Transportation Initiating Coverage July 2016

Price Upside/ We are reinitiating coverage on our LatAm Transportation Company Rating Target Downside sample, favoring the airline industry in the region over the Market Mexican airports as the latter currently trade at stretched ASUR P$265.3 -6.4% Underperformer valuations despite their attractive business models and solid Market growth outlook, while the airline sector offers interesting entry GAP P$165.4 -13.2% Underperformer points, taking advantage of pressured valuations. Market OMA P$108.8 +1.0% Performer Here is a quick summary about our thesis by company: Market AEROMEX P$44.6 +21.7% Outperformer ASUR. Despite our positive view about Cancun’ s growth potential as Market a tourist destination, we believe that current valuations are COPA US$64.0 +15.8% Outperformer assuming recent year’ s exceptional growth rates for perpetuity. We Market believe traffic’ s upward trend should begin to normalize this year, GOL R$3.5 +5.4% Performer when tougher comps start to weigh in, while in the long run, traffic Market should revert to the mean. LATAM US$7.2 +7.5% Performer GAP. All the benefits from being the most diversified operator in terms of geography, along with strong traffic growth and solid commercial initiatives are more than reflected at current prices. In addition, lower EBITDA margins from Jamaica would taint the

improvements achieved in Mexico.

OMA. After the recent rally witnessed in OMA’ s stock, it seems that all the expected profitability improvements—derived from more efficient terminals, along with improved operating leverage—are already reflected at current prices.

AEROMEX. The company’ s long-term potential, alongside persistently low oil prices and appealing traffic growth in Mexico due to an under-penetrated aeronautical industry should aid the company’ s profitability, along with the approval and kick-off of the JV with DAL, in which both companies will share their network between the US and Mexico would allow them to boost profitability in the mid-term.

COPA. The company counts with one of the strongest business models across our sample, driven by the effectiveness of its four pillars: geographic location, connectivity, infrastructure, and product. Still, the weak economic environment in the South American region has taken a toll on profitability; however we believe COPA has the necessary tools to swiftly recover after this year’ s rough patch.

Mauricio Martinez Vallejo GOL. Bearing in mind that GOL serves primarily as a domestic carrier [email protected] in Brazil, leaving it more exposed to the country’ s harsh economic +52(55) 5480 5800 ext. 4187 downturn, GOL’ s management continues to seek out opportunities to bring the company afloat, aiming to endure until an economic Pablo Zaldivar recovery materializes; still, GOL stands our sample’ s riskiest pick. [email protected] +52(55) 5480 5800 ext. 4390 LATAM. The company’ s profitability should remain harshly pressured in the short term, as yields continue to weaken due to the tough economic environment in the region, together with significant local currency devaluation.

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa (“GBM”) and its affiliates may carry out and seek to do business with companies covered in its research reports. Investors should not consider this report as a single factor in making their investment decision. These materials do not constitute an offer to buy or sell any security or participate in any trading strategy. Please refer to the last page of this report for Important Disclosures.

Transportation Initiating Coverage

Index J. AEROMEX 56 A. Industry Investment Thesis 01 I. Investment Thesis 57 II. Valuation 59 B. The Mexican Air Transportation Industry 03 III. Financial Estimates 60 IV. Company Description 62 C. The Mexican Airport Industry 04 V. Key Figures 68 VI. Corporate Structure 72 D. ASUR 06 I. Investment Thesis 07 K. COPA 74 II. Valuation 09 I. Investment Thesis 75 III. Financial Estimates 10 II. Valuation 77 IV. Company Description 12 III. Financial Estimates 78 V. Key Figures 15 IV. Company Description 80 VI. Corporate Structure 18 V. Key Figures 83 VI. Corporate Structure 86 E. GAP 20 I. Investment Thesis 21 L. GOL 88 II. Valuation 23 I. Investment Thesis 89 III. Financial Estimates 24 II. Valuation 91 IV. Company Description 26 III. Financial Estimates 92 V. Key Figures 28 IV. Company Description 94 VI. Corporate Structure 33 V. Key Figures 97 VI. Corporate Structure 100 F. OMA 35 102 I. Investment Thesis 36 M. LATAM II. Valuation 39 I. Investment Thesis 103 III. Financial Estimates 40 II. Valuation 105 106 IV. Company Description 42 III. Financial Estimates V. Key Figures 44 IV. Company Description 108 VI. Corporate Structure 49 V. Key Figures 112 116 VI. Corporate Structure

G. The Airline Industry in Latin America 51 I. Hub-and-spoke vs. point-to-point 52 N. Appendix I – Mexico and the US Aviation 118

Agreement

H. The Mexican Airline Industry 53 119 O. Appendix II – Oil Price Latest Update from

I. Brazil’ s Airline Industry 54 our O&G team

P. Chile’ s Airline Industry 55

Transportation Initiating Coverage

A. Industry Investment Thesis

We are reinitiating coverage on the LatAm Transportation sector, favoring the airline industry in the region over the Mexican airports as the latter currently trade at stretched valuations despite their attractive business models and solid growth outlook. Still, we believe the airline sector offers interesting entry points, taking advantage of pressured valuations after the economic turmoil seen in the last year and the region’ s long-term potential growth.

An under-penetrated Mexican aeronautical industry should support solid traffic growth. Mexico’ s air passenger traffic has grown at an 8.9% CAGR in the past 5 years driven by the country’ s solid economic development, as the industry is characterized by an extreme sensitivity to economic cycles. Going forward, we believe that our sample should benefit from the growth potential in Mexico, as the country has a very low per capital expenditure in commercial airlines (US$46 per year) when compared to other countries. Thus, we are estimating an average growth rate of 5.8% for the 2016-2020 period.

As for South America, the severe economic slowdown should take a toll on profitability. As we have witnessed throughout the past year, the profitability of South American carriers has been tainted by Brazil’ s tough economic environment, due to the steep decline in consumption. Moreover, the slowdown in most countries throughout the region has pressured further their financial performance. Still, we should note that the region—especially Brazil—possesses enormous long-term potential, as according to aircraft manufacturers, domestic traffic in LatAm is expected to grow at a 5.5% 20-year CAGR—considerably above the world’ s 4.8%.

Mexico’s Total Air Passenger Traffic Brazil’s Domestic Air Passenger Traffic —figures in millions of PAX —figures in millions of PAX 100.0 CAGR 2015-2020: 5.8% CAGR 2015-2020: 2.5% 140.00 90.0 80.0 120.00 70.0 100.00 60.0 50.0 80.00 40.0 60.00 30.0 40.00 20.0 10.0 20.00 0.0 0.00 2015 2015 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e Source: GBM

FX depreciation continues to impact our sample, albeit in different proportions. Local currency depreciation has been a widespread occurrence throughout emerging markets, affecting the performance of our sample in different ways. Airlines come out as the main losers, as over 50% of their cost structure is linked to the US dollar. Still, carriers are able to naturally hedge their exposure through increased international sales, as fares tend to be priced in USD. On the other hand, airports enjoyed higher traffic inflows, in particular on tourist destinations, as Mexico became a cheaper destination.

Cost containment and capacity rationalization remain vital for airlines. Despite lower fuel prices, carriers must maintain their focus on cost reduction in order to improve long-term profitability, especially South American carriers, as they seek to offset top-line weakness amidst economic turmoil. Furthermore, capacity management continues to be critical for our sample, as stable yields should be achieved by avoiding oversupplied markets.

Transportation Initiating Coverage

FX Depreciation on Main LatAm Currencies Sample’s Demand and Capacity Growth —figures in millions 110% 350,000 84.0% 90% 300,000 83.0% 250,000 70% 82.0% 200,000 81.0% 50% 150,000 80.0% 30% 100,000 79.0% 10% 50,000 0 78.0% -10% 2015 2016e 2017e 2018e 2019e 2020e Jul-13 Jul-14 Jul-15 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-13 Jan-14 Jan-15 Jan-16 ASK RPK Load Factor MXN CLP '00 COP '000 BRL

Source: GBM

Potential industry consolidation due to the region’s long-term appeal. Throughout the past year, we have seen the first steps towards industry consolidation in Latin America: Delta announced a tender offer for up to 49% of AEROMEX; Delta increased its stake in GOL to 9.5%; United acquired a 5% stake in Azul; China’ s HNA group bought 24% of AZUL, and LATAM established a JV with IAG and American. We believe all of these events have been driven by the region’ s long-term growth potential, together with pressured stock prices amidst a tough economic environment. As such, we expect further industry consolidation in the region, as it makes sense for larger international carriers to secure a spot in one of the world’ s most attractive markets in the long run. Price Performance of South American carriers

150% 120% 90% 60% 30% 0% -30% -60% -90% Jul-13 Jul-14 Jul-15 Jul-16 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Jan-14 Jan-15 Jan-16

AEROMEX COPA GOL LATAM

Source: GBM

All in all, we believe that current airport valuations seem stretched, despite their attractive business model and solid growth outlook. We believe that, at current valuations, the market has already priced in the airport’ s profitability improvements going forward, derived from more efficient terminals, alongside further operating leverage through traffic growth. As such, we are waiting for more appealing valuations to participate in the sector, as we believe there is not much maneuvering room at current prices.

On the other hand, current airline valuations should allow investors to enjoy attractive upsides. Despite significant differences across our airline sample, we think the sector offers interesting entry points, taking advantage of pressured valuations. Delving in, we remain confident about the region’ s long-term potential, which should allow airlines to recover as soon as an economic turnaround materializes, while industry consolidation should improve profitability through joint ventures, stock prices or M&As.

Airport Industry | Transportation Initiating Coverage

B. The Mexican Air Transportation Industry

According to the National Chamber of Air Transport (CANAERO), air traffic in Mexico is poised to grow at an average annual rate of 4.5% for the following 20 years, doubling the amount of flights per capita by 2033, driven by the country’ s healthy growth outlook, while the country’ s consolidated fleet should reach almost 600 aircraft by that time. According to the General Direction of Civil Aviation (DGAC), roughly 73 million passengers were transported in Mexico throughout 2015 (+12.5% YOY), while the country’ s consolidated fleet reached 317 aircraft.

We should note that, in the last decade, the industry has suffered from economic crises, health alerts, high operating costs, and natural disasters. The most recent event took place in 2009, when Mexico’ s slow economic recovery, together with the H1N1 flu epidemic took a toll on the sector as a whole, driving many domestic airlines to bankrupt by 2010—including Mexicana de Aviacion, the country’ s second largest carrier. Afterwards, the surviving airlines had to absorb the gap left in terms of market share, although it took the industry a while to recover back to its maximum levels.

Since 2008, air traffic in the country has grown at a 4.6% CAGR according to DGAC data, while the number of flights performed has remained stable, expanding at a 0.1% CAGR throughout the same period. On the other hand, Mexico’ s consolidated aircraft fleet is currently 8.1% lower than the maximum levels reached in 2007, reflecting higher occupancy rates and larger aircraft. We should note that in terms of transported passengers, it was not until 2012 that the record set in 2008 was beaten, reflecting the significant impact on the country’ s air transportation.

Throughout the 2013-’ 14 period, the industry was marked by highly competitive dynamics among domestic airlines, boosting the number of passengers transported to double-digit increases at the expense of airlines’ profitability. On the other hand, airports welcomed the pricing aggressiveness in airlines, as they enjoyed profitability improvements from stronger traffic readings.

Fleet and Passenger Traffic Projected PAX (Airport Sample) —As of December 2015 —Figures in millions of PAX 400 80 70 350 70 60 300 60 50 250 50 40 200 40 30 150 30 20 100 20 10 50 10 0 0 0 2011 2012 2013 2015 2014 2010 2007 2011 2006 2008 2009 2013 2012 2015 2017e 2014 2016e 2018e 2019e 2010 2007 2005 2006 2008 2009 2020e Fleet Passengers (millions) Total PAX Domestic PAX International PAX Source: GBM with DGAC data Another important matter regarding the industry is the new bilateral agreement between the US and Mexico. The new aviation agreement is aiming, inter alia, to eliminate the restraints in the number of airlines allowed to fly between any city pair in Mexico-US routes, which is currently set at 2 or 3 airlines depending on the route. Still, the impact from lifting said restrictions should be minor, as only 7 routes are currently capped from the Mexican side, of which 6 originate at the currently saturated Mexico City airport. On the other hand, 14 routes are capped by US carriers, with 4 of them reaching Mexico City and the rest beach destinations, mainly. (For further information please refer to Appendix I).

Airport Industry | Transportation Initiating Coverage

C. The Mexican Airport Industry

Before 1998, the airport industry in Mexico was controlled by the government through Aeropuertos y Servicios Auxiliares (ASA), an entity in charge of the operation and management of the country’ s airports. ASA was established in 1965, with the purpose of developing a central entity to take care of airport modernization and expansion, navigation services, and fuel supply. Despite the significant progress made in airports under ASA’ s management, the 1980s financial crisis drove the Mexican government to consider the participation of private investment in the country’ s airport network, in order to continue with the expansion and renovation necessary to maintain the system.

By February 1998, the government reduced ASA’ s 58-airport network by 35, splitting the most profitable airports into four groups:

 Grupo Aeroportuario del Sureste (ASUR)  Grupo Aeroportuario del Pacifico (GAP)  Grupo Aeroportuario del Centro-Norte (OMA)  Aeropuerto Internacional de la Ciudad de Mexico (AICM)

We should note that the AICM is in charge of the operation of the busiest airport in the country, which was not privatized, as it was considered an asset of importance regarding national security. On the other hand, ASUR received the concession to operate 9 airports, GAP 12 airports, and OMA the remaining 13 airports.

Airport Distribution by Group

Source: GBM with DGAC data

Airport Industry | Transportation Initiating Coverage

The investment program was divided in two stages. The first stage conducted a series of public bidding processes in order to award a minority interest in each airport group to a strategic shareholder, comprised of a Mexican investor and an experienced international airport manager. In the second stage, the remaining interest in each airport group was sold through public offerings in the capital markets. We should note that the strategic partners possess control of the airport groups through controlling shares.

Under the terms of the airport’ s concessions, each group is required to present a Master Development Program (MDP) every 5 years for approval by the Mexican Ministry of Communication and Transportation (SCT). Each airport group revises their MDP on consecutive years, starting with ASUR, followed by GAP, and lastly OMA. Each MDP includes the investment commitments for the regulated portion of the business, becoming binding commitments after the SCT’ s approval. The CAPEX commitment is destined towards the expansion and improvement of the airport and is directly related to the maximum tariff an airport is allowed to charge to an aircraft or passenger.

As previously mentioned, the government is responsible for regulating the revenue received from the direct operation of the airport by implementing a maximum tariff. The maximum tariff refers to the amount of revenue an airport can charge per workload unit (one passenger or 100kg of cargo) and is determined by the projected workload units, capital investments, and operating expenses authorized by SCT in the MDP. We should note that maximum tariffs are an airport’ s main source of aeronautical revenue. Furthermore, after the MDP is settled, maximum tariffs are adjusted on a yearly basis by inflation according to the Producer Price Index (ex-petroleum), as well as by an efficiency factor (currently 0.7%).

MT= Maximum Tariff RV= Reference Value ∗ 1 RV= Terminal Value DR= Discount Rate WLU= Workload Units

The most recent MDP negotiations include ASUR receiving approval for the ‘ 14-’ 18 period, GAP for the ’ 15-’ 19 period, and most recently OMA for the ’ 16-’ 20 period. We should note that OMA negotiated the most significant maximum tariff expansion, despite a sound traffic performance and a strong outlook, due to higher CAPEX commitments. On the other hand, ASUR’ s negotiation resulted in a maximum tariff decrease, due to strong traffic, while GAP achieved a slight tariff increase. Driven by the inverse relationship between tariffs and traffic, smaller airports tend to charge higher tariffs

Latest Master Development Plans Maximum Tariff Evolution —Negotiated Amounts —Average figures for each airport group (MXN) CAPEX Max. Tariff 180 (P$ Millions) (YOY Change) ASUR $ 7,026 -2.2% 160 GAP $ 5,479 2.4% 140 OMA $ 4,446 13.9% 120

100 2011 2012 2013 2015 2014 2010 2007 2006 2008 2009 ASUR GAP OMA Source: GBM with companies’ data

It is important to mention that despite the risks involved in the air transport industry, the airport business has proven more resilient than the airline industry, aided by the natural monopoly embedded in the industry, as there is virtually no direct competition among airports due to the distance between them. Still, some leisure destinations are subject to competition, due to the attractiveness and affordability of other tourist destinations, which could sway passengers on their decision.

ASUR | Transportation Initiating Coverage

ASUR Market Underperformer Strong traffic growth is not forever… valuations show 2016e Price Target P$265.3 otherwise, though.

Despite our positive view about Cancun’ s growth potential as a tourist destination, we believe that current valuations are Price 282.86 assuming recent year’ s exceptional growth rates for perpetuity. 12M Price Range 223.32 / 294.05 We believe traffic’ s upward trend should begin to normalize this Shares Outstanding (Mill) 300.0 year, when tougher comps start to weigh in, while in the long Market Cap (Mill) 85,590 run, traffic should revert to the mean. Thus, we are introducing Float 73% our 2016e price target of P$265.3 per share, with a Market Net Debt (Mill) 751 Underperformer rating. EV (Mill) 86,341 Dividend Yield 2.0% FCF to recover in 2016 thanks to lower CAPEX commitments…

Still, FCF yield remains unappealing. After the rally witnessed in the company’ s stock, our expectations in terms of FCF improvements—moving from P$585 million in 2015 to P$2.4 2015 TTM 2016e 2017e billion in 2016—are more than priced in, given its 2016 FCF yield Revenue 6,414 6,745 7,376 8,079 of 2.8%. EBITDA 4,542 4,813 5,347 5,900 Net Profit 2,914 3,098 3,456 3,913 Still, Cancun’s airport should maintain a solid traffic growth Free CF 586 950 2,393 3,333 over the next 5 years. Cancun’ s undisputable position as the main tourist destination in Mexico should lead ASUR to keep a EPS 9.71 10.33 11.52 13.04 sound pace in terms of traffic expansion. Therefore, we are calling P/E 25.1x 27.6x 24.8x 21.9x for a 2015-2020 CAGR of 6.4%, reaching 26.7 million PAX by EV/EBITDA 16.5x 17.9x 16.0x 13.9x 2020 while, on a consolidated basis, total PAX should post a 6.4% P/BV 3.6x 4.0x 3.6x 3.1x CAGR to 35.7 million.

Commercial revenues, one of the main drivers going forward. ASUR should be able to keep improving its commercial revenues Mauricio Martinez Vallejo per PAX, due to the opening of Terminal 4 in Cancun, along with [email protected] other terminal expansions. As such, the company will be able to +52(55) 5480 5800 ext. 4187 optimize the array of its commercial space, while bringing more attractive brands in its facilities. Thus, we are forecasting consolidated commercial revenues to post a 2015-2020 CAGR of Pablo Zaldivar 12.9%. [email protected] +52(55) 5480 5800 ext. 4390 Catalyst. The company would be able to improve its capital structure by taking on more debt to deliver higher dividend payments, or enter into new projects.

32.0x 16.5x EV/EBITDAR FWD 12M PRICE PERFORMANCE VS. IPC P/E 16.0x 35% 31.0x 30% 15.5x 30.0x 25% 15.0x 20% 29.0x 14.5x 15% 28.0x 14.0x 10% 13.5x 5% 27.0x 0% 13.0x 26.0x -5% 12.5x -10% 25.0x 12.0x -15% 24.0x 11/15 11/15 12/15 12/15 11/15 10/15 01/16

07/15 10/15 07/16 12/15 01/16 03/16 07/15 02/16 08/15 05/16 09/15 07/16 04/16 06/16 02/16 03/16 08/15 05/16 09/15 10/15 04/16 06/16 01/16 07/15 07/16 03/16 02/16 05/16 08/15 09/15 04/16 06/16 ASUR IPC

ASUR | Transportation Initiating Coverage

I. Investment Thesis

Strong traffic growth is not forever… valuations showing otherwise though. Although we are positive about the potential that Cancun has going forward as a growing tourist destination with an increasing community in the city and its surroundings, we believe that current valuations are assuming the exceptional growth rates in traffic witnessed in the last couple of years for perpetuity. What’ s more, in our view, traffic growth should start to normalize as soon as this year, when tougher comps will start to weigh-in, while in the long run, traffic should revert to the mean—growing between 4-5% p.a. Thus, we are introducing our 2016e price target of P$265.3 per share, with a Market Underperformer rating.

Valuations are overweighting strong traffic shown in the last years. Indeed, ASUR’ s 12M FWD EV/EBITDA stands at its highest level in the last 3 years—a normalized period considering/given the absence of natural phenomena or noise in the aeronautical industry. Moreover, when running an implicit perpetuity growth approach, we reckon the street is assuming a 6.3% perpetual growth.

3-year EV/EBITDA Fwd Implicit Growth Implicit g Normalized 17.0x 3-Years EV/EBITDA FWD 16.0x WACC 9.7% 15.0x EBITDA 5,503,989 14.0x Taxes -2,081,904 13.0x CAPEX -716,450 12.0x LMM FCF 248,189 11.0x FCF 2,953,824 10.0x Current Mkt Cap 85,590,000 Minority Equity Value 0 12/13 12/15 12/14 10/13 10/15 10/14 02/15 08/13 02/14 06/13 02/16 04/15 06/15 08/15 04/14 06/14 08/14 04/16 Net Debt 751,312 Implicit g 6.3% Source: GBM

FCF to recover in 2016 due to lower CAPEX commitments… Still, FCF yield remains unappealing. After the rally we witnessed in the name, our expectations in terms of FCF improvements—as it moves from P$585 million in 2015 to P$2.4 billion in 2016—are more than priced in, given its 2016 FCF yield stands at 2.8%. Indeed, FCF should recover as this year the company will be facing P$1.1 billion less in CAPEX commitments vs. 2015.

2014-2019 MDP FCF and CCR —figures in billions —figures in ‘000 3.0 6 80% 75% 2.5 5 70% 2.0 4 65% 60% 1.5 3 55% 50% 1.0 2 45% 40% 0.5 1 35% 0.0 0 30% 2015 2014 2017e 2016e 2018e 2019e 2017e 2016e 2018e 2019e 2020e FCFE CCR Consolidated

Source: GBM

ASUR | Transportation Initiating Coverage

Still, Cancun’s airport should maintain a solid traffic growth in the next 5 years. Cancun’ s undisputable position as the main tourist destination in Mexico should lead ASUR to keep a strong growth pace in terms of traffic growth. For this reason, we are penciling a 2015-2020 CAGR of 6.4%, reaching 26.7 million PAX in 2020, while on a consolidated basis, total PAX should post a 6.4% CAGR to 35.7 million.

Cancun’s PAX 2015-2020e ASUR PAX 2015-2020e —figures in millions —figures in millions 30 40 CAGR 2015-2020: 6.4% 35 CAGR 2015-2020: 6.4% 25 30 20 25 15 20 15 10 10 5 5 - - 2015 2015 2017e 2017e 2016e 2018e 2019e 2016e 2018e 2019e 2020e 2020e

Source: GBM

Commercial revenues, one of the main company’s drivers going forward. ASUR should be able to keep improving its commercial revenues per PAX as a result of the new T4 in Cancun, along with expansions in T2 and T3 there and in Veracruz during the current MDP period. As a result, the company will be able to optimize the array of its commercial space, while bringing more attractive brands in its facilities. Thus, we are forecasting consolidated commercial revenues to post a 2015- 2020 CAGR of 12.9%.

ASUR’s Commercial Revenues —figures in billions 4.5 4.0 CAGR 2015-2020: 12.9% 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2018 2017e 2016e 2019e 2020e Source: GBM

Catalysts. The company would be able to improve its capital structure by taking on more debt to deliver higher dividend payments, or our favorite, entering into new projects in LatAm or the US. Indeed, there is some interest by the US congress to sell some airports, which gives ASUR an advantage due to its stake in Puerto Rico—the only commercial airport owned by a private operator in the US.

ASUR | Transportation Initiating Coverage

II. Valuation

We are introducing our 2016e price target of P$265.3 per share with a Market Underperformer rating, as current valuations are already reflecting all the potential of the airport concessions known. Our valuation considers a DCF approach.

DCF assumptions  EBITDA 2015-2020 CAGR of 11.6%.

 A normalized effective tax rate of 30%.

 An EBITDA present value for the 2021-2048 period of P$133.5 billion—with a long-term nominal growth of 5%.

 We are considering a cash conversion rate (CCR) target for the 50% stake in the Luis Muñoz Marin airport in Puerto Rico.

 WACC of 9.7% o Cost of Equity of 10.0% o Cost of Debt of 3.6%

DCF ASUR’s WACC 2016e 2017e 2018e 2019e 2020e NPV 2021-2048e %Equity 95.9% EBITDA 5,346,593 5,900,389 6,556,463 7,205,066 7,858,030 133,529,520 Taxes 1,446,609 1,676,832 1,938,028 2,216,222 2,496,535 492,783,083 %Debt 4.1% Working Capital -257,642 -88,689 -114,045 -102,347 -102,733 Risk Free 6.0% OPERATING CASH FLOW 3,642,343 4,134,867 4,504,390 4,886,497 5,258,762 95,587,294 Beta 80.3% CAPEX -1,823,344 -1,135,101 -306,298 -454,267 -970,133 -4,960,780 LMM EBITDA @ 50% ownership 494,571 526,263 555,858 599,076 633,271 6,963,273 Market Risk Premium 5.0% CCR 30% 35% 40% 45% 50% Cost of Equity 10.0% LMM FCF 148,371 184,192 222,343 269,584 316,636 3,481,636 Cost of Debt 3.6% FREE CASH FLOW 1,967,370 3,183,958 4,420,435 4,701,814 4,605,265 94,108,150 Corporate Tax Rate 30.0% WACC 9.7% WACC 9.7%

TOTAL PRESENT VALUE 80,331,815 Net Debt 1Q16 751,312 Minority Equity 0 P/BV 4.0x Minority Equity 0 Equity Value (P$) 79,580,503 Shares Outstanding (000's) 300,000 Price Target 2016e P$265.3

ASUR | Transportation Initiating Coverage

III. Financials Estimates P&L - Thousands of MXN 2015-2020 2015 2016e 2017e 2018e 2019e 2020e CAGR 12.9% 6.9% 7.0% 6.5% 6.0% 5.5% Passengers '000 26,152 27,969 29,940 31,900 33,829 35,706 6.4% 4.6% 4.1% 2.1% 2.1% 2.1% 2.1% Aeronautical Revenues per PAX 150.0 156.1 159.4 162.7 166.1 169.6 2.5% 18.1% 11.3% 9.3% 8.8% 8.3% 7.8% Aeronautical Revenues 3,921,949 4,365,612 4,771,192 5,190,114 5,619,342 6,055,404 9.1% 11.5% 13.0% 2.6% 7.6% 3.8% 3.3% Non-Aero Revenues per PAX 95.3 107.6 110.5 118.9 123.4 127.5 6.0% 12.3% 13.3% 2.6% 7.6% 3.8% 3.3% Commercial Revenues per PAX 84.5 95.8 98.3 105.8 109.8 113.4 6.1% 26.8% 21.2% 9.9% 14.6% 10.1% 9.1% Commercial Revenues 2,210,548 2,679,368 2,943,617 3,374,625 3,714,241 4,050,452 12.9% 25.9% 20.8% 9.9% 14.6% 10.1% 9.1% Non-Aeronautical Revenues 2,491,941 3,010,526 3,307,435 3,791,714 4,173,304 4,551,069 12.8% 22.7% 15.0% 9.5% 11.2% 9.0% 8.3% Net Revenues Excl. Construction 6,413,890 7,376,138 8,078,627 8,981,828 9,792,647 10,606,473 10.6% 53.0% -1.6% 1.3% 2.5% 10.4% 13.1% Net Revenues 8,994,598 8,849,482 8,963,728 9,188,126 10,146,914 11,476,606 5.0% 9.5% 8.8% 7.0% 9.4% 5.9% 5.9% Operating Costs excl. Construction 2,340,994 36.5% 2,546,722 34.5% 2,726,064 33.7% 2,981,460 33.2% 3,155,941 32.2% 3,342,998 31.5% 7.4% 5.8% 5.7% 6.9% 12.9% 6.0% 5.6% Cost of Services 1,144,327 17.8% 1,209,687 16.4% 1,292,580 16.0% 1,459,547 16.3% 1,547,238 15.8% 1,633,397 15.4% 7.4% 15.7% 4.8% 7.6% -0.9% 2.4% 2.4% General Expenses 196,991 3.1% 206,532 2.8% 222,162 2.8% 220,055 2.5% 225,231 2.3% 230,691 2.2% 3.2% 25.6% 17.7% 10.2% 11.3% 9.9% 9.0% Techincal Assistance Fee 239,175 3.7% 281,400 3.8% 310,017 3.8% 344,902 3.8% 378,975 3.9% 413,255 3.9% 11.6% 20.4% 13.9% 9.5% 11.2% 9.0% 8.3% Concession Taxes 291,506 4.5% 331,926 4.5% 363,538 4.5% 404,182 4.5% 440,669 4.5% 477,291 4.5% 10.4% 3.2% 10.3% 5.9% 1.5% 2.2% 4.6% Depreciation & Amortization 468,996 7.3% 517,178 7.0% 547,825 6.8% 556,095 6.2% 568,361 5.8% 594,554 5.6% 4.9% 28.9% 18.6% 10.8% 12.1% 10.6% 9.4% Operating Profit 4,072,896 63.5% 4,829,416 65.5% 5,352,563 66.3% 6,000,367 66.8% 6,636,705 67.8% 7,263,476 68.5% 12.3% 25.6% 17.7% 10.4% 11.1% 9.9% 9.1% EBITDA 4,541,892 70.8% 5,346,593 72.5% 5,900,389 73.0% 6,556,463 73.0% 7,205,066 73.6% 7,858,030 74.1% 11.6% 27.6% 18.6% 13.2% 15.6% 14.4% 12.6% Maj. Net Income 2,913,732 45.4% 3,455,519 46.8% 3,912,608 48.4% 4,522,065 50.3% 5,171,184 52.8% 5,825,249 54.9% 14.9% Source: GBM

ASUR | Transportation Initiating Coverage

FCF - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e EBITDA 4,541,892 5,346,593 5,900,389 6,556,463 7,205,066 7,858,030 Change in Working Capital 142,200 -257,642 -88,689 -114,045 -102,347 -102,733 Interests 58,701 36,760 148,647 343,776 605,037 889,051 Taxes -1,366,174 -1,057,475 -1,676,832 -1,938,028 -2,216,222 -2,496,535 CAPEX -2,906,567 -1,823,344 -1,135,101 -306,298 -454,267 -970,133 FCFE 585,871 2,393,264 3,332,606 4,764,210 5,306,851 5,494,315 Source: GBM

Balance - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 2,084,160 3,920,872 7,069,286 11,611,153 16,648,420 21,826,100 Concessions 19,022,311 20,290,023 20,877,299 20,627,502 20,513,408 20,888,986 Total Assets 26,125,884 29,588,439 33,523,170 38,073,899 43,270,322 49,121,012 Short-Term Debt 39,893 20,131 20,131 20,131 20,131 20,131 Long-Term Debt 3,678,128 3,676,791 3,676,791 3,676,791 3,676,791 3,676,791 Total Liabilities 5,717,833 5,728,322 5,750,443 5,779,107 5,804,344 5,829,784 Majority Equity 20,408,051 23,860,117 27,772,726 32,294,790 37,465,974 43,291,223 Net Debt 1,633,861 -223,950 -3,372,364 -7,914,231 -12,951,498 -18,129,178 Source: GBM

ASUR | Transportation Initiating Coverage

IV. Company Description

Grupo Aeroportuario del Sureste (ASUR) was created in 1998 as part of the opening of the Mexican airport system to private investment. The airport group has concessions to operate 9 airports in the South and East of Mexico: Cancun, Cozumel, Huatulco, Merida, Minatitlan, Oaxaca, Tapachula, Veracruz, and Villahermosa. Furthermore, on July 11, 2012, Aerostar—a joint venture between Cancun airport subsidiary and Oaktree Capital—submitted a successful bid for a concession to operate the LMM Airport in Puerto Rico, which was completed on February 27, 2013. In 2015, ASUR served 26.1 million passengers, representing 23% of Mexico’ s total airport traffic.

 9 airports  6 different States  26.1 million PAX in 2015  9.4% five-year PAX CAGR  P$7.0 billion 2014-2018 MDP investment  168 routes by the end of 2015

ASUR’s Airport Locations

Cancun Merida Cozumel Veracruz Villahermosa Oaxaca Minatitlan

Huatulco Tapachula

Source: GBM

ASUR | Transportation Initiating Coverage

A. Company’s airports

ASUR holds the concession for 9 airports in some of Mexico’ s main tourist destinations, three of which are located in the Yucatan Peninsula (Cancun, Cozumel, and Merida). Cancun, Mexico’ s flagship tourist destinations, and its surroundings were the country’ s most visited international tourist destinations in 2015. The Gulf of Mexico, an important commerce and oil center in the country, hosts other three airports, namely Villahermosa, Minatitlan, and Veracruz. The remaining airports—Oaxaca, Huatulco, and Tapachula—serve tourist destinations in the south of Mexico, specifically the state of Chiapas and Oaxaca. ASUR also operates an airport in Puerto Rico, close to the capital, San Juan—one of the main tourist destination in the Caribbean.

In 2015, ASUR catered 26 million passengers, out of which 55.3% were international passengers. Due to the large number of tourists it serves, ASUR’ s operating results generally reflect a seasonal effect, as demand for air travel is tends to be higher during the summer months and during the winter holiday season, particularly in international markets.

