ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

General

     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.

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     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 codesharing 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.

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     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.

Capital Investments

     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”.

B. Business Overview

Overview

     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.

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     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.

Competitive Advantages

We believe that our principal competitive advantages are:

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     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.

Strategy

     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:

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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.

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     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.

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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

     Passenger transportation

     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.

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     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:

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     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.

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Marketing

     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.

Fleet

     General

     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.

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     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).

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     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:

     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:

     Leasing agreements

     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.

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     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.

     Maintenance

     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;

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• 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.

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     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

     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.

      Safety

     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).

     Our priority is to provide safe air transportation. Our founder Commander Rolim Amaro passed down the Company’s motto: “Safety comes first to the Client.” We are extremely devoted to flight safety. We adopt modern standards of organization and management; for example:

• In 2002, we were the first Brazilian company to implement the FOQA (Flight Operations Quality Assurance) system, a system used for the systemic analysis of flights and to prevent operating failures that may affect the safety of a flight, which subsequently became a benchmark for other Brazilian companies;
  
  
• In 2004, the European Union Aviation Authority granted us the EASA 145 certification for our aircraft maintenance and repair facility located in São Carlos;
  
  
• In July 2006, we became a member of the United Kingdom Flight Safety Committee (UKFSC), an association of organizations and professionals dedicated to improving flight safety standards in commercial aviation in the United Kingdom. In 2006, we also became a member of the Steering Committee of the Emergency Response and Planning run in Task Force (ERPTF) of IATA;

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• In 2007, we were the first company in Latin America to implement the AQD (Aviation Quality Database) system for safety database management, used to analyze operating risks and implement the SMS (Safety Management System), in conformity with Brazilian and foreign regulations;
  
  
• In January 2008, we ratified the IOSA certification that the IATA had granted us in 2007, which is the most complete and recognized international operational safety certificate. The IOSA consists of an independent evaluation system focused on the evaluation of the operational management and control systems of air companies. The IOSA audit encompasses over 950 requirements covering eight operational areas in an air company, such as: organization and management systems, flight operations, operational instructions, aircraft engineering and maintenance, cockpit operations, ground handling (airports and ground services), loading operations and operational safety;
  
  
• The U.S. aviation authority (FAA) is expected to grant to us the FAR 145 certification for certification for our aircraft maintenance and repair facility located in São Carlos by 2009.

     The joint venture with Star Alliance will further enhance our operational safety, giving us a competitive advantage over other airlines.

     Brazilian civil aviation follows the highest safety standards in the world. Brazil is classified as Category 1 in terms of the flight safety standards established by ICAO, which is the highest classification in existence.

Insurance

     We maintain insurance policies as required by law and the terms of our aircraft leasing agreements. The scope of these policies includes all risk coverage for aircraft hull, including war risks and third party legal liability for passengers, cargo, baggage and injuries to third parties on the ground. Our current policies, which will be in force through December 19, 2009, follow practices adopted by the international civil aviation industry.

     We have also contracted for asset insurance against the risk of theft, fire, flood, electrical damage and similar matters for equipment and buildings we own or for which we are responsible, including airport areas where we have operations. Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible.

     We have also contracted liability insurance in respect of our directors and officers, the current term of which is due to expire on April 23, 2010.

Information Technology

     We have a policy of investing significant amounts in information technology systems that enhance our operating processes, allowing us to provide higher quality services to our passengers, in addition to giving us greater flexibility and speed in our operations.

     In 2004 we introduced the e -TAM portal, a tool that integrates our entire sales chain, from the time of reservation to passenger boarding. Moreover, data obtained from the e -TAM portal allows us to offer passengers a set of customized services. All of our domestic reservations are made through the portal environment. The use of the e -TAM portal allows us to reduce the cost of reservations and ticket issuance by consolidating the GDSs previously used for almost all our reservations. Currently, GDS is used only for tickets issued abroad.

     As discussed in “Item 4. Information on the Company — A. History and development of the company — Capital Investments,” we entered into a loan agreement with BNDES on November 10, 2005 and are using the proceeds from such loan to invest in the software used in our e -TAM portal and the software we use for cost control and managing spare parts and supplies.

     We were the first Brazilian airline to develop and install self-service check-in kiosks in airports. With over 100 units operating in Brazil’s major airports, the kiosks allow passengers who purchase e -tickets to check-in and select their seat in less than ten seconds, reducing lines in the check-in halls and on boarding of the aircraft. In 2006, 2007 and 2008 approximately 742,871, 2,009,900 and 5,888,474 passengers respectively checked in through the self-service kiosks.

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     In October 2003, we signed a general services agreement with Sabre Travel International Limited, pursuant to which we were granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup, allowing us to better utilize our fleet and network. This agreement will remain in force until October 2013, unless previously cancelled by either party.

     The TAM Loyalty Program and “special services” system are also important tools for obtaining profile information on our passengers. The TAM Loyalty Program allows us to monitor the activity of passengers registered with the program, recording information on each passenger flight in addition to personal information and preferences (such as preferred seat, special meal requests and other data obtained through our contacts or customer surveys). The “special services” system allows the crew to input data on preferences of our passengers directly to our database. This data is also used to study passengers, offer promotions and new services and define our advertising message.

