad of proceeds of investments in Brazil and the conversion of the real into foreign currencies. The Brazilian government last imposed such remittance restrictions for a brief period in 1989 and early 1990. In the event that the Brazilian government determines that the Brazilian foreign currency reserves need to be maintained, it may impose temporary charges on any overseas remittance of up to 50% of the value of the remittance. We cannot assure you that the Brazilian government will not take similar measures in the future. The return of any such restrictions would hinder or prevent your ability to convert dividends, distributions or the proceeds from any sale of our preferred shares into U.S. dollars and to remit U.S. dollars abroad and our capacity to make dividend payments to non-Brazilian investors. The imposition of any such restrictions would have a material adverse effect on the stock market price of our preferred shares or ADSs.
If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.
As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, permitting the custodian to convert dividends and other distributions with respect to the preferred shares into non‑Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian's electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the preferred shares, unless you obtain your own electronic certificate of foreign capital registration, or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration, you would not be able to remit abroad non‑Brazilian currency. In addition, if you do not qualify under the foreign investment regulations, you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares.
If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner. The depositary's electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.
If we do not maintain a registration statement and no exemption from the Securities Act is available, U.S. Holders of ADSs will be unable to exercise preemptive rights with respect to our preferred shares.
We will not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file a registration statement. If a registration statement is not filed and an exemption from registration does not exist, JPMorgan Chase Bank, N.A., as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale. However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.
TAM S.A. is a holding company, founded in May 1997 (under the name CIT Companhia de Investimentos em Transportes) for the specific purpose of participating in, managing and consolidating shareholdings in airlines. In November 1997, we implemented a corporate restructuring increasing TAM Marília's stake in our capital and changing our corporate name to TAM Companhia de Investimentos em Transportes. In September 2002 we again changed our corporate name to TAM S.A. We currently hold ownership interests in TAM Linhas Aéreas and TAM Mercosur. TAM Linhas Aéreas holds an ownership interest in TAM Viagens, TAM Capital, TAM Financial 1 and TAM Financial 2.
TAM S.A. is a sociedade anônima de capital aberto organized and operating under the Brazilian law. Our headquarters are located at Avenida Jurandir, 856, Lote 4, 1º andar, CEP 04072‑000, São Paulo, SP, Brazil. Our telephone number is +55 11 5582 9715.
TAM Marília was founded in January 1961 in the interior of the state of São Paulo, where the late Captain Rolim Amaro worked as a pilot. In 1971, Captain Rolim Amaro became an executive partner and minority shareholder of TAM Marília. TAM Regionais was founded in May 1976 and was the group's first scheduled airline, with 67% of its capital stock held by Captain Rolim Amaro. In 1978, Captain Rolim Amaro became the major shareholder of TAM Marília, holding 98% of its capital stock.
In 1986, Captain Rolim Amaro incorporated TAM Linhas Aéreas, launching its operations through Brasil‑Central Linha Aérea Regional S.A. (which was created to operate in the country's northern and central‑western regions). In the same year, Brasil‑Central Linha Aérea Regional S.A. was granted a concession to operate at Guarulhos International Airport and became TAM Transportes Aéreos Meridionais S.A., Brazil's second‑largest domestic airline.
In 1993, we launched the TAM Loyalty Program (the first airline loyalty program in Brazil) in order to incentivize existing customers to fly with us more and to attract new customers. In 1998 we inaugurated our first international flight, between São Paulo and Miami. In 1999, we initiated flights to Paris through a codeshare agreement with Air France.
In 1998, we acquired Itapemirim Transportes Aéreos Regionais (whose corporate name was changed to Interexpress Transportes Aéreos Regionais S.A.) and then acquired Helisul Linhas Aéreas S.A. (whose corporate name was changed to TAM Express S.A.).
In 1999, TAM Express and Interexpress Transportes Aéreos Regionais merged into TAM Linhas Aéreas, resulting in greater integration, operational efficiency and a consequent reduction in expenses. As a continuation of this restructuring process, and as a result of the need to unify our regional, national and international operations, TAM Transportes Aéreos Regionais S.A. was merged into TAM Linhas Aéreas in November 2000.
On February 6, 2003, we signed a protocol of understanding with Varig for code sharing operations as a preliminary stage in a possible merger between the two companies. This was primarily intended to eliminate overlapping flights and to rationalize supply in the market. As a result of signing this protocol of understanding, we were able to reorganize our aircraft fleet, negotiate to return 19 Fokker 100 aircraft and to reduce our operating expenses.
On February 15, 2005, as it became clear that the proposed merger would not take place, both parties (Varig and TAM S.A. submitted detailed plan to the CADE to cancel the codeshare arrangement. On February 23, 2005, the codeshare agreement was cancelled (with the approval of the CADE) with a deadline of May 24, 2005 to terminate codeshare operations with Varig. We ceased all codeshare operations with Varig on May 2, 2005.
On June 17, 2005, we completed our initial equity offering of preferred shares, offering a total of 30,190,000 preferred shares to institutional investors in the United States and institutional and other investors elsewhere. On July 19, 2005, we and the selling shareholders in the equity offering issued a further 281,600 preferred shares pursuant to an over‑allotment option granted to the underwriters in that offering.
On March 15, 2006, we completed a follow‑on equity offering of preferred shares in Brazil and our initial public offering of ADSs in the United States and elsewhere outside Brazil. This offering of preferred shares and ADSs was registered with the SEC and the ADSs are listed on the New York Stock Exchange. We became a reporting company under the Securities Exchange Act of 1934, or the Exchange Act. We offered 2,660,103 ADSs and 2,339,897 preferred shares, while the selling shareholders in that offering sold 21,209,462 ADSs and 9,408,636 preferred shares. On April 11, 2006, we and the selling shareholders in that offering sold an additional 1,103,000 ADSs pursuant to an over‑allotment option granted to the underwriters in that offering.
TAM Mercosur operates scheduled air transportation operations and is headquartered in Asunción, Paraguay. TAM Mercosur, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia, and was founded in March 1993 under the name Líneas Aéreas Paraguayas S.A. (LAPSA), with all capital stock held by the Government of Paraguay. The Paraguayan government currently holds 5.02% of TAM Mercosur's capital stock. In January 1997, LAPSA's corporate name was changed to Transportes Aéreos del Mercosur S.A. In September 2003, upon approval of TransAmérica's dissolution and liquidation, we acquired all shares of TAM Mercosur held at the time by TransAmérica (which consisted of 94.98% of its capital stock). In the year ended December 31, 2008, TAM Mercosur's net operating revenues represented 2.2% of our total consolidated net operating revenues. In 2007, we began a project to streamline the management of TAM Mercosur by integrating key administration and management functions with our central management in Brazil.