ASUR’s Airport Breakdown Capacity MDP 2014-2018 Passenger 2005-2015 2010-2015 Airport (Flights per invesment P$ MDP investment plan breakdown PAX CAGR PAX CAGR Hour) million - New terminal 4 - Terminal 2 and 3 expansion Cancun 75.0% 70 7.7% 9.5% 5,565.6 - Airport certification required works - Airport certification required Merida 6.4% 30 5.0% 7.9% 379.4 works - Airport certification required Villahermosa 4.9% 20 5.9% 11.8% 153.2 works - Terminal building Expansion Veracruz 4.8% 20 8.0% 8.4% 394.1 - Airport certification required works - Airport certification required Oaxaca 2.5% 33 1.6% 8.2% 93.8 works - Airport certification required Huatulco 2.4% 20 7.1% 9.9% 128.8 works - Airport certification required Cozumel 2.1% 22 1.3% 4.8% 174.8 works - Airport certification required Tapachula 1.0% 18 3.3% 7.5% 54.1 works - Airport certification required Minatitlan 1.0% 20 5.8% 16.2% 82.0 works Source: GBM with company data

Below we present a brief description on ASUR’ s main airports:

Cancun: Cancun is ASUR’ s most important airport in terms of passenger volume, air traffic and contribution to revenues. In 2015 the airport served 19.6 million passengers out of which 69.2% were international passengers, furthermore 60.7% of these passengers began or ended their travel in the US. The airport has 2 runways and 3 terminals with terminal 4 being under construction. Cancun is located near beaches, coral reefs, ecological parks, and Mayan archeological sites. As such, in 2015, the city and its surroundings were the most visited international tourist destinations in Mexico.

ASUR | Transportation Initiating Coverage

Merida: This airport ranks as ASUR’ s second busiest in terms of passengers, most of whom come from domestic flights. In 2015, roughly 93.0% of Merida’ s 1.7 million passengers where domestic. The airport has one terminal and two runways and serves a combination of both business and leisure travelers. Merida is an established urban area with numerous small and medium-sized businesses, as it is close to important archeological sites of the Mayan pre-Columbian era.

Villahermosa: Last year, Villahermosa airport served 1.3 million, of which 95.9% where domestic travelers. It has 1 terminal and 1 runway. Travelers to Villahermosa are mainly businesspeople working in the oil industry, as oil exploration is the principal business activity in the area. The city—which is at a 144-km driving distance from the archeological site of Palenque—hosts the La Venta museum.

Veracruz: Veracruz airport—that has 1 terminal and 2 runways—catered 1.3 million passengers in 2015 with 93.4% of these coming from domestic markets. Veracruz, one of Mexico’ s busiest ports, hosts the country’ s largest container terminal and, as such, most of the airport’ s passengers are Mexican businesspeople.

Oaxaca: Oaxaca airport mobilized 663.2k passengers in 2015, with only 9.6% of them coming from international markets. The airport has one terminal and one runway. As the capital of the state of Oaxaca and a picturesque colonial city located near the archeological ruins of Monte Alban and Mitla as well as other tourist attractions, Oaxaca airport serves both businessmen and tourists travelers.

LMM (Luis Muñoz Marin) in Puerto Rico:

In 2013, Aerostar—JV between ASUR’ s Cancun airport LMM 5 year traffic subsidiary (50%) and Oaktree Capital (50%)—began —figures in millions operating the LMM International Airport in Puerto Rico 8.8 after being awarded a 40-year contract. The airport serves 2010-2015 PAX CAGR, 1.6% the capital of San Juan and is the main gateway from Puerto 8.6 Rico to mainland US and international destinations, 8.4 offering leisure and business travel to over 50 destinations which makes it the Caribbean’ s largest and busiest airport. 8.2 Furthermore, as it is located in an island, LMM airport does not face any local competition, also its closest competitor 8.0 is an airport located at a nearly 2-hour driving distance from San Juan. The airport is also near Puerto Rico’ s hotel 7.8 zone. 7.6 LMM airport has two runways and five terminals, providing 2010 2011 2012 2013 2014 2015 it sufficient capacity to deal with up to 10 million Source: GBM enplanements annually—over twice as much its current usage. As such, of its five terminals (A through E), Terminal E is currently not in use, while Terminal D should be closed in 2016 in order to make a more efficient utilization of the airport’ s capacity.

In the last decade, 83.0% of the airport’ s total PAX traffic traveled to and from the United States, with the most recurrent reasons for travel reported including leisure, visit friends and/or relatives, and business. By the end of 2015, the airport had served 35 airlines.

ASUR | Transportation Initiating Coverage

V. Key Figures

A. Revenue

As an airport operator, ASUR’ s main source of revenues is the handling of air traffic at its airports, where the company charges airlines and passengers for the services it provides. Additionally, the company receives revenues from the retail activities in the commercial area of its airports and from the provision of ancillary services to the airlines. Revenue Breakdown Non-Aero Revenue Breakdown Other 3% Complementary Services 8% Non- Aeronautical 39% Aeronautical Commercial 61% Revenues 89%

Source: GBM with company data

i. Aeronautical Revenue ASUR’s Historic PAX Traffic Growth —Figures in millions (left) Revenues from aeronautical services are regulated under the —Number of routes (right) maximum tariff system applicable to ASUR’ s airports and are 30 200 comprised of passenger charges, aircraft landing and parking 180 duties, airport security and passenger walkway charges. They are 25 160 20 140 mainly determined by passenger traffic levels and workload units 120 at each of the company’ s airports. Aeronautical services are 15 100 ASUR’ s major source of revenues, representing 61% of its 80 10 consolidated revenues in 2015. 60 5 40 20 ASUR served 26.1 million passengers throughout 2015, - 0 representing 23% of Mexico’ s total air traffic in the year. Of that 2011 2012 2013 2015 2014 2010 2007 2006 2008 figure, 14.4 million were international passengers (55.3% of its 2009 consolidated traffic) and 11.7 million were domestic (44.7% of Domestic PAX International PAX Routes the consolidated traffic). Through the 2010-2015 period, ASUR’ s Source: GBM with company data traffic grew at a 9.4% CAGR, reflecting the strong traffic dynamics in Mexico as well as the company’ s success in Cancun.

Lastly, in terms of connectivity, ASUR operated 168 routes by the end of 2015, with the number of routes operated by ASUR having grown at a 9.6% CAGR in the 2010-2015 period, which explains part of the company’ s average 9.4% annual traffic expansion. Furthermore, roughly 52.4% of the routes reach ASUR’ s flagship airport, Cancun. We should note that the airport group is constantly negotiating with airlines the opening of new routes.

ii. Non-Aeronautical Revenue

Non-aeronautical revenues represented the remaining 39% of the company’ s revenues in 2015, and to a large extent, these are not regulated by the government, as roughly 3% of consolidated revenues, are regulated non-aeronautical revenues. Delving in, ASUR classifies its non-aero revenues into ancillary and commercial services.

ASUR | Transportation Initiating Coverage

a. Commercial activities represented the greater part (89%) of ASUR’ s non-aero revenues in 2015. Retail shops are the company’ s largest contributor of revenue from commercial activities, amounting to roughly 32.2% of the consolidated figure, followed by duty-free shops, which contribute with 24% of the consolidated figure. Additionally, commercial activities consider advertising, food and beverage, car rental, parking lots, banking and currency exchange services, teleservices, ground transportation, and other services. b. Ancillary services represent 8.0% of the airport group’ s non-aero revenues, and include services provided to passengers and airlines, such as the use of runways and aprons for landings and departures, security services, car park facilities, and the general use of terminal space by aircraft, passengers, and cargo.

iii. Construction Revenue

As a concessionaire, ASUR is required to secure construction or upgrade services for its airports, and as such, it needs to account for both revenues and expenses in relation to those services. Given that ASUR hires a third party to provide such services, and that the costs incurred for construction or upgrades are at government’ s expense, construction revenues do not have an impact on ASUR’ s operating or net income, as they are netted off/due to a netting effect.

B. Profitability

Below, we present ASUR’ s cost structure breakdown:

 Costs of service represent almost half (49%) of ASUR’ s consolidated expenses and consists primarily of labor, maintenance, and safety, security & insurance costs, as well as utilities. Delving in, labor costs, maintenance, and safety, security & insurance costs represent 30, 19, and 13% of the cost of services, respectively.  D&A represents 20% of expenses, and mainly reflect the amortization of the investments deployed in all of ASUR’ s airports under the Master Development Plan (MDP).  Concession fees account for 13% of the company’ s cost structure, and as concessionaire, ASUR is required to pay 5% of the gross revenue obtained from public assets to the Mexican government under the Mexican Federal Duties Law.  Technical assistance fee refers to the fee paid by the company to ITA (Inversiones y Técnicas Aeroportuarias) for providing management and consulting services, as well as for sharing technical assistance, technological and industry knowledge, as well as expertise with ASUR. It is equal to the greater of U.S.$2.0 million, adjusted for U.S. inflation, or 5 % of ASUR’ s EBITDA  Administrative expenses represent 8% of ASUR’ s expenses, and consist of professional fees paid to consultants or other service providers, as well as overhead expenses.

Operating Costs Breakdown Cost of Service Breakdown

Administrative Utilities 8% 9% Technical Safety Assistance 13% Employee 10% costs Costs of 30% services Concession Maintenance 49% Fees 19% 13% D&A Other 20% 29%

Source: GBM with company data

ASUR | Transportation Initiating Coverage

Income Statement Summary - Thousands of MXN

2011 2012 2013 2014 2015

5.0% 9.7% 9.5% 9.9% 12.9% Passengers '000 17,540 19,247 21,069 23,158 26,152 4.2% 3.9% -1.4% -1.8% 4.6% Aeronautical Revenues per PAX 142.4 148.0 146.0 143.4 150.0 9.4% 14.0% 8.0% 7.9% 18.1% Aeronautical Revenues 2,498,344 2,849,136 3,076,737 3,319,671 3,921,949 7.0% 7.6% 1.3% 1.0% 11.5% Non-Aero Revenues per PAX 77.6 83.5 84.6 85.5 95.3 1.2% 1.3% 12.3% Commercial Revenues per PAX - 73.5 74.4 75.3 84.5 10.7% 11.3% 26.8% Commercial Revenues - 1,414,590 1,566,528 1,743,487 2,210,548 12.4% 18.1% 10.9% 11.0% 25.9% Non-Aeronautical Revenues 1,360,940 1,607,585 1,782,753 1,979,718 2,491,941 10.4% 15.5% 7.3% 9.4% 22.7% Net Revenues Excl. Construction 3,859,281 4,456,721 4,780,674 5,228,282 6,413,890 8.0% 12.0% 6.4% 8.0% 53.0% Net Revenues 4,573,306 5,119,891 5,446,088 5,879,165 8,994,598 -0.2% 9.1% 3.2% 7.5% 9.5% Operating Costs excl. Construction 1,766,454 45.8% 1,926,802 43.2% 1,988,383 41.6% 2,138,456 40.9% 2,340,994 10.4% 8.6% 1.1% 8.7% 5.8% Cost of Services 906,172 23.5% 984,495 22.1% 995,159 20.8% 1,081,377 20.7% 1,144,327 2.2% 8.1% -1.7% -4.7% 15.7% General Expenses 168,063 4.4% 181,644 4.1% 178,560 3.7% 170,231 3.3% 196,991 17.8% 18.4% 12.2% 9.9% 25.6% Techincal Assistance Fee 130,381 3.4% 154,384 3.5% 173,259 3.6% 190,419 3.6% 239,175 7.0% 14.8% 9.0% 8.5% 20.4% Concession Taxes 178,342 4.6% 204,735 4.6% 223,132 4.7% 242,166 4.6% 291,506 0.9% 4.9% 4.2% 8.6% 3.2% Depreciation & Amortization 382,740 9.9% 401,545 9.0% 418,273 8.7% 454,265 8.7% 468,996 21.4% 20.9% 13.5% 10.1% 43.7% Operating Profit 2,092,827 54.2% 2,529,919 56.8% 2,871,108 60.1% 3,160,935 60.5% 4,541,892 17.7% 18.4% 12.2% 9.9% 25.6% EBITDA 2,475,567 64.1% 2,931,464 65.8% 3,289,381 68.8% 3,615,200 69.1% 4,541,892 27.3% 30.4% 10.7% -0.6% 27.6% Maj. Net Income 1,591,138 41.2% 2,075,328 46.6% 2,296,875 48.0% 2,283,727 43.7% 2,913,732 Source: GBM with company data

ASUR | Transportation Initiating Coverage

C. Balance Sheet

As at 1Q16, ASUR’ s total assets amounted to P$27.1 billion. Current assets totaled P$4.0 billion, of which P$2.9 billion were cash and equivalents, P$584 million were accounts receivable, and P$423 million were recoverable taxes and other current assets. Other assets totaled P$23.2 billion, where P$19.0 billion correspond to airport concessions.

On the other hand, ASUR’ s total liabilities reached P$5.8 billion by 1Q16, including P$600 million in current liabilities, mostly coming from accrued expenses and other payables (P$555 million). As for long-term liabilities, they amounted to P$5.2 billion in the quarter, and were mainly composed of P$3.7 billion in bank loans and P$1.5 billion in deferred income taxes. As such, the company’ s shareholders’ equity stands at P$21.3 billion.

ASUR held a P$751 million net debt position by the end of the first quarter of 2016, equal to a 0.2x net debt to EBITDA ratio.

Balance Sheet Summary - Thousands of MXN 2011 2012 2013 2014 2015 Cash and equivalents 1,638,661 2,265,427 1,259,563 2,855,362 2,084,160 Concessions 15,405,490 15,629,821 15,790,795 16,509,356 19,022,311 Total Assets 18,598,283 19,109,238 21,416,495 23,924,521 26,125,884 Short-Term Debt 374,640 281,611 41,803 29,945 39,893 Long-Term Debt 321,731 33,333 2,799,059 3,157,357 3,678,128 Total Liabilities 3,121,652 2,638,243 5,132,279 5,173,425 5,717,833 Majority Equity 15,476,631 16,470,995 16,284,216 18,751,095 20,408,051 Net Debt -942,290 -1,950,483 1,581,299 331,940 1,633,861 Source: GBM with company data

VI. Corporate Structure

A. Main shareholders

Currently, 7.65% of ASUR’ s ownership is held by ITA— ADO and Fernando Chico Pardo, each, own 50.0% of ITA. Furthermore, Mr. Chico and ADO hold an additional 12.58 and 12.31% stake, respectively of the airport group. Of the remaining shares, 19.96% are held by Aberdeen, while the remainder is free float.

ASUR | Transportation Initiating Coverage

ASUR’s main shareholders Shareholder # of Shares % of Shares Series B Series BB Total Series B Series BB Total

Float 159,133,873 159,133,873 53.04% 53.04% Aberdeen Asset Management 43,251,540 43,251,540 14.42% 14.42% Grupo ADO 36,918,290 11,475,000 48,393,290 12.31% 3.83% 16.13% Fernando Chico Pardo 37,746,297 11,475,000 49,221,297 12.58% 3.83% 16.41%

Total 277,050,000 22,950,000 300,000,000 92.35% 7.65% 100.00% Source: GBM with company data

B. Board of Directors

ASUR’ s bylaws provide that the holders of Series BB shares are entitled to designate two Board members and their alternates. The other members are appointed by the holders of Series B shares, with each stockholder owning at least 10.0% of the company’ s capital stock in the form of Series B shares, thus being entitled to name one member for each 10.0% interest they hold. The remaining directors are appointed by a majority vote of all holders of Series B shares present at the stockholders’ meeting.

Board of Directors Board Members Position Series 1 Fernando Chico Pardo President and Advisor BB 2 Jose Antonio Perez Anton Advisor BB 3 Ricardo Guajardo Touché Independent Advisor B 4 Francisco Garza Zambrano Independent Advisor B 5 Guillermo Ortíz Martínez Independent Advisor B 6 Roberto Servitje Sendra Independent Advisor B 7 Aurelio Perez Alonso Advisor B 8 Luis Chico Pardo Advisor B 9 Rasmus Christiansen Independent Advisor B

Main Officers Seniority in Name Position Post 1 Adolfo Castro Rivas CEO / CFO 16 2 Carlos Trueba Coll Cancun Airport Director 5 3 Héctor Navarrete Muñoz Regiona Operations Director 14 4 Claudio Góngora Morales Legal Director 17 5 Manuel Gutiérrez Sola Commercial Director 13 6 Agustín Arellano Rodríguez International Affairs Director 3 7 Alejando Pantoja López nfrastructure & Regulation Directo 3

GAP | Transportation Initiating Coverage

GAP Despite the benefits of being the most geographically diversified Market Underperformer airport operator… all growth and efficiencies are more than 2016e Price Target P$165.4 reflected at current prices.

We are reinitiating coverage on GAP introducing our 2016e price Price 188.40 target of P$165.4 and a Market Underperformer rating, as all the 12M Price Range 115.51 / 194.16 benefits from being the most diversified operator in terms of Shares Outstanding (Mill) 525.6 geography, along with strong traffic growth and solid commercial Market Cap (Mill) 99,907 initiatives are more than reflected at current prices.

Float 85% GAP stands as the airport operator with the greatest geographic Net Debt (Mill) 2,768 diversification in Mexico. GAP has five airports that represent more than 80% of its traffic, being Guadalajara the most important EV (Mill) 107,255 followed by Tijuana and Montego Bay in Jamaica, benefiting itself Dividend Yield 3.9% from a lower exposure to any risk inherent to climate phenomena, and Mexican airlines.

2015 TTM 2016e 2017e Non-aeronautical revenues to post a steady growth. GAP will be investing in terminal expansions, which would add more than 8,100 Revenue 7,268 8,061 9,053 9,994 m2 in commercial spaces in its most important airports, while EBITDA 5,245 5,760 6,266 6,957 renewing its agreements with its commercial tenants in order to Net Profit 2,726 2,991 3,370 3,858 increase both the fixed and variable rental fees it charges. As a result, non-aeronautical revenues per PAX should post a steady growth over Free CF 1,039 2,052 4,274 7,303 the next 5 years. EPS5.195.696.417.34 P/E 36.8x 33.4x 29.6x 25.9x Traffic should continue to grow at solid rates in the long term. Indeed, the company should continue to benefit from a rising EV/EBITDA 20.6x 18.5x 16.6x 14.3x economic development in Guadalajara and the Bajio region and from P/BV 4.7x 4.5x 4.0x 3.5x the growth of Los Cabos and Puerto Vallarta as tourist destinations.

However, lower EBITDA margins from Jamaica would taint the

improvements achieved in Mexico. Montego Bay is set to deliver Mauricio Martinez Vallejo lower profitability readings going forward, with a normalized [email protected] EBITDA margin of roughly 50%. +52(55) 5480 5800 ext. 4187 Catalysts. GAP has expressed its intentions to increase its leverage, Pablo Zaldivar looking for a net debt to EBITDA ratio of 2.0x. Such incremental debt [email protected] should be destined to acquisitions—looking for new concessions in +52(55) 5480 5800 ext. 4390 LatAm, where the Kingston Airport in Jamaica would be a possibility— or dividend payments.

17.0x 16.0x EV/EBITDA FWD 12M PRICE PERFORMANCE VS. IPC 36.0x P/E 80% 15.0x 70% 34.0x 14.0x 60% 13.0x 50% 32.0x 12.0x 40% 30.0x 11.0x 30% 20% 10.0x 28.0x 10% 9.0x 0% 8.0x 26.0x -10% -20% 24.0x 11/15 12/15 10/15 01/16 07/15 02/16 03/16 05/16 08/15 09/15 09/15 04/16 06/16 11/15 12/15 11/15 10/15 01/16 07/15 12/15 07/16 02/16 03/16 08/15 05/16 09/15 09/15 04/16 06/16 10/15 01/16 07/15 07/16 02/16 03/16 08/15 05/16 09/15 09/15 04/16 06/16 GAP IPC

GAP | Transportation Initiating Coverage

I. Investment Thesis

Despite the benefits of being the most geographically diversified airport operator… all growth and efficiencies are more than reflected at current prices. GAP is the only operator in our sample with over 80% of its traffic stemming from more than five airports—four of them in Mexico and one in Jamaica. In addition, the company seems to have a good opportunity to keep improving its profitability on a healthy growth in traffic and commercial strategies. However, all such good news seem to be priced already. Thus, we are introducing our 2016e price target of P$165.4 with a Market Underperformer rating.

GAP stands as the airport operator with the greatest geographic diversification in Mexico. Indeed, the company has five airports that represent more than 80% of its traffic, being Guadalajara the most important followed by Tijuana. In addition, its third most important airport in terms of traffic is Montego Bay in Jamaica. As such, the company benefits from a lower exposure to any risk inherent to climate phenomena, as well as from a lower dependence on Mexican airlines, due to its natural exposure to international traffic.

GAP’s Traffic Breakdown by Airport GAP’s EBITDA Breakdown by Airport —2015 Figures —2015 Figures

Other 6 Airports Other 6 Airports 9% 5% Montego Montego Bay Bay 12% 14% Guadalajara Guadalajara Guanajuato Guanajuato 31% 31% 5% 5% Los Cabos Los Cabos Hermosillo Tijuana Hermosillo 16% Tijuana 12% Puerto 4% Puerto 16% 3% 12% Vallarta Vallarta 11% 14% Source: GBM with company data Source: GBM with company data

Non-aeronautical revenues to post a steady growth. During the current MDP period (2015-2019), GAP will be investing in terminal expansions, which would add more than 8,100 m2 in commercial spaces in its most important airports. In addition, the company is about to renew the agreements with its commercial tenants in order to increase both the fixed and variable rental fees it charges, seeking at the same time to incorporate more trusted and valuable brands. As a result, non- aeronautical revenues per PAX should post a steady growth over the next 5 years with a 2015-2020 CAGR of 5.1%, moving from P$61 in 2015 to P$78.3 per PAX in 2020.

GAP’s additional Commercial Spaces Non-Aero vs. Aero-Revenues Commercial 100% Airport 90% 25% 26% 26% 27% 27% 28% Space Expansion 80% Guadalajara 3,000 sqm 70% 60% Tijuana 4,600 sqm 50% 40% Hermosillo 5,00 sqm 75% 74% 74% 73% 73% 72% 30% 20% 10% 0% 2015 2017e 2016e 2018e 2019e 2020e

Aero Revenues Non-Aero Revenues

Source: GBM with company data Source: GBM with company data

GAP | Transportation Initiating Coverage

Traffic should continue to grow at solid rates in the long term. Indeed, the company should continue to benefit from a rising economic development in Guadalajara and the Bajio region and from the growth of Los Cabos and Puerto Vallarta as tourist destinations. As such, we are calling for a 2015- 2020 CAGR of 8.5% GAP’ s traffic.

Traffic increase and commercial initiatives to underpin profitability margins in Mexico, offsetting lower margins in Jamaica. As a result of a higher traffic, alongside the above mentioned strategy in the commercial front, GAP should be able to post a 2016-2020 CAGR of 12.0% in its EBITDA while it should keep expanding its EBITDA margin from 69.2 in 2016 to 71.0% in 2020. Still, we should note that Montego Bay is set to deliver lower profitability readings going forward, with a normalized EBITDA margin of roughly 50%, which should partially offset improvements in GAP’ s Mexican operations.

GAP’s traffic growth GAP’s EBITDA growth —figures in millions —figures in billions 50 10 CAGR 2016-2020: 12.0% 75% 45 CAGR 2015-2020: 8.5% 74% 40 8 73% 35 72% 30 6 71% 25 70% 20 4 69% 15 68% 10 2 67% 5 66% - - 65% 2015 2017e 2016e 2018e 2019e 2017e 2020e 2016e 2018e 2019e 2020e EBITDA EBITDA mg.

Source: GBM with company data Source: GBM with company data

Current valuations have all good news already priced in. As witnessed in our entire Mexican sample, GAP’ s valuations seems to be reflecting all the positives for the future. Indeed, its 12M FWD EV/EBITDA stands at its highest level in the last 3 years. What’ s more, despite an expected improvement in GAP’ s FCF in 2016, its FCF yield at current prices remains at 4.3%.

GAP’s 3-year EV/EBITDA Fwd FCF and Cash Conversion Rate —figures in billions 17.0x 7 80% 16.0x 6 75% 15.0x 5 70% 14.0x 4 65% 13.0x 3 12.0x 2 60% 11.0x 1 55% 10.0x 0 50% 9.0x 2017e 2016e 2018e 8.0x 2019e 2020e FCFE CCR Consolidated 12/13 12/15 12/14 03/15 03/14 03/16 06/13 09/13 06/15 09/15 06/14 06/16 09/14 Source: GBM

Catalysts. GAP has expressed its intentions to increase its leverage looking for a net debt to EBITDA ratio of 2.0x, which translates into a more efficient capital structure. Such incremental debt should be used to acquisitions or dividend payments. Furthermore, GAP may be interested in participating in new concessions in LatAm, where the Kingston Airport in Jamaica would be a possibility.

GAP | Transportation Initiating Coverage

II. Valuation

Introducing our 2016e price target of P$165.4 for GAP with a Market Underperformer rating, awaiting for more comfortable valuations. Our valuation derives from a DCF approach.

DCF assumptions  EBITDA 2015-2020 CAGR of 12.0%

 An EBITDA present value for the 2021-2048 period of P$159 billion—with a long-term nominal growth of 5%.

 Normalized effective tax rate of 30% for the long- term.

 CAPEX for the next 4 years in accordance with MDP commitments

 WACC of 9.6% o Cost of Equity of 10.1% o Cost of Debt of 4.4%

DCF GAP’s WACC 2016e 2017e 2018e 2019e 2020e NPV 2021-2048e %Equity 92.9% EBITDA 6,266,359 6,957,426 7,672,742 8,457,426 9,232,878 159,355,334 %Debt 7.1% Tax Expense 1,316,887 1,656,036 1,927,416 2,246,146 2,564,052 40,839,999 Risk Free 6.0% Working Capital 540,179 531,468 -12,943 -21,972 -10,970 Beta 82.2% OPERATING CASH FLOW 5,489,652 5,832,858 5,732,383 6,189,308 6,657,856 118,515,336 Market Risk Premium 5.0% CAPEX -1,884,593 -2,967,714 -709,372 -194,982 -898,486 -10,616,362 Cost of Equity 10.1% FREE CASH FLOW 3,605,058 2,865,144 5,023,012 5,994,326 5,759,370 107,898,974 Cost of Debt 4.4% WACC 9.6% Corporate Tax Rate 30.0% WACC 9.6% TOTAL PRESENT VALUE 93,784,078 Net Debt 1Q16 2,768,330 Minority Equity 912,584 P/BV 4.5x

Minority Equity 4,092,578 Equity Value (P$) 86,923,169 Shares Outstanding (000's) 525,576 Price Target 2016e P$165.4

GAP | Transportation Initiating Coverage

III. Financial Estimates

P&L - Thousands of MXN 2015-2020 2015 2016e 2017e 2018e 2019e 2020 CAGR 22.6% 16.5% 7.7% 6.7% 6.2% 5.8% Passengers '000 30,302 35,288 38,014 40,570 43,106 45,595 8.5% 12.6% 6.4% 1.8% 1.9% 2.3% 2.3% Aeronautical Revenues per PAX 178.8 190.4 193.8 197.5 202.2 206.8 3.0% 38.0% 24.0% 9.7% 8.8% 8.7% 8.2% Aeronautical Revenues 5,419,021 6,717,409 7,368,466 8,013,529 8,714,068 9,431,259 11.7% 12.7% 8.4% 4.4% 4.5% 4.2% 4.2% Non-Aero Revenues per PAX 61.0 66.2 69.1 72.2 75.2 78.3 5.1% 38.2% 26.3% 12.4% 11.5% 10.7% 10.2% Non-Aeronautical Revenues 1,849,254 2,335,457 2,625,970 2,928,433 3,240,972 3,571,788 14.1% 38.1% 24.6% 10.4% 9.5% 9.3% 8.8% Net Revenues Excl. Construction 7,268,274 9,052,866 9,994,436 10,941,961 11,955,040 13,003,047 12.3% 46.2% 34.6% 2.0% 4.7% 4.3% 14.4% Net Revenues 8,106,908 10,909,670 11,132,391 11,651,333 12,150,022 13,901,533 11.4% 37.0% 22.3% 7.7% 6.3% 5.3% 6.6% Operating Costs excl. Construction 3,434,286 4,199,324 4,524,536 4,809,233 5,063,366 5,398,243 9.5% 34.8% 13.3% 8.7% 7.2% 5.8% 7.6% Cost of Services 1,558,259 21.4% 1,765,309 19.5% 1,918,932 19.2% 2,057,089 18.8% 2,175,817 18.2% 2,340,548 18.0% 8.5% 21.8% 25.2% 11.8% 9.5% 10.6% 8.8% Technical Assistance 236,507 3.3% 296,029 3.3% 330,816 3.3% 362,179 3.3% 400,494 3.4% 435,602 3.4% 13.0% 84.7% 50.1% 8.6% 8.0% 8.4% 7.9% Concession Tax 483,086 6.6% 725,234 8.0% 787,262 7.9% 849,951 7.8% 921,303 7.7% 994,018 7.8% 15.5% 25.0% 22.2% 5.3% 3.5% 1.7% 4.0% Depreciation 1,156,435 15.9% 1,412,753 15.6% 1,487,526 14.9% 1,540,014 14.1% 1,565,753 13.1% 1,628,074 12.2% 7.1% 47.9% 18.7% 12.7% 12.1% 12.4% 10.3% Operating Profit 4,088,600 56.3% 4,853,607 53.6% 5,469,900 54.7% 6,132,729 56.0% 6,891,673 57.6% 7,604,804 58.5% 13.2% 42.1% 19.5% 11.0% 10.3% 10.2% 9.2% EBITDA 5,245,035 72.2% 6,266,359 69.2% 6,957,426 69.6% 7,672,742 70.1% 8,457,426 70.7% 9,232,878 71.0% 12.0% 21.6% 23.6% 14.5% 16.6% 16.7% 14.3% Maj. Net Income 2,726,020 37.5% 3,369,972 37.2% 3,857,702 38.6% 4,496,778 41.1% 5,248,357 43.9% 5,997,620 46.1% 17.1% Source: GBM

FCF - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e EBITDA 5,245,035 6,266,359 6,957,426 7,672,742 8,457,426 9,232,878 Change in Working Capital 512,532 540,179 -8,278 -12,943 -21,972 -10,970 Interests -118,416 -48,314 143,783 400,885 722,380 1,086,899 Taxes -930,657 -599,421 -1,656,036 -1,927,416 -2,246,146 -2,564,052 CAPEX -3,669,927 -2,156,806 -1,437,955 -1,009,372 -494,982 -1,198,486 1,038,567 4,001,997 3,998,939 5,123,897 6,416,707 6,546,268 FCFE Source: GBM

GAP | Transportation Initiating Coverage

Balance - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 2,996,499 7,529,486 11,828,426 17,252,322 23,969,029 30,815,297 Concessions 13,888,948 14,083,270 13,733,698 12,903,056 11,532,286 10,802,698 Total Assets 31,473,399 36,882,205 40,912,043 45,586,277 51,018,794 57,225,040 Short-Term Debt 3,529,102 245,410 245,410 245,410 245,410 245,410 Long-Term Debt 2,984,126 7,409,098 7,409,098 7,409,098 7,409,098 7,409,098 Total Liabilities 9,317,356 11,189,523 11,261,715 11,329,751 11,394,360 11,472,957 Majority Equity 21,273,951 24,713,418 28,571,120 33,067,898 38,316,256 44,313,875

Net Debt 3,516,729 125,022 -4,173,918 -9,597,814 -16,314,521 -23,160,789

Source: GBM

GAP | Transportation Initiating Coverage

IV. Company Description

Grupo Aeroportuario del Pacífico (GAP) was created in 1998 as part of the opening of the Mexican airport system to private investment. The airport group has concessions to operate 12 airports in the Pacific region of Mexico: Guadalajara, Tijuana, Puerto Vallarta, Los Cabos, La Paz, Manzanillo, Hermosillo, Bajio, Morelia, Aguascalientes, Mexicali, and Los Mochis. Furthermore, on April 20, 2015 GAP acquired 100% of the shares of the Spanish company Desarrollo de Concesiones Aeroportuarias (DCA) that has a 74.5% stake in MBJ Airports Limited (MBJA), the entity that operates Montego Bay airport in Jamaica. In 2015, Montego Bay airport served 3.7 thousand passengers. In the same year GAP served 27.6 million passengers, representing 23.9% of Mexico’ s total airport traffic.

 12 airports  9 different States  27.6 million PAX in 2015  6.4% 5-year PAX CAGR  P$5.5billion 2015-2019MDP investment  218 routes by the end of 2015

GAP’s Airport Locations Mexicali Tijuana Hermosillo

Los Mochis La Paz Los Cabos Aguascalientes Guadalajara Guanajuato Puerto Vallarta Morelia Manzanillo

Source: GBM with company data

GAP | Transportation Initiating Coverage

A. Company’s airports

In its 12 Mexican airports, GAP serves 2 of the most important cities in Mexico, Guadalajara (second most populated) and Tijuana (fifth most populated) as well as six medium sized cities (Mexicali, Hermosillo, Los Mochis, Aguascalientes, Guanajuato, and Morelia). The six remaining airports serve main tourist destinations in the country (La Paz, Los Cabos, Puerto Vallarta, and Manzanillo). Under the Mexican law applicable, all of GAP’ s airports are categorized as international and of the 27.6 million passengers in 2015, roughly 34.6 % came from international markets.