     Our DOV-line tracing system monitors all aircraft baggage and cargo, following the location of items inside the aircraft, for proper weight balancing. A balanced aircraft is critical for a safe flight and has the added benefit of reducing fuel consumption. The DOV-line tracing system also manages crew distribution.

Seasonality

     The Brazilian passenger air transportation market is subject to seasonality, as there is always higher demand for air transportation services in the second half of the year. In this regard, we are impacted to a similar extent as the rest of the market, though this is mitigated by the fact that we have a higher concentration of business travel than the market average (and business travel is less sensitive to seasonality). Our other operations do not vary significantly as a result of seasonality.

Competition

     Domestic

     Airlines in Brazil compete primarily in terms of routes, price, flight frequency, service reliability, brand recognition and benefits offered to passengers, such as loyalty programs and customer service. We believe our market leadership and the TAM Loyalty Program enhance our competitive performance in many of these areas.

     Our competitors, both actual and potential, include Brazilian airlines, airlines operating on regional air routes and new participants in the market, who operate primarily on regional transportation networks. Our principal competitor is Gol. In previous years, Varig had been one of our major competitors. However, Varig filed for bankruptcy protection in Brazil and the United States in June 2005. Varig’s assets and operations were sold to various investors over the course of 2006 and, on December 14, 2006, Varig ceased operations altogether. On December 15, 2006, a new company, VRG Linhas Aéreas S.A., initiated operations on some of the routes previously used by Varig. On March 24, 2007 Gol announced that it had entered into an agreement to acquire VRG Linhas Aéreas S.A. In compliance with applicable CADE requirements, Gol and Varig operated as separate airlines until final approval from CADE of the acquisition, which was obtained in June 25, 2008 and integrated the route networks of both companies on October 19, 2008.

     To a much lesser degree, we also face competition from a number of significantly smaller airlines operating in the domestic market. At December 31, 2008, 15 different airlines together had a share of the 7.2% of the domestic market that is not served by TAM and Gol/VRG (who together had a share of approximately 92.8% of the domestic market).

     ANAC’s resolution provides that 80% of new slots are distributed to existing airlines, with these slots being divided evenly (without regard to market shares). New slots are only available to airlines that have a history of punctuality, no pending proceedings with ANAC and a positive shareholders’ equity. The remaining 20% of slots are available to new entrants. See “— Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Policy on slots.”

     The graph below shows the history of market participation on domestic routes, calculated by reference to RPKs, for the major Brazilian airlines, for the periods indicated (based on data provided by ANAC):

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     Source : ANAC.

     Some of our competitors have significant levels of debt and their financial condition and prospects are uncertain. If our competitors in financial difficulty succeed in restructuring their debt and strengthening themselves in the market, they may be able to offer cheaper fares on the routes we operate, or compete with us in other ways (even if our operations are more efficient).

     We also face competition, albeit to a lesser degree, from land transportation companies such as road transport companies.

International

     The international market is substantially more competitive than the domestic market, with large international airlines that are more experienced and larger than we are. To ensure increased competitiveness, airlines are dependent on partnerships and codeshare agreements with regard to their international operations.

     On international routes, airlines compete primarily on the basis of routes, services, price and mileage and frequent flyer programs. We offer 73 international daily flights to Buenos Aires, Santiago, Asunción, Montevideo, Ciudad del Este, Santa Cruz de la Sierra, Cochabamba, Bariloche, Punta del Este, Caracas, Lima, Miami, New York, Orlando, London, Paris, Frankfurt, Madrid and Milan. Our codeshare agreements with United Airlines and Lufthansa allow our passengers to make connections to destinations in Latin America, the United States and Europe. We also have other agreements allowing us to offer our passengers a wide range of destinations around the world. On October 7, 2008, we announced our joining Star Alliance, the largest global alliance in commercial aviation.

     In the international market, our main competition is from major international airlines that serve the markets in which we currently operate. Our average international market share in 2008 was 75.2% (measured by RPK). According to ANAC, Brazilian airlines were responsible for approximately 29% of international passengers transported in 2007, with the remainder offered by non-Brazilian airlines. We believe that in 2008, Brazilian airlines transported 33% of the passengers to and from Brazil. The graph below shows the history of market participation on international routes, calculated by reference to RPKs, among only the Brazilian airlines, for the periods indicated (based on data provided by ANAC):

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     Source : ANAC.

Overview of the Industry

     General

     According to IATA, Brazil is the fourth largest domestic aviation market in the world, covering a vast area (greater than the continental United States) and in 2007 had a population of approximately 184 million people (according to the Brazilian Geography and Statistics Institute - Instituto Brasileiro de Geografia e Estatística , or IBGE). We believe that the São Paulo — Rio de Janeiro shuttle route is one of the busiest shuttle routes in the world (according to ANAC approximately 3 million passengers were transported in this route in 2008). Growth of the Brazilian commercial aviation industry is closely related to growth of Brazilian GDP. Also according to ANAC, the Brazilian commercial aviation industry transported more than 46 million passengers in the domestic market in 2008.