TAM Viagens is a limited company (sociedade limitada) and tourism operator controlled by TAM Linhas Aéreas. Through TAM Viagens, we package and sell tourism travel and corporate events in Brazil and abroad.
In 2007, TAM Linhas Aéreas incorporated TAM Capital as a wholly‑owned subsidiary, organized under the laws of the Cayman Islands, for the purpose of issuing U.S.$300,000,000 7.375% senior guaranteed notes due 2017 on April 25, 2007. On December 18, 2007 we completed an exchange offer pursuant to which holders of 99.2% of the notes issued on April 25, 2007 exchanged their notes for new notes that were registered under the Securities Act of 1933, as amended, and otherwise carried identical terms.
In 2007, TAM Linhas Aéreas incorporated TAM Financial 1 Limited as a wholly‑owned subsidiary, organized under the laws of the Cayman Islands, for the purpose of raising funds for the payment of pre‑delivery payments in respect of four Boeing 777 aircraft, and also incorporated TAM Financial Services 2 Limited as a wholly‑owned subsidiary, organized under the laws of the Cayman Islands, whose main activities include aircraft acquisition and financing.
In 2008, we joined the Star Alliance, the largest global alliance in commercial aviation, in terms of the number of members as well as geographical coverage. During 2008, the integration process began with experts from TAM, its mentor in the alliance, United, and the Star Alliance, teaming up to ensure we met the requirements for the association. These include, for example, compatibility with StarNet the Star Alliance's IT backbone common guidelines for dealing with passengers and the accumulation and redemption of loyalty program points.
Once TAM becomes a full‑fledged member of the global alliance which is expected at the end of 2009, it will share products and services in 1,000 airports and 170 countries in which it operates. Services include baggage check‑in to the final destination, easier connections and the convenience of more than 800 VIP lounges. Another benefit for clients will be the integration of all the Star Alliance member companies' frequent flier programs, which will make accumulating points easier, provide more redemption options and give priority to service and boarding.
In 2008, we began operating our aircraft the with largest capacity, the Boeing 777‑300ER that currently transports up to 365 passengers on our routes connecting Brazil, Germany, England and Chile. These Boeing aircraft were financed by a structured deal with a financial guarantee from the Export‑Import Bank of the United States (Ex‑Im Bank) and included the participation of four international financial institutions: Calyon, Natixis, Pefco (Private Export Funding Corporation) and Société Générale. In this same year, we finalized the phase‑out program of 100‑seat aircraft from our fleet and returned our MD‑11s, older and less efficient aircraft that we had used to operate some of our long haul routes.
During 2008, we invested R$637 million in fixed assets, primarily due to aircraft acquisition, and replacement parts for our fleet and R$133 million in intangible assets. During 2007, we invested R$311 million in fixed assets primarily for replacement parts for our fleet and R$37 million in intangible assets.
For more information on our capital investments, see below "Item 5 Operating and Financial Review and Prospects B. Liquidity and Capital Resources".
We provide scheduled air transportation in both the domestic market and the international market through our operating subsidiaries TAM Linhas Aéreas and TAM Mercosur. According to data provided by ANAC, we are the leading airline in the domestic market, with a 50.3% market share in December 2008 and a 48.8% market share in December 2007, as measured in RPKs. We offer flights throughout Brazil, serving the largest number of destinations in Brazil of all Brazilian airlines, and operate scheduled passenger and cargo air transport routes to 42 cities, in addition to 37 other domestic destinations that we serve through regional alliances with other airlines. We also directly serve 18 international destinations and provide connections to other destinations through commercial agreements with United Airlines, Lufthansa, TAP, LAN and other airlines. We offer convenience to our passengers by offering frequent and direct flights to and from all major domestic airports at competitive prices. In 2008 we carried approximately 25.6 million passengers on domestic flights and approximately 4.5 million passengers on international flights. We carried approximately 24.2 million passengers on domestic flights and 3.7 million passengers on international flights in 2007. In 2008, we averaged 772 take-offs per day and in 2007 we averaged 734 take-offs per day. In order to meet domestic demand, we primarily cater to the business market, but also operate in the leisure and cargo markets, which complement our primary operations and allow us to maximize the use of our aircraft.
At December 31, 2008, we operated with a fleet of 129 aircraft, consisting primarily of Airbus models A340, A330, A321, A320 and A319, as well as Boeing models B777 and B767, and we had 24,389 employees. As of the same date, TAM Linhas Aéreas consisted of 129 aircraft, as set forth in the table below, including three Airbus A320 subleased to TAM Mercosur.
Since our incorporation, we believe that we have demonstrated a history of sustained growth and a proven ability to adapt with the development of the civil aviation industry in Brazil and around the world. We believe that Brazil is currently the fourth largest domestic aviation market in the world and has one of the busiest shuttle services in the world (São Paulo Rio de Janeiro).
We believe that we have a strong corporate culture, embedded by our founder (Captain Rolim Adolfo Amaro) that permeates all levels of our company and continues to guide the day‑to‑day activities of our management. In order to ensure that we act in accordance with best practices and provide value‑added service to our passengers, we seek to embed our culture in our employee training, and believe that our entire staff is a product of this practice. Our mission is to be the people's favorite airline company, through joy, creativity, respect and responsibility, and we consistently transmit this mission statement to our employees.
Our principal strategic goal is to consolidate and expand our leadership in the domestic passenger market and to attain high levels of profitability. We will seek to pursue this goal by offering an overall service that gives passengers superior value for money by continuing to reduce expenses and by improving the return on capital invested.
We believe that our principal competitive advantages are:
· Value‑added service at competitive prices. We believe that we offer the best combination in the domestic market of a network of destinations and frequent flights, with value‑added service, high on‑time rates and competitive prices, based on:
· broad domestic network of destinations: our own domestic network serves 42 destinations in Brazil, many of which are direct flights, offering greater convenience to our clients. Through our regional alliances with Passaredo Transportes Aéreas Ltda. (Passaredo), Total Linhas Aéreas S.A. (Total Linhas), Trip Transporte Aéreo Regional do Interior Paulista Ltda. (Trip Transporte) and NHT Linhas Aéreas Ltda (NHT), our network extends to a further 37 destinations in Brazil;
· convenient schedules with high on‑time arrival rates: according to ANAC, we offer more frequent flights than our domestic competitors and have achieved a high percentage of on‑time arrivals;
· efficient network of international destinations and supporting domestic service: we currently serve 18 profitable international destinations (ten in South America, three in North America and five in Europe) that are in high demand by the Brazilian public. We also serve various other destinations in North America, Europe, and other continents through agreements with several international carriers;
· special services: we have developed special services to meet specific demands and optimize the use of our aircraft, such as night and holiday flights offered at promotional rates.