GAP’s Airport Breakdown

Passenger Capacity (Flights 2005-2015 PAX 2010-2015 PAX MDP 2015-2019 Airport MDP investment plan breakdown per Hour) CAGR CAGR invesment P$ million

-Terminal expansion Guadalajara 35.4% 39 5.6% 7.1% 1,359.0 - Integration of terminal 2 and 1

Tijuana 17.6% 36 3.4% 5.9% 1,035.1 -Terminal expansion and upgrades

-Apron expansion Los Cabos 13.2% 42 4.0% 5.9% 1,121.0 -Refurbishment of Terminal 1 -Terminal 2 expansion Puerto Vallarta 13.0% 37 2.7% 5.6% 360.6 -Maintenance - Airport expansion to improve Guanajuato 5.4% 11 3.0% 11.8% 269.7 departure lounges and security Hermosillo 4.9% 30 1.1% 3.5% 386.1 -Terminal expansion La Paz 2.5% 14 4.3% 4.1% 186.0 -Maintenance Aguascalientes 2.3% 12 6.0% 16.6% 190.8 -Maintenance -Airport expansion for new bagage Mexicali 2.2% 14 0.9% 5.2% 187.4 belt. Morelia 1.7% 14 -3.3% 2.2% 216.2 -Maintenance Los Mochis 1.1% 16 3.7% 3.6% 85.9 -Maintenance Manzanillo 0.7% 16 -2.1% 4.0% 80.9 -Maintenance

Source: GBM with company data

Below we present a brief description on GAP’ s main airports:

Guadalajara: GAP’ s most important airport in terms of passenger traffic, air traffic movements, and contribution to the sum of aeronautical and non-aeronautical revenues. In 2015, the airport served 9.8 million passengers out of which around 33.2% were international passengers. The airport serves 14 airlines and has two runways and two terminals. Guadalajara is a major hub for the Mexican national highway system as it is an important center for agricultural commerce. Jalisco is another important contributor to the maquiladora industry in Mexico, especially in the electronics, computer equipment and clothing industries.

Tijuana: Ranked as GAP’ s second busiest airport, Tijuana serves mostly domestic passengers. In 2015, around 99.0% of its 4.9 million passengers were domestic. Tijuana serves 6 airlines and has one runway and one main terminal building with 23 gates. As a bordering state, Tijuana is a popular entry point to the United States, and as such, the airport serves a great number of Mexican migrant workers traveling to Tijuana in order to seek work in the United States. Furthermore, the opening of the cross-border facility at the airport has attracted passengers seeking to cross directly to the United States using the pathway. Lastly, Baja California is the second largest maquiladora center in Mexico.

Los Cabos: The airport ranks as GAP’ s third most important airport in terms of traffic and second in terms of revenues. In 2015, it catered 3.7 million passengers, out of which roughly 72.1% were from international markets. The airport serves 25 airlines and counts with 2 commercial aviation terminals and 1 runway. The airport mainly serves tourists visiting coastal destinations in the state of Baja California Sur, such as San José del Cabo and Cabo San Lucas.

GAP | Transportation Initiating Coverage

Puerto Vallarta: As a beach destination, Puerto Vallarta serves a high volume of international traffic. In 2015 it catered 3.6 million passengers, of which 68.7% were international. The airport serves 24 airlines and counts with 1 commercial terminal and 1 runway. Due to the natural beauty of the Bay of Banderas and the area’ s many beaches and abundant marine wildlife, Puerto Vallarta is a popular tourist destination.

Hermosillo: In 2015, the Hermosillo airport catered 1.4 million passengers out of which 94.7% were domestic. The airport counts with 1 terminal and 1 runway and serves 6 airlines. Hermosillo is an important hub in a primarily agricultural and industrial region. The airport serves as the main alternate airport for flights heading to the Tijuana International Airport

Guanajuato: Last year, Guanajuato airport mobilized 1.5 million passengers, of which around 37.2% were international passengers. The airport serves 9 airlines and counts with 2 terminals (one for commercial aviation and other for general aviation) and 1 runway. Guanajuato is located in Mexico’ s Bajio region, best known for its rich colonial history, agricultural sector, and manufacturing industry.

La Paz: The coastal capital of Baja California Sur, La Paz is a gateway to the Gulf of California and to the abundance of marine life found in it. As such, the airport serves a growing Eco-tourism industry and in 2015 mobilized 682.4 thousand passengers, most of whom came from domestic markets (98.6%). The airport serves 5 airlines and has 1 terminal for commercial aviation and 1 runway.

Montego Bay Jamaica: MBJ 5-year traffic In 2015, GAP acquired a 74.5% stake in MBJ Airports -Figures in millions Limited through the acquisition of 100% of DCA. Thus, 3.8 GAP owns the rights to operate Montego Bay 3.7 International airport until 2033. In addition, every 2010-2015 year PAX CAGR, 3.2% 5years, MBJ Airports can submit its proposal to the 3.6 Jamaica Civil Aviation Authority (JCAA) for maximum 3.5 tariff increase and investment commitments, which if 3.4 approved, would become binding obligations under the 3.3 terms of MBJA’ s concession. Montego Bay International 3.2 airport handles 71% of Jamaica’ s total air traffic. 3.1

In November 2014, new maximum tariffs for MBJ airport 3 were authorized for the period April 2015-March 2020. 2.9 The JCAA determined the new maximum tariff based on 2010 2011 2012 2013 2014 2015 traffic projections, operating costs and CAPEX included in Source: GBM the Capital Development Program, which is estimated at

US$38 million for the period, out of which US$0.7 million were deployed in 2015. These capital investments have been destined for the expansion of terminals, aprons, and equipment at the airport

V. Key Figures

A. Revenue

Being an airport operator, GAP’ s revenues mainly come from charging airlines and passengers a fee for the service of handling air traffic at its airports. Additionally, the company also recognizes revenues in the form of non-aeronautical services such as the retail activities in the commercial areas of the airports and construction revenues.

GAP | Transportation Initiating Coverage

Revenue Breakdown Non-Aero Revenue Breakdown Recovery of costs Leasing of space 8% 8% Non- Aeronautical Other Car rentals 25% 8% 8% Food and Advertising Car parking beverage 7% Retail 14% 9% 9% Aeronautical 75% Other Duty-free 16% 13%

Businesses operated by third parties Businesses operated directly Recovery of costs Source: GBM with company data

i. Aeronautical Revenue

Aeronautical revenues represented 75% of GAP’ s consolidated revenues in 2015. They are subject to government regulation under the MDP, and are comprised of passenger charges, aircraft landing and parking duties, charges for aircraft connection to terminals through a passenger walkway, the leasing of space in the airports to the airlines, airport security charges and fees for any other ancillary services, such as cargo handling.

Throughout 2015, GAP served 27.1 million passengers, equivalent to 23.9% of Mexico’ s consolidated air traffic. Delving in, GAP’ s domestic traffic represented 65.4% of the company’ s total traffic, while the remaining 34.6% of the passengers came from international markets. GAP’ s traffic has grown at a 6.4% CAGR through the 2010-2015 period, reflecting the strong market conditions that prevail in Mexico.

In terms of connectivity, by the end of 2015, GAP operated 218 routes, with the number of routes having grown at a 5.5% CAGR in the 2010-2015 period, which explains part of the 6.4% annual traffic expansion. We should note that the company is constantly in the lookout for new routes and airlines to fly them.

Lastly, as an additional source of revenues, GAP handles cargo as part of its aeronautical services, with100kg of cargo representing one workload unit, equal to one passenger. It must be noted that cargo revenues are not very relevant for the company, as they only represent around 0.01% of GAP’ s total workload units. GAP’s Historic PAX Traffic Growth GAP’s Historic Cargo Traffic Growth —Figures in millions (left) —Figures in thousands —number of routes (right) 30 250 200 180 25 200 160 20 140 150 120 15 100 100 80 10 60 5 50 40 20 - 0 - 2011 2011 2012 2013 2013 2012 2015 2015 2014 2014 2010 2010 2007 2007 2006 2008 2009 2006 2008 2009

Domestic PAX International PAX Routes Domestic Cargo (tons) International Cargo (tons) Source: GBM with company data

GAP | Transportation Initiating Coverage

ii. Non-Aeronautical Revenue

Non-aeronautical revenues represented 25% of GAP’ s consolidated revenues in 2015. They consist of revenues that are not subject to government regulation under the MDP. Delving in, GAP classifies non- aero revenue into three separate categories: Businesses operated directly by them, Businesses operated by third parties, and Recovery of costs:

a. Businesses operated directly by GAP represent around 29% of non-aeronautical revenues. They consist of revenues derived from business lines operated directly by the company, which include car park charges (representing 14% of non-aeronautical revenues), advertising (7% of non-aeronautical revenues), VIP lounges and convenience stores (contributing with 4% to non-aeronautical revenues, each). b. Businesses operated by third parties are GAP’ s principal source of non-aeronautical revenues, as they represented 63% of this category in 2015. Revenues from businesses operated by third parties primarily come from leasing of commercial space to tenants, advertisers and certain ground transportation providers. Duty-free operations represent the largest source of revenues from businesses operated by third parties, with 13% thereof, followed by retail (9%) and food and beverage (9%) operations. c. Recovery of costs represents 8% of non-aeronautical revenues and consists of utilities, fuel, maintenance, and operation charges that are transferred passed through to airlines and other tenants of GAP’ s airports. iii. Construction Revenue

As a concessionaire, GAP is required to undertake all necessary constructions or improvements to the airports it operates as obliged by the MDP. As such, GAP must account for both revenues and expenses in connection with those services. As the costs incurred by GAP for construction or upgrades are at government’ s expense, construction revenues do not have an impact on GAP’ s operating or net income, as they are netted off/due to a netting effect.

B. Profitability

Operating Costs Breakdown Cost of Service Breakdown

Technical assistance fees 7% Utilities 12% Concession Employee taxes costs Costs of Safety 14% 32% services 16% 45% D&A Maintenance Other 34% 20% operating expenses 20%

Source: GBM with company data

GAP | Transportation Initiating Coverage

Below, we present GAP’ s cost structure breakdown:

 Cost of services represents roughly 45% of GAP’ s consolidated expenses, with its main components being labor costs (representing 32% of the category), followed by maintenance and utilities expenses (around 20 and 12% , respectively), and safety, security and insurance costs (16% ). The remaining 20% corresponds to other operating expenses.

 D&A represents 34% of expenses and is mainly reflected on the depreciation of machinery & equipment, upgrades of leased buildings, and amortization of the improvements to concession assets.

 Concession fees amount to 14% of the company’ s cost structure. All concessionaires are required to pay these fees, thus they represent a tax revenue for the Mexican government equal to 5% of its gross annual revenues.

 Technical assistance fee is that paid to AMP —a strategic partner—for providing management and consulting services, as well as technical assistance, and technological and industry knowledge to GAP. The fee is equal to the greater of US$4.0 million or 5% of GAP’ s annual EBITDA.

GAP | Transportation Initiating Coverage

Income Statement Summary - Thousands of MXN

2011 2012 2013 2014 2015

-0.1% 5.3% 8.9% 6.7% 22.6% Passengers '000 20,205 21,283 23,171 24,718 30,302 4.1% 3.8% -1.3% 1.8% 12.6%

Aeronautical Revenues per PAX 152.3 158.2 156.1 158.8 178.8 4.1% 9.4% 7.4% 8.5% 38.0% Aeronautical Revenues 3,077,925 3,365,984 3,616,616 3,925,734 5,419,021 8.8% 16.1% 6.6% 7.2% 12.7% Non-Aero Revenues per PAX 40.8 47.4 50.5 54.2 61.0 8.7% 22.3% 16.1% 14.4% 38.2% Non-Aeronautical Revenues 824,580 1,008,455 1,170,491 1,338,541 1,849,254 3.8% 12.1% 9.4% 10.0% 38.1% 3,902,507 4,374,434 4,787,108 5,264,278 7,268,274 Net Revenues Excl. Construction 12.9% 0.1% 5.7% 6.1% 46.2% Net Revenues 4,938,735 4,944,667 5,227,837 5,546,152 8,106,908 -6.3% 9.6% 6.8% 3.8% 37.0% Operating Costs excl. Construction 2,061,429 2,260,293 2,413,902 2,506,404 3,434,286 8.0% 7.4% 6.2% 2.7% 34.8% Cost of Services 987,243 25.3% 1,060,003 24.2% 1,125,982 23.5% 1,156,313 22.0% 1,558,259 21.4% 6.1% 13.9% 10.6% 13.3% 21.8% Technical Assistance 136,191 3.5% 155,072 3.5% 171,470 3.6% 194,228 3.7% 236,507 3.3% 4.9% 11.9% 9.4% 10.0% 84.7%

Concession Tax 194,102 5.0% 217,295 5.0% 237,728 5.0% 261,577 5.0% 483,086 6.6% -15.6% 11.3% 6.8% 4.8% 25.0% Depreciation 742,969 19.0% 827,229 18.9% 883,234 18.5% 925,219 17.6% 1,156,435 15.9% 17.8% 15.1% 12.3% 16.5% 47.9% Operating Profit 1,836,020 47.0% 2,113,501 48.3% 2,373,178 49.6% 2,765,090 52.5% 4,088,600 56.3% 5.7% 14.0% 10.7% 13.3% 42.1% EBITDA 2,578,989 66.1% 2,940,730 67.2% 3,256,412 68.0% 3,690,309 70.1% 5,245,035 72.2% 5.4% 10.0% 26.8% -0.2% 21.6% Maj. Net Income 1,611,579 41.3% 1,772,030 40.5% 2,246,229 46.9% 2,242,520 42.6% 2,726,020 37.5% Source: GBM with company

C. Balance Sheet

As of 1Q16, GAP’ s current assets amounted to P$5.7 billion, of which P$4.9billion were cash and equivalents and P$596 million were accounts receivable. Other assets totaled P$28.3 billion, mainly due to P$12.2 billion in airport concessions and P$7.4 billion in improvements to the concession assets. As such, total assets amount to P$33.9 billion. On the other hand, the GAP’ s total liabilities amounted to P$10.8 billion by 1Q16, including P$1.6 billion in short-term liabilities and P$9.1 billion in long-term liabilities. As such, the company’ s shareholders’ equity stands at P$23.2 billion.

GAP held a P$2.8 billion net debt position by the end of the first quarter of 2016, equal to a 0.2x net debt to EBITDA ratio.

GAP | Transportation Initiating Coverage

Balance Sheet Summary - Thousands of MXN 2011 2012 2013 2014 2015 Cash and equivalents 2,413,359 2,097,256 2,578,620 1,595,502 2,996,499

Concessions 10,463,499 10,179,422 9,895,346 9,611,296 13,888,948

Total Assets 24,719,675 24,533,637 25,234,600 24,286,207 31,473,399 Short-Term Debt 411,439 555,925 637,577 978,538 3,529,102

Long-Term Debt 1,612,179 1,456,798 1,216,899 740,936 2,984,126 Total Liabilities 3,038,492 3,080,424 3,021,889 3,000,316 9,317,356

21,681,183 21,453,213 22,212,711 21,285,891 21,273,951 Majority Equity Net Debt -389,741 -84,533 -724,144 123,972 3,516,729 Source: GBM with company data

VI. Corporate Structure

Currently, 15.0% of GAP’ s ownership is held by AMP, while the remaining is float. Of the latter, 14.9% is held by GMEXICO, who according to GAP’s bylaws, must sell its excess stake in GAP to reach a maximum of 10%. Also, of the float, 30.4% corresponds to BMV float and 10.9% to ADR float.

A. Main shareholders

Both of GAP’ s Series B and BB shares are entitled to one vote per share at any general shareholders’ meeting, while Series BB shares confer certain special rights that allow holders to exercise significant control over the company’ s management.

Currently, Series BB shares represent 15% of common stock—being held by AMP—, and can only be transferred upon their prior conversion into B shares, based on certain time restrictions. Pursuant these time restrictions, AMP presently has the right to sell almost all of the shares that it owns; yet, under the company’ s bylaws, if at any time AMP were to hold less than 7.65% of GAP’ s capital stock as Series BB shares, all BB series would then be converted into Series B shares.

GAP | Transportation Initiating Coverage

GAP’s main shareholders Shareholder # of Shares % of Shares Series B Series BB Total Series B Series BB Total

BMV Float 170,560,878 170,560,878 30.4% 30.4% ADRs float 61,055,270 61,055,270 10.9% 10.9% Top 8 Holders (excluding GMEXICO) 112,449,979 112,449,979 20.0% 20.0% Treasury 35,424,453 35,424,453 6.3% 6.3% GMEXICO 83,839,520 83,839,520 14.9% 14.9% AMP 13,519,900 84,150,000 97,669,900 2.4% 15.0% 17.4%

Total 476,850,000 84,150,000 561,000,000 85.0% 15.0% 100% Source: GBM with company data

B. Board of Directors Series BB shares holders are entitled to elect four members the board of directors while holders of Series B shares are entitled to elect the remaining members.

Board of Directors Board Members Position Series 1 Laura Diez Barroso Azcárraga President and Advisor BB 2 Eduardo Sánchez Navarro Redo Advisor BB 3 Francisco Javier Marín San Andrés Advisor BB 4 José Vicente Corta Fernández Advisor BB 5 Carlos Cardenas Guzman Independent Advisor B 6 Joaquín Vargas Guajardo Independent Advisor B 7 Álavaro Fernández Garza Independent Advisor B 8 Juan Diez-Canedo Ruiz Independent Advisor B 9 Angel Losada Moreno Independent Advisor B 10 Roberto Servitje Achutegui Independent Advisor B 11 Eduardo Gallsstegui Armella Independent Advisor B

Main Officers Name Position Seniority 1 Fernando Bosque Mohino CEO 5 2 Saul Villareal Garcia CFO 1 3 Sergio Enrique Flores Ochoa Legal Director 14 4 Jorge Luis Valdespino Rivera Human Resources Director 9 5 Tomás Enrique Ramirez Vargas Director of Commerce 2 6 Jose Angel Martinez Sanchez Technical Operating Director 0

OMA | Transportation Initiating Coverage

OMA Market Performer OMA’s profitability improvements going forward and solid 2016e Price Target P$108.8 traffic already priced in.

Price 107.28 After the recent rally witnessed in OMA’ s stock, it seems that all the expected profitability improvements—derived from more 12M Price Range 77.19 / 109.29 efficient terminals, along with improved operating leverage—are Shares Outstanding (Mill) 392.2 already reflected at current prices. Thus, we are introducing our Market Cap (Mill) 42,071 2016e price target of P$108.8 with a Market Performer rating.

Float 46% OMA is the cheapest airport operator among our Mexican Net Debt (Mill) 1,816 sample, although current valuations are not as appealing as we EV (Mill) 43,505 would like. Indeed, OMA is trading at roughly 14x 12M FWD EV/EBITDA, versus its 3-year average of around 11x. In addition, Dividend Yield 3.3% when adjusting its 2016e ROE of 25.8% for its P/BV it remained

2015 TTM 2016e 2017e practically unchanged from a year ago (3.8%), leading us to believe that all the benefits for the year are already priced in. Revenue 4,145 4,335 5,001 5,477

EBITDA 2,450 2,619 3,075 3,379 FCF should be under pressure in 2016 and 2017. Despite stronger margins due to greater operating leverage, higher CAPEX Net Profit 1,234 1,349 1,740 1,907 commitments should reduce the company’ s ability to turn Free CF 1,561 1,465 549 815 EBITDA into FCF. As a result, 2016 and 2017 FCF yield should land EPS 3.15 3.44 4.44 4.86 at 1.3 and 1.9%, respectively, at current prices.

P/E 26.6x 31.5x 24.4x 22.3x Waiting for more appealing valuations to play an attractive EV/EBITDA 14.4x 16.4x 14.4x 12.8x story. OMA should continue to improve its profitability on higher P/BV 5.6x 6.8x 5.6x 3.4x traffic, mainly in its Monterrey airport, which is one of Mexico’ s largest hubs. As such, we believe OMA’ s traffic should post a

2015-2020 CAGR of 6.3% on the back of Monterrey’ s CAGR of Mauricio Martinez Vallejo 6.4%. [email protected] +52(55) 5480 5800 ext. 4187 Business diversification to reduce results’ volatility… not a game changer, however. We applaud OMA’ s efforts to reduce its Pablo Zaldivar dependence on aeronautical traffic through the investments [email protected] made in two hotels and an industrial park. However, in terms of +52(55) 5480 5800 ext. 4390 revenues, these businesses will only contribute with between 6 and 7% of revenues by 2020.

Catalysts. Full conversion of BB shares into B shares would eliminate the technical assistance fee, thereby improving profitability.

EV/EBITDA FWD 12M PRICE PERFORMANCE VS. IPC 36x P/E 40% 35x 14.0x 35% 30% 34x 25% 33x 20% 32x 13.0x 15% 31x

10% 30x 5% 12.0x 0% 29x -5% 28x -10% 27x 11.0x -15% 26x

11/15 11/15 12/15 11/15 12/15 10/15 01/16 07/15 01/16 07/15 02/16 03/16 10/15 08/15 09/15 09/15 05/16 01/16 03/16 04/16 06/16 07/15 05/16 09/15 07/16 03/16 02/16 08/15 05/16 09/15 09/15 04/16 06/16 OMA IPC

OMA | Transportation Initiating Coverage

I. Investment Thesis

OMA’s profitability improvements going forward and solid traffic already priced in. After the rally witnessed in the name during the last months, it seems that all the profitability improvements going forward—derived from more efficient terminals under construction, along with a better operating leverage as a result of the increasing traffic—are already reflected at current prices. Thus, we are introducing our 2016e price target of P$108.8 with a Market Performer rating, as we would rather wait for more comfortable valuations to show up.

OMA is the cheapest airport operator among our Mexican sample, although current valuations are not as appealing as we would like. Indeed, OMA is trading at roughly 14x 12M FWD EV/EBITDA, versus its 3-year average of around 11x. In addition, when adjusting its 2016e ROE of 25.8%—while considering a 410 bps improvement from 2015—, by its P/B it remained practically unchanged from a year ago (3.8%), leading us to believe that all the benefits for the year are already priced in.

3-year EV/EBITDA Fwd OMA’s ROE vs. Adj. ROE —left axis ROE; Right axis ROE Adj. 15.0x 30% 6.5% 14.0x 25% 6.0% 13.0x 20% 5.5% 12.0x 5.0% 15% 11.0x 4.5% 10% 4.0% 10.0x 5% 3.5% 9.0x 0% 3.0% 8.0x 2012 2013 2015 2014 2016e 12/13 12/15 12/14 03/15 03/14 06/13 09/13 03/16 06/15 09/15 06/14 09/14 06/16 ROE adj. ROE

Source: GBM Source: GBM

FCF should be under pressure in 2016 and 2017. Despite stronger margins related to an improved operating leverage, higher CAPEX commitments should reduce the company’ s ability to turn EBITDA into FCF. As such, OMA should post a FCFE in 2016 of P$549 million, down from P$1.6 billion in 2015, translating into a cash conversion rate (CCR) of 17.8% this year. As a result, 2016 and 2017 FCF yield also remains lower at 1.3 and 1.9%, respectively, at current prices.

CAPEX committed under 2016-2020 MDP FCF vs. CCR —Figures in billions —Figures in millions 1.4 3.0 70.0% 1.2 2.5 60.0% 1.0 2.0 50.0% 0.8 40.0% 1.5 0.6 30.0% 1.0 0.4 20.0% 0.5 0.2 10.0% 0.0 0.0 0.0% 2017e 2016e 2018e 2019e 2017e 2016e 2018e 2019e 2020e 2020e FCFE CCR Consolidated Source: GBM Source: GBM

OMA | Transportation Initiating Coverage

Waiting for more appealing valuations to play an attractive story going forward, as OMA should continue to improve its profitability on a higher traffic, mainly in its Monterrey airport—which represents 50.0% of OMA’ s total traffic. Indeed, OMA’ s traffic should post a 2015-2020 CAGR of 6.3% on the back of Monterrey’s CAGR of 6.4%. As a result, Adj. EBITDA margin should expand 590 bps between 2015 and 2020 due to an improved operational leverage.

Monterrey PAX Traffic OMA’s PAX Traffic —Figures in millions —Figures in millions 14 25 CAGR 2015-2020: 6.4% CAGR 2015-2020: 6.3% 12 20 10 8 15

6 10 4 5 2 - - 2015 2015 2017e 2017e 2016e 2018e 2016e 2018e 2019e 2019e 2020e 2020e Source: GBM

Monterrey remains the third most important hub in Mexico. After the saturation of the Mexico City airport, domestic carriers are developing secondary bases in Monterrey, including AEROMEX, Volaris, and Interjet, the market’ s largest players, while VivaAerobus—a growing low cost carrier— established its main base at that airport.

Monterrey destinations Domestic International Acapulco Nuevo Laredo Atlanta Aguascalientes Oaxaca Austin Cancun Puebla Baltimore Chihuahua Puerto Escondido Chicago C. del Carmen Puerto Vallarta Dallas C. Juarez Queretaro Detroit C. Obregon Reynosa Houston C. Victoria Saltillo La habana C. Mexico Los Cabos Las Vegas Culiacan San Luis Potosi Memphis Bajio Tampico Miami Durango Tijuana NY Guadalajara Toluca Orlando Hermosillo Torreon Panama Huatulco Tuxtla Gutierrez San Antonio Ixtapa Veracruz Tokyo La Paz Villahermosa Matamoros Zacatecas Mazatlan Morelia Source: GBM and DGAC

OMA | Transportation Initiating Coverage

Monterrey’s industrial activity should continue to boost aeronautical traffic. Nuevo Leon has posted a sustained growth of 4.0% in the last 10 years, which contrasts with Mexico’ s 2.5%. In addition, big foreign companies continue to invest in the state due to its strategic proximity with the US, alongside a developed infrastructure, making us believe that Monterrey’ s airport is poised to keep showing a sustained traffic growth above Mexico’ s overall, as witnessed in the past.

GDP growth: Nuevo Leon vs. Mexico 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2011 2012 2013 2014 2010 2007 2005 2004 2006 2008 2009

Nuevo Leon Mexico

Source: GBM and INEGI

Business diversification to reduce results’ volatility… not a game changer, however. We welcome OMA’ s efforts to reduce its dependence on aeronautical traffic through the investments made in two hotels and an industrial park. However, in terms of revenues, and considering only two contracts signed in the industrial park, these businesses will only contribute with 6-7% of revenues by 2020. Still, new contracts to be signed in the future could be a catalyst that boosts this bracket ahead.

OMA’s Hotels Revenue Industrial Park Revenue —figures in millions —figures in millions 450 12

400 10 350 300 8

250 6 200 150 4

100 2 50 - - 2017e 2016e 2018e 2019e 2020e 2017e 2016e 2018e 2019e

2020e NH T2 Mexico City Monterrey Hotel Source: GBM

Catalysts. Full conversion of BB into B shares would result in the elimination of the technical assistance fee; indeed, we should recall previous attempts to eliminate such fee by some shareholders, reducing it throughout 2015 and 2020. Still, benefits from such reductions would not be lineal—if eliminated— in profitability, as the elimination should be reflected at the time when the calculation of the maximum tariff takes place in the next MDP.

OMA | Transportation Initiating Coverage

II. Valuation

Despite an appealing long-term story, valuations already price in all good news. Thus, we are introducing our 2016e price target of P$108.8 with a Market Performer rating. Our valuation comes from a DCF approach.

DCF assumptions  EBITDA 2015-2020 CAGR of 13.0%.

 A normalized effective tax rate of 30%.

 An EBITDA present value for the 2021-2048 period of P$85.7 billion—with a long-term nominal growth of 5%.

 CAPEX in accordance with MDP commitments.

 WACC of 9.6% o Cost of Equity of 10.2% o Cost of Debt of 6.5%, excluding tax shield.

DCF OMA’s WACC 2016e 2017e 2018e 2019e 2020e NPV 2021-2048e %Equity 90.0% EBITDA 3,075,383 3,378,632 3,701,365 4,134,609 4,508,159 85,672,318 %Debt 10.0% Taxes 698,982 819,761 917,324 1,054,844 1,180,702 24,004,624 Risk Free 6.0% Working Capital -112,564 -100,082 -49,136 -80,661 -43,523 Beta 84.1% OPERATING CASH FLOW 2,263,838 2,458,789 2,734,904 2,999,103 3,283,933 61,667,693 Market Risk Premium 5.0% CAPEX -1,463,553 -1,391,572 -1,094,600 -703,704 -483,489 -7,009,233 FREE CASH FLOW 800,285 1,067,217 1,640,305 2,295,399 2,800,445 54,658,461 Cost of Equity 10.2% Cost of Debt 6.5% Corporate Tax Rate 30.0% WACC 9.6% WACC 9.6%

TOTAL PRESENT VALUE 44,680,878 Net Debt 1Q16 1,816,453 Minority Equity 90,305 P/BV 2.0x Minority Equity 180,610 Equity Value (P$) 42,683,815 Shares Outstanding (000's) 392,156 Price Target 2016e P$108.8

OMA | Transportation Initiating Coverage

III. Financials P&L - Thousands of MXN 2015-2020 2015 2016e 2017e 2018e 2019e 2020e CAGR 15.1% 8.1% 6.7% 6.1% 5.6% 5.1% Passengers '000 16,920 18,286 19,502 20,696 21,861 22,982 6.3% 4.0% 13.1% 2.3% 2.1% 2.1% 2.1% Aeronautical Revenues per PAX 179.3 202.7 207.4 211.7 216.1 220.6 4.2% 19.8% 22.2% 9.1% 8.3% 7.8% 7.3% Aeronautical Revenues 3,033,130 3,707,264 4,043,835 4,381,244 4,724,590 5,070,887 10.8% 12.1% 12.2% 5.1% 3.9% 3.2% 2.8% Non-Aero Revenues per PAX 66.2 74.2 78.0 81.0 83.7 86.0 5.4% 15.2% 6.5% 5.3% 5.4% 4.4% 4.0% Non-Aero Revenues per PAX ex. Diversification 52.6 56.0 59.0 62.2 65.0 67.5 5.1% 8.6% 10.0% 5.0% 4.0% 4.0% 4.0% NH T2 Mexico City Revenues 212,488 233,737 245,424 255,241 265,450 276,068 5.4% NA 440.0% 26.1% 8.0% 7.0% 4.0% Hotel Monterrey Revenues 16,882 91,163 114,947 124,143 132,833 138,146 52.3% NA NA 45.7% 0.1% 2.8% 2.8% Industrial Park Revenues 0 7,095 10,338 10,346 10,640 10,938 29.1% 21.2% 12.1% 10.2% 9.0% 8.1% Non-Aeronautical Revenues 1,119,372 1,356,727 1,521,444 1,677,174 1,828,883 1,977,300 12.1% 21.4% 20.7% 9.5% 8.9% 8.2% 7.5% Net Revenues Excl. Construction 4,144,671 5,001,069 5,476,838 5,962,141 6,449,329 6,936,181 10.8% 20.7% 39.4% 7.2% 2.8% 1.4% 3.8% Net Revenues 4,492,659 6,264,622 6,718,410 6,906,740 7,003,033 7,269,669 10.1% 9.3% 6.3% 9.2% 7.9% 2.1% 5.1% Operating Costs excl. Construction 1,556,924 37.6% 1,655,425 33.1% 1,807,438 33.0% 1,950,037 32.7% 1,991,472 30.9% 2,092,634 30.2% 6.1% 11.5% 6.5% 9.5% 8.2% 3.3% 5.0% Cost of Services 836,233 20.2% 890,190 17.8% 974,877 17.8% 1,055,299 17.7% 1,089,937 16.9% 1,144,470 16.5% 6.5% -3.1% -40.8% 2.8% 2.8% 2.8% 2.8% Major Maintenance Provision 174,293 4.2% 103,166 2.1% 106,055 1.9% 109,025 1.8% 112,078 1.7% 115,216 1.7% -7.9% 22.2% 19.2% 9.5% 8.9% 8.2% 7.5% Concession Taxes 209,771 5.1% 250,053 5.0% 273,842 5.0% 298,107 5.0% 322,466 5.0% 346,809 5.0% 10.6% 18.6% 53.7% 9.7% 9.2% -17.9% 8.2% Techincal Assistance Fee 97,818 2.4% 150,306 3.0% 164,883 3.0% 179,988 3.0% 147,745 2.3% 159,891 2.3% 10.3% 6.6% 9.6% 10.0% 6.9% 3.8% 2.2% Depreciation & Amortization 238,809 5.8% 261,708 5.2% 287,781 5.3% 307,618 5.2% 319,246 5.0% 326,249 4.7% 6.4% 38.6% 33.1% 10.1% 10.0% 12.7% 9.8% Operating Profit 2,036,553 49.1% 2,710,509 54.2% 2,984,796 54.5% 3,284,723 55.1% 3,703,286 57.4% 4,066,694 58.6% 14.8% 30.8% 25.5% 9.9% 9.6% 11.7% 9.0% Adj. EBITDA 2,449,655 59.1% 3,075,383 61.5% 3,378,632 61.7% 3,701,365 62.1% 4,134,609 64.1% 4,508,159 65.0% 13.0% 20.4% 41.1% 9.6% 11.9% 15.0% 11.9% Maj. Net Income 1,233,766 29.8% 1,740,492 34.8% 1,907,300 34.8% 2,134,461 35.8% 2,454,854 38.1% 2,748,036 39.6% 17.4% Source: GBM

OMA | Transportation Initiating Coverage

FCF - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e EBITDA 2,449,655 3,075,383 3,378,632 3,701,365 4,134,609 4,508,159 Change in Working Capital 119,816 -112,564 -100,082 -49,136 -80,661 -43,523 Interests -244,912 -261,966 -252,257 -226,975 -187,138 -131,020 Taxes -308,223 -688,742 -819,761 -917,324 -1,054,844 -1,180,702 CAPEX -455,145 -1,463,553 -1,391,572 -1,094,600 -703,704 -483,489 FCFE 1,561,191 548,559 814,959 1,413,330 2,108,261 2,669,425 Source: GBM

Balance - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 2,733,458 3,303,692 4,118,651 5,531,981 7,640,242 10,309,667 Concessions 6,348,605 7,554,444 8,658,234 9,445,216 9,829,675 9,986,914 Total Assets 12,510,336 14,792,997 16,801,615 19,093,595 21,678,338 24,596,964 Short-Term Debt 55,433 46,542 46,542 46,542 46,542 46,542 Long-Term Debt 4,658,349 4,654,750 4,654,750 4,654,750 4,654,750 4,654,750 Total Liabilities 6,559,809 7,089,267 7,185,108 7,336,664 7,460,105 7,623,758 Majority Equity 5,869,158 7,609,650 9,517,426 11,652,848 14,109,150 16,859,121 Net Debt 1,980,324 1,397,600 582,641 -830,689 -2,938,950 -5,608,375 Source: GBM

OMA | Transportation Initiating Coverage

IV. Company Description

Grupo Aeroportuario del Centro Norte (GACN), commonly known as OMA, was created in 1998 as part of the opening of the Mexican airport system to private investment. OMA has concessions to operate, manage, and develop 13 international airports where, in 2015, the airport group received 16.9 million passengers. This represents about 14.9% of Mexico’ s total airport traffic. Most of the airports are found in central and northern Mexico: Monterrey, Acapulco, Mazatlan, Zihuatanejo, Chihuahua, Culiacan, Durango, San Luis Potosi, Tampico, Torreon, Zacatecas, Ciudad Juarez, and Reynosa.