     Brazilian civil aviation follows the highest established standards of flight safety in the world. Brazil is classified as Category 1 under the flight safety standards established by the International Civil Aviation Organization, the same classification as the United States and Canada.

     Airlines operating in the Brazilian commercial aviation market can be divided into the following four categories:

• domestic airlines, which provide public transportation service on a scheduled basis within Brazil and operate mainly with large aircraft between the major cities of Brazil;
  
  
• regional airlines, which provide public transportation service on a scheduled basis within Brazil, generally connecting between smaller cities and bigger cities in Brazil. Typically, regional airlines operate with smaller aircraft, such as turbo- props;
  
  
• charter airlines, which provide transportation service on a non-scheduled basis; and
  
  
• international airlines, which provide international transportation services on a scheduled basis to and from Brazil.

     The market for scheduled airline service in Brazil includes two main types of passengers: those traveling on business and those traveling for leisure. Business passengers generally place more importance on factors such as frequency of flights, reliability, availability of direct flights, extent of area served and value-added services (and are becoming increasingly sensitive to price). Leisure passengers generally place more importance on price and tend to be more flexible regarding the scheduling of their trips.

     The business travel sector is the largest and most profitable segment of the air transport industry in Brazil. We believe that business trips represented approximately 68% of total demand in Brazil for domestic flights in 2008, a number we believe is significantly greater than the proportion of domestic business trips in the international civil aviation sector. In Brazil, small and medium-sized companies (which comprise a large proportion of our customer base) place significant importance on receiving good service from their airline, while maintaining a balance between quality, frequency of flights and low prices.

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     In 2007, the eleven busiest airports accounted for 72.1% of all domestic traffic in terms of departures and arrivals, according to ANAC’s annual report.

     The domestic civil aviation market is principally served by TAM and Gol/VRG who together represented 92.8% of all domestic routes in December 2008, in terms of RPK. According to ANAC, in December 2008, our share of the domestic market was 49.1%, while that of Gol/VRG was 42.4% .

     The remaining approximately 7.2% share was served by 15 different airlines. This market profile is consistent with the historical make-up of the domestic market, which has traditionally seen a small number of airlines holding the vast majority of domestic market share and a much larger number of airlines (the identity of whom has continuously changed over the years as different airlines have entered and left the market) holding the remaining portion.

     On June 17, 2005 Varig became the first Brazilian company to file (for an in-court reorganization under Law No. 11,101 of February 9, 2005 (which we refer to as the New bankruptcy law)) in the Courts of the State of Rio de Janeiro. Previously, the Brazilian Aeronautical Code provided that concessionaires of air public transportation were not allowed to apply for an in-court reorganization. During this period of in-court reorganization, Varig faced a drastic deterioration in its financial and operational condition. It ceased operation of several flights and withdrew from important domestic and international markets. On December 18, 2005, the creditors’ assembly of Varig approved its in-court reorganization plan but this was amended by the creditors on May 9, 2006 in order to permit a judicial disposal of Varig’s flight operating unit. On July 17, 2006, the flight operating unit of Varig was sold in a public bid process held by the Judiciary of the State of Rio de Janeiro to VarigLog Linhas Aéreas S.A., a former subsidiary of Varig that was also sold on November 11, 2005 pursuant to the in-court reorganization plan). On March 24, 2007 VarigLog and Gol announced that Gol had entered into an agreement to acquire VRG Linhas Aéreas S.A., which is VarigLog’s subsidiary that operates Varig’s routes. In compliance with applicable CADE requirements, Gol and Varig operated as separate airlines until October 19, 2008 when they integrated their networks, after the final approval from CADE for the acquisition obtained in July 25, 2008.

Trends In the Domestic Market

     In the past 35 years, the domestic market has generally grown in terms of RPK, except during times of significant economic recession (such as the oil crisis, the debt-moratorium crisis in the 1980s and the economic recession and political instability of the early 1990s).

     Since the year 2000, the annual air-traffic passenger growth rate, in terms of RPK, was 9%, compared to an annual available capacity growth rate in terms of ASK, of 7%. The average load factor in the period was 64%. Domestic passenger traffic and available capacity rates for the period between 2000 and 2008 are set out in the following table:

Source: Anuário DAC/ANAC (2000 to 2007) and Dados Comparativos Avançados ANAC (2008).

     Historically, growth in domestic civil aviation demand has generally exceeded growth in GDP. From 2000 to 2008, domestic civil aviation RPK grew 9% per year, while the annual GDP growth rate in the same period was 4%, according to ANAC and IBGE.

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     The variable factors that have the greatest influence on the commercial aviation market are the price of fuel and variations in exchange rates, because fuel is the most important element of expenses for airlines, and most elements of the market (including fuel) are tied to the U.S. dollar.