· Focus on cost management. We are an airline with low operating expenses. In 2003, we initiated the implementation of a restructuring project that initiated a cultural change within the company, making our employees aware of cost management. We continuously seek opportunities to reduce expenses focusing our efforts on reducing operating, commercial and administrative expenses. Our overall CASK increased from R$16.17 in 2007 to R$17.44 in 2008 and our CASK excluding fuel decreased from R$10.84 in 2007 to R$10.56 in 2008. Some of our principal cost savings arise from:
· efficient use of our aircraft: we maintained the average load factor of our aircraft and the daily average block hours per aircraft by optimizing our network of destinations and our fleet. In 2008, the average load factor of our aircraft was 71.0% and the block hours per aircraft was 12.5 hours, compared to 70.4% and 12.6 hours in 2007;
· modern and flexible fleet: we have one of the newest fleets in the domestic market, with an average age of 5.5 years at December 31, 2008. Our use of a modern fleet allows us to reduce operating and maintenance expenses. We primarily operate Airbus narrow‑bodied aircraft in the domestic and South American markets and Airbus and Boeing wide‑bodied aircraft in the long haul routes, providing us with the flexibility required to serve routes of different passenger densities. We believe that all of our aircraft are equipped with the most advanced equipment and technology, ensuring greater reliability, comfort and safety. In 2008, we received 4 Boeing 777‑300ERs, with further firm orders for four aircraft of the same model to be delivered in 2012 and additional 2 to be delivered in 2013;
· proprietary maintenance team: we have our own maintenance team trained to serve all aircraft in our fleet quickly and at a labor expenses we believe is lower than that of our competitors. We also have our own maintenance center in the city of São Carlos (in the interior of the state of São Paulo) which performs all hull maintenance on our aircraft and also provides maintenance services for other airlines in Latin America. By using our own maintenance center, we have been able to reduce the maintenance time of our aircraft and, consequently, obtain more efficient use of our aircraft; and
· use of technology in operating processes: in addition to using globally‑renowned systems to assist in activities such as network and fleet management, we are developing proprietary internal management systems with innovative solutions that allow greater flexibility and skill in performing our daily operations. During 2005, we finalized implementation of the e‑TAM portal, which consolidates sales made through indirect channels and provides us with greater flexibility in decision‑making and allocating sales commissions.
· Innovative services and products combined with a strong brand and our "espírito de servir" (spirit of service). Our corporate culture is based on providing value‑added services to our passengers. We consistently seek to make travel a more convenient and comfortable experience for our passengers and believe that we have successfully positioned our brand so as to associate it with superior service, aircraft and technologically‑advanced operations. We strive to be a company that is focused on our passengers, translating our "spirit of service" into all operations, and we believe this is evidenced by:
· high on‑time arrival rates and frequent flights;
· a modern fleet equipped with interiors specifically designed to afford greater comfort to our passengers, with the widest middle seat of all the Airbus model aircraft;
· a polite approach to our passengers, including the aircraft captain personally welcoming passengers during boarding, a courteous flight crew and attendants and our red carpet welcome for passengers at airports;
· video and audio entertainment on domestic flights, in addition to offering in‑flight meals and magazines;
· self‑service options for check‑in in major airports; and
· open channels of communication with our passengers through our call center, our "Talk to the President" program and online service chat sessions at our portal.
· TAM Loyalty Program. We were the first airline in Brazil to offer a loyalty program, and there are currently over 5.4 million members in the TAM Loyalty Program. We regard our loyalty program as a strong relationship tool and believe that it is the most flexible loyalty program in the market because it imposes no restrictions on flights or the number of seats available when members are redeeming accumulated points in the domestic or South American market. Members may accumulate points quickly and easily by flying on TAM or partner airlines, making purchases through TAM Loyalty Program‑affiliated credit cards or using services and products at partner establishments. In addition, the TAM Loyalty Program strengthens lines of communications with our passengers.
· Multiplus Fidelidade. In 2009, we launched a new program meant to create a network of loyalty programs, with an attempt to maximize the full potential of customers' loyalty. Multiplus Fidelidade is an expansion of a loyalty program concept, a tool to assist partner companies and capture and retain customers and increase sales. It is a real coalition of loyalty programs that permits the accrual of points for redemption for products or services with different partners. We believe this program is a source of value generation and have dedicated a team to focus on its development.
· An experienced management team and motivated professionals.
To further the Company's mission, we hire and retain motivated professionals. We consider the talent, skill and dedication of our employees as a key competitive edge. We are deliberate about keeping our employees satisfied and motivated by providing them with ongoing professional development, ensuring their safety and adopting a people‑oriented approach to management. In our recruiting and selection process we deliberately look for employees with the potential to fit in the "TAM" profile. Persons who are hired attend an orientation to educate them about the Company's history, the founder's principles, and our fundamental values, mission and culture. Management also invests in our employees through the Commander Rolim Amaro Training Academy, and providing opportunities for internal transfers.
Some of our key motivational tools include an:
"Employee of the Month" and "Employees of the Year" Program; Breakfasts with team managers; Graduations for flight attendants; a Quality of Life Program; Barbecues for technical crew. Employees are encouraged to communicate to management through the Chief Executive Officer Blog, which fosters a dialogue between the Chief Executive Officer and the employees; and the TAM Ethics Channel, a medium where employees can write their comments, suggestions or concerns and be answered on an individual basis with total privacy.
The Company's compensation policy for executives is variable. For all other levels the compensation policy is profit sharing, reflecting employee needs and the market, within the bounds of current legislation and the terms and conditions of the Airline Ground Crew and Pilots Union's collective labor agreements.
Our strategic goal is to consolidate our leadership in the domestic and international passenger markets and to attain high levels of profitability in both markets. We will seek to pursue this goal by offering an overall service that delivers superior value to passengers by continuing to reduce expenses and by increasing the return on capital invested. To reach these objectives, our strategies are:
· Continue providing superior customer service. One of our key strategies is to offer differentiated and high‑quality service. Relying on a strong and reliable network, we consistently seek to make travel more convenient and comfortable for our passengers and to perfect our service and strengthen our commitment to passengers.