 13 airports  8 different states  16.9 million PAX in 2015  7.9% 5-year PAX CAGR  P$4.5 billion 2016-2020 MDP investment  167 routes by yearend 2015 OMA’s Airport Locations

Ciudad Juarez

Chihuahua

Torreon Reynosa Culiacan Monterrey Durango Mazatlan Zacatecas Tampico San Luis Potosi

Zihuatanejo Acapulco

Source: GBM with company data

OMA | Transportation Initiating Coverage

A. Company’s airports

In its 13 airports, OMA serves one of the most important cities in Mexico (Monterrey), as well as several beach destinations, which receive an increasing volume of tourist traffic (Acapulco, Mazatlan, and Zihuatanejo), and two border cities (Ciudad Juarez and Reynosa). Furthermore, its 7 remaining airports (Chihuahua, Culiacan, Durango, San Luis Potosi, Tampico, Torreon, and Zacatecas) are all regional economic centers. We should mention that under Mexican law, all of OMA’ s airports are designated as international ones, and as such 2.4 million PAX out of 16.9 million were international in 2015. Moreover, OMA’ s most important route is Mexico City-Monterrey.

OMA’s Airport Breakdown Capacity Passenger 2005-2015 2010-2015 MDP 2016-2020 Airport (Flights per MDP investment plan breakdown PAX CAGR PAX CAGR invesment P$ million Hour) -Terminal A Expansion Monterrey 50.0% 38 6.1% 9.5% 1,264.8 -Operational Infrastructure Development -Operational Infrastructure Culiacan 8.5% 20 6.4% 6.2% 192.0 Development Chihuahua 6.6% 40 6.3% 6.0% 440.8 -Terminal Expansion Ciudad Juarez 5.1% 20 3.5% 6.4% 161.8 -Terminal Expansion Mazatlán 5.0% 22 0.7% 2.5% 124.0 -Maintenance Tampico 4.5% 22 6.6% 11.1% 290.4 -Terminal Expansion Acapulco 4.3% 40 -1.8% -0.2% 582.8 -New Terminal Zihuatanejo 3.3% 20 -0.8% 2.5% 297.3 -Maintenance Torreon 3.3% 20 4.0% 10.5% 130.0 -Maintenance Reynosa 3.0% 18 13.2% 20.7% 347.5 -New Terminal San Luis Potosi 2.6% 20 6.6% 14.8% 381.3 -Terminal Expansion Zacatecas 1.9% 20 0.7% 3.6% 95.0 -Maintenance -Operational Infrastructure Durango 1.9% 40 3.9% 7.8% 138.0 Development Source: GBM with company data

Below, we present a brief description of OMA’ s main airports:

Monterrey: OMA’ s most important airport in terms of passenger traffic, air traffic movements, and contribution to revenues. Monterrey airport has 3 terminals as well as 2 runways and an OMA Bonded Warehouse, and serves 11 different airlines. During 2015, it served 8.5 million passengers 15.6% of which were international. Monterrey is Mexico’ s leading industrial center, as well as its third largest city. Thus, the airport primarily serves business travelers, as well as being a hub for the transportation of goods.

Culiacan: Culiacan airport ranks as OMA's second busiest airport and serves mostly domestic passengers. In 2015, it served 1.4 million passengers, 98.9% of which were domestic. The airport serves 6 domestic airlines and has 1 terminal and 1 runway, as wells as an OMA Bonded Warehouse. The airport is located approximately 14 kilometers from the city of Culiacan, capital of Sinaloa, and an important producer of beef and agricultural products.

Chihuahua: Chihuahua airport is OMA’ s third most important airport in terms of traffic. In 2015, it transported 1.1 million passengers, 89.9% of which were domestic. The airport has 1 terminal and 2 runways. Chihuahua’ s close proximity to the United States and its highly developed maquiladora industry account for most of the airport’ s incoming and outgoing traffic. The airport serves 7 airlines.

OMA | Transportation Initiating Coverage

Ciudad Juarez: Ciudad Juarez airport is a border destination that mainly serves domestic traffic. In 2015, it served 863.8 thousand passengers, 99.9% of which were domestic. The airport serves 5 domestic airlines and has 1 terminal, 2 runways, and an OMA Bonded Warehouse. By definition, Ciudad Juarez is a business center, and because of its proximity to El Paso, it is the main maquiladora center in the country. Also, as Ciudad Juarez is a popular entry point to the United States, many of the airport’ s passengers consist of Mexican migrant workers traveling to the US.

Acapulco: Acapulco airport served 730.4 thousand passengers in 2015, 7.2% of which were international. The airport has 1 terminal and 2 runways and serves 7 airlines. As one of Mexico's top tourist destinations on the Pacific Coast, as well as being a port of embarkation and disembarkation for cruise ships, the airport primarily serves tourists.

Mazatlan: Mazatlan airport served 853.4 thousand passengers in 2015 around 32.7% of which were international. The airport has 1 terminal and 1 runway and serves 14 airlines. Mazatlan is one of Mexico's tourist hotspots on the Pacific Coast, as well as a major producer of shrimp, sardines, and tuna.

Zihuatanejo: Zihuatanejo airport served 562.1 thousand passengers in 2015, 40.8% of which were international. The airport has 1 terminal and 1 runway and serves 11 airlines. Zihuatanejo is considered the third most visited tourist destination in the country as it has beautiful beaches and great hotel infrastructure. Furthermore, it is one of the most popular sport fishing sites in Mexico. Thus, the airport primarily serves tourists.

V. Key Figures

A. Revenue

As an airport manager, OMA’ s main business is to handle air traffic at its airports, charging airlines and passengers for the service. Additionally, the company benefits from the commercial area at its airports, and its participation in other activities, such as hotels and real estate.

Revenue Breakdown Non-Aero Revenue Breakdown

Other Complementary 4% 16% Non- Aeronautical 27% Commercial Diversification 49% Aeronautical 31% 73%

Source: GBM with company data

i. Aeronautical Revenue

Aeronautical services are regulated by the Mexican Government under the maximum tariff regulation system and include revenues made from passenger and cargo fees, aircraft landing and parking charges, and the leasing of space in the airports to airlines. This is the most significant source of revenues for OMA, representing around 73% of the company’ s revenues in 2015.

OMA | Transportation Initiating Coverage

Throughout 2015, OMA served 14.9% of the total air traffic in Mexico, amounting to 16.9 million passengers. Delving in, OMA’ s domestic passenger traffic represented 86% of the figure, while international traffic represented just 14%. The company’ s traffic has grown at a 7.9% CAGR throughout the 2010-2015 period, reflecting the strong traffic dynamics in Mexico, as well as OMA’ s success via Monterrey.

In terms of connectivity, OMA operated 167 routes by the end of 2015, as it managed to open 31 new routes while closing just 17 throughout the year. We should note that the company is constantly negotiating with airlines in order to open new routes, giving carriers feasibility studies on certain unserved routes to stimulate expansion. The number of routes operated by OMA has grown at a 6.3% CAGR in the ’ 10-’ 15 period, explaining part of the company’ s average 7.9% annual traffic expansion. Monterrey represents OMA’ s main hub, with roughly 30% of the company’ s routes reaching the airport.

Lastly, OMA handles cargo as part of the aeronautical business, as 100kg of cargo represents one workload unit, equal to one passenger. Thereby, the company is able to charge its airports’ maximum tariff for each 100kg of cargo, representing an additional source of revenues. Still, we should note that revenues from cargo are not very relevant for the company, as they only represent around 5% of OMA’ s total workload units.

OMA’s Historic PAX Traffic Growth OMA’s Historic Cargo Traffic Growth —Figures in millions (left) —Figures in thousands —Number of routes (right) 18 180 100 16 160 14 140 80 12 120 10 100 60 8 80 40 6 60 4 40 20 2 20 - 0 - 2011 2011 2012 2013 2012 2013 2015 2015 2014 2014 2010 2010 2007 2007 2006 2008 2006 2008 2009 2009 Domestic PAX International PAX Routes International Cargo (tons) Domestic Cargo (tons)

Source: GBM with company data

ii. Non-Aeronautical Revenue

Non-aeronautical revenues are not considered for the calculation of the maximum rate and, as such, are deemed non-regulated. In 2015, they accounted for the remaining 27% of OMA’ s revenues. Delving in, OMA segregates non-aero revenues into three separate categories: Commercial, Diversification, and Ancillary activities:

a. Commercial Activities represent the main source of non-aero revenues for OMA, totaling around 49.2% in 2015. Parking represents the largest source of revenue for commercial activities, amounting to 16.4% of the consolidated figure. Additionally, commercial activity considers advertising, retail, restaurants, car rentals, passenger services, time shares & hotel promotion, communications, VIP lounges, and financial services. b. Diversification Activities represent the second largest source of non-aeronautical revenues for OMA, amounting to 31.3% in 2015. Hotel services are the largest item among diversification activities, accounting for 20.6% of the figure. Additionally, the company provides cargo services through OMA Carga, and real estate services.

OMA | Transportation Initiating Coverage

c. Complementary Activities represent the remaining 16.0% of non-aero revenues, and include services provided to passengers and airlines, such as baggage screening and access fees. We should note that this is another form of regulated revenues. Below, we present more details regarding OMA’ s diversification activities:

OMA Carga provides logistic services for both air and ground cargo, including the handling, maneuver, loading and unloading, x-ray screening and temporary warehousing. The service is available in the Monterrey, Ciudad Juarez, and Chihuahua airports, with the largest operation in Monterrey. OMA Carga registered P$107.4 million in revenues during 2015. We should note that OMA Carga differs from the cargo revenue portion in aeronautical revenues, as the former provides logistic and handling services, while the latter charges for cargo traffic.

In October 2008, OMA acquired 90% of the shares in the Terminal 2 NH hotel for P$280 million, while the remaining 10% is owned by Hotels SA. The hotel has the right to operate and develop a 287 room hotel and five thousand square meters of commercial space in the terminal, under a lease agreement expiring in 2029. Throughout 2015, the hotel registered an 80.5% average occupancy rate and delivered P$212.5 million in revenues. Concerning the NH hotel and the new AICM, we should note that in the case of the early termination of the contract, there is a clause protecting OMA, although it has not yet been defined in what way will the company be compensated once the new airport opens.

In 2012, the company signed an alliance with VYNMSA to develop and operate an industrial park in Monterrey airport, where OMA holds a 51% stake. The company believes that up to fourteen 10,000 m2 warehouses can be built in the development, and expects to close 2016 with three built warehouses, two of them leased. Still, revenues should not start flowing until the second quarter. In 2013, OMA signed an agreement with Grupo Hotelero Santa Fe to develop and operate a 134-room hotel in Monterrey’ s airport under the Hilton Garden Inn brand. The consortium invested P$180 million in the development of the hotel, with OMA holding an 85% stake in the project. The hotel began operations in August 2015, and achieved a 73.3% average occupancy rate by 1Q16 after just two quarters of operation. iii. Construction Revenue

As an operator of a service concession, OMA is required by the Mexican government to provide infrastructure improvements across its airports. As such, the concessionaire must recognize the revenues and costs associated with said improvements. We should note that construction revenues do not affect operating or net income, as the same amount is subtracted from operating expenses.

B. Profitability

Below, we present OMA’ s cost structure break down when excluding construction costs:

 Cost of services represent 39% of the company’ s expenses, and includes all the outflows related to payroll, maintenance, security, insurance, and utilities. Delving in, payroll expenses represent 23% of cost of services, followed by security and insurance (18%), and maintenance (18%).

 Administrative expenses represent 27% of OMA’ s expenses, and consist of personnel expenses and fees paid to consultants or other service providers, as well as administrative overhead expenses.

 Concession fees amount to 10% of OMA’ s cost structure, as concessionaires are required to pay 5% of the gross revenue obtained from public assets to the Mexican government.

OMA | Transportation Initiating Coverage

 Major maintenance provision represents 8% of OMA’ s cost. The provision is established to cover the company’ s MDP commitments, and can be adjusted quarterly depending on changes in maintenance requirements and the passing of time.

 Technical assistance fee is equal to roughly 5% of the company’ s expenses, and is driven by the payment made to SETA in exchange for management and consulting services. We should note that the company used to pay 5% of its EBITDA as the fee, but was adjusted downwards in June 2015 to 4% until 1H17 and 3% afterwards.

 D&A represents 11% of expenses, due to the amortization of the concession investment as well as the depreciation of fixed assets.

Operating Costs Breakdown Cost of Service Breakdown

Technical assistance fees Real estate Major maintenance 5% Hotel service 5% provision 5% 8% Concession Employee Cost of costs Fees Equipment services 23% 10% 15% D&A 39%

11% Utilities Safety 16% 18% Administrative 27% Maintenance 18% Source: GBM with company data

OMA | Transportation Initiating Coverage

Income Statement Summary - Thousands of MXN

2011 2012 2013 2014 2015 1.6% 7.0% 5.5% 10.6% 15.1%

Passengers '000 11,773 12,594 13,292 14,695 16,920

11.4% 6.5% 0.9% 1.0% 4.0%

Aeronautical Revenues per PAX 158.9 169.2 170.7 172.3 179.3

13.2% 13.9% 6.5% 11.6% 19.8%

Aeronautical Revenues 1,870,177 2,130,662 2,268,870 2,532,667 3,033,130 17.8% 9.4% 9.5% -1.5% 12.1% Non-Aero Revenues per PAX 50.0 54.7 59.9 59.0 66.2 12.1% 11.0% 10.7% -2.1% 15.2% Non-Aero Revenues per PAX ex. Diversification 37.9 42.1 46.6 45.7 52.6 42.6% 11.6% 11.4% 10.9% 8.6% NH T2 Mexico City Revenues 141,978 158,407 176,511 195,742 212,488 NA NA NA NA NA Hotel Monterrey Revenues 000016,882 NA NA NA NA NA

Industrial Park Revenues 00000

19.7% 17.0% 15.6% 8.8% 29.1%

Non-Aeronautical Revenues 588,670 688,959 796,501 866,980 1,119,372

14.7% 14.7% 8.6% 11.5% 21.4%

Net Revenues Excl. Construction 2,458,847 2,819,621 3,063,263 3,415,219 4,144,671 8.4% 12.6% 8.8% 8.9% 20.7% Net Revenues 2,789,709 3,141,339 3,418,059 3,722,546 4,492,659 5.3% 9.4% 15.9% 1.7% 9.3% Operating Costs excl. Construction 1,104,501 44.9% 1,208,834 42.9% 1,400,992 45.7% 1,424,903 41.7% 1,556,924 -13.3% 8.4% 11.0% 3.4% 11.5% Cost of Services 602,599 24.5% 653,429 23.2% 725,463 23.7% 750,233 22.0% 836,233 157.8% -0.9% 60.3% -31.6% -3.1% Major Maintenance Provision 165,685 6.7% 164,209 5.8% 263,167 8.6% 179,932 5.3% 174,293 12.5% 18.1% 8.1% 15.9% 22.2% Concession Taxes 115,979 4.7% 137,028 4.9% 148,159 4.8% 171,669 5.0% 209,771

15.9% 22.1% -1.1% 23.7% 18.6%

Techincal Assistance Fee 55,151 2.2% 67,366 2.4% 66,643 2.2% 82,461 2.4% 97,818

54.9% 6.1% -42.7% 11.3% 6.6%

Depreciation & Amortization 330,771 13.5% 351,011 12.4% 201,226 6.6% 223,982 6.6% 238,809 27.6% 26.2% 3.5% 22.3% 38.6% Operating Profit 919,269 37.4% 1,160,172 41.1% 1,201,285 39.2% 1,468,991 43.0% 2,036,553 41.8% 18.3% -0.6% 12.4% 30.8% Adj. EBITDA 1,415,725 57.6% 1,675,392 59.4% 1,665,678 54.4% 1,872,905 54.8% 2,449,655 Source: GBM with company data -6.8% 32.8% 46.6% -14.6% 20.4%

Maj. Net Income 615,822 25.0% 818,119 29.0% 1,199,640 39.2% 1,024,699 30.0% 1,233,766 Source: GBM with company data

OMA | Transportation Initiating Coverage

C. Balance Sheet

By 1Q16, OMA’ s current assets amounted to P$3.8 billion, mainly comprising P$2.9 billion in cash and equivalents, and P$580 million in accounts receivable. Other assets totaled P$9.3 billion, mainly due to P$6.3 billion classified as investments in airport concessions, as well as P$2.4 billion in PP&E. As such, OMA’ s consolidated assets reached P$13.1 billion.

On the other hand, the company’ s current liabilities reached P$1.0 billion, including P$515 million in accrued expenses and taxes. As for long-term liabilities, OMA reached a P$5.7 billion position, mainly composed of P$4.6 billion in long-term debt. Thus, the company’ s shareholders’ equity stands at P$6.3 billion.

Thereby, OMA held a P$2.0 billion net debt position by the end of the first quarter of 2016, equal to a 0.7x net debt to EBITDA ratio.

VI. Corporate Structure

A. Main shareholders

Currently, 16.7% of OMA’ s ownership is held by SETA—a JV between Aeroports de Paris and Aeroinvest—another 1.88% is owned directly by ICA’ s CONOISA, and the remainder is free float.

Source: GBM with company data

All of OMA’ s Series B and Series BB shares entitles the holder to one vote per share at any general shareholders’ meeting, while Series BB shares confer special voting and other rights.

OMA | Transportation Initiating Coverage

Currently, SETA holds all of Series BB shares, representing 12.69% of total shares; however, such series can only be transferred if converted into series B shares. In addition, the conversion into Series B shares is subject to certain time related terms—after June 14, 2015 all Series BB shares can be converted—, and at least 51% of the Series B shareholders must approve the conversion. Furthermore, if SETA owns less than 7.65% Series BB shares after June 14, 2015, or terminates the Technical Assistance Agreement, then, the Series BB shares will be automatically converted into Series B shares.

B. Board of Directors

OMA’ s bylaws provide that each person (or group of persons acting together) holding 10% of its capital stock in the form of Series B shares is entitled to designate one director. Also, the holders of Series BB shares are entitled to elect three directors and their alternates, while the remaining members of the Board of Directors are to be elected by the holders of OMA’ s capital stock. OMA is required to have at least eleven members on its Board of Directors.

Board of Directors Board Members Position Series 1 Diego Quintana Kawage Chairman BB 2Alonso Quintana Kawage Advisor BB 3 Frédéric Paul Joseph Dupeyron Advisor BB 4 Elsa Beatriz García Bojorges Independent Advisor B 5 Alberto Felipe Mulás Alonso Independent Advisor B 6 Ricardo Gutiérrez Muñoz Independent Advisor B 7 Ricardo Maldonado Yáñez Independent Advisor B 8 Felipe Duarte Olvera Independent Advisor B 9 José Luis Guerrero Álvarez Advisor B 10 Luis Fernando Zárate Rocha Advisor B 11 Sergio Fernando Montaño León Advisor B

Main Officers Name Position Seniority 1 Porfirio Gonzalez Alvarez CEO 5 2 Stephane Laurent Christian Lemoine COO 6 3 Vicsaly Torres Ruiz CFO 0 4 Alfredo Dominguez Sanchez Legal Director 4 5 Roberto Ontiveros Chavez Infraestructure and Maintenance Director 8 6 André Lormain Marketing and Commercial Director 0 7 Juan Manuel Jauregui Aguilar Airports' Director 5 8 Héctor Cortés Cortés Real Estate and New Businesses Director 0

Airline Industry | Transportation Initiating Coverage

G. The Airline Industry in Latin America

Latin America has undergone strong economic growth since 2010, with the region’ s GDP experiencing a 3.1% average annual expansion up to 2014, driving the region’ s population to benefit from a higher level of disposable income, which in turns allows them to acquire additional goods and services. The air transport industry has benefited from the economic expansion in Lain America, reflected in the 8.0% demand CAGR throughout the 2010-2015 period, above the world’ s 5.8% average expansion, according to the International Air Transport Association (IATA).This reflects the industry’ s hypersensitivity to economic cycles, allowing it to outperform economic growth through an upsurge, or to significantly underperform a declining economic environment.

In terms of future expectations, the Latin American region is set to outperform the world’ s average economic expansion of 3.1% for the following 20-year period, delivering a 3.5% CAGR, according to estimates from Airbus, Boeing, and Embraer. Delving in, this compares positively to Europe‘ s (1.8%), and North America’ s (2.5%) average annual economic expansion. As such, Latin America’ s traffic growth should expand at a 5.5% CAGR throughout the next 20 years, with Mexico and Brazil delivering 4.8 and 5.4% expansions on the domestic front, compared to the world’ s 4.8% CAGR. Going into further detail, Latin America should deliver a 5.3% CAGR in regional traffic, while traffic to other regions expands at a 4.3% CAGR, reflecting the importance of the region’ s economic expansion.

Demand by region GDP and demand forecast by region — 2010 to 2015 CAGR — Average 20-year CAGR 12% 5% 7%

10% 6% 4% 5% 8% 3% 4% 6% 2% 3% 4% 2% 1% 2% 1%

0% 0% 0% Africa Asia Europe Latin Middle North World Africa Asia Middle Latin North CIS Europe World America East America East AmericaAmerica

RPK Growth World Growth RPK Growth GDP Growth Source: GBM with IATA data Source: GBM with Airbus, Boeing and Embraer data

Due to the region’ s strong growth prospects, foreign airlines have shown interest in Latin America, driving carriers to establish a variety of codeshare agreements, join global alliances and develop joint ventures with other carriers looking to participate in one of the world’ s most dynamic markets, while providing profitability and efficiency improvements. As such, we believe that the region is ripe for consolidation, especially in South America, as many carriers around the world are delivering record profitability performance, while South American carriers struggle through economic hardship.

Latin American carriers have invested actively in their aircraft fleets due to the region’ s strong performance, as well as the industry’ s rapid development in general. By the year 2000, the region controlled a 922 aircraft fleet with an average age of 14.8 years, according to the Latin American and Caribbean Air Transport Association (ALTA), while by 2014, Latin American carriers possessed around 1,350 aircrafts with an average age of 9.7 years, boasting a younger fleet than US and European airlines, with an average age of 11.7 and 9.8 years, respectively. According to Airbus and Boeing, Latin America is on track to double its fleet by 2034 in order to satisfy demand, totaling over three thousand aircrafts.

Airline Industry | Transportation Initiating Coverage

After a strong performance up to the first half of 2014, oil prices have been constantly pressured downwards, reaching prices below US$45 on the WTI barrel, due to current market oversupply (despite decreasing investment) and the USD appreciation. As such, our O&G team cut their oil price estimates to US$42.5 per barrel for 2016, US$49.9 for 2017, and US$65 for the long term (vs. previous estimates of US$55 for 2016, and US$60 for 2017 and the long term) (For more information regarding our oil outlook, please refer to Appendix II). We should note that airline profitability is strongly linked to fuel prices, as this commodity represents the largest expense item in an airline’ s cost structure, equal to roughly 30% of operating costs across our airline sample.

A. Hub-and-spoke vs. point-to-point

An airline’ s operation can be broken down into two types of strategies: the hub-and-spoke or the point-to-point model. The hub-and-spoke model offers customers a greater range of connectivity, as it focuses on operating flights from several origins to a central hub, where traffic is consolidated, and then transported to other spoke destinations, allowing airlines to service destinations with insufficient direct traffic flows. On the other hand, the point-to-point model focuses on the most profitable direct routes, where higher demand allows carriers to charge lower fares due to higher load factors, at the expense of connectivity.

Main hubs and bases in Latin America

Aeromexico Volaris Copa Avianca LATAM Gol

Source: GBM with company data

Airline Industry | Transportation Initiating Coverage

H. The Mexican Airline Industry

The history of Mexican aviation, is strongly related to the developments of Aeromexico and Mexicana de Aviacion, which were founded as private companies in 1934 and 1921, respectively. In 1959, the Mexican government seized control of Aeromexico, while Mexicana was nationalized in 1981. By 1988, Aeromexico went bankrupt, although it was quickly reinstated in October under the name Aerovias de Mexico, keeping the Aeromexico brand. It was not until the early 2000s, that both airlines were returned to private investment. Mexicana de Aviacion was purchased by Grupo Posadas in 2005, while a group of investors led by Banamex acquired Aeromexico in 2007.

We should note that the industry has suffered from economic crises, health alerts, and high operating costs. The most recent was in 2009, when Mexico’ s slow economic recovery, together with the H1N1 flu epidemic, took a toll on the sector as a whole, driving the number of domestic airlines from fourteen to nine. Delving in, the bankruptcy of Mexicana de Aviacion, together with Lineas Aereas Azteca, Aviacsa, Aerovolar, and Nova Air, drove the surviving airlines such as Aeromexico, Interjet, Volaris, VivaAerbous, Aeromar, and Magnicharters to absorb the remaining market share. As such, Aeromexico moved from a 32.0% market share to 39.6%, Volaris from 10.7 to 24.4%, and Interjet from 9.9 to 22.3%.

Fleet and Passenger Traffic Domestic Carriers Market Share — Up to December 2015 — Up to December 2015 400 80 Magnicharters Aeromar 2% 1% 350 70 Vivaaerobus 300 60 10%

250 50

200 40 Aeromexico Interjet 40% 150 30 22% 100 20

50 10 Volaris 0 0 25%

Fleet Passengers (millions) Source: GBM with DGAC data

Since 2008, air traffic in the country has grown at a 4.6% CAGR according to DGAC data, while the number of flights performed has remained stable, expanding at a 0.1% CAGR throughout the same period. On the other hand, Mexico’ s consolidated aircraft fleet is currently 8.1% lower than the maximum levels reached in 2007, reflecting higher occupancy rates and larger aircraft. We should note that in terms of transported passengers, it was not until 2012 that the record set in 2008 was broken, reflecting the significance of the 2009 economic crisis on the country’ s air transportation.

Throughout the 2013-2014 period, the industry was marked by a highly competitive environment among domestic airlines, strongly boosting the number of passengers transported at the expense of airline profitability. As such, Mexican carriers experienced significant yield contractions, as pricing aggressiveness became the tool for consumer stimulation, while load factors expanded. On the other hand, airports benefited from the competitive environment, as they experienced profitability improvements thanks to traffic.

According to the National Chamber of Air Transport (CANAERO), air traffic in Mexico is poised to grow at an average annual rate of 4.5% for the next 20 years, doubling the amount of flights per capita by 2033, driven by the country’ s healthy growth outlook, while the country’ s consolidated fleet should reach almost 600 aircrafts, in order to satisfy demand. Throughout 2015, roughly 73 million

Airline Industry | Transportation Initiating Coverage

passengers were transported in Mexico according to the General Direction of Civil Aviation (DGAC), delivering a 12.5% YOY increase, while the country’ s consolidated fleet reached 317. Another important matter regarding the industry is the new bilateral agreement between the US and Mexico. The new aviation agreement is aiming, among other things, to eliminate the restraints in the number of airlines allowed to fly between any city pair on Mexico-US routes, which is currently set at 2 or 3 airlines, depending on the destination. Still, only 7 routes are currently capped from the Mexican side, 6 of which originate at the currently saturated Mexico City airport. On the other hand, 14 routes are capped by US carriers, with 4 of them reaching Mexico City and the rest mainly to leisure destinations. (For further information, please refer to Appendix I).

I. Brazil’s Airline Industry

For the past 10 years, air traffic in Brazil has expanded at a 9.2% CAGR in terms of transported passengers, according to the National Agency of Civil Aviation (ANAC), while demand and capacity have grown at 8.0 and 6.9% average rates, respectively, driving load factor up by 790 bps to 80.2% since 2005. In terms of fleet, Brazilian airlines have achieved a 4.0% average annual expansion, reaching 549 aircrafts by the end 2014.

Fleet and Passenger Traffic Domestic Carriers Market Share — Up to December 2014 — Up to December 2015 600 120 Avianca 500 100 7%

400 80

300 60 TAM Azul 36% 20% 200 40

100 20 GOL 0 0 37% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fleet Passengers (millions) Source: GBM with ANAC data Source: GBM with ABEAR data

Most recently, Brazilian airlines have been significantly impacted by South America’ s economic slowdown in general, although Brazil has been one of the most affected countries, further offsetting performance. As such, yields have been pressured, as airlines attempt to stimulate a weak consumption environment, together with an increasingly competitive environment. We should note that Brazilian airlines are aiming towards capacity rationalization, with the market reducing 4.0% YOY of its capacity offer in 2015, as carriers aim to decrease the current oversupply. Going forward, the market’ s main players, GOL and TAM are looking to reduce up to 8 and 10% of their domestic capacity in Brazil throughout 2016.

According to the Brazilian Airline Association (ABEAR), domestic air traffic in Brazil holds a 1.88x GDP and -0.62x price relationship. Thus, domestic passenger traffic should expand (contract) by 1.88 times every percentage increase (decrease) in GDP, reflecting the sector’ s significant sensitivity to economic cycles. On the other hand, a 1% fall in prices should further improve demand by 0.62%, reflecting the industry’ s elasticity to pricing dynamics. Additionally, the ABEAR believes that air traffic in Brazil could reach 211 million passengers by 2020, equal to a 15.3% CAGR from last year’ s 103.5 million passengers.

Airline Industry | Transportation Initiating Coverage

We should note that according to ABEAR data, the Brazilian market has presented a persistently downward domestic yield trend since 1970, equal to a 2.7% average annual decrease until 2014. Still, the entity believes that this decrease is in line with the world’ s average, due to operating efficiency improvements and technological progress, allowing airlines to provide customers with lower prices. Delving in, the steepest yield decline was unleashed in 2002, after the airfare liberalization in Brazil took place, presenting a 6.8% average annual decline.

GDP, Yield and Domestic Demand — Up to December 2014 100 1.0 90 0.9 80 0.8 70 0.7 60 0.6 50 0.5 40 0.4 30 0.3 20 0.2 10 0.1 0 0.0

GDP (R$ trillions) Demand (RPK millions) Yield (R$) Source: GBM with ABEAR data

J. Chile’s Airline Industry

Chile’ s air traffic industry has experienced significant growth in the last 5 years, with passenger traffic averaging a 10.4% annual expansion, according to the Civil Aeronautics Board (JAC). Delving in, domestic traffic has increased by a 10.6% CAGR since 2010, while international traffic rose 10.2% on average. In terms of demand, the domestic front expanded by a 12.7% CAGR from 2010 to 2014 according to JAC’ s data, while domestic capacity expanded by 10.2% annually on average, driving load factor up by 690 bps to 79.8% over the period. By the end of 2015, Chile’ s consolidated fleet amounted to 134 aircrafts.

Passenger Traffic Domestic Carriers Market Share — Up to December 2015 — Up to December 2015 20 Others 18 1% 16 14 SKY 12 20% 10 8 6 4 2 LAN 0 79%

Passengers (millions) Source: GBM with JAC data

According to a study developed by the JAC in 2014, passenger traffic is set to grow at a 6.4% CAGR in Chile throughout 2030, with domestic traffic presenting a 7.1% average expansion, while the international front grows 5.2% annually on average. The fastest growth will be delivered up to the 2020 milestone, with traffic expansion averaging 9.6% annually, while throughout the 2020-2030, traffic will grow at 4.2% CAGR.

AEROMEX | Transportation Initiating Coverage

AEROMEX AEROMEX’s true potential still undervalued as further Market Outperformer opportunities are yet to be materialized. 2016 Price Target P$44.6 We are reinitiating coverage on AEROMEX introducing our 2016e

price target of P$44.6 with a Market Outperformer rating, as the Price 36.35 company’ s long-term potential, alongside persistently low oil prices 12M Price Range 25 / 41.6 and appealing traffic growth in Mexico due to an under-penetrated Shares Outstanding (Mill) 730.9 aeronautical industry should aid the company’ s profitability. In Market Cap (Mill) 26,778 addition, the approval and kick-off of the JV with DAL, in which both companies will share their network between the US and Mexico Float 18.0% would allow them to boost profitability in the mid-term. Net Debt (Mill) 14,472 Mexico’s aeronautical industry under-penetrated. AEROMEX EV (Mill) 91,916 should benefit from the potential growth in the air traffic in Mexico, Dividend Yield 0.0% as the country has a very low per capita expenditure in commercial airlines (US$46 per year) when compared to other countries.

Capacity expansion will allow to offer premium service to 2015 TTM 2016e 2017e international destinations. The company will continue to grow its fleet, as between 2018 and 2023 it will receive around 60 B-737 Revenue46,94648,32650,21955,000 MAX and 10 B-787-9 aircrafts, which will be used to provide a wider EBITDAR 11,306 11,975 12,794 14,098 international destination offer and, in turn, its long-haul routes and Net Profit 1,160 1,137 1,011 1,617 frequencies.

Free CF -2,589 -587 -1,588 957 Operating cost and expense efficiencies to materialize going EPS 1.59 1.56 1.38 2.21 forward, offsetting higher fuel prices. The company should be able to improve its cost and expense structure, thanks to initiatives P/E 24.8x 23.6x 26.5x 16.6x already in place that should start to pay off in the long run while EV/EBITDAR 7.4x 7.0x 7.1x 6.4x more than offsetting the impact of heftier fuel prices linked to higher P/BV 2.7x 2.4x 2.2x 2.0x oil prices. Among the main drivers for cost and expense efficiencies are:

 Payroll: The pilot and cabin crew rollover from the old union contract to the new one implies a 40% saving per each new Mauricio Martinez Vallejo recruit. [email protected] +52(55) 5480 5800 ext. 4187  Maintenance: After the JV with DAL regarding the MRO, AEROMEX should register savings, aided as well by a more Pablo Zaldivar modern fleet. [email protected]  Leasing: The company seeks to balance the proportion of owned +52(55) 5480 5800 ext. 4390 and leased aircraft, reducing leasing expenses.