     The influence of the Brazilian government on the industry, through industry regulations, has also had a significant impact on the performance of airlines operating in the market. From 1986 to 1993, the Brazilian government imposed more rigid control over local civil aviation activities because of high inflation levels which led to a series of economic crises in Brazil during that entire period. The Brazilian government mainly monitored airline air fares and supervised the use and expansion of their routes. In 1994, after successful efforts to control inflation and stabilize the Brazilian economy, the Brazilian government (acting through the aviation authorities) began to deregulate civil aviation activities, principally by gradually reducing government control over the airlines’ local activities. Even though Brazilian civil aviation is still a regulated sector, ANAC’s current rules are significantly more flexible than the regulations which were previously in effect. Further, the relevant authorities have frequently issued basic and essential regulations in order to harmonize the Brazilian regulatory environment with international, more modern models.

     We believe the current regulatory regime has favored the financial performance of Brazilian civil aviation. As a result of imposing a more rational supply of services and ending implicit subsidies to less competitive airlines, we believe that the Brazilian government has enabled more competitive airlines such as TAM and Gol to better utilize their aircraft in an environment of healthy competition, which in turn has led to improved average returns in the domestic market. Such regulatory system is undergoing certain structural changes. See “Item 3. Key Information — D. Risk Factors — Risks Relating to the Civil Aviation Industry and our Business — 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” and “— Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Future legislation.”

Regulation of the Brazilian Civil Aviation Industry

     Overview

     Scheduled air transportation services are considered public services in Brazil and, accordingly, are subject to extensive regulation by the High Command of Aeronautics of the Ministry of Defense, or the High Command of Aeronautics, CONAC and ANAC. Scheduled air transportation services are also regulated by the Brazilian federal constitution and by the Brazilian Aeronautical Code.

     The Brazilian Aeronautical Code sets out the principal rules relating to airport infrastructure and operations, flight protection and safety, certification of airlines, aircraft leasing structure, liability, transfers, registration and licensing, training of crews, concessions, inspection and control of airlines, public and private air cargo transport services, airlines’ civil liability and penalties for violations.

     CONAC is the Brazilian President’s advisory body. Its board of advisors includes the Minister of Defense, the Minister of Civil Affairs, the Minister of Finance, the Minister of Development, Industry and Foreign Trade, the Minister of Foreign Relations, the Minister of Tourism and the Command of the High Command of Aeronautics. CONAC has the authority to establish policies for the Brazilian civil aviation industry that are adopted and carried out by the High Command of Aeronautics and ANAC. CONAC establishes general rules related to adequate representation of Brazil in treaties, conventions and other matters related to international air transportation, airport infrastructure, the granting of additional funds to be used to benefit airlines and airports (based on strategic, economic and leisure considerations), the coordination of civil aviation operations, air safety, concessions for the operation of airline services and permits for the provision of related commercial services.

     ANAC is the main civil aviation authority in Brazil and reports directly to the Ministry of Defense. ANAC is an independent regulatory agency associated with, but not under the control of, the Ministry of Defense and operates as an independent agency for an indefinite term. ANAC principally has the authority to: (i) regulate, inspect and supervise services rendered by airlines operating in Brazil, (ii) grant concessions, permits and authorizations for air transport operations and airport infrastructure services, (iii) represent the Brazilian government before international civil aviation organizations, (iv) control, register and inspect civil aircraft, and (v) ensure that air transportation services are provided under free market principles.

     The Brazilian government has recognized and approved the three main international conventions related to world commercial air transportation operations: the Chicago Convention of 1944, the Geneva Convention of 1948 and the Montreal Convention of 1999.

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     Recently, in February 2009, the Federal Government approved the new Civil Aviation National Policy (Política Nacional de Aviação Civil or “PNAC”). Although the PNAC does not establish any immediate measure, it contains the main guidelines for the national civil aviation system. It encourages the Ministry of Defense, CONAC and ANAC to issue regulations on strategic matters such as safety, competition, environmental, and consumers’ issues, as well as to inspect, review and valuate the activities of all operating companies.

     Air transportation services concession

     The Brazilian federal constitution grants the Brazilian government the exclusive authority to explore air transportation services and airport infrastructure and provides that the government can render these services either directly or indirectly through third parties (by means of concessions or permits). According to the Brazilian Aeronautical Code and regulations issued by the High Command of Aeronautics, any operation of scheduled air transportation services requires a concession granted by the High Command of Aeronautics. The terms of each concession must be formalized by means of a concession agreement entered into with ANAC. Any company seeking a concession must meet certain economic, financial, technical, operational and administrative requirements established by ANAC. In addition, all companies seeking a concession must (i) be legal entities constituted in Brazil, (ii) obtain a valid Air Operation Approval Certification (CHOA) — corresponding to the former Air Transport Operation Approval Certification (CHETA), and (iii) comply with certain restrictions regarding ownership of its shares or quotas. See “— Rights to Operate Air Routes — Restrictions against the ownership of shares in airlines operating under concessions.”