· Increase revenue with profitability, serving a greater number of passengers at a competitive price. We will seek to continue to provide what we believe is a service that delivers the best value to our customers in the domestic market, offering more convenient and higher quality services at competitive prices. Our goal is to increase revenues as well as profitability through:
· expansion of business traveler market: consolidating and expanding our traditional passenger base of business travelers, who we believe represent approximately 75% of demand for our domestic flights, through measures focusing on business travelers and sales channels that traditionally serve that market;
· growth in our tourism and leisure travel operations: we believe that the tourism and leisure markets are complementary to our core market of business travelers. In order to use our fleet more efficiently, our strategy involves capturing additional demand in the tourism and leisure market through specific promotions for holidays and local events (for example, festivals and city anniversaries, among others) using our scheduled operations. We also serve leisure travelers by (i) the operation of charter flights, and (ii) the sale of tourism packages through TAM Viagens (an indirect subsidiary controlled by TAM Linhas Aéreas). We believe that we are the largest charter operator in Brazil, with gross revenues of R$412 million and R$166 million at December 31, 2008 and December 31, 2007, respectively, representing approximately 3.9% and 2.0% of our consolidated revenues for the same periods. Through our subsidiary TAM Viagens, we also own the second‑largest tourism and leisure travel operator in the country;
· selective expansion in international markets: in the last three years, our international operations have consistently grown as a percentage of our total revenues. In the year ended December 31, 2008, international flights represented 39% of our ASKs. Our strategy involves maintaining our leadership in the international market and selectively identifying new international destinations to serve our customers; and
· expansion of our cargo business: we have focused on greater utilization of cargo space in our aircraft to develop our cargo business line, while maintaining our commitment to further improve service to our passengers. Our cargo transportation business line represented R$1,009 million or 9.3% of our consolidated revenues at December 31, 2008 and R$777 million or 9.2% of our consolidated revenues at December 31, 2007.
· Reduce our operating expenses, optimize the use of our fleet and streamline our processes. We believe that successfully implement of our strategy we need to reduce expenses and improve how we invest. We are pursuing this strategy by:
· maintaining a standardized, efficient and flexible fleet: we will continue to optimize the size of our fleet, in order to keep maintenance and operating expenses for our fleet at a low level. In 2006, we announced our decision to phase out our entire fleet of Fokker 100 aircraft by mid‑2008 and we met that goal. As a result of this decision, we have been exclusively using Airbus A320 family aircraft in the domestic market from mid‑2008. We maintain a high aircraft utilization and to maintain a flexible fleet with aircraft capable of easily adapting to the differing levels of demand from route to route; and
· increasing productivity by redesigning operational processes and using technology: since the implementation of our restructuring project in 2003, we have applied a cost reduction policy aimed at increasing our productivity through new information technology tools, redesigning operational processes and redeployment of labor and outsourcing activities which are not related to our core strategy. We also hope to obtain economies of scale by increased growth in our operations.
Products and Services
Our principal product is the scheduled air transportation of passengers. In addition, we also have products targeted specifically towards the development of domestic and international tourism. We also provide cargo transportation operations.
We set out below a breakdown of our gross revenues by type of service rendered for the periods indicated:
Sales and Distribution
We are developing several direct and indirect distribution channels for ticket sales of air fares. We plan to increase direct sales (which at December 31, 2008 represented approximately 17.1% of our total ticket sales) through promotion of the leisure market and by making it easier for our passengers to purchase tickets; this principally involves direct sales through the internet and through our call center. We were the first airline in Latin America to sell tickets on the internet. Through our website, registered users may purchase tickets online, receive customer service, make reservations up to one hour before departure and access information relating to the TAM Loyalty Program, for example. As part of our plan to increase direct sales through the internet, in 2006 we launched a new "fare profile" system for sales of domestic tickets. This system involves the presentation of five different color-coded fare profiles that are intended to make identification of fare types and related rules simpler for our passengers. The five fare profiles are "Promo," "Light," "Flex," "Max" and "Top." We launched a marketing campaign highlighting this new fare profile system at the time of launch and recorded an increase of approximately 40% in direct sales in the month after introduction. In 2008, 82.9% of our sales were through travel agencies and 17.1% were through direct channels, of which 10.3% were through the internet.
Our call center allows passengers an alternative means to make reservations and purchase tickets 24 hours a day. To a lesser extent, we also sell tickets through our network of stores located in the main cities of Brazil.
Indirect sales are those made through corporate travel agencies, agencies with registrations and pre‑approved credit and travel operators. Currently, there are approximately 5,000 travel agencies authorized to sell our tickets in Brazil.
We use our proprietary e‑TAM portal to integrate our entire sales chain, from the time of reservation to passenger boarding, consolidating indirect sales and eliminating the GDSs (or Global Distribution System, an electronic passenger distribution system) in our distribution chain. Data obtained from the e‑TAM portal allows us to offer passengers a set of customized services, based on the "one‑to‑one" concept. In the last 12 months of operation, 95.8% of indirect channel reservations made in Brazil are now made through the e‑TAM portal.
We believe that approximately 75% of our passenger traffic consists of business travelers and employees of large and medium‑sized companies with whom we have travel agreements. To further develop our business relationship with our corporate clients, we have signed agreements with hotel chains and car rental companies to offer our customers complete corporate transportation and accommodation packages. Our advertisements run primarily in media vehicles such as internet sites, radio spots, local newspaper advertisements, magazines and outdoor billboards.
Pricing Policy, Revenue and Yield Management
In general, prices charged in the Brazilian domestic market by airlines are freely set by the airlines, with ANAC responsible for monitoring the prices. No discounts greater than 65% of the total price may be granted without ANAC's approval five days in advance of the date such discounts will be offered to consumers. Brazilian airlines are freely able to set their prices. See "Item 4. Information on the Company B. Business Overview Regulation of the Brazilian Civil Aviation Industry Rights to Operate Air Routes Prices."
We believe that our current pricing policy is dynamic. Focusing on maximizing profitability, we aim to define particular niches within the market to better serve projected demand. Pricing availability is based on traffic projections and is accompanied by closely monitored performance indicators. Our pricing policy focuses specifically on our indirect distribution channels (GDS system and e‑TAM portal) and direct channels (our website, reservation call center and stores).
We seek to achieve the greatest possible competitiveness for each origin/destination in relation to the competition, keeping in mind at all times our product's added value in terms of flight frequency, schedules, the TAM Loyalty Program and our on‑time record.