Mexico City to turn the main hub in LatAm. Once the brand new airport kicks off operations, seemingly in 2020, AEROMEX should be among the players who benefit the most from it due to its solid foothold in the airport, while also reaping the benefits from the JV with DAL. EV/EBITDAR FWD 12M PRICE PERFORMANCE VS. IPC P/E 7.0x 70% 26.0x

60% 24.0x

6.5x 50% 22.0x

40% 20.0x 30% 6.0x 18.0x 20% 16.0x 10% 5.5x 0% 14.0x -10% 12.0x 5.0x -20% 10.0x /16 7 11/15 11/15 11/15 12/15 12/15 12/15 10/15 01/16 07/15 10/15 07/16 10/15 01/16 02/16 03/16 01/16 08/15 05/16 07/15 09/15 09/15 07/15 04/16 06/16 0 07/16 02/16 03/16 02/16 03/16 05/16 08/15 08/15 05/16 09/15 09/15 09/15 09/15 04/16 04/16 06/16 06/16

AEROMEX IPC

AEROMEX | Transportation Initiating Coverage

I. Investment Thesis

AEROMEX’s true potential still undervalued as further opportunities are yet to be materialized. Despite the revaluation seen in AEROMEX—after Delta Airlines (DAL) announced its intention to acquire up to 49% of AEROMEX’ s shares at P$43.59 each, increasing its stake from the 16.8%—, present valuations do not reflect the company’ s long-term potential, in our view. Indeed, operating efficiencies—boosted by the JV with DAL—, alongside persistently low oil prices and appealing traffic growth in Mexico due to an under-penetrated aeronautical industry should aid the company’ s profitability. As a result, we are introducing our 2016e price target of P$44.6 per share with a Market Outperformer rating.

Mexico’s aeronautical industry under-penetrated. AEROMEX should benefit from the potential growth in the air traffic in Mexico, as the country has a very low per capita expenditure in commercial airlines (US$46 per year) when compared to other countries. Thus, we are calling a 2015-2020 CAGR in PAX of 5.0%. Additionally, the company should be able to slightly improve its yields thanks to a more rational industry in Mexico.

2015 per capita expenditure in Airlines GBMe AEROMEX PAX and Yield —figures in 2014 USD —PAX figures in millions 600 552 25 1.33 1.32 500 453 20 1.32 400 15 1.31

300 247 1.31 10 1.30 200 104 101 1.30 100 75 5 46 1.29

0 0 1.29 USA Western Chile ArgentinaColombia Brazil Mexico 2015 2016e 2017e 2018e 2019e 2020e Europe PAX Yield (MXN) Source: Euromonitor Source: GBM

Capacity expansion will allow to offer premium service to international destinations. The company will continue to expand its fleet, as between 2018 and 2023 it will receive around 60 B-737 MAX and 10 B-787-9 aircrafts, which will be used to increase its international destinations offer and in turn, its long-haul routes and frequencies. Thus, AEROMEX’ s ASK should post a steady growth of roughly a 7.7% 2015-2020 CAGR.

Aircraft deliveries GBMe AEROMEX ASK —figures in billions 14 70 CAGR 2015-2020: 7.7% 12 2 60 2 10 50

8 40

6 30 11 11 10 4 20

2 10

11 0 0 2016e 2017e 2018e 2019e 2020e 2015 2016e 2017e 2018e 2019e 2020e B737-MAX B787-9 Source: GBM with company data Source: GBM

AEROMEX | Transportation Initiating Coverage

Operating cost and expense efficiencies to materialize going forward, offsetting higher fuel prices. The company should be able to improve its cost and expense structure, thanks to initiatives already in place that should start to pay off in the long run. However, after the bottom seen in oil prices, and the rally witnessed afterwards, fuel expenses should start to weigh more every year going forward. Therefore, AEROMEX’ s CASK and CASK excluding fuel should post a 2015-2020 CAGR of -0.2 and - 1.8%, respectively, whereas its EBIT should increase at a 17.2% CAGR in the same period. Among the main drivers for cost and expense efficiencies are:

1. Payroll: The pilot and cabin crew rollover from the old union contract to the new one implies a 40% saving per each new employee.

2. Maintenance: After the JV with DAL regarding the MRO, AEROMEX should register savings, aided as well by a more modern fleet.

3. Leasing: The company seeks to balance the proportion of owned and leased aircraft, reducing leasing expenses.

4. Fuel costs: Our GBM Oil & Gas team estimates that WTI should move from US$42.5 in 2016 to US$65 in 2020, directly affecting fuel prices.

GBMe WTI 2016-2020 GBMe AEROMEX CASK and CASK excl. Fuel 70 1.10 0.86

60 1.10 0.84 0.82 50 1.09 0.80 40 1.09 0.78 30 1.08 0.76 1.08 20 0.74

10 1.07 0.72

0 1.07 0.70 2015 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e CASK CASK ex-fuel

Source: GBM Source: GBM

Mexico City to turn the main hub in LatAm. Once the brand new airport kicks off operations, seemingly in 2020, AEROMEX should be among the players who benefit the most from it due to its solid foothold in the airport. As a result, the airline would be able to strengthen its international presence across the Americas.

Catalysts: The main catalyst for AEROMEX is the approval and kick-off of the JV with DAL, in which both companies will share their network between the US and Mexico. This will allow them to optimize their revenue management, boost their yields, widen their offer for customers, and as a result, increase their profitability.

AEROMEX | Transportation Initiating Coverage

II. Valuation

Introducing our 2016e price target of P$44.6 with a Market Outperformer rating, which results from our SOP approach, considering an average between a DCF method and an EV/EBITDAR target for AEROMEX’ s consolidated results and adding the value of PLM valued at a P/E target for the ownership in Premier.

DCF assumptions EV/EBITDAR  EBITDA’ s 2015-2020 CAGR of 15.0%.  2016 EBITDAR of P$12.8 billion, implying a 140bp margin improvement, mainly due to lower fuel  Normalized effective tax rate of 30%. expenses

 WC to remain stable in terms of days for each  Adj. lease commitments of P$47.2 billion bracket.  Net Debt for the year , excluding leasing, of P$16.5  A perpetual growth of 3.5%. billion

 WACC of 10.6%  EV/EBITDAR target of 7.2x in line with latest o Cost of Equity of 15.9% transactions o Cost of Debt of 5.2% P/E assumptions for PLM  User base growth of 8% to 4.5 million users in 2016.

 2016e net revenue of P$1.17 billion.

 Net income of P$51.6 per user, assuming a net margin target of 20%, in line with the industry in more developed markets.

 P/E target multiple of 12x in line with the industry’ s developed market valuations.

DCF EV/EBITDAR 2016e 2017e 2018e 2019e 2020e Perpetual FCF EV/EBITDAR 7.2x EBITDA 5,808,830 7,149,441 8,642,210 9,901,733 10,860,301 10,860,301 EBITDAR 2016e 12,794,185 Taxes 418,142 693,016 1,027,438 1,265,097 1,427,085 1,427,085 EV 92,118,132 Working Capital -112,985 -7,317 -59,507 -36,058 -38,470 Net Debt 2016e 16,590,135 OPERATING CASH FLOW 5,277,703 6,449,108 7,555,265 8,600,578 9,394,746 9,433,216 Minority Part 8,226 Leasing 2016e x7 47,258,702 CAPEX -5,023,672 -3,481,910 -5,207,038 -5,950,056 -6,639,010 -5,380,356 Mkt Cap 28,261,068 FREE CASH FLOW 254,031 2,967,198 2,348,227 2,650,522 2,755,736 4,052,860 Shares Outstanding (000's) 730,850 Price Target 2016e P$38.7 WACC 10.6% PLM P/E TOTAL PRESENT VALUE 45,855,323 2016e 51% Earnings 234,112 P/E Multiple 12.0x Net Debt 1Q16 14,471,772 Market Cap 2,809,344 Minority Equity 3,307 Shares Outstanding (000's) 730,850 P/BV 2.5x Price per share P$3.8 Minority Equity 8,226 AEROMEX’s WACC Equity Value (P$) 31,375,325 %Equity 56.69% Shares Outstanding (000's) 730,850 %Debt 43.31% Price Target 2016e P$42.9 Risk Free 5.97% Beta 1.24 Market Risk Premium 8.00% P$40,8 Average DCF & EV/EBITDAR Cost of Equity 15.9% Sum of the Parts P$44,6 Cost of Debt 5.17% Corporate Tax Rate 30.00% WACC 10.6%

AEROMEX | Transportation Initiating Coverage

III. Financial Estimates P&L - Thousands of MXN 2015-2020 2015 2016e 2017e 2018e 2019e 2020e CAGR 6.8% 5.3% 5.0% 5.0% 5.0% 5.0% Passengers '000 18,353 19,317 20,282 21,296 22,361 23,479 5.0% 11.5% 6.3% 8.4% 8.0% 7.9% 7.7% ASK (millions) 40,374 42,931 46,553 50,259 54,220 58,385 7.7% 11.6% 5.3% 8.9% 8.0% 8.7% 7.8% RPK (millions) 32,115 33,822 36,833 39,784 43,228 46,613 7.7% 0.1% -1.0% 0.4% 0.0% 0.7% 0.1% Load Factor 79.5% 78.8% 79.1% 79.2% 79.7% 79.8% 0.1% -1.9% 1.0% 0.7% -0.1% 0.0% -0.1% Yield 1.300 1.312 1.322 1.320 1.320 1.320 0.3% 9.4% 7.0% 9.5% 7.9% 8.6% 7.8% Total Revenue 46,946,267 50,219,342 55,000,276 59,326,486 64,416,432 69,429,640 8.1% -1.9% 0.6% 1.0% -0.1% 0.6% 0.1% RASK 1.163 1.170 1.181 1.180 1.188 1.189 0.4% 6.7% 6.9% 8.1% 6.4% 8.0% 7.7% Operating Costs 43,853,497 93.4% 46,888,244 93.4% 50,680,351 92.1% 53,919,009 90.9% 58,229,711 90.4% 62,722,878 90.3% 7.4% -21.5% -1.1% 20.7% 11.7% 12.5% 15.2% Fuel Expenses 10,754,000 22.9% 10,630,692 21.2% 12,836,329 23.3% 14,343,730 24.2% 16,140,682 25.1% 18,586,009 26.8% 11.6% 9.6% 4.9% 7.9% 5.7% 4.2% 4.4% Payroll 9,815,000 20.9% 10,294,965 20.5% 11,110,056 20.2% 11,746,644 19.8% 12,239,122 19.0% 12,775,054 18.4% 5.4% 43.6% 10.0% 2.9% 2.7% 5.9% 6.2% Maintenance 3,298,000 7.0% 3,626,363 7.2% 3,731,372 6.8% 3,833,011 6.5% 4,057,887 6.3% 4,308,882 6.2% 5.5% 20.4% 10.2% 0.9% 2.8% 5.9% 3.3% Traffic Servicing 6,332,000 13.5% 6,980,488 13.9% 7,040,035 12.8% 7,237,831 12.2% 7,665,555 11.9% 7,914,979 11.4% 4.6% 24.5% 8.3% 9.5% 7.9% 8.6% 7.8% Passenger Services 1,113,000 2.4% 1,205,264 2.4% 1,320,007 2.4% 1,423,836 2.4% 1,545,994 2.4% 1,666,311 2.4% 8.4% -2.8% 13.0% -1.8% 3.7% 4.2% 3.3% Travel Agent Comissions 1,289,000 2.7% 1,456,361 2.9% 1,430,007 2.6% 1,483,162 2.5% 1,545,994 2.4% 1,596,882 2.3% 4.4% 23.0% 8.1% 6.3% 4.6% 6.9% 2.7% SG&A 3,205,000 6.8% 3,465,135 6.9% 3,685,018 6.7% 3,856,222 6.5% 4,122,652 6.4% 4,235,208 6.1% 5.7% 28.1% 17.1% -0.8% 0.9% 6.5% 4.0% Leasing 5,763,180 12.3% 6,751,243 13.4% 6,698,010 12.2% 6,759,840 11.4% 7,196,812 11.2% 7,486,015 10.8% 5.4% 48.1% 8.0% 13.6% 13.6% 14.1% 11.3% Depreciation 2,511,484 5.3% 2,711,844 5.4% 3,080,015 5.6% 3,500,263 5.9% 3,993,819 6.2% 4,443,497 6.4% 12.1% 80.5% 3.1% 7.0% 6.0% 5.0% 4.0% Associated Companies -227,167 -0.5% -234,112 -0.5% -250,500 -0.5% -265,530 -0.4% -278,806 -0.4% -289,959 -0.4% 5.0% -3.8% 0.5% -0.3% -1.4% 0.1% 0.0% CASK 1.092 1.098 1.095 1.079 1.080 1.080 -0.2% 9.1% 2.3% -3.7% -3.1% -1.4% -2.6% CASK ex-fuel 0.826 0.845 0.813 0.787 0.776 0.756 -1.8% 71.1% 9.9% 29.7% 25.2% 14.4% 8.4% Operating Profit 3,030,850 6.5% 3,331,097 6.6% 4,319,925 7.9% 5,407,478 9.1% 6,186,721 9.6% 6,706,762 9.7% 17.2% 41.9% 13.2% 10.2% 11.1% 10.9% 7.2% EBITDAR 11,305,514 24.1% 12,794,185 25.5% 14,097,951 25.6% 15,667,581 26.4% 17,377,351 27.0% 18,636,274 26.8% 10.5% 48.1% -12.8% 59.9% 48.3% 23.1% 12.8% Maj. Net Income 1,159,893 2.5% 1,010,937 2.0% 1,616,933 2.9% 2,397,243 4.0% 2,951,771 4.6% 3,329,733 4.8% 23.5% Source: GBM

AEROMEX | Transportation Initiating Coverage

FCF - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e EBITDA 5,315,167 5,809,300 7,149,441 8,642,210 9,901,733 10,860,301 Change in Working Capital 2,156,530 -112,985 -7,317 -59,507 -36,058 -38,470 Interests -1,461,552 -1,644,707 -2,009,872 -1,982,684 -1,969,730 -1,949,813 Taxes -72,501 -364,314 -693,016 -1,027,438 -1,265,097 -1,427,085 CAPEX -8,526,363 -5,275,621 -3,481,910 -5,207,038 -5,950,056 -6,639,010 FCFE -2,588,719 -1,588,327 957,326 365,543 680,792 805,923 Source: GBM

Balance - Thousands of MXN 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 6,202,467 4,485,433 5,442,759 5,808,302 6,489,094 7,295,016 PP&E 23,545,223 26,108,999 26,510,894 28,217,669 30,173,906 32,369,420 Total Assets 49,883,919 52,365,882 54,652,593 57,487,486 60,951,111 64,847,587 Short-Term Debt 4,400,475 5,863,939 5,863,939 5,863,939 5,863,939 5,863,939 Long-Term Debt 16,037,405 15,211,629 15,211,629 15,211,629 15,211,629 15,211,629 Total Liabilities 39,110,035 40,414,865 41,084,539 41,522,076 42,033,808 42,600,420 Majority Equity 10,770,605 11,938,185 13,555,118 15,952,361 18,904,132 22,233,865 Net Debt 14,235,413 16,590,135 15,632,809 15,267,266 14,586,474 13,780,552 Source: GBM

AEROMEX | Transportation Initiating Coverage

IV. Company Description

AEROMEX began operations in 1934 under the name “Aeronaves de México”. As Mexico’ s only full-service carrier, AEROMEX operates the most extensive network of routes in Mexico, to both domestic and international destinations. Thus, the airline transported 18.7 million passengers in 2015. AEROMEX operates under the hub and spoke model, where traffic is consolidated at an airport (hub) that serves different destinations (spokes). Currently, the company concentrates most operations in Mexico City—its main hub—while using Monterrey, Guadalajara, and Hermosillo as secondary hubs. In 1988, the company was acquired by the Mexican government and it wasn’ t until 2007 that Banamex and a group of 16 prominent Mexican investors acquired 100% of the share capital of AEROMEX, returning the company to the private sector.

A. Company’s Network

Up to 2015, AEROMEX operated more than 620 daily flights, flying to 85 different destinations most of which are accessible from the company’ s main hub in Mexico City. Furthermore, in recent years, the company has expanded its network in Monterrey as it develops the airport as a secondary hub to deal with the saturation in the Mexico City airport (AICM).

Domestic network: AEROMEX flies to 46 different destinations in Mexico, with most of its routes in the country, either originating or ending in Mexico City. The company’ s secondary hub in Monterrey operates flights to 16 domestic destinations. As such, in 2015, AEROMEX transported 12.6 million passengers in its domestic network.

AEROMEX’s domestic routes

Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

International network. Currently, AEROMEX flies to 39 international destinations, including 19 in the US and Canada, 8 in South America, 8 in Central America and the Caribbean, 4 in Europe, and 2 in Asia. Of these destinations, 37 are operated by flights from Mexico City, while 6 are operated from Monterrey and 6 from Guadalajara. AEROMEX is the only Mexican carrier that flies long-haul routes to Europe and Asia. Furthermore, the JV with Delta, as well as the new bilateral MX-US aviation agreement, should allow for the opening of more routes between Mexico and the US. In 2015, AEROMEX transported 6.1 million passengers in its international network.

AEROMEX’s international routes

Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

B. Market Share

With the liberalization of the aviation industry in 1995 and the following entry of new airlines into the market, AEROMEX and Mexicana began to lose part of their domestic market share to the emerging airlines. Still, it was not until Mexicana and other airlines ceased operations due to the economic crisis of 2008 and the A-H1N1 epidemic in 2009 that the surviving airlines absorbed the market share that was left behind. It was at this point that AEROMEX consolidated itself as the leading airline in Mexico’ s domestic market .On the other hand, the low-cost carriers—Interjet and Volaris—benefited the most from the situation due to their low-cost strategy.

Since 2011, AEROMEX has lost around 6% market share to the growing low-cost airlines—mainly Volaris. Still, AEROMEX holds 25.4% of Mexico’ s consolidated market share—40% when excluding foreign airlines—as roughly 32.6% of the company’ s passengers are international.

Domestic market share Historical domestic market share 100% 90% 17% 18% 17% 17% 17% 32% 27% 80% 40% 37% 40% 36% 70% 25% 24% 24% 24% 25% 16% 60% 6% 13% 4% 7% 11% 50% 8% 15% 18% 23% 12% 13% 20% 23% 23% 25% 21% 40% 10% 6% 17% 13% 30% 20% 40% 37% 36% 38% 36% 36% 34% 33% 29% 28% 32% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AEROMEX Mexicana VOLAR Interjet Other

Source: GBM with DGAC

Up to 2015, AEROMEX held 14.6% of the US-Mexico market share, below United and American Airlines, which control 22.6 and 21.4% of the market, respectively. We should mention that this market represents around 70% of Mexico’ s international market. Excluding the US, AEROMEX holds 21.7% of the international market share, followed by COPA (9.3%), WestJet (8.4%), and LATAM (6.7%). We must note that AEROMEX holds 16.8% of the consolidated international market.

US-Mexico market share International market share ex-US

Source: GBM with DGAC

AEROMEX | Transportation Initiating Coverage

C. Fleet

AEROMEX ended 2015 with a fleet of 125 aircraft, consisting of 13 wide body aircrafts, 9 Boeing B787 aircrafts and 4 B777, as well as 50 narrow body aircrafts, 19 of which are B737-700 and 31 are B737-800. The company also operates 62 regional planes, consisting of 18 E145, and 44 E170, E175, and E190 aircrafts. At the end of the year, AEROMEX’ s operating fleet had an average age of 7.7 years. It must be noted that Boeing aircrafts are operated under the Aeromexico brand, while the Embraer aircrafts are operated under the Aeromexico Connect brand.

For 2016, the airline intends to increase its fleet to 130 planes, reducing its number of E145 and B777 carriers and increasing its B737, E170/190, and B787 carriers.

Aeromexico Fleet Fleet type Model 2010 2011 2012 2013 2014 2015 2016e E-145 39 39 38 30 24 18 15 E-170/175/190 7 11 22 27 38 44 50 Regional 46 50 60 57 62 62 65

MD-83 3 ------B-737 38 44 45 47 49 50 52 Narrow Body 41 44 45 47 49 50 52

B-767 6 7 7 6 4 - - B-787 - - - 35910 B-777 4444443 Wide Body 10 11 11 13 13 13 13 Total 97 105 116 117 124 125 130 Source: GBM with company data

In the long term, AEROMEX plans to renew its fleet so that it uses E170-190, B737-800’ s NG-MAX, and B787 aircrafts. This measure aims to provide CASK efficiencies and reduce ownership cost by homogenizing the fleet, while maintaining flexibility. Furthermore, the new-generation planes allow for increased capacity due to a larger number of seats as well as greater efficiencies in fuel consumption and speed, due to the use of new technologies.

Fleet Aircraft Specifications

E-145 E-170

 Seats: 50  Seats: 76  Cruise speed: 765 km/h  Cruise speed: 830 km/h  Length: 29.8m  Length: 29.9m  Wingspan: 20m  Wingspan: 26m  Max. Weight at take-off: 22 ton.  Max. Weight at take-off: 37.2 ton.  Flight Distance: 2,800 km  Flight Distance: 3,706 km

AEROMEX | Transportation Initiating Coverage

E-175 E-190

 Seats: 86  Seats: 99  Cruise speed: 830 km/h  Cruise speed: 830 km/h  Length: 31.6m  Length: 28.7m  Wingspan: 26m  Wingspan: 28.7m  Max. Weight at take-off: 38.79 ton.  Max. Weight at take-off: 47.8 ton.  Flight Distance: 3,890 km  Flight Distance: 4,250 km

B- 737-700 B- 737-800

 Seats: 124  Seats: 160  Cruise speed: 840 km/h  Cruise speed: 840 km/h  Length: 33.6  Length: 39.5m  Wingspan: 35.8m  Wingspan: 35.8m  Max. Weight at take-off: 67.13 ton.  Max. Weight at take-off: 79 ton.  Flight Distance: 4,700 km  Flight Distance: 5,000 km

B-777 B-787-800

 Seats: 277  Seats: 243  Cruise speed: 890 km/h  Cruise speed: 900 km/h  Length: 63.7m  Length: 56.72m  Wingspan: 60.9m  Wingspan: 60.09m  Max. Weight at take-off: 286.67 kg.  Max. Weight at take-off: 227.93 kg.  Flight Distance: 12,800 km  Flight Distance: 14,800 km

Source: GBM with company data

D. Alliances

AEROMEX is a founding member of the SkyTeam alliance, providing the company with the option of celebrating code sharing agreements, reciprocal loyalty programs, access to VIP lounges, and joint marketing activities with other members of the alliance. As such, AEROMEX customers flying on SkyTeam members’ flights are able to accumulate and redeem mileage for the Club Premier loyalty program, use electronic tickets, document from the origin to the final destination, and assign their seats in advance. Furthermore, Premier, Business, or higher class passengers will enjoy priority documentation, boarding, and on waiting lists, while SkyTeam Elite Plus passengers will receive priority baggage handling and access to the VIP lounge.

AEROMEX | Transportation Initiating Coverage

SkyTeam current members:

 Aeroflot  Delta  Aerolineas Argentinas  Garuda Indonesia  Aeromexico  Kenya Airways  Air Europa  KLM Royal Dutch Airlines  Air France  Korean Air  Alitalia  MEA Air Liba  China Airlines  Saudia  China Eastern  TAROM  China Southern  Vietnam Airlines  CSA Czech Airlines  Xiamen Air

AEROMEX operates codeshare agreements with 8 SkyTeam members—Air Europa, Air France, Alitalia, CSA Czech Airlines, Delta, Garuda Indonesia, KLM Royal Dutch Airlines, and Korean Air—as well as 5 airlines that aren’ t members of SkyTeam, allowing for the accrual and redemption of mileage, electronic tickets, documentation from origin to final destination, and advanced seat assignment. The 5 airlines are Aeromear, Alaska Airlines, Avianca, Copa Airlines— which also allows Elite members and premium and business class travelers to access VIP lounges—and WestJet. Mileage redemption is not available with the latter. Mexico-US market share E. Delta JV

With the approval of the new bilateral MX-US aviation agreement by the Mexican Senate, the Mexican antitrust watchdog COFECE authorized the cooperation agreement between AEROMEX and Delta.

The agreement will allow AEROMEX and Delta to act as a sole carrier in the Mexico-US market, enabling more efficient aircraft and slot utilization and the simplification of redundant flights where the airlines used to compete. Additionally, the agreement will give AEROMEX greater access to Delta’ s corporate market, which should provide the company with an upside in terms of revenues. By 2015, AEROMEX held a 14.6% market share between Mexico and the US, while Delta held an additional 10.9% market share. Together, the companies Source: GBM with DGAC would hold a 25.5% market share, above United’ s and American Airlines’ 22.6 and 21.4% shares, respectively.

Delta is already experienced when it comes to JVs as in May 2009, it signed a JV agreement with Air France-KLM involving transatlantic operations, which was joined by Alitalia one year later. The JV allowed the partners to rationalize their capacity offer on transatlantic routes, delivering a 3% increase in yield due to the improved operations, as well as giving Delta a greater number of destinations, frequencies, more competitive fares on the routes, and a more efficient slot and schedule utilization.

Additionally, back in November 18, 2015 Delta announced its intention to acquire up to 49% of AEROMEX’ s shares—up from the 16.8% that Delta currently holds—at P$43.59 per share, which should be done by late 3Q16 or early 4Q16. As such, Delta has mentioned that it is very confident in this investment as, with its help, it sees AEROMEX doubling its operating margin in the next 3-5 years.

AEROMEX | Transportation Initiating Coverage

F. Club Premier

In 1991, AEROMEX launched the “Club Premier” loyalty program, allowing members to accumulate mileage—Premier Kilometers —when traveling with AEROMEX, as well as its codeshare agreement partners and members of the Sky Team Alliance. Additionally, since 1997, the company entered an agreement with American Express—up to 2015, AEROMEX had similar agreements with most of Mexico’ s main banks—for the issuance of shared brand credit cards, allowing customers to exchange the bank points generated when buying with the credit card for Premier Kilometers.

Furthermore, AEORMEX holds agreements with certain hotels and hotel chains, including Marriott, Hilton, and Camino Real, and with car rental agencies such as Hertz, Avis, and Budget, under which members earn Premier Kilometers for each stay or rental. The company also has partnerships with several companies in Mexico, including Soriana, City Club, Linio, OfficeMax, Hidrosina, MacStore, and Palacio de Hierro, allowing members to accumulate Premier Kilometers, when purchasing the products or services offered by these companies.

Club Premier members can use their accumulated Kilometros Premier to purchase flights and upgrades through AEROMEX, its codeshare partners, and SkyTeam members flights, as well as to pay for certain hotels and purchases made at the Tienda Premier store and some stores, such as bookstore Gandhi and deli store La Europea.

V. Key Figures

A. Revenue

As a full service carrier, AEROMEX’ s main business and source of revenues resides in transporting passengers by air on international and domestic routes. Additionally, the company benefits from transporting cargo along said routes, as well as from charging passengers for excess baggage and other benefits, maintenance operations to third parties, and training services. These activities represent only around 11.1% of the company’ s revenues, while the remaining portion comes from charging customers a fare for the service of transporting them.

Revenue breakdown Passenger income by market Other Income Air Cargo 3.9% 6.1% Charter Flights 1.1%

International Domestic Passengers Passengers Passenger 54.4% 45.6% Income 88.9%

Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

i. Passenger

AEROMEX has a concession granted by the Ministry of AEROMEX’s Historic PAX Traffic Growth Communications and Transportation (SCT) to transport *Figures in millions passengers by air and on certain domestic and 20 international routes, which have been previously 18 16 CAGR 2010-2015: 10.6% authorized by the competent authorities. This represents 14 AEROMEX’ s main source of revenues, and was around 12 88.9% of the company’ s revenues in 2015. 10 AEROMEX transports passengers on both domestic and 8 international routes. Roughly 33% of its passengers fly on 6 4 international routes, and the remaining 67% on domestic 2 routes. Although the company transports less - international than domestic passengers, international 2011 2013 2012 2015 2014 2010 2007 2005 passenger revenues represent 54.4% of passenger 2006 2008 2009 revenues. The company’ s traffic has grown at a 10.6% Domestic International CAGR throughout the 2010-2015 period, reflecting the strong traffic dynamics in Mexico, as well as the Source: GBM with DGAC company’ s success on international routes.

ii. Air Cargo

AEROMEX transports cargo as part of the concession granted by the SCT. AEROMEX transports cargo in the interior of its passenger aircrafts, in other airlines’ compartments through block leases, and through a wet-lease contract with ACMI (Aircraft, Crew, Maintenance, and Insurance). Air cargo represented 6.1% of the company’ s cargo in 2015. The company’ s cargo has grown at a 12.0% CAGR throughout the 2010-2015 period

In addition to transporting cargo, AEROMEX also operates 2 warehouses within the customs premises of the AICM, which contribute 3% of the income of the company’ s cargo subsidiary. iii. Charter Flights

In October 2011, AEROMEX’ s charter airline—Aeromexico Travel—ceased operations. Since then, charter operations have been conducted by Aeromexico and Aeromexico Connect, in addition to their regular operations. Charter operations represent 1.1% of the company’ s revenues, with AEROMEX transporting 147 thousand charter passengers in 2015. Charter passengers have contracted at a 10.1% CAGR throughout the 2010-2015 period.

AEROMEX’s Historic Cargo Growth AEROMEX’s Historic Charter PAX Traffic Growth -Figures in millions of kg -Figures in thousands 100 500 90 450 80 400 CAGR 2010-2015: -10.1% CAGR 2010-2015: 12.0% 70 350 60 300 50 250 40 200 30 150 20 100 10 50 - - 2011 2011 2012 2013 2012 2013 2015 2015 2014 2014 2010 2010 2007 2007 2005 2005 2008 2006 2009 2006 2008 2009 Domestic International Domestic International

Source: GBM with DGAC

AEROMEX | Transportation Initiating Coverage

iv. Other Income

Other income represents 3.9% of AEROMEX consolidated revenues, and consists mainly of Gran Plan, complementary services, unused tickets, and maintenance operations. Gran Plan allows customers to buy packages consisting of a flight, hotel, and car rental for a discount fare, while complementary services consist in excess baggage—representing 1.1% of consolidated revenues— and other complementary charges to passengers. Finally, AEROMEX receives additional revenues from providing maintenance services through TechOps to third parties.

B. Profitability

AEROMEX’ s profitability is directly linked to improving its operating leverage through higher load factors and asset utilization, the FX effect, and jet fuel prices.

AEROMEX’ s main expenses are:

 Aircraft fuel. Around 24% of expenses for the company, consuming around 380 million gallons of jet fuel per year. By December 31, 2015, the company had around 65.6% of its 2015 fuel consumption hedged with call options at a minimum of US$2.06 per gallon and a maximum of US$2.75 per gallon for 2016.

 Salaries. About 22% of AEROMEX’ s expenses. By 2015, the company had 13,392 employees, translating into roughly 107 employees per plane. Around 69% of AEROMEX’ s employees belong to a labor union.

 Aircraft, Traffic, and communications services. 14% of AEROMEX’ s expenses, related to charges incurred by aircrafts using airport services. As such, this is related to the company’ s capacity.

 Leasing. Roughly 13% of the firm’ s total expenses, and includes aircraft leases. By 1Q16, AEROMEX had 93 aircrafts under financial leases.

Operating Expenses breakdown Travel Agent Commissions Passenger Services 3% D&A 3% Maintenance 6% 7% Aircraft Fuel Administrative 24% Expenses 8% Aircraft Salaries Leasing 22% 13% Aircraft Services 14% Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

Income Statement Summary - Thousands of MXN 2011 2012 2013 2014 2015

23.0% 4.8% 4.3% 12.9% 6.8% Passengers '000 13,923 14,596 15,221 17,190 18,353 20.4% 6.0% 5.8% 11.4% 11.5% ASK (millions) 28,987 30,724 32,496 36,216 40,374 21.5% 3.7% 6.4% 15.1% 11.6% RPK (millions) 22,636 23,483 24,989 28,772 32,115 0.9% -2.1% 0.6% 3.3% 0.1% Load Factor 78.1% 76.4% 76.9% 79.4% 79.5% 5.6% 5.9% -5.1% -6.7% -1.9% Yield 1.414 1.497 1.421 1.326 1.300 27.5% 10.4% 0.8% 7.7% 9.4% Total Revenue 35,808,165 39,523,423 39,849,502 42,920,749 46,946,267 5.7% 3.8% -4.2% -3.4% -1.9% RASK 1.233 1.280 1.226 1.185 1.163 27.0% 14.3% 1.7% 9.8% 6.7% Operating Costs 32,217,373 90.0% 36,833,272 93.2% 37,455,724 94.0% 41,114,164 95.8% 43,853,497 93.4% 54.2% 15.7% -1.2% 6.2% -21.5% Fuel Expenses 11,286,000 31.5% 13,063,000 33.1% 12,906,000 32.4% 13,706,000 31.9% 10,754,000 22.9% 11.8% 10.7% 6.4% 6.1% 9.6% Payroll 7,166,000 20.0% 7,930,000 20.1% 8,436,000 21.2% 8,954,000 20.9% 9,815,000 20.9% 21.2% -9.5% -7.6% 16.5% 43.6% Maintenance 2,356,000 6.6% 2,132,000 5.4% 1,971,000 4.9% 2,297,000 5.4% 3,298,000 7.0% 32.1% 27.5% 5.6% 11.2% 20.4% Traffic Servicing 3,514,000 9.8% 4,481,000 11.3% 4,732,000 11.9% 5,261,000 12.3% 6,332,000 13.5% 29.5% 10.1% 0.7% 18.4% 24.5% Passenger Services 681,000 1.9% 750,000 1.9% 755,000 1.9% 894,000 2.1% 1,113,000 2.4% 24.8% -7.0% -16.5% 14.6% -2.8% Travel Agent Comissions 1,490,000 4.2% 1,385,000 3.5% 1,157,000 2.9% 1,326,000 3.1% 1,289,000 2.7% 11.2% 14.0% 0.2% 12.2% 23.0% SG&A 2,034,000 5.7% 2,319,000 5.9% 2,323,000 5.8% 2,606,000 6.1% 3,205,000 6.8% 8.3% 12.2% -1.5% 24.5% 28.1% Leasing 3,268,000 9.1% 3,668,000 9.3% 3,613,000 9.1% 4,499,735 10.5% 5,763,180 12.3% -12.7% 197.3% 25.4% 9.4% 48.1% Depreciation 415,866 1.2% 1,236,488 3.1% 1,551,127 3.9% 1,696,272 4.0% 2,511,484 5.3% NA -2116.5% -108.8% -1185.1% 80.5% Associated Companies 6,507 0.0% -131,216 -0.3% 11,597 0.0% -125,843 -0.3% -227,167 -0.5% 5.4% 8.6% -4.6% -1.5% -3.8% CASK 1.112 1.207 1.152 1.135 1.092 -3.7% 8.3% -3.5% 0.2% 9.1% CASK ex-fuel 0.722 0.782 0.755 0.757 0.826 9.2% -9.6% -13.2% -33.1% 71.1% Operating Profit 3,374,059 9.4% 3,049,156 7.7% 2,646,113 6.6% 1,771,153 4.1% 3,030,850 6.5% 7.2% 12.7% -1.8% 2.0% 41.9% EBITDAR 7,057,925 19.7% 7,953,644 20.1% 7,810,240 19.6% 7,967,160 18.6% 11,305,514 24.1% -31.6% -35.4% -18.4% -27.5% 48.1% Maj. Net Income 2,045,935 5.7% 1,322,661 3.3% 1,079,907 2.7% 783,218 1.8% 1,159,893 2.5% Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

C. Balance Sheet

By 1Q16, AEROMEX had P$13.3 billion in current assets, P$5.6 billion of which were cash and cash equivalents, P$3.9 billion were accounts receivable, and inventories and prepaid expenses amounted to P$1.3 billion, each. Fixed assets totaled P$23.5 billion, while other assets amounted to P$14.9 billion. As such, total assets amounted to P$51.7 billion.

