Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

I.

INTRODUCTION

Air traffic at Arturo Merino Benitez International Airport in Santiago, Chile (the Airport) has been well below the original forecast levels presented in the Offering Circular dated December 17, 1998. The original forecast was prepared for the Chilean Ministry of Public Works by the Civil Aviation Board and was used by SCL Terminal Aereo Santiago S.A. (the Company) in an Offering Circular which accompanied the sale of US$213 million used to finance capital development at the Airport which is operated by the Company under a concession awarded by the Chilean Ministry of Public Works. The objective of this report is to define the changes in the underlying economic conditions upon which the original forecast was based and the industrys structural changes since 1997. This report examines the aggregate changes in the Chilean economy since 1997. Changes in GDP from its pattern of historical performance prior to 1998 as well as the performance of the disaggregated components of GDP particularly consumption, investment, and exports and imports demonstrate the change in general economic conditions. The decline in Chilean GDP in 1999 as a result of the East Asian Crisis of 1997-1998 and the Russian Crisis of 1998-1999, both of which significantly affected investment levels in emerging market countries, had significant effects on Chilean passenger traffic. Additional elements beyond GDP such as the deterioration of the Chilean foreign exchange rate and the current regional crisis precipitated by the ongoing recession in Argentina, also contributed to declines in projected air passenger volumes. A. THE ORIGINAL FORECAST

The original passenger forecast prepared by the Chilean Civil Aviation Board (CAB) was prepared in 1997 and assumed no capacity constraints at the Airport. The forecast methodology used an econometric model to predict air service levels. Input variables for the model included GDP, population, and an index of airfares, which were regressed in several series against historical volumes of domestic, and international passenger traffic. The original forecast envisioned growth for Chilean GDP of 5.8 percent per annum and a decrease in airfares of 1.0 percent per annum through 2001 with stable air fares thereafter. Projections for population growth were 1.3 percent per annum through 2000 and 1.2 percent per annum thereafter corresponding to standard population growth rates projected for developed countries. The forecast published by the CAB used 1996 as a base year and 2001, 2006, and 2011 as forecast horizons with the intervening years interpolated from these forecast numbers. Variations of the CAB forecast were produced which indicated High, Medium, and Low forecasts for both domestic and international passengers. The forecast presented by the Company in its offering circular updated the CABs original Medium Forecast with 1997 actual passenger numbers (which exceeded the forecast) while keeping the original CAB Medium Forecast number for 2006 with intermediate years interpolated from the endpoints. So the Companys forecast for the years from 1998 to 2005 was higher than that of the original CAB forecast. From 2007 forward, the adjusted passenger forecast prepared by the Company was capped at 12 million passengers per year reflecting the Companys conservative estimate at a reasonable ceiling for passenger operations due to the passenger terminal design capacity.

September 20, 2002

Landrum & Brown, Inc.

Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

The SCL forecast from the Offering Circular of December 17, 1998, which was adopted from the CAB Medium Forecast, is shown in Table I-1. B. CHANGES IN THE MACROECONOMIC ENVIRONMENT OF CHILE PRIOR TO SEPTEMBER 11, 2001

Since the original forecast prepared by the CAB and subsequently revised by the Company, the CAB/SCL forecast, relied heavily on projections of the general economic conditions of output and growth as measured by economic aggregates (GDP), any significant variations from the original passenger forecast levels would correspond with variations in the economic conditions of Chile. Since Chilean GDP declined in 1999, this report refers to 1999 as a crisis year. Throughout this report, where appropriate, growth rates are calculated pre-crisis (1995-1998) and post-crisis (2000-2001) for comparison. Variations in GDP: A comparison of the actual changes in GDP for the Chilean economy with the changes that would have been achieved by using the growth rate of 5.8 percent per annum in real terms from 1997 forward (as used in the CAB Medium Forecast assumptions) are shown in Table I-2. In this comparison, both are shown in Constant 1995 United States Dollars to eliminate any distortion from inflation or currency devaluation or revaluation.

September 20, 2002

Landrum & Brown, Inc.

Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

September 20, 2002

Landrum & Brown, Inc.

Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

September 20, 2002

Landrum & Brown, Inc.

Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

In Table I-2, the base year of 1996 is identical in both the actual and the projected GDP totals. In 1997, the Chilean economy grew at a real rate higher than that used by the CAB in its forecast: 7.4 percent actual versus the CAB projection of 5.8 percent. Chilean GDP reached US$73.4 billion actual versus US$72.3 projected. Concurrent with the higher than projected GDP of 1997 were higher passenger levels. For 1997, the CAB projected total passengers at the Airport at 4.7 million while the actual passenger level reached 5.2 million. This increase of passengers in 1997 from their projected levels in the CAB Medium Forecast, prompted the upward revision in the passenger forecast by the Company from 1998 through 2005. In 2006, the Company resumed its use of the CAB Medium Forecast target and capped passengers at 12 million per year owing to facility constraints not used in the unconstrained passenger demand forecast prepared by the CAB. In 1998, Chilean GDP continued to grow in real terms from its 1997 level but at 3.9 percent rather than the CAB projected rate of 5.8 percent. In terms of passengers, the projected level was 5.8 million based on the Companys refinement of the CAB Medium Forecast with 1998 actual passenger levels reaching 5.6 million. The pivotal year for the forecast is 1999. In that year the lagged effects of the East Asian Crisis of 1997-1998 and the retrenchment of investment in emerging market countries concomitant with the Russian Crisis of 1998-1999 and other internal economic events led to a fall in Chilean real GDP in 1999 of 1.1 percent. Owing to the cumulative differences between the projected and actual rates of growth in real GDP from 1997 forward, actual GDP for 1999 was 6.8 percent below that in the CABs initial estimate. Concurrent with the lower than expected GDP, passenger levels were 10.6 percent below the CAB/SCL forecast. A comparison of the actual total passengers versus the level projected in the CAB/SCL Medium Forecast is shown in Table I-3. 1999 also marked the beginning of severe economic constraint for other Latin American countries. Regional economic performance: Table I-4 reports the historical growth in real GDP for other major South American countries. In the period from 1986 to 1990, all of the countries in Table I4 achieved real GDP growth except for Argentina and Peru. The period from 1990 through 1995 had all major South American countries, including Chile, recording positive real growth in GDP. The positive growth continued through 1998 but in smaller increments (except for Bolivia and Uruguay that both recorded a higher percentage gain in 1995 through 1998). There is a noticeable change from 1998 through 2000. In this period, five of the nine countries in Table 4 recorded a fall in real GDP. The rate of GDP growth in the remaining four countries fell but remained positive with the exception of Brazil whose GDP growth marginally increased during the period. A great deal of both the absolute decline or the reduction in growth in GDP for the region has been attributed to a reduction of investment in emerging markets associated with the East Asia Crisis of 1997-1998 and the Russian Crisis of 1998-1999. The GDP growth of Chiles regional partners, in particular Argentina, has particular relevance for Chilean air service. Since 1998, Argentina comprises an average of 31.3 percent of Chiles International passenger traffic and an average 17.6 percent of total passenger traffic. The decline in Argentinas GDP from 1998 through 2000 is evident in Table I-4 and the subsequent reduction in passenger traffic is noted in Table I-5. Passenger traffic to Argentina increased continuously from 1988 through 1999. From 1999 to 2000, passenger traffic fell approximately 3.0 percent with an additional 9.5 percent decline from 2000 to 2001 both declines paralleling the deepening

September 20, 2002

Landrum & Brown, Inc.

Macroeconomic induced variations in air service

SCL Terminal Areo Santiago S.A.

September 20, 2002

Landrum & Brown, Inc.