We continuously analyze market opportunities with the intention of stimulating demand for specific routes and periods. Lower prices are offered for one‑time promotions (such as national or regional holidays) and as incentives to take flights at particular times (such as night flights). These prices generally carry restrictions, such as the requirement to purchase a round‑trip, a minimum stay at the destination, or the requirement that the ticket be issued within 24 hours, and generally do not earn points for the TAM Loyalty Program.
The price a passenger is willing to pay may vary depending upon factors such as destination, month of the year, day of the week and departure schedule. Revenue and yield management is the process by which (based on historical data and statistical projection models) airlines establish the number of seats to be offered for each price category over time, in order to maximize total operating revenue for each flight. We believe that efficient yield management is the key to success in the air transportation market in Brazil and abroad.
We believe that we have an efficient and accurate system for collecting data on reservations, departures and revenue. The system also monitors levels of overbooking and recommends discounts for future departures. Data relating to reservations and departure is collected daily, forming reservation profiles for each flight and allowing specific recommendations from flight to flight. The system allows our analysts to ascertain whether flights are above or below historic reservation levels and decide whether to close the discount classes or offer more space for passengers who generate higher revenues. Accordingly, our yield management practices allow us to anticipate and react quickly to market changes.
We currently have a team of analysts dedicated to revenue and price management. These professionals are divided by market sector and have particular knowledge of specific routes in order to better understand features which are specific to each route (such as holidays, high and low season, peak schedules and days and the competitive environment).
Air Transportation Operations
Scheduled domestic operations
We currently operate an average of 627 daily flights to 42 destinations in Brazil. Through our regional alliances with Passaredo, Total Linhas, Trip Transporte, and NHT we serve an additional 37 domestic destinations.
Passenger traffic in the domestic market represented approximately 58.6% of our revenues in 2008, 60.3% in 2007 and 65.4% of in 2006. Our RPKs in the domestic market increased 10.6% in 2008, 12.5% in 2007 and 31.8% in 2006. The RPKs in the total domestic market increased 7.4% in 2008, 11.9% in 2007 and 13.1% in 2006.
In 2008, according to data provided by INFRAERO, we recorded the highest number of passengers transported in 27 of the 42 airports we serve. The table below sets forth the airports we serve in Brazil, our average number of departures per day at those airports and the number of passengers who took our flights in 2008:
(1) Figures relate to departures on TAM aircraft only.
(2) Figures relate to TAM Issued tickets (and include departures on non‑TAM aircraft).
Scheduled international operations
We operate an average of 73 daily international flights to Buenos Aires, Santiago, Asunción, Montevideo, Lima, Ciudad del Este, Santa Cruz de la Sierra, Cochabamba, Bariloche, Caracas, Miami, Orlando, New York, London, Paris, Frankfurt, Madrid and Milan. Our codeshare agreements with LAN Group, Pluna, United Airlines, Air Canada, TAP, Lufthansa and BMI allow our passengers to make connections to destinations in Latin America, the United States and Europe, in addition to access to other services, such as check‑in at desks of our partner airlines, simplified baggage shipping, access to VIP lounges and the ability to earn points in the TAM Loyalty Program. We also have agreements allowing us to offer our passengers a wide range of destinations around the world.
International scheduled passenger traffic represented 25.7% of our revenue in 2008, 25.3% in 2007 and 19.6% in 2006. Our RPKs from international flights grew 40.2% in 2008, 70.6% in 2007 and 41.6% in 2006, successive increases that have resulted primarily from increased capacity on selected routes that presented substantial traffic throughout the year. The RPKs of Brazilian carriers in the total international market increased 25.7% in 2008, compared to a decrease of 5.1% in 2007 and 30.4% in 2006. Our share of the international market operated by Brazilian carriers was 75.2%, 67.5% and 60.6% in 2008, 2007 and 2006, respectively, successive increases that have resulted primarily from a decrease in Varig's long haul international flights as result of its liquidation.
Cargo transportation operations
We also earn revenues through cargo transportation operations. These operations represented 9.2% of our total revenues in 2008, 9.3% in 2007. TAM Cargo is our freight business unit, reporting directly to our Commercial and Planning Vice President. We do not operate exclusive cargo aircraft; however, we sell the empty space available on the belly of passenger aircraft.
We are improving our domestic cargo terminal operating structures, resulting in faster package receiving. By the end of the first half of 2009, we expect to implement a new cost saving and advanced tracking system, which will allow shippers to track in detail the entire path of their freight. Our strategy for this division in 2009 is to increase the freight of small packages, which usually have higher yields.
In the international cargo segment we are improving our management systems, which will result in quicker processing, and better revenue monitoring these improvements will help us analyze market behavior to enhance our monitoring and decision making with respect to the shipments. We are entering into Special Prorate Agreements (SPA) with several airline companies, allowing us to send shipments worldwide. We are also in the final phase of the Global Partners Project, with all major International Cargo Agents, in order to increase the volume sold and TAM Cargo's brand awareness.
Travel and tourism operations
We also have a travel and tourism operation, TAM Viagens. In 2008 and 2007, this business represented 3.9% and 2.1% of our total revenues respectively. TAM Viagens offers complete packages including air tickets, ground transportation, hotels, tours and several tourism services. Nowadays, it is one of the largest tour operators in Brazil and has 68 of its own stores, and deals with 5,000 agencies all over the country, offering products to more than 600 tourist destinations.
Its main objective is to attract passengers flying for tourism and leisure to seats that would otherwise be empty during certain flights, either off‑peak flights, or flights during low season as the Brazilian market has the characteristic of being predominantly composed by business passengers that fly during specific periods of the day. Our tour operator also has fundamental importance in promoting and selling tickets for newly launched flights. We have commercial offices in the U.S. and Argentina, where we focus our sales efforts on promoting trips to Brazil.
In the first half of 2009, we will promote a codeshare with our Loyalty Program, accepting points for the sales of packages. Recently, we also started the process of opening TAM Viagens franchise stores, which will increase the reach of our operations at no additional cost, improving further our margins.