On the other hand, AEROMEX’ s total liabilities totaled P$40.6 billion, with P$21.6 billion being short- term liabilities, and P$19.0 billion being long-term liabilities. As such, the company’ s shareholders’ equity stands at P$11.1 billion.

Thus, AEROMEX held a P$57.2 billion adjusted net debt position by the end of the first quarter of 2016, equal to a 5.2x adj. net debt to EBITDAR ratio.

Balance Sheet Summary - Thousands of MXN 2011 2012 2013 2014 2015 Cash and equivalents 4,099,862 3,265,501 3,822,142 3,793,448 6,202,467 PP&E 7,327,120 11,912,243 14,241,373 17,530,344 23,545,223 Total Assets 24,242,856 28,700,650 34,317,624 39,868,409 49,883,919 Short-Term Debt 934,089 1,056,522 1,024,266 2,461,121 4,400,475 Long-Term Debt 2,245,197 5,283,323 7,862,571 10,450,461 16,037,405 Total Liabilities 17,296,216 20,457,295 24,070,981 28,983,789 39,110,035 Majority Equity 5,705,850 7,268,401 8,218,286 9,224,609 10,770,605 Net Debt -920,576 3,074,344 5,064,695 9,118,134 14,235,413 Source: GBM with company data

VI. Corporate Structure

A. Main shareholders

Currently, it is estimated that around 40.8% of AEROMEX’ s ownership is held by investors, directors, and other related persons, while 16.8% is held by Delta. Of the ownership held by Delta, 4.24% is held directly by the airline, 4.53% is held by the Delta Master Trust, and the remaining 8.03% is held by Barclays due to a related financial transaction carried out with Delta Airlines. The remaining 42.4% of the shares is held by minority shareholders.

AEROMEX’s main shareholders Shareholder # of Shares % of Shares

Investors, directors and related persons 290,538,423 40.8% Delta Airlines 119,360,302 16.8% Minority shareholders 301,812,742 42.4%

Total 711,711,467 100%

Source: GBM with company data

AEROMEX | Transportation Initiating Coverage

B. Board of Directors

All the members of the company’ s Board of Directors (except for AEROMEX‘ s CEO Andres Conesa Labastida and Eduardo Tricio Haro, who occupy the position of board directors) occupy the position of independent directors in terms of the provisions set by Article 26 of the Securities Market Law (LMV).

Board of Directors Board Members Position Javier Arrigunaga Gomez del Campo Chairman Valentin Diez Morodo Propietary Eduardo Tricio Haro Propietary Edward H. Bastian Propietary Juan Francisco Beckman Vidal Propietary Luis de la Calle Pardo Propietary Fernando Canales Clariond Propietary Marcelo Canales Clariond Propietary Arquimedes Adriano Celis Ordaz Propietary Andres Conesa Labastida Propietary Antonio Cosio Pando Propietary Jorge Esteve Recolons Propietary Juan Fernando Franco Hernaiz Propietary Stephen Gorman Propietary Hector Madero Rivero Propietary Arturo Martinez del Campo Propietary Jose Antionio Tricio Haro Propietary Rafael Tricio Haro Propietary Carlos Villareal Tricio Propietary

Main Officers Name Position Seniority Andrés Conesa Labastida CEO 11 Ricardo Sánchez Baker CFO 10 Anko Van der Werff Income Director 2 Corneel Johan Albert Koster Operations Director 3 Sergio Allard Barrosos Commercial Director 6 David Gustavo Lamoyi Córdova Legal Director 3

COPA | Transportation Initiating Coverage

COPA COPA’s successful business model should allow it to recover as Market Outperformer soon as an economic turnaround approaches 2016e Price Target US$64.0 We believe that COPA counts with one of the strongest business models across our sample, driven by the effectiveness of its four Price 55.75 pillars: geographic location, connectivity, infrastructure, and 12M Price Range 40.39 / 85.64 product.

Shares Outstanding (Mill) 42.0 Still, the weak economic environment in the South American Market Cap (Mill) 2,339 region has taken a toll on profitability, mainly due to the sluggish performance in COPA’ s main markets: Brazil, Colombia, and Float 75% Venezuela. All things considered, we are introducing our 2016e Net Debt (Mill) 527 price target of US$64.0 with a market Outperformer rating. EV (Mill) 2,888 Dividend Yield 3.7% Yields should underperform throughout 2016, although a recovery may materialize afterwards. We believe that COPA’ s

yields should remain pressured in the short run, due to the 2015 TTM 2016e 2017e weakness of its main markets, as well as the negative impact from Revenue 2,250 2,175 2,081 2,238 FX depreciation. Still, we believe that COPA has the necessary tools to swiftly recover after this year’ s rough patch. EBITDAR 523 493 462 582 Net Profit 185 188 191 237 Capacity rationalization should prevent further deterioration. Free CF -85 14 148 395 COPA should continue with the careful management of its capacity offer, aiming to improve its load factors amidst a weak EPS 4.42 4.47 4.55 5.64 consumption environment. It is important to note that COPA P/E 10.9x 12.5x 12.2x 9.9x continues to focus on reducing its exposure to Brazil, Colombia, EV/EBITDAR 5.0x 7.6x 6.1x 4.5x and Venezuela. Thus, we are estimating a 3.8% 2015-2020 CAGR in COPA’ s ASK, as the company should resume its expansion as soon P/BV 1.0x 1.4x 1.3x 1.2x as demand recovers.

Cost reduction initiatives to kick in, improving profitability. Mauricio Martinez Vallejo COPA’ s management remains focused on cost containment, [email protected] actively searching for opportunities to curtail the airline’ s +52(55) 5480 5800 ext. 4187 expenses, such as a more agile operation in airports, maintenance facility optimization, stricter fuel management and improved fuel burn from a more efficient fleet. Pablo Zaldivar [email protected] +52(55) 5480 5800 ext. 4390 Catalysts. COPA is in the process of maturing its loyalty program, ConnectMiles, which should deliver a positive P&L and cash flow

impact. Additionally, the implementation of Sabre should allow the carrier to pursue additional ancillary revenue opportunities.

EV/EBITDAR FWD 12M PRICE PERFORMANCE VS. P/BV 10.0x 1.7x 10% MXLA 1.6x 9.5x 0% 1.5x 9.0x 1.4x -10% 8.5x 1.3x 8.0x -20% 1.2x 7.5x -30% 1.1x 1.0x 7.0x -40% 0.9x 6.5x -50% 0.8x 6.0x -60% 0.7x

11/15 11/15 11/15 12/15 12/15 12/15 10/15 10/15 01/16 10/15 10/15 07/15 01/16 07/16 10/15 10/15 07/15 02/16 03/16 01/16 08/15 05/16 07/16 09/15 07/15 04/16 06/16 02/16 03/16 07/16 05/16 08/15 09/15 02/16 03/16 04/16 06/16 08/15 05/16 09/15 04/16 06/16

COPA MXLA

COPA | Transportation Initiating Coverage

I. Investment Thesis

COPA’s four pillars should allow it to recover as soon as an economic turnaround approaches. We believe that COPA counts with one of the strongest business models across our sample, driven by the effectiveness of its four pillars:

 Geographic location. Panama’ s strategic location in Central America allows COPA to cater a wide range of markets across the continent.  Connectivity. COPA serves several routes that could not be sustained with point-to-point service due to insufficient demand through its hub business model.  Infrastructure. The company’ s hub is located at sea-level, which improves aircraft performance. Additionally, airport infrastructure is designed to provide an efficient service to connecting passengers.  Product. COPA boasts the best on-time performance in the Americas, offering a reliable service with its young aircraft fleet.

Still, the weak economic environment in the South American region has taken a toll on profitability, mainly due to the sluggish performance in COPA’ s main markets: Brazil, Colombia, and Venezuela. All things considered, we are introducing our 2016e price target of US$64.0 with a market Outperformer rating, driven by the carrier’ s long-term potential.

Yields should underperform throughout 2016, although a recovery may materialize afterwards. We believe that COPA’ s yields should remain pressured in the short run, as weakness across the company’ s main markets should dilute its pricing power. It is important to note that the strong FX depreciation has taken its toll, as COPA has not been able to raise prices at the same rate local currencies depreciate. Still, we believe that COPA has the necessary tools to swiftly recover after this year’ s rough patch.

COPA’s Main Markets GBMe COPA PAX and Yield —% of transported passengers —PAX figures in millions Caribbean 11 15 6.2% 10 9 14 8 7 13 Central 6 America South 5 12 23.3% America 4 45.6% 3 2 11 North 1 America 0 10 24.9% 2015 2016e 2017e 2018e 2019e 2020e PAX Yield Source: GBM with company data Source: GBM

Capacity rationalization should prevent further deterioration. COPA should continue to carefully manage its capacity offer, aiming to improve its load factors amidst a weak consumption environment. As such, the company is aiming to grow its capacity by roughly 2.0% during the year, while cutting its fleet by one aircraft. We should note that COPA continues to focus on reducing its exposure to Brazil, Colombia, and Venezuela through capacity cuts, as those markets remain among South America’ s weakest. Thus, we are estimating an 3.8% 2015-2020 CAGR in COPA’ s ASK, as the company should resume its expansion as soon as demand recovers.

COPA | Transportation Initiating Coverage

GBMe COPA’s ASM GBMe COPA’s fleet plan —figures in billions 30 120 CAGR 2015-2020: 3.8% 5 22 25 100 10 14 12 12 12 14 80 19 20 21 19 19 19 15 60

40 10 68 70 64 61 58 20 5

0 0 2016e 2017e 2018e 2019e 2020e 2015 2016e 2017e 2018e 2019e 2020e B737-800 E190 B737-700 B737-MAX Source: GBM with company data Source: GBM

Cost reduction initiatives to kick in, improving profitability. COPA’ s management remains focused on cost containment, actively searching for opportunities to curtail the airline’ s expenses. At present, the carrier is implementing a cost reduction program in an attempt to achieve a more agile operation in airports, maintenance facility optimization, and stricter fuel management. In addition, the arrival of new more efficient B787-MAX aircraft should improve fuel burn by roughly 14% when compared to B737-800s.

EBIT margin should recover, although reaching historic highs seems unlikely. COPA’ s operating margin should recover gradually after a weak 2016, with its EBIT posting an 12.6% 2015-2020CAGR, reaching a 16.3% margin by 2020. We believe that COPA’ s margin expansion will be mainly driven by the economic recovery of the South American region, although historic margins of ~ 20% seem like an impossible feat, as they consider the times when the company enjoyed a highly profitable Venezuelan market, which came to an end after a sharp local currency devaluation, together with government’ s unwillingness to make the corresponding payments. On the other hand, COPA should begin to generate free cash flow by 2017, which would enable the company to improve its cash position and follow through its expansion plan.

GBMe COPA’s EBIT and EBIT Margin GBMe COPA CASK and CASK excl. Fuel —figures in millions 600 17% 9.6 6.9 16% 9.4 6.8 500 15% 9.2 6.7 400 14% 9.0 6.6 6.5 13% 8.8 300 6.4 12% 8.6 6.3 200 11% 8.4 6.2 10% 8.2 100 6.1 9% 8.0 6.0 0 8% 7.8 5.9 2015 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e

EBIT EBIT mg. CASM (cents) CASM ex-fuel (cents)

Source: GBM Source: GBM

Catalysts:

 ConnectMiles Loyalty Program. COPA is currently in the process of maturing its loyalty program launched in July 2015, which should have a positive P&L impact by 2017, according to management expectations.

 Sabre Implementation. The successful implementation of the Sabre software platform by 2017 should allow the carrier to pursue additional ancillary revenue opportunities in 2018, improving revenue management and performance.

COPA | Transportation Initiating Coverage

II. Valuation

Introducing our 2016e price target of US$64 with a Market Outperformer rating, due to the company’ s long-run appeal despite short-term pressure. We valued COPA through a DCF model, taking into account a 4.0% perpetual growth and a 9.2% WACC.

DCF assumptions  EBITDA’ s 2015-2020 CAGR of 10.0%.

 Normalized effective tax rate of 30%.

 A perpetual growth of 4.0%

 WC to remain stable in terms of days for each bracket.

 An average CAPEX of US$269 and US$338 million for perpetuity

 WACC of 9.2% o Cost of Equity of 12.6% o Cost of Debt of 4.3%

DCF COPA’s WACC 2016e 2017e 2018e 2019e 2020e Perpetual FCF %Equity 63.5% EBITDA 336,749 453,291 514,413 585,487 645,205 671,013 %Debt 36.5% Taxes -36,661 -78,839 -95,315 -110,551 -123,389 -128,325 Risk Free 4.6% Working Capital -10,265 -5,425 -3,460 -3,983 -967 OPERATING CASH FLOW 289,823 369,027 415,638 470,954 520,849 542,688 Beta 1.23 CAPEX -128,402 -128,402 -359,839 -346,260 -383,602 -337,561 Market Risk Premium 6.5% FREE CASH FLOW 161,421 240,625 55,799 124,694 137,247 205,127 Cost of Equity 12.6% Cost of Debt 4.3% WACC 9.2% Corporate Tax Rate 25.0% WACC 9.2% TOTAL PRESENT VALUE 3,222,699 Net Debt 1Q16 527,437 Minority Equity 0 P/BV 1.3x Minority Equity 0 Equity Value (US$) 2,695,262 Shares Outstanding (000's) 42,109 Price Target 2016e US$64.0

COPA | Transportation Initiating Coverage

III. Financials P&L -Thousands of USD 2015-2020 2015 2016e 2017e 2018e 2019e 2020 CAGR 0.8% 3.5% 3.5% 5.5% 5.0% 4.5% Passengers '000 7,875 8,151 8,436 8,900 9,345 9,765 4.4% 4.4% 1.5% 2.5% 7.5% 1.9% 6.0% ASM (millions) 21,675 21,995 22,545 24,246 24,699 26,179 3.8% 2.5% 3.5% 3.5% 5.5% 5.0% 4.5% RPM (millions) 16,309 16,880 17,471 18,432 19,354 20,224 4.4% -1.8% 2.0% 1.0% -1.9% 3.1% -1.4% Load Factor 75.2% 76.7% 77.5% 76.0% 78.4% 77.3% 0.5% -16.8% -7.5% 7.6% 10.7% 9.7% 9.1% Total Revenue 2,250,063 2,080,840 2,238,057 2,478,261 2,717,722 2,966,153 5.7% -20.3% -8.9% 4.9% 3.0% 7.7% 3.0% RASM 10.4 9.5 9.9 10.2 11.0 11.3 1.8% -19.3% -11.0% 4.0% 5.0% 4.5% 4.5% Yield 13.3 11.8 12.3 12.9 13.5 14.1 1.2% -9.2% -5.3% 2.1% 9.4% 8.6% 8.9% Operating Costs 1,983,976 88.2% 1,879,345 90.3% 1,919,050 85.7% 2,100,153 84.7% 2,281,710 84.0% 2,484,086 83.7% 4.6% -26.6% -17.8% 1.9% 15.7% 9.5% 11.0% Fuel Expenses 602,777 26.8% 495,198 23.8% 504,622 22.5% 583,637 23.6% 639,121 23.5% 709,272 23.9% 3.3% -3.2% -3.0% 3.6% 10.7% 7.6% 7.0% Payroll 289,514 12.9% 280,913 13.5% 290,947 13.0% 322,174 13.0% 346,510 12.8% 370,769 12.5% 5.1% -3.9% -7.4% 7.6% 5.9% 9.7% 4.2% Passenger Servicing 258,302 11.5% 239,297 11.5% 257,377 11.5% 272,609 11.0% 298,949 11.0% 311,446 10.5% 3.8% -10.7% -0.1% 1.2% 10.7% 9.7% 9.1% Commissions 88,559 3.9% 88,436 4.3% 89,522 4.0% 99,130 4.0% 108,709 4.0% 118,646 4.0% 6.0% -6.1% 18.2% -14.0% 10.7% 9.7% 9.1% Reservations and sales 88,051 3.9% 104,042 5.0% 89,522 4.0% 99,130 4.0% 108,709 4.0% 118,646 4.0% 6.1% 9.6% 12.3% 6.4% 11.1% 10.6% 7.5% Maintenance, material and repairs 111,181 4.9% 124,860 6.0% 132,842 5.9% 147,526 6.0% 163,122 6.0% 175,351 5.9% 9.5% 17.1% 0.3% -0.7% 1.5% 9.7% 9.1% Depreciation 134,888 6.0% 135,255 6.5% 134,283 6.0% 136,304 5.5% 149,475 5.5% 163,138 5.5% 3.9% -0.9% -0.7% 3.3% 1.5% 9.7% 9.1% Flight Operations 130,930 5.8% 130,052 6.3% 134,283 6.0% 136,304 5.5% 149,475 5.5% 163,138 5.5% 4.5% 9.0% 2.5% 3.0% 10.3% -0.9% 14.1% Aircraft Rentals 122,217 125,230 128,987 142,250 140,989 160,879 5.5% 0.9% -2.2% 10.7% 9.7% 9.1% Landing Fees and others rentals 56,703 57,223 55,951 61,957 67,943 74,154 14.7% -2.0% 1.9% -1.6% 9.7% 9.1% Other 100,854 4.5% 98,840 4.8% 100,713 4.5% 99,130 4.0% 108,709 4.0% 118,646 4.0% 3.3% -13.0% -6.7% -0.4% 1.8% 6.7% 2.7% CASM 9.2 8.5 8.5 8.7 9.2 9.5 0.7% -3.0% -1.2% -0.3% -0.3% 6.3% 1.9% CASM ex-fuel 6.4 6.3 6.3 6.3 6.7 6.8 1.2% -48.9% -24.3% 58.3% 18.5% 15.3% 10.6% Operating Profit 266,087 11.8% 201,495 9.7% 319,007 14.3% 378,109 15.3% 436,013 16.0% 482,066 16.3% 12.6% -30.1% -11.7% 26.0% 12.8% 10.6% 11.0% EBITDAR 523,192 23.3% 461,979 22.2% 582,277 26.0% 656,663 26.5% 726,476 26.7% 806,084 27.2% 9.0% -48.7% 3.0% 23.8% 20.9% 16.0% 11.6% Maj. Net Income 185,422 8.2% 191,016 9.2% 236,516 10.6% 285,946 11.5% 331,653 12.2% 370,167 12.5% 14.8% Source: GBM

COPA | Transportation Initiating Coverage

FCF -Thousands of USD 2015 2016e 2017e 2018e 2019e 2020e EBITDA 400,975 336,749 453,291 514,413 585,487 645,205 Change in Working Capital 9,124 -10,265 -5,425 -3,460 -3,983 -967 Interests -7,208 -13,179 -3,652 3,153 6,191 11,490 Taxes 37,230 36,661 78,839 95,315 110,551 123,389 CAPEX -450,380 -128,402 -128,402 -359,839 -346,260 -383,602 FCFE -84,719 148,242 394,651 249,583 351,987 395,515 Source: GBM

Balance -Thousands of USD 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 682,894 751,684 988,658 1,047,610 1,178,495 1,327,232 PP&E 2,407,583 2,394,160 2,388,278 2,611,812 2,808,598 3,029,061 Total Assets 4,166,100 3,771,276 4,018,638 4,327,380 4,681,760 5,076,455 Short-Term Debt 245,514 229,347 229,347 229,347 229,347 229,347 Long-Term Debt 1,055,184 1,021,159 1,021,159 1,021,159 1,021,159 1,021,159 Total Liabilities 2,163,913 2,013,272 2,024,117 2,046,913 2,069,640 2,094,167 Majority Equity 2,002,187 1,758,004 1,994,521 2,280,467 2,612,120 2,982,287 Net Debt 617,804 498,822 261,848 202,896 72,011 -76,726 Source: GBM

COPA | Transportation Initiating Coverage

IV. Company Description

COPA began operations in 1947, quickly becoming one of the leading providers of airline passenger and cargo services in Latin America, operating flights across the Americas through a hub-and-spoke model from the strategically-located position of its Panama City hub. Additionally, COPA’ s subsidiary COPA Colombia provides domestic services within Colombia, as well as international flights from various cities in Colombia to Panama, Venezuela, Ecuador, Mexico, Cuba, Guatemala, and Costa Rica. Until 2015, COPA operated flights to 73 destinations in 31 countries in the Americas with a 100-aircraft fleet. Thus, in the same year, COPA mobilized 11.9 million passengers.

A. Company’s Network COPA’s Routes At present, COPA offers around 360 daily scheduled flights to 73 destinations in 31 countries in North, Central and South America as well as the Caribbean, the majority of which operate through its Panama City hub. The usage of Panama City as a hub allows COPA to transport passengers and cargo at a greater frequency than if each route was served directly. Furthermore, its hub enables COPA to consolidate passenger traffic from multiple points to serve each destination more effectively. As such, more than half of its passengers stops over at Panama City to reach other destinations. In 2015, COPA transported 11.9 million passengers through its network.

International network. Currently, COPA operates flights to 20 destinations in North America (2 in Canada, 6 in Mexico and 12 in USA), 14 in the Caribbean and Central America (1 each in Belize, El Salvador, Guatemala, Nicaragua, Aruba, Bahamas, and Curacao, 2 in Costa Rica and Honduras, and 3 in Cuba), as well as 12 destinations in South America (1 in Bolivia and Chile, 3 in Argentina and 7 in Brazil). It must by noted that in 2013, COPA Colombia began to change its target, focusing more on international markets.

Domestic network: As part of its domestic network, COPA operates 2 destinations inside Panama— one being its Panama City hub and the other being David. Additionally, the company operates 9 destinations inside Source: GBM with company data Colombia.

COPA | Transportation Initiating Coverage

B. Market Share

COPA operates in two domestic markets, where the Main countries where COPA holds an company represents more than 80% of the daily international market share operations in its Panama City hub apart from being the only Panamanian airline of the 19 that serve at the airport. When considering Colombia, in 2015 the 100% company mobilized 2.1% of the country’ s domestic 90% 80% 33% PAX, while Avianca transported 59% of the passengers. 52% 51% 70% 67% 60% 80% From the geographically central location of its Panama 50% 40% 63% 30% City hub, COPA caters for convenient connections to 43% 44% 18% markets in the Caribbean and North, Central and South 20% 17% 10% 3% 5% 4% 15% America, allowing the airline to provide international 0% 5% services to 17 countries in America. As such, the Mexico Chile Peru Colombia Ecuador company holds a small market share of the COPA LATAM Avianca AEROMEX Other international passengers in many countries in the Source: GBM with public data. continent, such as Mexico, Brazil, Chile, Peru, and Ecuador.

C. Fleet

COPA ended 2015 with a fleet of 100 planes—77 Boeing (14 B737-700 and 63 B737-800) and 23 Embraer 190 aircrafts, with an additional B737-800 to be delivered this year. Currently, the company has a purchase contract with Boeing for 11 B737 Next Generation aircraft, to be delivered between 2016 and 2018, as well as a purchase agreement for 65 B737 MAX, to be delivered between 2018 and 2025. Until last year, the average age of COPA’ s fleet was approximately 6.2 years.

COPA Fleet Model 2010 2011 2012 2013 2014 2015 2016e E-190 12 26 26 26 26 23 21 B-737-700 18 20 18 18 18 14 14 B-737-800 17 27 39 46 54 63 64

Total 47 73 83 90 98 100 99 Source: GBM with company data

Fleet Aircraft Specifications BOEING 737-700 BOEING 737-800

 Seats: 124  Seats: 160  Cruise speed: 840 km/h  Cruise speed: 840 km/h  Length: 33.6m  Length: 39.5m  Wingspan: 35.8m  Wingspan: 35.8m  Max. Weight at take-off: 70.08 ton.  Max. Weight at take-off: 79 ton.  Flight distance: 5,700 km  Flight distance: 5,700 km

COPA | Transportation Initiating Coverage

Embraer 190 BOEING 737 MAX

 Seats: 94  Seats: 162  Cruise speed: 1000 km/h  Cruise speed: 842 km/h  Length: 36.24m  Length: 39.5m  Wingspan: 28.72m  Wingspan: 35.9m  Max. Weight at take-off: 51.8ton.  Max. Weight at take-off: 82.19ton.  Flight distance: 4,074 km  Flight distance: 5,875 km Source: GBM with company data

D. Alliances

In May 1998, COPA entered into a 10-year alliance agreement package with Continental— now United Airlines (UAL) —, which included the participation of COPA in Continental’ s frequent flyer programs and VIP lounges, as well as agreements in other areas, such as trademarks. In November 2005, the airlines amended and restated the agreements extending their term through 2016. In June 2016, COPA extended its agreements with United for the next 5 years.

In an attempt to stay aligned with Continental, in 2007, Copa joined the Sky Team global alliance with Continental’ s support and accordingly, when Continental left Sky Team and joined the Star Alliance, COPA also left SkyTeam in the fourth quarter of 2009, joining Star Alliance on June 21, 2012. As a member of Star Alliance, COPA has reciprocity between frequent flyer programs with the 26 other airlines in the alliance while also holding code sharing agreements with United, Avianca, Asiana, Lufthansa and TAP Portugal in addition to 7 airlines that aren’ t members of Star Alliance.

Star Alliance current members:

 Air India  Ethiopian  Adria Airways  EVA AIR  Aegean Airlines  LOT Polish Airlines  Air Canada  Lufthansa  Air China  Scandinavian Airlines  Air New Zealand  Shenzhen Airlines  ANA  Singapore Airlines  Asiana Airlines  South African Airlines  Austrian  SWISS  Avianca  TAP Portugal  Brussels Airlines  THAI  COPA  Turkish Airlines  Croatia Airlines  UNITED  Egyptair

Other code share agreements:  Aeromexico  Iberia  GOL  KLM  Tame  Cuba  Emirates

COPA | Transportation Initiating Coverage

E. Loyalty Program

Prior to July 2015— when COPA launched its own loyalty program, Connect Miles—, the company had adopted UAL’ s MileagePlus as its loyalty program. This allowed UAL to leverage its brand recognition across Latin America while enabling COPA to compete more effectively against regional competitors. In July 2015, COPA began the operation of Connect Miles, program designed to strengthen its relationship and give exclusive attention to its frequent flyers. Connect Miles accumulates and redeems miles in the same way as Mileage Plus, with its members being recognized by Star Alliance and miles being earned and redeemed at any of Star Alliance’ s destinations.

V. Key Figures

A. Revenue

Most of COPA’ s revenues come from transporting passengers in domestic and international routes, reaping additional benefits from the transportation of air cargo and other small sources of revenue. Additionally, due to its geographically central location, COPA operates routes to the whole American continent, earning 45.6% of its revenues in South America, 24.9% in North America, 23.3% in Central America, and the remaining 6.2% in the Caribbean.

Revenue breakdown Revenues by region Cargo Caribbean Mail and 2.5% 6.2% other 1.2% Central America South 23.3% America Passenger 45.6% 96.3% North America 24.9%

Source: GBM with company data i. Passenger COPA’s Historic PAX Growth COPA’ s main source of income is the transportation -Figures in millions 14 of passengers in both domestic and international 12 routes through a hub-and-spoke model. Leisure CAGR 2010-2015: 8.2% traffic makes up almost half of COPA’ s total traffic 10 and mostly coincides with holidays and school 8 vacations. Even though because of the latter, its 6 peak seasons are July-August and December- January, its overall traffic remains relatively stable 4 due to business travelers. In 2015, COPA 2 transported 11.9 million passengers, with its traffic - growing at an 8.2% CAGR in the 2010-2015 period. 2011 2012 2013 2015 2014 2010 2007 2005 2006 2008 2009

Source: GBM with company data

COPA | Transportation Initiating Coverage

ii. Air Cargo

COPA’ s cargo division operates both international and domestic routes, making an efficient use of extra capacity in the belly passenger aircrafts by carrying cargo. However, the company also makes use of wet-leases and charter freighter capacity to meet cargo demand when needed. In 2015, cargo operations represented 2.5% of consolidated revenues. Cargo services are recognized when COPA provides and completes the shipping services as requested by the client. iii. Other Revenue

Other revenues for the company represent 1.2% of consolidated revenues and are primarily comprised of mail, excess baggage charges, commissions earned on tickets sold for flights on other airlines and charter flights.

B. Profitability

As COPA’ s profitability peaks during the July-August and December-January holiday seasons, and given the airline has a high proportion of fixed costs, operations vary from quarter to quarter. Furthermore, the company’ s profitability directly relates to jet fuel prices, FX fluctuations, and operating leverage improvements through higher load factors and asset utilization. COPA’ s main expenses are as follows:

 Aircraft fuel. It represents ~ 30% of the company’ s COPA’s costs expenses, as COPA consumes around 277.1 million gallons of jet fuel per year. In 2015, the average price Commissions Sales Landing Fees per gallon of jet fuel into plane (excluding hedge) was 4% 4% 3% US$1.83. Up to December 2015, COPA had hedged Other 33 and 6% of its anticipated fuel needs for 2016 and 5% Aircraft 2017, respectively. Maintenance Fuel 6% 30%  Salaries and benefits explain about 15% of COPA’ s Leases expenses. Until last year, close to 60% of the 6% company’ s 9,302 employees were part of one of nine Flight Salaries D&A PAX union organizations Operations 15% 7% Services 7% 13%  Passenger services represent 13% of COPA’ s expenses, and are related to those incurred for liability insurance, baggage handling, catering, in- flight entertainment, and other costs associated to Source: GBM with company data aircraft and airport services.

 Leases correspond to ~6% of the firm’ s total expenses. By the end of 2015, COPA had 100 carriers, of which 33 were leased and the remaining 67 were owned by the company.