     ANAC has the authority to revoke a concession in the event of any failure by an airline to comply with the rules of the Brazilian Aeronautical Code, supplemental laws and regulations and the terms of the applicable concession agreement.

     Article 122 of Law No. 8,666 of June 21, 1993 provides that concessions must be regulated by specific procedures stipulated in the Brazilian Aeronautical Code. The Brazilian Aeronautical Code and the regulations issued by ANAC do not expressly establish any bidding procedures in relation to concessions. Accordingly, it is not currently necessary to conduct bidding prior to awarding concessions for the operation of air transportation services (such as ours), as would be required in the case of other public services generally regulated by laws applicable to public concessions.

     Our concession to operate scheduled air transportation of passengers, cargo and mail at a national level was obtained on December 9, 1996 through the issuance of Ordinance 816/GM5 and the execution of the relevant concession agreement, which will remain valid until December 9, 2011. Although we can offer no guarantee that we will be able to renew our concession, we do not currently foresee any problems in relation to this renewal.

     Aircraft registration

     The registration of aircraft in Brazil is governed by the Brazilian Aeronautical Code. The Brazilian Aeronautical Code provides that no aircraft is authorized to fly in Brazilian airspace or to land in or take-off from Brazilian territory without being duly registered. In order to remain registered with a Brazilian registration number, an aircraft must have both a certificate of registration and an airworthiness certificate ( certificado de navegabilidade ), each of which is issued by RAB after a technical inspection by ANAC. The certificate of registration issued by ANAC attributes Brazilian nationality to the aircraft and proves for its enrollment with the proper authorities. The airworthiness certificate is generally valid for six years from the date on which ANAC conducted its inspection of the aircraft and provided authorization for it to fly over Brazilian airspace (subject to continued compliance with certain technical requirements and conditions). The registration of any aircraft can be cancelled in the event that the authorities verify that such aircraft is not in compliance with the requirements for registration (in particular any failure to adapt the aircraft to any safety requirements specified by ANAC or by the Brazilian Aeronautical Code).

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     All agreements relating to aircraft registered in Brazil, including sale and purchase agreements, financial commercial leasing agreements, mortgages (and amendments to any such agreements) must be submitted to the Brazilian Aeronautical Registry (RAB) for the purpose of publishing the transactions contemplated thereby and updating aircraft registration.

     Rights to Operate Air Routes

     Domestic routes

     ANAC has the authority to grant Brazilian airlines the right to operate any new route. Any airline seeking to operate a new route must submit studies proving both the technical and economic feasibility of the proposed route (in form satisfactory to ANAC) and must fulfill certain conditions in relation to the awarding of those routes. In respect of awarding any new route or approving any change to existing routes, ANAC evaluates the infrastructure capacity of the airports from which the route will be operating and the increase in demand and competition between airlines. In addition, approval for operation of a route is made subject to the condition that the route must be operated on a scheduled basis. The operation of a route by any airline can be cancelled in the event that the airline (i) fails to initiate operation of the route within 15 days of receiving authorization, (ii) fails to maintain at least 75% of the flights established in the respective National Air Transport Schedule ( hotran ) for a period of 90 days, or (iii) suspends operations for more than 30 days. ANAC’s approval of new routes or changes to existing routes is given in the course of an administrative proceeding and does not require any amendment to the applicable concession agreement.

     Once awarded, the routes must be immediately reflected in the hotran (the report of the itinerary of all routes an airline operates), which will then become an integral part of each airline’s database at ANAC. The hotran not only establishes the routes but also the arrival and departure times at certain airports, none of which can be changed without the prior approval of ANAC. Brazilian civil aviation laws and regulations provide that an airline may not sell or transfer routes to another airline.

     Recently, ANAC has imposed schedule restrictions to several Brazilian airports from which we operate. Operating restrictions, including the prohibition of international flights’ operations and the prohibition of civil aircraft’s operation after 11:00 p.m. and before 6:00 a.m, were imposed for Congonhas Airport, one of the busiest Brazilian airports and the most important airport for our operations. No assurance can be given that these or other government measures will not have a material adverse effect on our business and results of operations.

     International routes

     International airlines are those with points of departure in Brazilian territory and points of arrival in foreign territory, operated by Brazilian companies previously designated by the Brazilian government and operated in accordance with the terms of bilateral agreements with foreign governments. The rights to international routes between major cities (as well as the corresponding landing rights) are derived from bilateral air transportation agreements negotiated between the government of Brazil and foreign governments. Pursuant to the terms of those agreements, each government grants the other the right to designate one or more domestic airlines to operate scheduled service between certain destinations in each country.

     Requests for new international routes or changes in existing routes must be submitted by each interested Brazilian airline to SRI, which evaluates each request based on the provisions of the applicable bilateral agreement, the availability of existing routes between the two countries and the general policies of the Brazilian aviation authorities. Following such evaluation, SRI may take any steps required in relation to qualification of the international route.