TAM Loyalty Program
The TAM Loyalty Program was the first loyalty program launched by a Brazilian airline and represents a key element in our marketing strategy. We believe our program is the most flexible in the market because it imposes no restrictions on flights or the number of seats available when members are redeeming accumulated points. The TAM Loyalty Program has more than 5 million members and approximately 7 million free flights have been distributed since its creation in 1993. Members may accumulate points by flying on TAM or partner airlines, making purchases through TAM Loyalty Program‑affiliated credit cards or using services and products at partner establishments. Both Unibanco União de Bancos Brasileiros S.A., or Unibanco and Banco Itaú S.A. offer credit cards that allow holders to earn Loyalty Program points, and credit cards are available in both MasterCard and Visa designations. There are three tiers in the TAM Loyalty Program (white, blue and red) and qualification for a particular tier is based on miles flown. The rate at which points are accumulated varies depending on the tier of membership. Blue and red cards receive extra benefits and higher points, therefore allowing the member to accrue points that can be redeemed for free travel more quickly.
Points earned by TAM Loyalty Program members must be redeemed for tickets within two years, and historically approximately 32% of points expire without being redeemed. This two year period for redemption limits the growth in liabilities arising from the TAM Loyalty Program, assuming a stable trend in relation to the number of passengers we carry. See "Item 5. Operating and Financial Review and Prospects A. Operating Results Critical Accounting Estimates and Judgments Revenue Recognition".
Communications with our passengers
Our "Talk to the President" initiative was introduced to encourage passengers to give us suggestions, compliments and complaints. The Talk to the President initiative involves employees responsible for receiving and forwarding thousands of correspondences per month, including response cards, faxes, e‑mails and telephone calls. Our 0800 123 000 hotline number works 24 hours a day, 7 days a week. Issues raised by passengers are surveyed, researched and analyzed, and we seek to keep the customer informed as to the progress of their request and/or suggestion until resolution or implementation. In 2008, the Talk to the President initiative received 179,564 responses from passengers (including complaints, complements and other comments) compared to 153,978 in 2007 and 155,643 in 2006. The Talk to the President service is also accessible to customers in 12 of the foreign airports in which we operate.
In addition to the Talk to the President initiative, we distribute the monthly President's Letter on our flights and our website. The President's Letter discusses issues relating to TAM, in addition to others considered important to our passengers.
Our fleet policy focuses on achieving the highest levels of safety, quality, efficient scheduling and high on‑time arrival rates (as well as rationalizing maintenance expenses). Currently, our fleet consists of advanced‑technology jet aircraft, yielding cost benefits (such as those arising from the greater ease of transition of technical crews from Fokker to Airbus aircraft), allowing us to achieve high results in efficiency indices and qualifications relating to safety standards. See " Safety."
The two Airbus "families" operating in our fleet are the A330‑200 and the A340‑500 aircraft (wide‑bodied aircraft used for long‑distance flights), and the A321, A320‑200 and A319‑100 aircraft (narrow‑bodied aircraft used for medium and short‑distance flights). The aircraft in these families differ by number of seats, allowing us to be more flexible in making commercial decisions. The A321, A320 and A319 models are considered to be among the most comfortable aircraft operating in Brazil in their category, with flexibility to operate at low cost on routes with up to five hours of flying time. They are also the only Brazilian narrow‑bodied fleet to have fly‑by‑wire flight controls, with computers receiving and analyzing each pilot command, making flying more efficient and accurate. Airbus family aircraft also have the benefit of standardized maintenance and operations, allowing pilots and technicians to transition between different models after minimum additional training. All our aircraft are equipped with the best and most advanced equipment and software options offered by the manufacturer, giving us what we believe is one of the most advanced aircraft fleets in the world.
We have data communications between our aircraft and departments, even when flying. For this purpose, we have developed a proprietary DMS (Datalink Management System) that allows us to manage all information sent in real time by the ACARS (Aircraft Communication Addressing and Reporting System) installed in our fleet. Using the aircraft DMS, pilots may send text messages similar to e‑mail to any of our sectors. Messages transmitted via satellite appear on the DMS user screen in real time. In addition to communicating with the pilot, these resources also allow remote online monitoring of aviation systems, such as computer function, landing and departure time, fuel consumption and engine performance parameters. As a result, any operating variance may be analyzed by our maintenance technicians even before the aircraft arrives at its destination. The technology yields not only savings but also significant improvements in efficiency and safety.
The quality of our technical services is regularly audited by the Brazilian and international authorities, manufacturers and insurance companies. As a result of the requirements of our codeshare agreements with United Airlines and Lufthansa, we also meet the maintenance and safety compliance requirements of the competent international aviation authorities in this regard.
The advantages of modern technology, combined with excellent operating and maintenance standards for the aircraft, are that we can yield high equipment utilization rates with reliability levels ("technical dispatch capacity") above the industry average for all equipment we operate. Our fleet has maintained high technical dispatch capacity indices according to standards defined by IATA. This index measures the on‑time departure capacity of aircraft without taking into consideration external factors such as bad weather. In 2008, we had an average technical dispatch capacity index of 98.8% (compared to 98.6% in 2007) for our fleet in operation (which is the reference point used in auditing our technical services). That data is audited by aircraft, engine and equipment manufacturers according to a unified standard set by IATA.
TAM Linhas Aéreas has RBHA (Brazilian Aviation Approval Regulation) certifications 121 and 145 for maintenance operations and services. It also has an EASA 145 certification for maintenance services, which are performed at the São Carlos maintenance center in São Paulo.
In 1998 we earned a U.S. Federal Aviation Regulation (FAR 129) operating certification, and in 1999 a European certification from the Direction Générale de L'Aviation Civile DGAC, allowing us to operate without restrictions in any European or U.S. city. In addition to the destinations to which we operate scheduled flights, such as Miami, New York, Orlando, Paris, London, Madrid, Milan and Frankfurt, these certifications also permit us to operate scheduled flights to Washington, Indianapolis, Lisbon, Barcelona, Zurich, Amsterdam, and Moscow.
All of these certifications, obtained as a result of our modern equipment levels and technical quality of our maintenance, rank us among the highest airlines in global aviation standards. Since 2000 we have had the Extended Twin Engine Operations (ETOPS) certification of 180 minutes for Airbus A330 model aircraft (the highest international level certification), proving that we are in compliance with the most stringent global aviation standards in this respect. We also have state‑of‑the‑art equipment in Brazil, such as the Future Air Navigation Systems (FANS), which increases safety in congested air space and achieves fuel savings by using more direct routes.
The following table shows our fleet over the last three years:
The TAM Airlines (TAM Mercosur) fleet consists of three Airbus A320 aircraft (sub‑leased from TAM Linhas Aéreas).
The average age of the TAM Linhas Aéreas fleet is one of the lowest in global aviation and is the lowest in Brazil: 5.6 years for Airbus A319/320/321 model aircraft, and 5.2 years for Airbus A330/340 model aircraft. With 129 aircraft in operation, the overall average age of our fleet was 5.5 years at the end of 2008.
