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9-709-410
REV: MARCH 6, 2009

RAMON CASADESUS-MASANELL JORGE TARZIJAN JORDAN MITCHELL

Lan Airlines in 2008: Connecting the World to Latin America
In early 2008, Enrique Cueto, CEO of Lan Airlines, was reviewing results from 2007. All divisions had enjoyed strong increases: domestic passenger traffic shot up by 23.5 percent, international passenger traffic rose 23.1 percent and cargotraffic advanced 4.8 percent.1 Much of the strong growth of domestic passenger traffic had been attributed to the company’s adoption of a “low-cost” approach on short-haul national routes in April 2007. Internationally, Lan had grown traffic by expanding routes through its wholly owned subsidiaries in Argentina and Peru and continuing to offer a far-reaching route network for full-service long-haulflights to North America, Europe, and beyond. In its cargo business, Lan set itself apart from U.S. legacy carriers, which derived between 3 and 4 percent from cargo, since 33 percent of Lan’s revenues came from cargo. Lan’s growth was not only limited to recent events however; since taking over the reigns of Lan in 1994, Cueto’s leadership had been heralded by the airline community as nothing shortof impressive despite several economic shocks: since 1994 to 2007 revenues had grown at a compound annual growth rate (CAGR) of 19 percent from $318 million to $3.5 billion and operating income had surged at a CAGR of 30 percent, from $11 million to $413 million. The company was one of the few airlines to be investment grade (BBB rating) and its EBITDAR (Earnings before Interest, Tax, Depreciation,Amortization and Airplane Rentals) margin was the fifth highest amongst the world’s top airlines at 20.6 percent.2 (See Exhibit 1 for the company’s recent financial history.) However, Cueto was not looking back. He thought about managing three distinct models going forward – low-cost for domestic short-haul, full-service for international, and a thriving global cargo business – and pondered howhe could continue to propel the airline to new levels of growth.

Brief on Worldwide Airline Industry
Globally, airlines posted collective revenues of $345.7 billion in 2006. After a colossal dip following the terrorist attacks in 2001, the industry had rebounded to grow at a compound annual growth rate (CAGR) of 8.7 percent. Airline traffic translated into approximately 2 billion passengers, up6.5 percent CAGR from 2002. Geographically, the Americas accounted for 50.6 percent of worldwide revenues followed by Europe with 28.4 percent and Asia-Pacific with 21.1 percent. Into the future, industry observers debated potential growth rates of the global airline industry. While it
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Professors Ramon Casadesus-Masanell and Jorge Tarzijan (Universidad Católica de Chile) and Research Associate Jordan Mitchell prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008, 2009 President and Fellows ofHarvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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Lan Airlines in 2008: Connectingthe World to Latin America

was generally agreed that passenger demand would likely remain strong as individuals continued to pursue work and recreational activities in other geographies, concerns for personal security and the natural environment were seen to act as dampeners to airline travel. Furthermore, approximately two-thirds of air travel was domestic, which meant that passengers had to...
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