     Ordinance No. 569/GC5 of September 5, 2000 provides that international air transportation services may be cancelled in the event that such services are (i) not implemented or operated for more than six months, (ii) the airline is proven to be incapable of performing the service, or (iii) the airlines fails to comply with the agreements, laws and regulations of the High Command of Aeronautics.

     Any airline’s international route frequency rights may be terminated if the airline fails to maintain at least 80% of flights provided for in its air transportation schedule HOTRAN for any 180-day period or suspends its operation for a period exceeding 180 days.

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     Policy on slots

     Each hotran represents the authorization for an airline to land and take off at certain airports within a predetermined space of time. That space of time is known as an airport slot and establishes that an airline can operate in a specific airport at the times contained in the hotran .

     Brazilian law provides that a slot is an ANAC concession reflected in an airline’s hotran . As is in the case with routes, a slot is not owned by the airline and may not be transferred to another airline.

     The more congested Brazilian airports are subject to traffic restrictions via slot allocation policies. On July 3, 2006, ANAC issued Resolution No. 2 which set forth the new rules to the distribution of domestic slots. This resolution establishes that 20% of the available slots of a restricted airport will be distributed among new entrants and 80% of the available slots will be distributed among existing airlines. In addition, ANAC requires that any airline applying for a slot must have a record of punctuality, have no pending proceedings with ANAC and have a positive shareholders’ equity. Although we comply with all conditions and requirements to apply for new slots, we can offer no guarantee that new slots will be allocated to us.

     The Departmento de Controle do Espaço Aéreo , or DECEA, is responsible for coordinating and inspecting the infrastructure support facilities of airports. DECEA, acting jointly with ANAC and INFRAERO, also conducts studies at all Brazilian airports to determine the maximum operating capacity of each airport. Congonhas airport in São Paulo currently has slot restrictions. Investments currently being made in Brazilian aviation infrastructure are expected to enable an increase in aircraft operations at congested airports and, consequently, the granting of new slots to airlines.

     Aviation infrastructure and the airport system

     The Brazilian Federal Constitution grants the Brazilian government the exclusive authority to operate air transportation services and airport infrastructure and provides that the government can render these services either directly or indirectly through third parties (by means of concessions or permits). The installation and operation of any aviation infrastructure services inside or outside an airport will always require the prior authorization of the aviation authority, which will also supervise them.

     Ground structures are required for the operation of air navigation systems. Any surface structure which is intended to meet the needs of air navigation is included under the category of aviation infrastructure. Accordingly, aviation infrastructure is broadly defined and includes all ground organizations, assets and facilities that support the development of air navigation. Aviation infrastructure is made up of the group of ground agencies, facilities or structures that support air navigation in relation to safety, schedules and efficiency, including (i) the airport system, (ii) the flight protection and safety system, (iii) the Brazilian Aviation Registration system; (iv) the air accident investigation and prevention system, (v) the system of air transport safety and coordination facilities, (vi) the system of personnel training and education for the air navigation and aviation infrastructure, (vii) the aviation industry’s system of coordination, and (viii) the aviation infrastructure coordination system.

     The airport system consists of all Brazilian landing fields (military and civilian, private and public) used for domestic aviation and international flights. Airports are public landing fields equipped with installations and facilities to support aircraft operations and the departure and arrival of passengers and cargo. The construction, administration, and operation of airports are subject to the rules, instructions, coordination and control of the aviation authority. Airports include areas intended for airport administration, public agencies that function on a mandatory or optional basis in the airports (such as those relating to the Federal Revenue Service (customs), the Ministry of Justice (federal police), the Ministry of Health (health supervision), and the Ministry of Agriculture (agricultural inspection)). In addition to these administrative areas, airports contain areas for passenger, baggage and cargo service and movement and for the general public (including vehicle parking facilities). Airports are open to traffic and the public by means of the approval of the aviation authorities. Airports may be built, maintained and operated directly by the Brazilian government or through concessions, authorizations or permits. Airports may also be operated by specialized quasi-public enterprises under the Brazilian government or its subsidiaries, reporting to the High Command of Aeronautics (such as INFRAERO), by Brazilian states or Municipalities and by legal entities considered technically, economically and financially qualified by the aviation authorities.

     INFRAERO, a government company reporting to the Ministry of Defense, has the function of managing, operating, and controlling most Brazilian federal airports (including their control towers and airport safety operations). Smaller airports and regional airports may belong to state or municipal governments and, in such cases, are frequently managed by local government agencies. INFRAERO performs safety activities at most Brazilian airports, including the verification of passengers and baggage, cargo safety and general airport safety measures.

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     The use of areas within federal airports (such as hangars and check-in counters) is subject to a concession-for-use granted by INFRAERO. Where there is more than one candidate to use a certain airport area, INFRAERO may institute a bidding process.

     Prices

     Brazilian airlines are freely able to set their prices for domestic routes but must register the prices with ANAC for monitoring purposes. ANAC constantly monitors airfares and may intervene in the market and in scheduled air service concessions to prevent acts against economic order and to protect the interests of consumers. Airlines may establish price discounts or follow other promotional strategies. Airlines must submit any promotional passenger fare discounts greater than 65% of ANAC’s reference rate per kilometer to ANAC at least five business days in advance. Reference rates are established by ANAC based on Brazilian civil aviation’s average operating expenses.