The following table sets forth the historical and projected development of our operational fleet at December 31 in each of the years indicated:
(1) Our fleet projection is based on the following: we currently have firm orders with Airbus for 37 Airbus aircraft (31 aircraft narrow body family A320 and 6 A330) for delivery by 2012 and 20 confirmed options for A320 family aircraft (including A319, A320 and A321) for delivery before the end of 2014. In addition we have firm orders for 22 Airbus A350XWB models 800 and 900, with options for 10 more, with delivery between 2013 and 2018. In 2006, we ordered 4 Boeing 777‑300ER with options for 4 additional aircraft, which were exercised in 2007. Upon receipt of the four aircraft in 2008, we had six firm orders placed with Boeing for this type of aircraft, of which four are expected to be delivered in 2012 and two in 2013.
We phased out our entire fleet of Fokker‑100 aircraft in 2008, at which point we started operating only Airbus A320 family aircraft in the domestic market.
On March 19, 1998 we entered into an agreement with Airbus pursuant to which we agreed to lease 38 Airbus A319/A320/A321 family aircraft. The last aircraft was delivered in February 2008. In November 2006, we entered into an agreement with Airbus pursuant to which we agreed to lease 31 A319/A320/A321 family aircraft, with 20 additional options and six A330 aircraft, with four additional options. On January, 2008, the options under the 2006 agreement were converted into firm orders. On December, 2007 we entered into an agreement with Airbus pursuant to which we agreed to lease 22 Airbus A350‑900 aircraft. Each Airbus A350 will be capable of carrying up to 300 passengers. The A350 aircraft are scheduled to be delivered in 2013. In February 2007, we entered into an agreement with Boeing pursuant to which we agreed to lease four Boeing 777 aircraft, with an additional four options that were converted to firm orders in 2008. In 2008 we also signed an agreement for an additional two firm orders of B777, to be delivered in 2013.
The following table shows average use rates of our aircraft, in hours per day, during the periods indicated:
We currently lease all of our aircraft (using long‑term lease agreements) through TAM Linhas Aéreas. Leasing gives us greater flexibility to change the composition of our fleet relatively quickly in the event we need to.
Of our total fleet of 129 aircraft at the end of 2008, 125 of our aircraft are subject to operating leases and four to finance leases. However, in order to comply with the accounting policies, 64 lease contracts are classified as finance leases.
Operating leases require us to make periodic payments but do not include aircraft purchase options at the end of the agreement. Pursuant to the terms of these agreements, aircraft are returned under the agreed conditions at the end of the lease. The lessor retains ownership of the aircraft, as well as the economic benefits and risks of ownership. We are responsible for maintaining and contracting insurance for the aircraft during the leasing period. Amounts corresponding to commitments for the leased equipment are not reflected on our balance sheet because these transactions do not include an aircraft purchase option. The payments are adjusted based on variations in the U.S. dollar exchange rate and LIBOR.
Finance leases are capitalized at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding lease obligations, net of finance charges, are recorded as financial liabilities. The interest element of the finance is recorded on the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
We rigorously follow the maintenance plans proposed by the aircraft manufacturers and approved by the competent Brazilian and international aviation authorities. Accordingly, maintenance carried out on our aircraft may be divided into three general categories (i) line maintenance, (ii) heavy maintenance, and (iii) component repair and inspection. Line maintenance includes simple inspections up to "A checks" (the first inspection level), executed in transit and overnight without requiring any change to our operations.
Heavy maintenance includes more complex aircraft inspections and services requiring removal from operations for between five and eight days.
Engine maintenance contracts cover all significant engine maintenance activity. We pay for services rendered pursuant to our engine maintenance contracts on an as‑incurred basis. The basis on which maintenance expenses are considered incurred is dependent on the nature of the services provided under our engine maintenance contracts:
· contracts under which amounts are payable to the maintenance provider, and are recognized in the income statement, based on actual maintenance activities performed by the maintenance providers. The expenses incurred reflect the actual time of maintenance and the cost of the materials and components used in the maintenance activities. These maintenance contracts are referred to as "time and materials" contracts; and
· contracts under which maintenance expenses are payable to the maintenance provider based on hours flown. These maintenance contracts are referred to as "power by the hour" contracts. We accrue a liability and record an expense for maintenance under these contracts on the basis of hours flown. These payments are made to maintenance providers when the engines undergo a maintenance shop visit based on an agreed hourly rate. Our "power by the hour" contracts also provide for a relatively small administrative fee that is paid and expensed monthly (this fee represents less than 5% of amounts paid under all of our "power by the hour" contracts considered together).
We have entered into a number of agreements with suppliers and service providers in order to assist with our maintenance requirements, of which the following are material:
· a general terms agreement between TAM Linhas Aéreas and GE Engine Services Distribution, L.L.C., or GE, dated May 7, 2001, pursuant to which TAM Linhas Aéreas has agreed to purchase certain spare engines and support equipment for both the spare engines it has purchased from GE and certain engines that have already been installed on its operating fleet. The agreement also provides that GE may provide non‑standard maintenance training courses upon request of TAM Linhas Aéreas. The agreement provides that GE will charge for any such courses on an "as incurred" basis. The agreement has no fixed termination date;
· an engine maintenance agreement between TAM Linhas Aéreas and MTU Motoren‑und Turbinen‑Union München GmbH, or MTU, dated September 14, 2000, or the TAY Agreement, pursuant to which MTU has agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105 aircraft engines. This agreement was amended by means of a novation and amendment between TAM Linhas Aéreas and Rolls‑Royce Brazil Ltda. or Rolls‑Royce, dated November 8, 2001, pursuant to which Rolls‑Royce replaced MTU as contract counterparty. The agreement provides that Rolls‑Royce may subcontract services to be performed and that it will not be held liable for damages to or losses of TAM Linhas Aéreas or third parties due to the performance of the services contracted under the agreement, unless caused by willful misconduct or negligence of Rolls‑Royce. The agreement provides that service orders placed by TAM Linhas Aéreas are to be charged based on a fixed rate specified for each type of service and subject to an escalation formula. TAM Linhas Aéreas is required to make payments based on actual services performed. This agreement terminates on June 30, 2015;
· an engine maintenance agreement between TAM Linhas Aéreas and MTU Maintenance Hannover GmbH, or MTU Hannover, dated September 14, 2000, pursuant to which MTU Hannover has agreed to provide certain maintenance, refurbishment, repair and modification services with respect to certain V2500‑A5 engines. The agreement provides that MTU Hannover may subcontract to third parties and that MTU Hannover will not be held liable for damages to or losses of TAM Linhas Aéreas or third parties due to the performance or non‑performance of the services contracted, unless caused by willful misconduct or negligence of MTU Hannover. The agreement provides that service orders placed by TAM Linhas Aéreas will be charged on actual services performed, based on hourly rates for engine/module repair work and on a fixed price for test runs, including fuel and oil, subject to an escalation formula. This agreement terminates on June 30, 2014; and
· an engine maintenance agreement between TAM Linhas Aéreas and United Technologies Inc., Pratt and Whitney Division, or Pratt and Whitney, dated September 14, 2000, pursuant to which Pratt and Whitney has agreed to perform maintenance, modification and/or overhaul of engines, engine modules and their parts and components. Pratt and Whitney has a limited exclusivity right for maintenance services of engines and modules pursuant to the terms of this agreement. This exclusivity provision requires TAM Linhas Aéreas to obtain prior written authorization from Pratt and Whitney before sending the equipment to another maintenance service supplier, with an exception in the case of delay or non‑performance of services by Pratt and Whitney. The services to be provided by Pratt and Whitney are charged based on a fixed rate specified for each type of service, subject to an escalation formula. TAM Linhas Aéreas is required to make payments based on actual services performed. This agreement terminates on September 14, 2010.