COPA | Transportation Initiating Coverage

Income Statement Summary -Thousands of USD 2011 2012 2013 2014 2015

7.3% 7.0% 9.3% 0.1% 0.8% Passengers '000 6,672 7,140 7,807 7,811 7,875 21.9% 24.1% 14.4% 9.5% 4.4% ASM 13,350 16,567 18,950 20,757 21,675 21.2% 22.6% 16.3% 9.5% 2.5% RPM 10,198 12,500 14,532 15,913 16,309 -0.6% -1.2% 1.6% 0.0% -1.8% Load Factor 76.4% 75.5% 76.7% 76.7% 75.2% 29.0% 22.7% 16.0% 3.7% -16.8% Total Revenue'000 1,832,952 2,249,387 2,608,330 2,705,068 2,250,063 30.2% 23.6% 16.5% 4.0% -17.3% Passenger Revenue '000 1,750,807 2,163,136 2,519,649 2,619,858 2,166,727 7.8% 5.0% 2.8% -3.9% -2.2% Cargo, mail and Other Revenue '00 82,145 86,251 88,681 85,210 83,336 5.8% -1.1% 1.4% -5.3% -20.3% RASM 13.7 13.6 13.8 13.0 10.4 7.5% 0.8% 0.2% -5.0% -19.3% Yield 17.2 17.3 17.3 16.5 13.3 28.0% 27.5% 11.5% 6.1% -9.2% Operating Costs 1,448,297 79.0% 1,846,850 82.1% 2,058,694 78.9% 2,183,984 80.7% 1,983,976 88.2% 54.2% 32.8% 7.9% 4.8% -26.6% Fuel Expenses 546,636 29.8% 725,762 32.3% 783,091 30.0% 820,694 30.3% 602,777 26.8% 19.1% 16.1% 11.6% 8.3% -3.2% Payroll 213,088 11.6% 247,405 11.0% 276,156 10.6% 299,182 11.1% 289,514 12.9% 20.0% 35.3% 15.4% 7.2% -3.9% Passenger Servicing 160,519 8.8% 217,137 9.7% 250,604 9.6% 268,762 9.9% 258,302 11.5% 24.6% 24.4% 16.0% -4.4% -10.7% Commissions 71,845 3.9% 89,378 4.0% 103,684 4.0% 99,115 3.7% 88,559 3.9% 20.5% 19.9% 17.5% -6.1% -6.1% Reservations and sales 70,870 3.9% 84,991 3.8% 99,823 3.8% 93,766 3.5% 88,051 3.9% 13.6% 30.3% 0.9% 9.1% 9.6% Maintenance, material and repairs 70,723 3.9% 92,165 4.1% 92,992 3.6% 101,421 3.7% 111,181 4.9% 19.8% 18.2% 18.1% 9.3% 17.1% Depreciation 75,458 4.1% 89,217 4.0% 105,330 4.0% 115,150 4.3% 134,888 6.0% 19.5% 24.3% 16.0% 8.5% -0.9% Flight Operations 84,440 4.6% 104,994 4.7% 121,787 4.7% 132,156 4.9% 130,930 5.8% 10.6% 41.4% 24.5% 24.2% 9.0% Aircraft Rentals 51,260 2.8% 72,467 90,233 112,082 122,217 4.3% 9.9% 9.0% 6.6% 5.5% Landing Fees and others rentals 42,065 2.3% 46,233 50,404 53,746 56,703 -5.8% 25.6% 9.7% 3.9% 14.7% Other 61,393 3.3% 77,101 3.4% 84,590 3.2% 87,910 3.2% 100,854 4.5% 5.0% 2.8% -2.5% -3.1% -13.0% CASM 10.8 11.1 10.9 10.5 9.2 -4.8% 0.2% -0.5% -2.4% -3.0% CASM ex-fuel 6.8 6.8 6.7 6.6 6.4 32.8% 4.6% 36.5% -5.2% -48.9% Operating Profit 384,655 21.0% 402,537 17.9% 549,636 21.1% 521,084 19.3% 266,087 11.8% 28.2% 10.3% 32.1% 0.4% -30.1% EBITDAR 511,373 27.9% 564,221 25.1% 745,199 28.6% 748,316 27.7% 523,192 23.3% 26.3% 5.2% 40.7% -21.3% -48.7% Maj. Net Income 310,427 16.9% 326,477 14.5% 459,356 17.6% 361,650 13.4% 185,422 8.2% Source: GBM with company data

COPA | Transportation Initiating Coverage

C. Balance Sheet

Up to1Q16, COPA had US$962.5 million in current assets, of which US$723.1 million were cash, cash equivalents and short-term investments, while 116.9 million corresponded to accounts receivable. Furthermore, the company’ s long-term investments amounted to US$0.9 million, while property and equipment totaled US$2.6 billion. Lastly, other assets of the company summed US$157.5 million.

On the other hand, COPA’ s total liabilities amounted to US$2.1 billion, of which US$928.1 million were short-term liabilities and US$1.1 billion long-term liabilities. As such, the company’ s shareholders’ equity stands at US$1.7 billion.

As such, by the end of the first quarter of 2016, COPA held a US$1.4 billion adjusted net debt position equal to a 2.9x adj. net debt to EBITDAR ratio.

Balance Sheet Summary -Thousands of USD 2011 2012 2013 2014 2015 Cash and equivalents 506,146 651,103 1,131,687 763,968 682,894 PP&E 1,757,904 2,039,087 2,020,970 2,184,161 2,407,583 Total Assets 3,066,178 3,483,465 3,952,761 4,072,308 4,166,100 Short-Term Debt 131,276 136,268 156,329 187,646 245,514 Long-Term Debt 936,657 1,069,836 913,507 928,964 1,055,184 Total Liabilities 1,675,364 1,946,921 2,050,858 1,996,734 2,163,913 Majority Equity 1,390,817 1,536,544 1,901,903 2,075,575 2,002,187 Net Debt 561,787 555,001 -61,851 352,642 617,804 Source: GBM with company data

VI. Corporate Structure

A. Main shareholders

COPA’ s capital stock is divided into Class A and B, where 31,017,102 shares are Class A shares and 10,938,125 are Class B. Class A and Class B shares have the same economic rights and privileges; however, the Panamanian Aviation Act requires Panamanian nationals to exercise effective control over the operations of the airline, maintaining a substantial ownership through the Class B shares. Therefore, Class A shares do not have any voting right.

Currently, 100% of COPA’ s Class B shares are held by CIASA, representing all of the company’ s capital stock with voting power and 26.1% of its total capital stock. CIASA is controlled by a group of Panamanian investors, some of whom are members of the Motta, Heilbron and Arias families and beneficially own around 90% of CIASA’ s shares. The remaining 73.9% of the company’ s capital stock is represented by its Class A shares, of which around 0.3% is owned by a group of 23 COPA’ s executive officers and directors, while the remaining 73.6% is free float.

COPA’s main shareholders Shareholder # of Shares % of Shares

Class A Class B Total Class A Class B Total CIASA 0 10,938,125 10,938,125 0.0% 26.1% 26.1% Executive Officers and Directors 118,076 0 118,076 0.3% 0.0% 0.3% Free Float 30,899,026 0 30,899,026 73.6% 0.0% 73.6%

31,017,102 10,938,125 41,955,227 73.9% 26.1% 100% Total Source: GBM with company data

COPA | Transportation Initiating Coverage

B. Board of Directors

COPA’ s board of directors is comprised of up to 12 directors, with the number of directors varying each year. At present, the Board meets on a quarterly basis and holds informal and regular meetings with UAL, supported by the annual formal meetings of the Alliance Steering Committee held between COPA and UAL.

With the passing of Mr. Alberto C. Motta, Jr. on April 11, 2016, COPA’ s board of directors is currently comprised of the following 11 directors:

Board of Directors Board Members Position 1Pedro Heilbron CEO / Director 2 Stanley Motta Chairman / Director 3 Alvaro Heilbron Director 4Jaime Arias Director 5 Ricardo Alberto Arias Director 6 Carlos A. Motta Director 7John Gebo Director 8Jose Castañeda Velez Director 9Roberto Artavia Loria Director 10 Andrew Levy Director 11 Josh Connor Director

Main Officers Name Position 1 Pedro Heilbron CEO 2 Jose Montero CFO 3 Daniel Gunn Senior Vice-President of Operations 4 Dennis Cary Senior Vice-President of Commercial and Planning 5 Vidalia de Casado Vice-President of Human Resources 6Julio Toro Vice-President of Technology 7 Ahmad Zamany Vice-President of Maintenance 8 Rulon J. Starley Vice-President of Flight Operations 9Michael New Vice-President of Safety 10 Michael Hinckley Vice-President of Frequent Flyer Program 11 Edwin Garcia Vice-President of Airport Services 12 Eduardo Lombana CEO of Copa Colombia

GOL | Transportation Initiating Coverage

GOL GOL’s tough environment makes it our sample’s riskiest pick Market Performer 2016e Price Target R$3.5 We should note that GOL serves primarily as a domestic carrier in Brazil, leaving it more exposed to the country’ s harsh economic Price 3.25 downturn. Still, GOL’ s management continues to seek out opportunities to bring the company afloat, aiming to endure until 12M Price Range 1.16 / 7.03 an economic recovery materializes. Thus, we are introducing our Shares Outstanding (Mill) 347.2 2016e price target of R$3.5 per share with a Market Performer Market Cap (Mill) 1,129 rating.

Float 35% Demand should remain pressured in the foreseeable future. GOL Net Debt (Mill) 6,053 should continue to report weak demand readings throughout 2016 EV (Mill) 7,313 and 2017, while we believe a recovery should be triggered as of 2018. Still, we should note that Brazil represents one of the world’ s Dividend Yield 0.0% most appealing markets in terms of long-term growth, resulting in

a 2.0% 2015-2020 CAGR.

2015 TTM 2016e 2017e Still, capacity management should allow for yield preservation. GOL’ s network reorganization strategy should improve its yield Revenue 9,778 9,986 9,717 10,312 performance despite consumption weakness, by reducing its EBITDAR 1,336 1,743 2,348 2,387 exposure to unprofitable international markets. Additionally, the Net Profit -4,460 -3,053 -445 -201 company is looking to cut its fleet by 20 aircrafts during the year, while also delaying airplane deliveries scheduled throughout the Free CF -2,126 -196 290 -159 next couple of years. As such, we believe that GOL’ s ASK should EPS -12.84 -8.79 -1.28 -0.58 remain flattish going forward.

P/E -0.2x -0.4x -2.5x -5.6x Cost containment remains key for GOL’s survival. The airline EV/EBITDAR 11.6x 7.5x 6.6x 6.6x should continue to look for cost reduction strategies, as lower fuel P/BV -0.2x -0.3x -0.3x -0.3x prices have proven insufficient to offset the country’ s weak economic environment. As such, GOL is currently undergoing

several restructure initiatives, which range from network and

capacity management to lease renegotiations. Thus, we are Mauricio Martinez Vallejo penciling a 4.2 and 3.6 % CAGR in GOL’ s CASK and CASK ex-fuel, [email protected] respectively. +52(55) 5480 5800 ext. 4187 An attractive acquisition target for foreign carriers. We believe that GOL is currently an attractive acquisition target as carriers Pablo Zaldivar look to participate in Brazil’ s long-term potential. It should be [email protected] mentioned that Delta holds a ~9.5% stake in the company, a +52(55) 5480 5800 ext. 4390 position we believe could increase.

Catalyst. Successful restructure and cost containment initiatives could improve GOL’ s cash flow generation by up to R$300 million. EV/EBITDAR FWD 12M PRICE PERFORMANCE VS. P/BV 9.0x IBOV 0.0x 20% -0.2x 8.5x -0.4x 0% -0.6x 8.0x -20% -0.8x

7.5x -40% -1.0x -1.2x 7.0x -60% -1.4x -1.6x 6.5x -80% -1.8x 6.0x -100% -2.0x /16 11/15 7 11/15 12/15 12/15 11/15 10/15 10/15 01/16 12/15 10/15 10/15 07/15 07/16 01/16 07/15 02/16 03/16 08/15 05/16 09/15 07/16 04/16 06/16 10/15 10/15 02/16 03/16 05/16 08/15 01/16 09/15 04/16 07/15

06/16 0 02/16 03/16 08/15 05/16 09/15 04/16 06/16

GOL IBOV

GOL | Transportation Initiating Coverage

I. Investment Thesis

GOL’s tough environment makes it our sample’s riskiest pick. Despite the sharp decline in the company’ s stock price in the last twelve months (-48% YOY), GOL stands as the riskiest name among our sample, as it undergoes a deep restructuring process, translating into high volatility. We should remember that the airline primarily serves as a domestic carrier in Brazil, leaving it more exposed to the country’ s harsh economic downturn, which materially taints profitability. On the other hand, GOL’ s management continues to actively seek out opportunities to deliver profitability improvements, as the company struggles to cover its debt amortizations. Thus, we are introducing our 2016e price target of R$3.5 per share with a Market Performer rating.

Demand should remain pressured in the foreseeable future. GOL should continue to report weak demand readings throughout 2016 and 2017, while we believe a recovery should be triggered as of 2018. Still, we should note that Brazil represents one of the world’ s most appealing markets in terms of long-term growth, resulting in a 2.0% 2015-2020 CAGR.

GBMe GOL PAX and Yield —PAX figures in millions 44 0.31 0.29 42 0.27 40 0.25 38 0.23 0.21 36 0.19 34 0.17 32 0.15 2016e 2017e 2018e 2019e 2020e PAX Yield (BRL) Source: GBM

Still, capacity management should allow for yield preservation. Recently, GOL announced its network reorganization strategy aiming to improve its yield performance, despite consumption weakness, by reducing its exposure to unprofitable international markets, mainly to the US. Additionally, the company is looking to cut its fleet by 20 aircraft during the year, as it adapts to a currently oversupplied market, while also delaying aircraft deliveries scheduled throughout the next couple of years. As such, we believe that GOL’ s ASK should remain unchanged—0.8 % 2015-2020 CAGR.

GOL’s fleet plan GBMe GOL ASK —figures in billions 140 54 CAGR 2015-2020: 0.8% 120 29 29 52 26 26 28 100 50

80 48

60 46 99 99 100 102 102 40 44

20 42

- 40 2016e 2017e 2018e 2019e 2020e 2015 2016e 2017e 2018e 2019e 2020e B737-800 B737-700 Source: GBM with company data Source: GBM

GOL | Transportation Initiating Coverage

Cost containment remains key for GOL’s survival. The airline should continue to look for cost reduction strategies, aiming to achieve profitability, as lower fuel prices have proven insufficient to offset the country’ s weak economic environment. As such, GOL is currently undergoing several restructure initiatives, which range from network and capacity management to lease renegotiations. Thus, we are penciling an 4.2 and 3.6% CAGR in GOL’ s CASK and CASK ex-fuel. As such, the company’ s EBIT margin should reach 8.2% by 2020, up from 2015’ s -1.9%.

GBMe GOL’s EBIT and EBIT Margin GBMe GOL CASK and CASK excl. Fuel 1,200 9.0% 3.0 1.65

1,000 1.60 8.0% 2.5 1.55 800 2.0 7.0% 1.50 600 1.5 1.45 6.0% 1.40 400 1.0 1.35 5.0% 200 0.5 1.30

0 4.0% 0.0 1.25 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e EBIT EBIT mg. CASK CASK ex-fuel

Source: GBM Source: GBM Leverage should continue on the rise, impacted by FX depreciation. The company should continue to experience high levels of leverage as local currency depreciation keeps taking a toll on GOL’ s USD denominated debt— despite the BRL’ s rally in recent months—, which currently represents 86% of the airline’ s R$7.9 billion total debt. Still, management has been actively restructuring GOL’ s debt position, extending its average maturity by delaying the strongest debt amortizations. Furthermore, the company has successfully implemented an advanced ticket sale agreement with Smiles, which should improve its currently deteriorated liquidity. Lastly, the company launched a private exchange offer for GOL’ s USD denominated unsecured bonds that amounted to over US$700 million, where 22% of bondholders participated. As a result, the carrier managed to reduce its total debt by roughly US$100 million.

GOL’s debt amortization schedule GBMe GOL’s FCF generation and CCR —2016 doesn’t include 1Q16 —figures in millions 1,800 500 35% 30% 1,600 400 25% 1,400 300 20% 1,200 15% 200 1,000 10% 5% 800 1,664 100 0% 600 0 -5% 400 -10% 136 184 -100 -15% 200 420 377 275 295 -200 -20% 26 0 19 2016e 2017e 2018e 2019e 2020e 2016e 2017e 2018e 2019e 2020e FCFE CCR Consolidated Debt amortization (USD) Debt amortization (BRL) Source: GBM with company data Source: GBM

An attractive acquisition target for foreign carriers, could translate into upside. We believe that GOL is currently an attractive acquisition target for foreign carriers looking to participate in one of the world’ s most appealing markets in terms of long-run growth prospects. Indeed, Delta holds around a 9.5% stake in the company, a position we believe could increase as it looks to participate in foreign markets with attractive long-term prospects, reflected on its intentions to acquire up to 49% of AEROMEX. We should note that Brazil’ s House of Representatives is looking to raise the limit of foreign ownership on airlines, up from the current 20%.

GOL | Transportation Initiating Coverage

SMILES loyalty program: GOL’s current source of value. We believe that SMILES remains as one of GOL’ s most valuable assets, as the airline is the controlling shareholder of this loyalty program that has a highly profitable business model. SMILES offers a single platform for mileage accrual and redemptions, connecting 11 million members with over 200 commercial partners. In 2015, over 50 billion miles were issued, of which 14% were sold to GOL.

Catalysts:

 Successful restructure initiatives to improve FCF generation. GOL’ s main catalysts are its cost containment initiatives and debt restructuring process, which if successful, could improve the company’ s cash flow generation by up to R$300 million annually.

II. Valuation

Introducing our 2016e price target of R$3.5 with a Market Performer rating, as current volatility offers an opportunity to reap rewards, although at a significant risk. Our valuation stems from a multiple valuation approach considering a 7.2x EV/EBITDAR multiple.

EV/EBITDAR multiple approach

 7.2x EV/EBITDAR multiple, in line with Delta’ s latest transactions (AEROMEX and GOL).

 Normalized profitability levels—for the 2017-2019

period— in order to reflect long-term potential from GOL’ s operations.

 Minority interest from SMILES at its current market price.

EV/EBITDAR multiple

EV/EBITDAR 7,2x 7.2x EBITDAR Normalized Normalized 2.649.0812,649,081 EV 19.073.381 EV 19,073,381 Net Debt 2016e 5.529.930 Net Debt 2016e 5,564,931 Minority Part 2.799.209 LeasingMinority Normalized Part x7 9.504.7402,799,209 MktLeasing Cap Normalized x7 1.239.5039,504,740 SharesMkt Cap Outstanding (000's) 347.2421,204,502 PriceShares Target Outstanding 2016e (000's) R$3,6347,242 Price Target 2016e R$3.5

GOL | Transportation Initiating Coverage

III. Financial Estimates

P&L - Thousands of BRL 2015-2020 2015 2016e 2017e 2018e 2019e 2020 CAGR -2.2% -7.5% 0.0% 7.0% 6.0% 5.0% Passengers '000 38,867 35,952 35,952 38,469 40,777 42,816 2.0% 0.5% -7.9% -2.7% 6.3% 5.3% 3.7% ASK (millions) 49,744 45,798 44,557 47,374 49,883 51,750 0.8% 0.9% -7.5% 0.0% 7.0% 6.0% 5.0% RPK (millions) 38,411 35,530 35,530 38,017 40,298 42,313 2.0% 0.4% 0.5% 2.8% 0.6% 0.7% 1.2% Load Factor 77.2% 77.6% 79.7% 80.2% 80.8% 81.8% 1.2% -2.9% -0.6% 6.1% 12.0% 10.4% 8.8% Total Revenue 9,778,200 9,716,652 10,311,862 11,544,190 12,741,949 13,864,551 7.2% -3.3% 7.9% 9.1% 5.3% 4.8% 4.9% RASK 196.570 212.165 231.430 243.684 255.436 267.914 6.4% -5.9% 7.0% 6.0% 4.5% 4.0% 3.5% Yield 0.223 0.239 0.253 0.265 0.275 0.285 5.0% 4.2% -8.9% 6.9% 11.3% 9.2% 8.0% Operating Costs 9,957,500 101.8% 9,069,738 93.3% 9,697,454 94.0% 10,793,981 93.5% 11,789,693 92.5% 12,730,826 91.8% 5.0% 15.0% -1.6% 2.8% 15.6% 10.4% 8.8% Payroll 1,580,500 16.2% 1,554,664 16.0% 1,598,339 15.5% 1,847,070 16.0% 2,038,712 16.0% 2,218,328 16.0% 7.0% -14.1% -19.2% 14.2% 13.6% 15.0% 12.2% Aircraft Fuel 3,301,400 33.8% 2,667,281 27.5% 3,045,347 29.5% 3,460,418 30.0% 3,978,710 31.2% 4,464,823 32.2% 6.2% 30.2% 14.9% 3.5% 3.8% 3.6% 3.2% Aircraft Leasing 1,100,000 11.2% 1,264,288 13.0% 1,308,770 12.7% 1,357,997 11.8% 1,406,693 11.0% 1,452,100 10.5% 5.7% -7.5% -8.7% 0.6% 12.0% 10.4% 3.9% Sales and marketing 617,300 6.3% 563,566 5.8% 567,152 5.5% 634,930 5.5% 700,807 5.5% 727,889 5.3% 3.4% 11.1% -0.2% -1.5% 12.0% 1.9% 8.8% Landing Fees 681,400 7.0% 680,166 7.0% 670,271 6.5% 750,372 6.5% 764,517 6.0% 831,873 6.0% 4.1% 36.5% -4.7% -4.5% 5.7% 0.6% -1.7% Aircraft and Traffic Services 1,019,800 10.4% 971,665 10.0% 928,068 9.0% 981,256 8.5% 987,501 7.8% 970,519 7.0% -1.0% 18.2% -10.4% 1.3% 10.8% 5.1% 11.7% Aircraft Maintenance 603,900 6.2% 541,026 5.6% 548,321 5.3% 607,519 5.3% 638,559 5.0% 713,500 5.1% 3.4% -9.4% 4.2% 6.1% 12.0% 10.4% 2.8% Depreciation 419,600 4.3% 437,249 4.5% 464,034 4.5% 519,489 4.5% 573,388 4.5% 589,243 4.3% 7.0% 27.8% -4.9% -5.9% 12.0% 10.4% 8.8% Others 633,600 6.5% 602,432 6.2% 567,152 5.5% 634,930 5.5% 700,807 5.5% 762,550 5.5% 3.8% 3.7% -1.1% 9.9% 4.7% 3.7% 4.1% CASK 2.00 1.98 2.18 2.28 2.36 2.46 4.2% 15.9% 4.5% 6.8% 3.7% 1.2% 2.0% CASK ex-fuel 1.34 1.40 1.49 1.55 1.57 1.60 3.6% -136.3% -453.1% -5.0% 22.1% 26.9% 19.1% Operating Profit -183,200 -1.9% 646,914 6.7% 614,408 6.0% 750,208 6.5% 952,256 7.5% 1,133,725 8.2% -244.0% -26.3% 75.7% 1.7% 10.1% 11.6% 8.3% EBITDAR 1,336,400 13.7% 2,348,451 24.2% 2,387,212 23.2% 2,627,693 22.8% 2,932,336 23.0% 3,175,069 22.9% 18.9% 257.9% -90.0% -54.9% -62.0% -217.1% 139.5% Maj. Net Income -4,460,200 -45.6% -445,224 -4.6% -200,995 -1.9% -76,455 -0.7% 89,527 0.7% 214,449 1.5% -154.5% Source: GBM

GOL | Transportation Initiating Coverage

FCF - Thousands of BRL 2015 2016e 2017e 2018e 2019e 2020e EBITDA 236,400 1,080,263 1,078,442 1,269,697 1,525,644 1,722,968 Change in Working Capital 138,815 109,409 64,346 56,603 71,429 52,620 Interests -751,700 -716,575 -651,113 -612,054 -551,318 -530,272 Taxes -844,200 -181,230 11,011 -41,446 -120,281 -181,036 CAPEX -905,500 -547,110 -661,365 -661,106 -671,133 -671,133 FCFE -2,126,185 290,308 -158,679 11,694 254,340 393,148 Source: GBM

Balance - Thousands of BRL 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 1,072,332 749,208 111,529 -322,777 -464,436 -1,735,289 PP&E 4,256,614 3,174,110 3,371,442 3,513,059 3,610,804 3,692,694 Total Assets 10,368,397 8,737,520 8,327,739 8,112,884 8,135,878 7,024,751 Short-Term Debt 1,396,623 837,000 837,000 837,000 837,000 837,000 Long-Term Debt 7,908,303 5,912,139 5,433,139 4,987,139 4,591,139 2,927,139 Total Liabilities 14,690,837 12,041,349 11,657,262 11,345,699 11,088,036 9,554,492 Majority Equity -4,546,462 -3,723,763 -3,924,758 -4,001,213 -3,911,685 -3,697,236 7,005,470 5,564,931 5,723,609 5,711,916 5,457,575 5,064,427 Net Debt Source: GBM

GOL | Transportation Initiating Coverage

IV. Company Description

GOL began operations in 2001 together with its own air cargo service— Gollog— and since then, it has become one of the largest low-cost carriers in the world and the largest low-cost carrier in Latin America, in terms of passengers transported. The company provides frequent service on routes connecting all of Brazil’ s major cities as well as Brazil to major cities in South America and some tourist destinations in the Caribbean.

GOL offers an affordable, reliable and simple service, focusing on those markets that were underserved or lacking a low fare alternative. As the first company to successfully introduce low-cost carrier operations in Latin America, GOL has managed to create a strong brand awareness and to rapidly increase its market share. Furthermore, in 2012, GOL began to diversify its leisure passengers’ revenue base by focusing on business passengers.

A. Company’s Network GOL’s destinations

To date, GOL transports passengers to 61 destinations in 9 countries, including Brazil, where the company operates domestic flights. In 2015, GOL transported around 40.0 million passengers through its network.

Domestic network: In its domestic network, GOL operates flights inside Brazil, reaching around 50 destinations in the country and serving 35.1 million passengers in 2015. GOL is the carrier with the highest number of flights connecting the busiest airports in Brazil — São Paulo, Rio de Janeiro, Brasilia, Belo Horizonte, Salvador, Salgado Porto Alegre, Recife, and Curitiba—, which are among the most profitable routes in GOL’ s domestic market.

International network. Currently, GOL operates routes to 11 international destinations in 8 different countries, 2 in the Caribbean—Barbados and Dominican Republic—and 6 in other Latin American countries—Argentina, Chile, Surinam, Bolivia, Uruguay, and Paraguay. Last year, GOL served 4.9 million passengers in its international network.

B. Market Share

Through its domestic operations, GOL controls the greatest market share of Brazil’ s domestic traffic (36.4%), with its major competitors being LATAM, Azul, and Avianca Brazil. Additionally, as the airline sector in Brazil grows, the company has begun to face higher competition from other companies, who have been lowering their fares to attract new passengers. When considering only Brazilian airlines, GOL holds Source: GBM with company data

GOL | Transportation Initiating Coverage

around 27.3% of Brazil’ s international market, as LATAM has the biggest market share (67.2%) in this front. The remaining 5.5% is mostly held by Azul (5.4% YOY), while Avianca holds roughly 0.1%.

Domestic market share International market share

*Includes only Brazilian airlines. Source: GBM with ANAC data

C. Fleet

To keep their operations simple, GOL utilizes one single type of aircraft, the Boeing 737. As such, the company ended 2015 with a fleet of 144 B737 aircrafts, of which 36 were B737-700 NG and 5 B737- 800NG airplanes. The remaining 103 planes were B737-800 NG Short Field Performance carriers. By the end of 2015, GOL’ s fleet had an average age of 7.7 years. Out of the 144 aircrafts that GOL operated at the end of 2015, 98 were under operating lease and 46 under finance lease.

For its 2020 fleet plan, the airline intends to reduce its fleet to 130 planes, of which 60 would be replaced with the new Boeing 737MAX aircraft, to be delivered as of 2018.

GOL’s Fleet Fleet type Model 2011 2012 2013 2014 2015 B737-700 NG 42 37 36 35 36 B737-800 NG 20 16 17 9 5 B737-800 Short Field Performance 61 72 88 97 103 B737-300 240000 Narrow Body 147 125 141 141 144

B737-300 0 19 8 3 0 B767-300/200 3 3 1 0 0 Non Operating Fleet 32293 0 Total 150 147 150 144 144 Source: GBM with company data

Fleet Plan Model 2015 2016e 2017e 2018e 2019e 2020e

B737-700/800 NG 144 125 125 128 131 130 Source: GBM with company data

GOL | Transportation Initiating Coverage

Fleet Aircraft Specifications

B737-700 NG B737-800 NG & NG Short-Field Performance

 Seats: 144  Seats: 184  Cruise speed: 840 km/h  Cruise speed: 840 km/h  Length: 33.6 m  Length: 39.5 m  Wingspan: 35.8 m  Wingspan: 35.8 m  Max. weight at take-off: 67.13 ton.  Max. weight at take-off: 79 ton.  Flight distance: 4,700 km  Flight distance: 5,000 km BOEING 737 MAX

 Seats: 162  Cruise speed: 842 km/h  Length: 39.5m  Wingspan: 35.9m  Max. Weight at take-off: 82.19ton.  Flight Distance: 5,875 km

Source: GBM with company data

The Short-Field Performance improvement on the B737-800 NG was developed exclusively to allow GOL to land their 737-800s into the 4,800ft Santos Dumont airports, enabling the planes to land and take-off from shorter runways.

D. Alliances

GOL holds a long-term commercial agreement with Delta designed to improve cooperation and increase synergies between both companies. The agreement considers a wider scope of the codeshare agreement between the companies, the aligning of the services and benefits for members of the Smiles and Sky Miles programs, and joint commercial and promotional activities, among others.

GOL also holds an exclusive long-term strategic partnership for commercial cooperation with Air France-KLM with the purpose of enhancing the companies’ code sharing, connectivity, and joint sales activities as well as the integration and improvement of their frequent flyer programs.

Furthermore, up to 2015, GOL had eleven codeshare agreements with the following airlines:

 Delta  Qatar Airways  Air France-KLM  TAP  Aeroméxico  Korean Air  Aerolíneas Argentinas  Copa Airlines  Alitalia  Air Canada  Etihad Airways

GOL | Transportation Initiating Coverage

Additionally, GOL had 77 interline agreements—which are commercial agreement between individual airlines—allowing them to serve passengers who travel on itineraries that require multiple airlines by permitting them to utilize one single ticket and check their baggage through to their final destination. Lastly, the company executed a frequent flyer program agreement with Aerolíneas Argentinas in 2014.

E. Loyalty Program

Smiles is one of Brazil’ s largest coalition of loyalty programs, functioning as GOL’ s independent loyalty plan manager, which gives it access to the airline’ s client base and tickets as well as its many international partners. The loyalty program operates by way of a single platform developed for the accumulation and redemption of miles through a broad network of commercial and financial partners. As at 2015, Smiles had over 11 million members.

Currently, members of the loyalty program can earn miles through flights with GOL and its international partners. In addition, some of the largest banks in Brazil—including Bradesco and Banco do Brasil—issued co-branded cards with Smiles, along with a broad network of retail partners. Additionally, the loyalty program allows customers to purchase miles through its Smiles Club. Smiles members are able to redeem and convert their miles into travel rewards, such as air tickets or non- travel rewards, including products and services offered by its partners.

V. Key Figures

A. Revenue

GOL derives most of its revenues (around 86%) from transporting passengers. Moreover, the company collects revenues from Smiles through the redemption of miles for GOL flight tickets as well as its cargo operations and other ancillary revenues. Mostly, all of GOL’ s revenues are denominated in BRL. Gross Revenue breakdown Revenues by Region Cargo Miles redemption International 3% 4% 11% Other 7%

Passenger 86% Domestic 89%

Source: GBM with company data

i. Passengers

GOL transports passengers in both domestic and international routes, with domestic operations representing 89% of its total passenger traffic. It should be noted that Brazilian airlines are permitted by the government to establish their own domestic fares without government preauthorization being required.

ii. Miles redemption

Around 4% of GOL’ s revenues come from the redemption of tickets though Smiles. These revenues are recognized either when transportation services are provided or when unused tickets expire.

GOL | Transportation Initiating Coverage

iii. Cargo

Cargo operations explain roughly 3% of GOL’ s revenues. Cargo is transported by using space on its passenger flights as GOL has no carriers designated to specifically transport cargo. iv. Ancillary

GOL’ s ancillary revenues represent around 7% of the company’ s gross revenues and basically correspond to ticket change fees, excess baggage charges and interest on installment sales.

B. Profitability

GOL’ s profitability is directly impacted by fuel price variations. In tandem, its operating leverage improves through higher load factors and asset utilization, which are linked to the size of the company’ s operations and its fleet. Additionally, around 50% of GOL’ s costs are USD-denominated and, accordingly, the company’ s profitability is affected by the FX depreciation.

 Aircraft fuel. It represents around 33% of the company’ s expenses, with GOL consuming ~1.6 billion liters of jet fuel per year. In 2015, the average price per liter of fuel was US$2.13. As at March 2016, GOL had 6.1% of its fuel exposure in the next 12 months hedged by non- derivative instruments.

 Salaries explain about 16% of GOL’ s expenses and include inflation and provisions made for the company’ s profit sharing plan. By 2015, the carrier had 16,472 employees, of which ~26% are members of a union.

 Leases represent 11% of the company’ s expenses and by 2015, 93 of its 144 aircrafts were under operating lease.

 Aircraft services represent roughly 10% of the firm’ s total expenses. They include those expenses related to ground handling operations and the cost of airport facilities

GOL’s Costs GOL’s USD costs

Maintenance D&A Other Maintenance 6% 4% 7% Sales 6% 6% Leases Landing 11% fees Aircraft 7% fuel Expenses 33% in R$ Aircraft Aircraft 50% services fuel 10% Salaries 33% Leases 16% 11% Source: GBM with Company data

GOL | Transportation Initiating Coverage

Income Statement Summary -Thousands of BRL 2011 2012 2013 2014 2015

10.0% 8.1% -7.3% 9.5% -2.2% Passengers '000 36,220 39,164 36,304 39,748 38,867 8.2% 4.4% -4.3% -0.3% 0.5% ASK 49,683 51,867 49,633 49,502 49,744 11.1% 7.0% -4.7% 9.8% 0.9% RPK 34,044 36,410 34,684 38,084 38,411 2.7% 2.4% -0.5% 10.1% 0.4% Load Factor 68.5% 70.2% 69.9% 76.9% 77.2% 8.0% 7.5% 10.5% 12.4% -2.9% Total Revenue 7,539,308 8,103,865 8,956,212 10,066,088 9,778,200 6.9% 6.7% 13.4% 11.4% -5.1% Passenger Revenue '000 6,713 7,160 8,122 9,046 8,584 17.7% 14.2% -11.6% 22.3% 17.1% Cargo and Other Revenue '000 826 944 834 1,020 1,195 -0.1% 3.0% 15.5% 12.7% -3.3% RASK 151.748 156.243 180.449 203.348 196.570 -3.7% -0.3% 19.1% 1.4% -5.9% Yield 0.197 0.197 0.234 0.238 0.223 23.9% 15.7% -3.5% 10.0% 4.2% Operating Costs 7,783,812 103.2% 9,009,171 111.2% 8,690,222 97.0% 9,558,823 95.0% 9,957,500 101.8% 24.6% 0.6% -15.0% 3.0% 15.0% Payroll 1,560,436 20.7% 1,569,669 19.4% 1,333,462 14.9% 1,374,128 13.7% 1,580,500 16.2% 33.8% 22.3% -3.5% 6.4% -14.1% Aircraft Fuel 3,060,665 40.6% 3,742,219 46.2% 3,610,822 40.3% 3,842,264 38.2% 3,301,400 33.8% -9.1% 27.5% 8.6% 20.8% 30.2% Aircraft Leasing 505,058 6.7% 644,031 7.9% 699,193 7.8% 844,595 8.4% 1,100,000 11.2% 9.5% 3.0% 24.4% 29.3% -7.5% Sales and marketing 402,568 5.3% 414,827 5.1% 516,059 5.8% 667,477 6.6% 617,300 6.3% 19.1% 41.5% 1.3% 8.2% 11.1% Landing Fees 395,249 5.2% 559,421 6.9% 566,541 6.3% 613,112 6.1% 681,400 7.0% 12.6% 9.1% 13.4% 24.7% 36.5% Aircraft and Traffic Services 484,642 6.4% 528,738 6.5% 599,479 6.7% 747,369 7.4% 1,019,800 10.4% 2.6% -3.7% 10.2% 10.9% 18.2% Aircraft Maintenance 434,181 5.8% 417,989 5.2% 460,804 5.1% 511,035 5.1% 603,900 6.2% 38.0% 33.7% 8.0% -17.4% -9.4% Depreciation 388,633 5.2% 519,631 6.4% 560,966 6.3% 463,261 4.6% 419,600 4.3% 57.2% 10.9% -44.0% 44.5% 27.8% Others 552,380 7.3% 612,646 7.6% 342,896 3.8% 495,582 4.9% 633,600 6.5% 14.6% 10.9% 0.8% 10.3% 3.7% CASK 1.57 1.74 1.75 1.93 2.00 9.3% 6.8% 0.8% 12.8% 15.9% CASK ex-fuel 0.95 1.02 1.02 1.15 1.34 -135.0% 270.3% -129.4% 89.8% -136.3% Operating Profit -244,504 -3.2% -905,306 -11.2% 265,990 3.0% 504,804 5.0% -183,200 -1.9% -57.7% -60.2% 490.7% 18.8% -26.3% EBITDAR 649,187 8.6% 258,356 3.2% 1,526,149 17.0% 1,812,660 18.0% 1,336,400 13.7% -450.8% 101.3% -47.3% 56.5% 257.9% Maj. Net Income -751,537 -10.0% -1,512,605 -18.7% -796,546 -8.9% -1,246,366 -12.4% -4,460,200 -45.6% Source: GBM with company data

GOL | Transportation Initiating Coverage

C. Balance Sheet

As at 1Q16, GOL had R$2.9 billion in current assets, of which R$967 million were cash and cash equivalents, R$485 million were short-term investments, and R$514 million were trade receivables. Non-current assets totaled R$7.2 billion, of which R$3.7 billion corresponded to property and equipment and R$1.2 billion to deposits.