     International prices are established in accordance with bilateral agreements. Since 1993, fares from all companies selling international flights originating in Brazil were required to exceed a floor. On April 22, 2009, ANAC approved a gradual phasing out of the floor (for flights to destination other than South America) through discounts of up to 20% until July, 2009, 50% until October, 2009, and 80% until April, 2010, when the phase-out will end. For international flights with destinations to South America, the floor was removed in September 2008.

     Civil liability

     The Brazilian Aeronautical Code and the Montreal Convention of 1999 limit an aircraft operator’s liability for damage to third parties caused by ground or air operations, or for damage resulting from persons or objects being thrown from aircraft. The Brazilian National Congress approved the Montreal Convention of 1999 by means of Legislative Decree No. 59 of April 18, 2006 and Decree No. 5,910 of September 27, 2006. The Montreal Convention replaced the Warsaw Convention of 1929 and will have the effect of increasing the liability limits for civil aircraft operators. The Brazilian courts, however, have occasionally disregarded the liability limits set forth in both the Warsaw Convention of 1929 and its successor, the Montreal Convention of 1999, and have granted compensation based on the Civil Code and Consumer Defense Code (which do not expressly set out maximum liability limits).

     In response to the substantial increase in insurance premiums to cover damage from terrorist attacks after the September 11, 2001 attacks in the United States, the Brazilian government introduced a law authorizing it to assume responsibility for damage caused to third parties as a result of terrorist attacks or acts of war against aircraft pertaining to Brazilian airlines. See “Item 4. Information on the Company — B. Business Overview — Insurance.”

     Environmental legislation and regulations

     Brazilian airlines are subject to various federal, state and municipal environmental protection laws, including those relating to the disposal of materials and chemical substances and noise pollution generated by aircraft. These laws and regulations are applied by the state and municipal governmental authorities, which can impose administrative sanctions following violations, in addition to liability in the civil and criminal courts for any party violating the laws and regulations. For example, according to a ANAC ordinance, the operation of scheduled commercial flights departing from or arriving at Congonhas Airport is subject to a noise ban from 11:00 P.M. to 6:00 A.M. because of the airport’s proximity to residential areas in the city of São Paulo.

     Restrictions against the ownership of shares in airlines operating under concessions

     The Brazilian Aeronautical Code provides that, in order to be entitled to a concession to operate scheduled service, and subject to the carve-outs described below, 80% of an airline’s voting capital must be held directly or indirectly by Brazilian citizens and certain management positions must be held only by Brazilian citizens.

     The Brazilian Aeronautical Code sets out certain restrictions against transferring the capital of scheduled airlines operating under concessions (such as our subsidiary, TAM Linhas Aéreas) including the following restrictions:

• shares with voting rights must be registered, and the company’s by-laws must prohibit the conversion of preferred shares with no voting rights into shares with voting rights;

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• ANAC’s prior approval of any share transfer, regardless of the investor’s nationality, which would result in (i) a change in the company’s control, (ii) the concessionaire’s ownership of more than 10% of the company’s capital, or (iii) a transfer of more than 2% of the company’s capital stock;
  
  
• the company must submit to ANAC in the first month of each six-month period a detailed chart of shareholder participation, including a list of shareholders and a list of all share transfers that occurred during the six-month period; and
  
  
• based on the information in the chart described above, ANAC may determine that subsequent transfers must be subject to its prior approval.

     Our corporate purpose is the management of corporate participation in airlines. We hold shares representing the shareholding control of TAM Linhas Aéreas, which, in turn, is a company operating under a concession for the operation of scheduled air transportation services. The Brazilian Civil Aviation code provides that the restrictions against share transfers described above apply only to companies operating under concessions for the operation of scheduled air transportation service and, accordingly, do not apply to us.

     Future legislation

     On March 28, 2001, CONAC published for public consultation a draft of a bill to replace the Brazilian Aeronautical Code and modernize the basic laws and regulations relating to the industry. In general, this draft deals with matters related to civil aviation, including airport concessions, consumer protection, increased foreign shareholding participation in airlines, limitation of airlines’ civil liability, compulsory insurance and fines. However, at the date of this annual report there are no relevant discussions or developments in respect of this draft bill.

     Federal intervention

     The executive branch of the government may intervene in Brazilian civil aviation companies whenever their operations or financial situations jeopardize the continuation, efficiency and safety of Brazilian air transportation services. The purpose of federal intervention is to re-establish normal service by the company and the intervention may last as long as necessary to achieve this purpose, though it may not exceed a period of two years. In the event that a technical inspection conducted before or after the decree of federal intervention demonstrates that the re-establishment of normal service would be impractical, the federal intervention can be converted to extra-judicial liquidation, provided at least half the company’s debts can be liquidated by means of a sale of its assets. In the event that the company’s assets are not sufficient to pay at least half of the company’s debts (or in the event that there is evidence of fraud), the federal intervention or extra-judicial liquidation must be converted to bankruptcy.