We are certified to conduct maintenance on all type of aircraft in our fleet. Line maintenance is performed all of the bases at which we operate, most importantly at the airports of São Paulo, Congonhas and Guarulhos. We also conduct heavy and component maintenance at our main maintenance center, in São Carlos (250km Northwest of São Paulo), which is approximately 4.6 million square meters in size. This maintenance center is fully certified by ANAC, as well as by EASA to perform maintenance in most of our fleet (Airbus A330, A320, A319 and A321), and over 2,500 different aeronautical parts for all Airbus and several Boeing fleet types. Our maintenance center is currently completing its ANAC 145 certification on Boeing 767 aircraft, with the first inspections scheduled for 2009. Our maintenance center has currently over 800 direct employees (for core maintenance activities) and approximately 200 indirect employees (providing support functions, such as security, facility maintenance and cleaning). Line maintenance and supply chain activities include an additional approximately 1,000 employees.
All maintenance that is conducted in‑house presents significant cost savings and strategic advantages. As we are qualified to perform most line, heavy and component maintenance services, we substantially eliminate the need to send aircraft and parts overseas, decreasing downtimes and avoiding the costs of aircraft transportation, parts logistics and import‑export taxes. For those parts requiring maintenance beyond what would break even economically (due to complexity or low volume, for example, for engines), we have long‑term, optimized maintenance agreements, where possible, with the engine manufacturers.
IATA Operational Safety Audits (IOSA) certification also applies to maintenance, as is required under our codesharing agreements (with, for example, Lufthansa, United, TAP, Air Canada, LAN, among others). Our maintenance division also has the required certifications for each country in which our aircraft fly (for example, FAR 127 in the United States).
In addition to the manufacturers (Airbus, Boeing, Rolls Royce, GE, Pratt & Whitney), we train our engineers and technicians, at our own training center, which is fully certified under ANAC 147, and which uses the same equipment and software that the manufacturers use. We refer to our training center as the "TAM Service Academy".
We also perform maintenance for third party aircraft and components within the ranges of our certifications. This includes several line maintenance support contracts on Airbus fleet types, as well as heavy and component support for Brazilian and foreign airlines. This also includes a total care maintenance contract for the President of Brazil's A319 ACJ. Such services are consistently growing, helping us to dilute our fixed expenses, as well as increase our revenues.
A significant part of our aircraft and vehicle maintenance expenses are indexed to the U.S. dollar. For a description and analysis of the effect of exchange rate variations on our income, including fleet maintenance expenses, see "Item 11. Quantitative and Qualitative Disclosures about Market Risk Exchange rate risk."
Fuel expenses are the largest component of our expenses, representing 40% of our operating expenses in 2008.
Fuel consumed in Brazil represents approximately 90% of our total consumption and is acquired through the distributors of Petrobrás, Shell, Cosan (previously Esso) and Air BP. We purchase fuel abroad from Exxon Mobil, Chevron, J&D Oil Field, Shell, Air BP, GALP, World Fuel Services and Repsol YPF. Supply contracts for fuel in Brazil are normally made for a two to three year period and we finalized the renewal of our contracts until the end of 2010. Supply contracts at our international bases normally have a term of one or two years. The majority of our fuel is purchased under "into‑plane" terms, meaning that the supplier is responsible for delivering the fuel directly into the tanks of our aircraft. The fuel prices in the contracts we sign consist of three components (i) the price from the refinery, (ii) the supplier differential, and (iii) airport or logistics fees and taxes. The price of fuel is subject to international market variations in the price of oil. The supplier differential is the portion charged by the supplier (which consists of a fixed amount per volume negotiated and committed to be charged during the contractual period) and reflects the cost of distribution, storage, and delivery and a profit margin. Airport taxes and fees may vary by region and by airport. We have a department responsible for negotiating fuel purchase contracts and, as a result of the high volumes of fuel we purchase, we believe that are we are normally able to obtain more favorable terms than our competitors.
To reduce our exposure to international fuel price and exchange rate variations, in 2004 we began to enter into arrangements intended to hedge a minimum of 30% and a maximum of 80% of our projected fuel consumption for up to a rolling 24‑month period. For a description and analysis of the effect of volatility in fuel prices on our income, see "Item 11. Quantitative and Qualitative Disclosures about Market Risk Risks relating to variations in the price of oil." Another important cost reduction initiative involving fuel is our "fuel tanker" program pursuant to which we refuel aircraft in regions where fuel prices are relatively low. We have also formed a multidisciplinary work group, involving the departments responsible for fuel, engineering, control, operations, dispatching and financing, to develop other measures to reduce spending and fuel consumption in our fleet.
We adopt the highest safety standards in the world. We comply with Brazilian and foreign aviation regulations, including those issued by the ICAO (International Civil Aviation Organization), the FAA Federal Aviation Administration (U.S. aviation authority) and the EASA European Aviation Safety Agency (EASA). As an international air company, we are a member of the IATA, and sit on the Regional Flight Safety Committee (RCG). We are also a member of the Flight Safety Foundation (the largest nongovernmental organization for flight safety) and the Flight Safety Committee (a product of all the Brazilian airlines).