     New bankruptcy law

     On February 9, 2005, the President of Brazil sanctioned the New Bankruptcy Law. The New Bankruptcy Law became effective on June 9, 2005 and replaced the current bankruptcy law (Decree-Law No. 7,661/45), and introduced significant innovations in the Brazilian bankruptcy system. In general, the New Bankruptcy Law creates new processes of extra-judicial recovery and judicial recovery (the latter being a replacement for current bankruptcy protection) and introduces other relevant changes in the bankruptcy process. Business owners and business partnerships are subject to the New Bankruptcy Law, including those whose purpose is to operate air services or aviation infrastructure of any kind, and those who are currently prevented from filing for bankruptcy protection.

     Through the extra-judicial recovery process, a debtor may ask the judiciary to approve agreements with one or more classifications of creditors or with groups of creditors of the same classification with similar payment terms. The plan may not include credits of a labor or tax nature or those derived from future exchange contracts, leasing agreements or fiduciary agreements. Once approved, the plan will apply to all creditors who adhered to it and will be binding on all creditors included in its scope, even those who did not sign the plan, provided that the debtor obtained the approval of at least three-fifths of the creditors of each class of creditors.

     The judicial recovery process consists of judicial action intended to remedy the debtor’s financial problems and enable it to continue its operations (provided that the economic feasibility of continuing operations can be proven). Unlike the current Brazilian bankruptcy protection system, which merely covers unauthenticated credits, the judicial recovery process obliges all prior creditors to go to court to recover credits, including labor creditors, except credits of a labor or tax nature or those derived from future exchange contracts, leasing agreements or fiduciary agreements. The recovery plan submitted by the debtor must present a proposal for the payment of debts, indicating the means of recovery to be utilized. In the event that a creditor objects to the plan proposed by the debtor, the judge must call a meeting of the creditors to decide whether to accept or refuse the plan. In the case of refusal, the judge must declare the debtor bankrupt. In the case of acceptance and subsequent granting of judicial recovery, the original obligations of the debtor will be novated.

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     The principal innovations introduced by the New Bankruptcy Law include (i) the requirement of a minimum amount of credit necessary for the creditor to request the debtor’s bankruptcy; (ii) elimination of suspensive bankruptcy protection, (iii) the possibility of a rapid sale of assets (with priority given to sales of blocks of assets), and (iv) an alteration in the order of credit classification.

     In the case of judicial recovery and bankruptcy of airlines, the exercise of rights derived from commercial aircraft leasing agreements (or parts thereof) will not be suspended.

C. Organizational Structure

     We currently have 150,585,147 shares, divided into 50,195,049 common shares and 100,390,098 preferred shares. TAM’s main shareholders are TAM Empreendimentos e Participações S.A. (TEP) and Agropecuária Nova Fronteira Ltda., which hold 46.25% of the capital stock of TAM and which belong to the Amaro family. See “Item 17 — Related Shareholders and Transactions.” We have a 53.75% free float. The organization chart below summarizes TAM’s ownership structure. The following organizational chart sets out, in summary form, our shareholder structure and subsidiaries at the date of this annual report:

     TAM S.A. (“TAM” or “Company”) is a joint stock company incorporated on May 12, 1997, whose main corporate purpose is holding direct ownership interests in the capital of companies in the air transportation industry. The Company holds ownership interests in:

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     In April 2007, two wholly-owned finance subsidiaries of TLA were incorporated TAM Capital Inc. (“TAM Capital”) and TAM Financial Services 1 Limited (“TAM Financial 1”), and in October, 2007 TAM Financial Services 2 Limited (“TAM Financial 2”) was incorporated, both being headquartered in the Cayman Islands, whose activities are related to the purchase and financing of aircraft. Debt issued by these wholly-owned companies is wholly and unconditionally guaranteed by TAM.

     TLA consolidates financial results of TAM Viagens, whose corporate purpose is to provide travel and tourism activities.

D. Property, Plant and Equipment

     In 2001, we inaugurated our maintenance center in São Carlos, in the interior of the state of São Paulo, which occupies an area of approximately 4.6 million square meters, with 50,000 square meters of building area. At this center, we perform maintenance on aircraft and components of TAM as well as other Latin American airlines.

     The TAM Service Academy is located in an eight-story building in São Paulo (close to Congonhas Airport) and covers an area of 12,000 square meters. The TAM Service Academy is the largest and most modern aviation training center in Latin America and is dedicated to training pilots, flight attendants, customer service and administrative staff. The TAM Service Academy has the capacity to accommodate over 750 persons for training each day.

     We have entered into concession agreements with management of different airports for the use of areas to provide services in passenger terminals, including check-in halls, passenger sales areas in airports and operational support areas. These agreements provide for periodic adjustments in the renewal conditions and amounts paid for the concessions. We also have a concession for the use of hangars and cargo terminals in airports throughout Brazil.