On the other hand, GOL’ s total liabilities amounted to R$13.1 billion, of which R$4.9 billion are short-term liabilities and R$8.2 billion long-term liabilities. As such, the company’ s shareholders’ equity stands at -R$3.6 billion.

As such, by the end of the first quarter of 2016, GOL held a R$14.5 billion adjusted net debt position equal to an 8.3x adj. net debt to EBITDAR ratio.

Balance Sheet Summary -Thousands of BRL 2011 2012 2013 2014 2015

Cash and equivalents 1,230,287 775,551 1,635,647 1,898,773 1,072,332 PP&E 3,890,470 3,885,799 3,772,159 3,602,034 4,256,614 Total Assets 9,891,435 9,027,098 10,638,448 9,976,647 10,368,397

Short-Term Debt 1,552,440 1,719,625 440,834 1,110,734 1,396,623

Long-Term Debt 3,439,008 3,471,550 5,148,551 5,124,505 7,908,303 Total Liabilities 7,685,524 8,294,270 9,419,948 10,309,621 14,690,837 Majority Equity 2,205,911 732,828 650,926 -518,387 -4,546,462

2,642,998 3,606,072 2,543,665 3,708,092 7,005,470 Net Debt Source: GBM with company data

VI. Corporate Structure

A. Main shareholders

Currently, 61.28% of GOL’ s shares are held by the Fundo de Investimento em Participações Volluto, which is equally controlled by Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto, and Ricardo Constantino. In addition, 9.48% of the company is owned by Delta Air Lines, while 0.44% is held in treasury shares. The remaining 28.8% of the shares represents GOL’ s free float. Yet, as at 2015, 60.6% of GOL’ s free float was traded in the United States.

GOL’s main shareholders Shareholder # of Shares % of Shares

Fundo de Investimento en Participacoes Volluto 212,773,282 61.28% Treasury Shares 1,526,769 0.44% Delta Air Lines Inc. 32,926,025 9.48% Free Float 100,016,096 28.80%

347,242,172 100.00% Total Source: GBM with company data

GOL | Transportation Initiating Coverage

B. Board of Directors

Currently, GOL’ s board of directors is comprised of 8 members, 3 of whom qualify as independent based upon New York Stock Exchange Criteria. All directors are elected at once by the holders of GOL’ s common shares at the general annual shareholders’ meeting and serve one-year terms, being eligible for reelection only at the end of the term. On average, the Board meets 5 times per year or as per request by at least 3 of its members or the Chairman.

Board of Directors Board Members Position 1 Constantino de Oliveira Junior Chairman and Regular Director 2 Henrique Constantino Regular Director 3 Joaquim Constantino Neto Regular Director 4 Edward H. Bastian Regular Director 5 Ricardo Constantino Regular Director 6 Antonio Kandir Independent Director 7 Luiz Kaufmann Independent Director 8 Richard F. Lark Independent Director

Main Officers Name Position 1 Paulo Sergio Kakinoff CEO 2Edmar Prado Lopes Neto CFO & IR 3 Eduardo José Bernardes Neto Vice-CEO 4 Celso Guimarães Ferrer Junior Vice-CEO 5Sergio Quito Vice-CEO

LATAM | Transportation Initiating Coverage

LATAM LATAM’s significant exposure to Brazil leads us to take a cautious Market Performer stance. 2016e Price Target US$7.2 We believe that the company’ s profitability should remain harshly pressured in the short term, as yields continue to weaken due to the tough economic environment in the region, together with Price 6.56 significant local currency devaluation. Thus, we are introducing 12M Price Range 4.49 / 7.39 our 2016e price target of US$7.2 per share with a Market Shares Outstanding (Mill) 545.5 Performer rating. Market Cap (Mill) 3,579 Highly pressured yields should impact profitability. We believe Float 60% that LATAM’ s yields will experience downward pressure Net Debt (Mill) 7,922 throughout the rest of the year, as consumption remains weak EV (Mill) 11,560 across most of South America, coupled with the significant local Dividend Yield 0.0% currency depreciation. Delving in, capacity cuts in Brazil should allow the company to achieve stable yields in local currency, although FX depreciation should drag them to negative ground. 2015 TTM 2016e 2017e Revenue 10,126 9,662 9,089 9,435 Capacity management remains vital, especially in the Brazilian EBITDAR 1,973 1,972 2,018 2,202 market. In an attempt to stabilize yield and load factor performance, LATAM must remain disciplined regarding its Net Profit -219 -77 28 116 capacity offer to avoid further oversupply. Brazil represents the Free CF -182 -158 -843 -33 focus point, as market oversupply has significantly affected the EPS -0.40 -0.14 0.05 0.21 region’ s profitability. LATAM expects to cut between 10 and 12% YOY of its offer in that country, driving consolidated capacity to a P/E -13.3x -46.4x 128.0x 30.9x range of -1 to 1% YOY. As such, we are expecting capacity to expand EV/EBITDAR 7.3x 7.7x 8.0x 7.4x at a 3.2% CAGR throughout the 2015-2020 period, with the P/BV 1.0x 1.1x 1.1x 1.1x sharpest increases further down the road as the region recovers.

Cost containment initiatives should partially offset top-line weakness. The carrier should continue to reap the benefits of its Mauricio Martinez Vallejo cost-containment initiatives, which are expected to reach US$700 [email protected] million in savings through 2018, with US$325 million already +52(55) 5480 5800 ext. 4187 achieved in 2015.

Pablo Zaldivar Catalysts. The approval of LATAM’ s joint venture with AA and IAG [email protected] — expected by 2017—should allow it to offer a wider network to its +52(55) 5480 5800 ext. 4390 passengers, as well as profitability improvements. Moreover, the successful implementation of its fleet restructuring plan, aiming to reduce fleet assets by between US$2.0 billion and US$3.0 billion, should reduce CAPEX and improve cash generation.

EV/EBITDAR FWD 12M PRICE PERFORMANCE VS. IPSA 1.6x P/BV 7.7x 15% 1.5x 7.5x 10% 1.4x 5% 1.3x 7.3x 0% 1.2x -5% 1.1x 7.1x -10% 1.0x -15% 6.9x 0.9x -20% 0.8x 6.7x -25% -30% 0.7x 6.5x -35% 0.6x

11/15 12/15 11/15 12/15 10/15 10/15 11/15 01/16 07/15 07/16 10/15 10/15 12/15 02/16 03/16 01/16 08/15 09/15 05/16 07/15 04/16 06/16 07/16 03/16 02/16 08/15 05/16 09/15 10/15 10/15 04/16 06/16 01/16 07/15 07/16 02/16 03/16 05/16 08/15 09/15 04/16 06/16

LATAM IPSA

LATAM | Transportation Initiating Coverage

I. Investment Thesis

LATAM’s significant exposure to Brazil leads us to take a cautious stance. We believe that the company’ s profitability should remain harshly pressured in the short term, as yields continue to weaken due to the tough economic environment in the region, together with significant local currency devaluation. Still, the company has been actively reducing capacity in Brazil, while implementing a series of cost-containment initiatives to preserve profitability. All-in-all, although the company’ s efforts to reduce its exposure to Brazil are welcome, we believe that the South American region as a whole should continue to struggle in the short run, hampering LATAM’ s profitability. Thus, we are introducing our 2016e price target of US$7.2 per share with a Market Performer rating.

Highly pressured yields should impact profitability. We believe that LATAM’ s yields will experience downward pressure for the remainder of the year, as consumption remains weak across most of South America, coupled with significant local currency depreciation. Capacity cuts in Brazil should allow the company to achieve stable yields in the country in local currency, although FX depreciation should drag them to negative ground. Thus, we are expecting a flattish yield performance through 2020, with a 0.8% 2015-2020 CAGR.

GBMe LATAM’s PAX and Yield LATAM’s 2015 Revenue Breakdown —PAX figures in millions —By region 78 8.0 Peru Colombia Ecuador 7.8 7.0% 3.6% 2.4% 76 Asia 74 7.6 Pacific 7.4 72 and rest 7.2 of Latin 70 America Brazil 7.0 35.6% 68 7.2% 6.8 66 6.6 Europe 7.4% 64 6.4 Chile 62 6.2 Argentina US 16.2% 2015 2016e 2017e 2018e 2019e 2020e 10.1% 10.5% PAX Yield Source: GBM Source: GBM with company data

Capacity management remains vital, especially in the Brazilian market. In an attempt to stabilize yield and load factor performance, LATAM must remain disciplined regarding its capacity offer to avoid further oversupply as consumers in the region continue to weaken. Brazil represents the main focus point for the company, as a market-wide oversupply has significantly impacted the region’ s profitability. Thus, LATAM expects to cut between 10 and 12% YOY of its offer in Brazil, driving consolidated capacity to a range of -1 to 1% YOY. We are expecting capacity to expand at a 3.2% CAGR throughout the 2015-2020 period, with the sharpest increases further down the road as the region recovers.

Additionally, LATAM continues to restructure its fleet, achieving a US$3.0 billion reduction in commitments by the end of 2015, and aiming for an additional US$2.0–US$3.0 billion reduction in fleet assets by 2018, as the company remains focused on capacity rationalization, looking to adapt to the currently weak environment in the region.

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LATAM’s fleet plan GBMe LATAM’s ASK —figures in billions 350 160 15 17 11 13 7 28 32 32 300 22 24 155 37 47 46 41 39 CAGR 2015-2020: 3.2% 250 150 48 48 48 48 48 145 200 57 47 47 53 53 140 150 135 100 130 148 152 154 154 155 50 125

0 120 2016e 2017e 2018e 2019e 2020e 2015 2016e 2017e 2018e 2019e 2020e A320 A321 A319-100 B767 and 777 B787 A350-900 Source: GBM with company data Source: GBM

Cost containment initiatives should partially offset top-line weakness. LATAM should continue to reap the benefits of its cost-containment initiatives, comprising further operational labor productivity, efficiencies in overhead and selling expenses, as well as route optimization. We should recall that the company expects to reach US$700 million in savings through 2018, with US$325 million already achieved in 2015. Thus, we are calling for -1.2 and -1.9% 2015-2020 CAGR in the company’ s CASK and CASK ex-fuel.

GBMe LATAM’s EBIT Margin GBMe LATAM’s CASK and CASK excl. Fuel —figures in millions 1,200 9.0% 0.74 0.53 0.52 1,000 0.72 8.0% 0.51 0.70 800 0.50 7.0% 0.68 0.49 600 0.48 6.0% 0.66 400 0.47 0.64 0.46 200 5.0% 0.62 0.45 0 4.0% 0.60 0.44 2015 2016e 2017e 2018e 2019e 2020e 2015 2016e 2017e 2018e 2019e 2020e EBIT EBIT mg. CASK CASK ex-fuel Source: GBM Source: GBM

Consequently, LATAM’s operating profit should expand going forward. We believe that the company’ s EBIT should grow at an 13.7% 2015-2020 CAGR, despite a weak 2016, landing at an 8.4% margin by 2020. Delving in, LATAM should benefit from improved top-line readings as South American economies recover, coupled with an improved cost structure as the company’ s initiatives kick in and merger synergies materialize. Thereby, LATAM’ s operating margin should keep rising to record levels, as the merger between LAN and TAM continues to gain steam.

Catalysts:

 JV with AA and IAG. In January 2016, the company announced American Airlines and IAG’ s intention to establish a joint venture with LATAM, offering a wider network to passengers travelling with any of these carriers, as well as profitability improvements. The JV is expected to be approved during 2017, which could improve LATAM’ s performance.

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 Successful fleet restructure. If the company succeeds in reducing its fleet assets by between US$2.0 and US$3.0 billion, a reduction in fleet commitments might be materialized, reducing CAPEX and improving cash generation. II. Valuation

Introducing our 2016e price target of US$7.2 with a Market Performer rating, as we believe LATAM’ s profitability should remain pressured amid weak South American economies. We are valuing the company through a DCF approach, considering a 4.0% perpetual growth and a 9.6% WACC.

DCF assumptions

 EBITDA’ s 2015-2020 CAGR of 7.5% with a normalized effective tax rate of 26%.

 A perpetual growth of 4.0%

 WC to remain stable in terms of days for each bracket.

 An average CAPEX of US$1.1 billion per annum and US$1.1 billion for perpetuity

 WACC of 9.6% o Cost of Equity of 20.8% o Cost of Debt of 7.3%

DCF LATAM’s WACC 2016e 2017e 2018e 2019e 2020e Perpetual FCF %Equity 27.6% EBITDA 1,451,087 1,562,029 1,733,464 1,890,147 2,075,860 2,158,894 %Debt 72.4% Taxes -92,447 -57,268 -98,242 -121,612 -152,199 -158,287 Risk Free 7.4% Working Capital -619,858 -120,208 -80,187 -69,184 -48,100 Beta 205.9% OPERATING CASH FLOW 738,782 1,384,553 1,555,035 1,699,351 1,875,560 2,000,607 Market Risk Premium 6.5% CAPEX -1,276,000 -1,019,133 -1,072,732 -1,136,132 -1,048,551 -1,092,342 Cost of Equity 20.8% FREE CASH FLOW -537,218 365,420 482,303 563,220 827,009 908,266 Cost of Debt 7.3% Corporate Tax Rate 26.0% WACC 9.6% WACC 9.6%

TOTAL PRESENT VALUE 12,334,135 Net Debt 1Q16 7,922,469 Minority Equity 472,182 Equity Value (US$) 3,939,484 Shares Outstanding (000's) 545,548 Price Target 2016e US$7.2

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III. Financials P&L - Thousands of USD 2015-2020 2015 2016e 2017e 2018e 2019e 2020 CAGR 0.0% -0.6% 2.4% 3.7% 3.5% 3.5% Passengers '000 67,835 67,444 69,088 71,653 74,187 76,812 2.5% 3.0% -0.2% 2.4% 3.7% 5.1% 5.2% ASK (millions) 134,165 133,834 137,001 142,131 149,419 157,203 3.2% 2.7% 1.4% 3.0% 3.6% 3.5% 3.6% RPK (millions) 111,511 113,067 116,425 120,657 124,940 129,376 3.0% -0.3% 1.6% 0.6% -0.1% -1.5% -1.6% Load Factor 83.1% 84.5% 85.0% 84.9% 83.6% 82.3% -0.2% -18.8% -10.2% 3.8% 6.6% 7.2% 7.4% Total Revenue 10,125,826 9,088,656 9,434,527 10,057,020 10,778,057 11,576,258 2.7% -21.2% -10.4% 1.8% 2.8% 1.9% 2.1% RASK 0.075 0.068 0.069 0.071 0.072 0.074 -0.5% -21.1% -10.4% 3.0% 4.1% 4.1% 4.2% Yield 7.54 6.76 6.96 7.25 7.54 7.86 0.8% -19.6% -11.1% 3.2% 5.3% 6.8% 6.9% Operating Costs 9,611,907 94.9% 8,546,435 94.0% 8,815,950 93.4% 9,278,972 92.3% 9,911,825 92.0% 10,600,143 91.6% 2.0% -11.8% -5.7% 1.4% 3.6% 5.1% 4.7% Wages and Benefits 2,072,805 20.5% 1,954,061 21.5% 1,981,251 21.0% 2,051,632 20.4% 2,155,611 20.0% 2,257,370 19.5% 1.7% -36.4% -24.8% 10.7% 11.3% 13.9% 14.0% Aircraft Fuel 2,651,066 26.2% 1,993,880 21.9% 2,207,614 23.4% 2,457,679 24.4% 2,798,509 26.0% 3,189,830 27.6% 3.8% -17.2% -9.9% -3.1% 2.8% 3.2% 3.3% Commissions to agents 302,774 3.0% 272,660 3.0% 264,167 2.8% 271,540 2.7% 280,229 2.6% 289,406 2.5% -0.9% -5.7% -2.7% 3.8% 1.3% 7.2% 7.4% Depreciation and Amortization 934,407 9.2% 908,866 10.0% 943,453 10.0% 955,417 9.5% 1,023,915 9.5% 1,099,745 9.5% 3.3% -16.4% -9.9% -0.9% 6.6% 7.2% 4.8% Other Rental and Landing Fees 1,109,825 11.0% 999,752 11.0% 990,625 10.5% 1,055,987 10.5% 1,131,696 10.5% 1,186,566 10.3% 1.3% -1.6% 4.6% -8.4% 3.0% -0.2% -0.6% Passenger Services 295,440 2.9% 309,014 3.4% 283,036 3.0% 291,654 2.9% 291,008 2.7% 289,406 2.5% -0.4% 0.7% 8.0% 12.8% 6.2% -0.2% -0.4% Aircraft Rentals 525,134 5.2% 567,108 6.2% 639,723 6.8% 679,214 6.8% 677,639 6.3% 674,699 5.8% 5.1% -3.4% -7.4% -3.0% -0.9% -0.1% 2.2% Aircraft Maintenance 437,236 4.3% 405,012 4.5% 392,808 4.2% 389,464 3.9% 389,187 3.6% 397,613 3.4% -1.9% -13.4% -11.5% -2.0% 1.2% 3.3% 4.4% Other Operating Expenses 1,283,220 12.7% 1,136,082 12.5% 1,113,274 11.8% 1,126,386 11.2% 1,164,030 10.8% 1,215,507 10.5% -1.1% -22.1% -10.8% 0.8% 1.5% 1.6% 1.6% CASK 0.72 0.64 0.64 0.65 0.66 0.67 -1.2% -13.4% -5.5% -1.5% -0.5% -0.8% -1.0% CASK ex-fuel 0.52 0.49 0.48 0.48 0.48 0.47 -1.9% 0.1% 5.5% 14.1% 25.8% 11.3% 12.7% Operating Profit 513,919 5.1% 542,222 6.0% 618,577 6.6% 778,047 7.7% 866,232 8.0% 976,115 8.4% 13.7% -2.6% 2.3% 9.1% 9.6% 6.4% 7.1% EBITDAR 1,973,460 19.5% 2,018,195 22.2% 2,201,752 23.3% 2,412,678 24.0% 2,567,786 23.8% 2,750,558 23.8% 6.9% 99.7% -112.8% 314.3% 98.0% 27.4% 28.4%

Maj. Net Income -219,274 -2.2% 27,959 0.3% 115,822 1.2% 229,327 2.3% 292,237 2.7% 375,300 3.2% -211.3% Source: GBM

LATAM | Transportation Initiating Coverage

FCF - Thousands of USD 2015 2016e 2017e 2018e 2019e 2020e EBITDA 1,448,326 1,451,087 1,562,029 1,733,464 1,890,147 2,075,860 Change in Working Capital 395,271 -619,858 -120,208 -80,187 -69,184 -48,100 Interests -338,277 -376,372 -398,314 -400,193 -398,492 -390,735 Taxes -122,504 -22,136 -57,268 -98,242 -121,612 -152,199 CAPEX -1,564,990 -1,276,000 -1,019,133 -1,072,732 -1,136,132 -1,048,551 FCFE -182,174 -843,279 -32,894 82,110 164,728 436,274 Source: GBM

Balance - Thousands of USD 2015 2016e 2017e 2018e 2019e 2020e Cash and equivalents 753,497 -59,960 -92,854 -10,744 153,984 590,258 PP&E 10,938,657 11,432,443 11,508,124 11,625,439 11,737,655 11,686,462 Total Assets 18,101,418 18,013,042 18,119,986 18,369,446 18,706,325 19,162,556 Short-Term Debt 1,644,235 1,641,563 1,641,563 1,641,563 1,641,563 1,641,563 Long-Term Debt 7,532,385 7,687,404 7,687,404 7,687,404 7,687,404 7,687,404 Total Liabilities 15,163,870 14,707,508 14,651,458 14,621,305 14,612,056 14,635,106 Majority Equity 2,856,535 3,188,333 3,305,884 3,540,053 3,840,738 4,228,476 Net Debt 7,700,326 8,784,176 8,817,070 8,734,960 8,570,232 8,738,709 Source: GBM

LATAM | Transportation Initiating Coverage

IV. Company Description

LATAM resulted from the merger of LAN and TAM in 2012. As such, the company’ s holdings include LAN and its affiliates in Peru, Argentina, Colombia, and Ecuador, LAN Cargo and its affiliates MasAir (Mexico), and LANCO (Colombia). Additionally, LATAM’ s holdings includes TAM and its subsidiaries: TAM Linhas Aereas, TAM Transportes Aereos del Mercosur, TAM Airlines (Paraguay), TAM Cargo, and Multiplus.

LATAM is the only airline in Latin America with local presence in 6 markets in addition to regional and long haul operations. The 6 countries where the company is present are Chile, Brazil, Peru, Argentina, Colombia, and Ecuador. They represent around 95% of the capacity—offered in ASKs—in the region. This allows LATAM to offer the largest network of intraregional routes in Latin America. Furthermore, the airline’ s presence in the two largest hubs in Latin America—Lima and São Paulo—allows it to offer the best connectivity between South America and the rest of the world.

A. Company Network LATAM’s Hubs

Up to January 2016, LATAM had transported passengers to approximately 137 destinations in 25 countries and provided cargo services to approximately 140 destinations in 29 countries. Around 111 of the passenger destinations are found in countries where the company has local presence, while the remaining 26 destinations are served by international flights. In 2015, LATAM transported 67.8 million passengers through its network.

Domestic network. As part of its domestic network, LATAM operates flights in the six countries where it has local presence, using Buenos Aires, Santiago, Lima, Quito, Bogota, Brasilia, Rio de Janeiro, and Sao Paulo as hubs in their respective countries. The company operated 16 destinations in Chile and Peru, each, 5 destinations in Ecuador, 14 destinations in Argentina and Colombia, each, and 46 destinations in Brazil. In 2015, LATAM served 53.4 million passengers in its domestic networks.

International network. Up to 2015, LATAM was flying to 26 international destinations, including 5 destinations in North America, 12 in the Caribbean and other Latin American countries, 6 in Europe, and 3 in the South Pacific. The company uses its presence at the largest hubs in South America—Lima and São Source: GBM with company data Paulo—as well as its hub in Santiago, to connect South America and the rest of the world. In 2015, LATAM served 14.4 million passengers in its international network.

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B. Market Share

LATAM operates domestic flights in 6 different countries—Brazil, Chile, Argentina, Peru, Colombia, and Ecuador—holding the largest market share in two of these countries—Chile and Peru—and the second largest market share in the remaining 4 countries.

As for its destinations, LATAM’ s international operations can be divided into three main segments: North America, Europe, and Regional, which represents destinations in other countries in Latin America. LATAM holds roughly 24 and 12% of the market share between Latin America and the US and Europe, respectively. Additionally, LATAM holds a market share of around 43% of the Regional operations within Latin America. Furthermore, considering the countries where it operates, LATAM holds the largest international market share in Brazil, Chile, Peru, and Ecuador.

Domestic market share International market share 100% 1% 6% 100% 5% 25% 25% 21% 20% 80% 31% 27% 32% 80% 44% 48% 13% 6% 67% 60% 69% 60% 51% 89% 36% 59% 13% 40% 74% 40% 62% 67% 62% 44% 43% 15% 20% 33% 20% 25% 20% 29% 12% 18% 0% 0% 8% Brazil Chile Argentina Peru Colombia Ecuador Brazil Chile Argentina Peru Colombia Ecuador LATAM GOL LATAM GOL SKY AIRLINE TACA PERU SKY AIRLINE Aerolíneas Argentinas PERUVIAN AIR LINE Avianca Avianca AEROGAL OTHER -Argentina measured in ASK -Brazil’s international market share only includes Brazilian airlines. Source: GBM with public data.

C. Fleet

LATAM ended 2015 with a fleet of 331 aircraft, 15 of which were cargo aircraft, and the remaining 316 were passenger aircraft. Cargo aircrafts consisted of four B 777-200F and eleven B 767-300F. On the other hand, the passenger aircraft fleet comprised 251 Air Bus carriers, 154 of which were A320- 200 and 50 were A319-100, as well as 65 Boeing aircrafts, 38 of which were B767-300. At the end of 2015, LATAM’ s fleet had an average age of 7.0 years.

For 2018, the airline intends to increase its fleet to 337 planes, reducing its number of A320-200 and introducing the A320 NEO and A321 NEO. Additionally, the company will stop operating A330-200 carriers.

LATAM Fleet Fleet type Model 2012 2013 2014 2015 2016e 2017e 2018e A319-100 57 54 52 50 48 48 48 A320 141 160 158 154 148 152 154 A321 9 102136474753 A330-200 20 20 13 10 0 0 0 A350-900 0 0 0 1 7 11 13 B767-300 41 43 38 38 37 36 34 B777-300ER 8 10 10 10 10 10 7 B787-800 3 5 10 17 22 24 28 Passenger aircraft 311 323 312 316 319 328 337

B767-300 Freighter 12 12 11 11 7 6 6 B777-200 Freighter 4 4 4 4 3 2 2 Cargo aircraft 16 16 15 15 10 8 8 Total 327 339 327 331 329 336 345 Source: GBM with company data

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As part of its fleet plan, LATAM decided to restructure its fleet, reducing the variety of aircraft it currently operates in order to increase the number of the more efficient and modern carriers, and reduce the number of less efficient carriers. A more modern fleet would allow LATAM to lower its unscheduled maintenance costs, fuel consumption, and operating and cost efficiencies.

Fleet Aircraft Specifications

AIRBUS A319-100 AIRBUS A320-200

 Seats: 144  Seats: 168-174  Cruise speed: 850 km/h  Cruise speed: 850 km/h  Length: 33.8m  Length: 37.6m  Wingspan: 34.1m  Wingspan: 34.1m  Max. Weight at take-off: 70 ton.  Max. Weight at take-off: 77 ton.  Flight Distance: 6,950 km  Flight Distance: 6,500 km

AIRBUS A321-200 AIRBUS A330-200

 Seats: 220  Seats: 223  Cruise speed: 850 km/h  Cruise speed: 860 km/h  Length: 44.51m  Length: 58.8m  Wingspan: 34.1m  Wingspan: 60.3m  Max. Weight at take-off: 89 ton.  Max. Weight at take-off: 230-233  Flight Distance: 7,400 km ton.  Flight Distance: 13,450 km

AIRBUS A350-900 BOEING 767-300

 Seats: 348  Seats: 221-238-205  Cruise speed: 905 km/h  Cruise speed: 869 km/h  Length: 66.8m  Length: 54.2m  Wingspan: 64.8m  Wingspan: 47.6m  Max. Weight at take-off: 268 ton.  Max. Weight at take-off: 184.6  Flight Distance: 15,000 km ton.  Flight Distance: 11,000 km

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BOEING 777-300 ER BOEING 787-8

 Seats: 362  Seats: 247  Cruise speed: 896 km/h  Cruise speed: 913 km/h  Length: 73.9m  Length: 56.69m  Wingspan: 64.8m  Wingspan: 60m  Max. Weight at take-off: 347.8 ton.  Max. Weight at take-off: 227.93  Flight Distance: 13,650 km ton.  Flight Distance: 13,620 km

BOEING 787-9 BOEING 777-200F (Cargo freighter)

 Seats: 313  Cruise speed: 896 km/h  Cruise speed: 913 km/h  Length: 63.7m  Length: 62.8m  Wingspan: 64.8m  Wingspan: 63m  Max. Weight at take-off: 347.45  Max. Weight at take-off: 252.65 ton. ton.  Flight Distance: 9,200 km  Flight Distance: 14,140 km

BOEING 767-300F (Cargo freighter)

 Cruise speed: 896 km/h  Length: 54.2m  Wingspan: 47.6m  Max. Weight at take-off: 186.88 ton.  Flight Distance: 6,025 km Source: GBM with company data

D. Alliances

Before LAN and TAM merged into LATAM, LAN, LAN Peru, LAN Ecuador, and LAN Argentina were members of Oneworld, while TAM was a member of Star Alliance. In 2013, the company chose Oneworld as its global alliance. Thus, LAN Colombia and TAM became members of Oneworld in 2013 and 2014, respectively.

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Oneworld alliance current members:

 LATAM  Japan Airlines  Airberlin  Malaysia Airlines  American Airlines  Qantas  British Airways  Qatar  Cathay  Royal Jordanian  Pacific  Sri Lankan  Finnair  S7  Iberia

Joint Ventures. In January 2016, LATAM signed 2 JV agreements: one with American Airlines and the other with IAG. Both are subject to regulatory approval by the relevant authorities. Additionally, LATAM holds code-sharing agreements with both airlines. Moreover, by January 2016, LATAM held code-sharing agreements with the following airlines that are not Oneworld members:

 Lufthansa (TAM)  Swiss Air (TAM)  Interjet (LAN, LAN Peru and TAM)  Jetstar Airways (LAN)  Air China (TAM)  Korean Air (LAN Peru)  Alaska Airlines (LAN and LAN Peru)  South African Airlines. (TAM)

E. Loyalty Program

In 2015, LAN and TAM operated their independent loyalty programs—LANPASS and TAM Fidelidade, respectively—which allowed members of both programs to accumulate and redeem kilometers on flights managed by both airlines and their associates. Customers of the two programs earned kilometers based on distance flown and the class of ticket purchased, as well as by using other services of partners in the program. In March 2016, the company announced LATAM Pass as part of its new brand strategy, which corresponds to the previous LANPASS and LATAM Fidelidade. The program allows customers to redeem kilometers for free tickets and other products available in an online catalogue.

Additionally, in 2009, TAM launched MULTIPLUS as a coalition of loyalty programs that allow for the accrual of points for redemption in the form of products and services offered by many different partner companies other than LATAM. MULTIPLUS is especially attractive to less-frequent flyers as it allows members to accrue loyalty points in ways other than flying. By the end of 2015, MULTIPLUS had more than 400 partners and roughly 14.2 million participants who can accrue MULTIPLUS points in over 13,000 retail establishments.

V. Key Figures

A. Revenues

LATAM revenues come mainly from transporting domestic and international passengers by air. Additionally, LATAM also benefits from the transportation of air cargo which, together with passenger revenues, makes up the company’ s traffic revenues. In 2015, LATAM’ s traffic revenues amounted to roughly 96.2% of its consolidated revenues. Additionally, LATAM also benefits from other sources of revenue, such as providing maintenance operations to third parties, which represent the remaining 3.8% of consolidated revenues.

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Revenue breakdown Revenues by Region in 2015

Other Peru Colombia Ecuador 3.6% 2.4% Net Cargo 3.8% 7.0% Asia Revenue Pacific 13.1% and rest of Latin America Brazil 35.6% 7.2% Net Europe Passenger 7.4% Revenue Chile 83.1% Argentina US 16.2% 10.1% 10.5%

Source: GBM with company data

i. Passenger

LATAM transports passengers on both domestic and international routes, with domestic operations being carried out in Chile, Peru, Argentina, Colombia, Ecuador, and Brazil. As such, roughly 79% of its operations are carried out in its domestic markets, while the remaining 21% consists of international operations. We should note that domestic operations in Brazil represent 47% of LATAM’ s total passenger traffic, while the domestic operations in Spanish-speaking countries represent the remaining 32%.

ii. Air Cargo

LATAM’ s cargo division operates on both international and domestic routes, through subsidiaries and affiliates under LAN Cargo and TAM Cargo. In 2015, it transported 1.0 million tons of cargo. Cargo is usually operated on the same route network as the passenger business, and includes approximately 140 destinations. Around 129 destinations are also served by passenger aircrafts, and 11 are served only by cargo aircraft. The company’ s cargo has grown at a 3.6% CAGR throughout the 2011-2015 period.

LATAM’s Historical PAX Growth LATAM’s Historical Cargo Growth -Figures in millions *Figures in thousands 80 1,400 CAGR 2011-2015: 3.0% CAGR 2011-2015: 3.6% 70 1,200 60 1,000 50 800 40 600 30 400 20 10 200 - - 2011 2012 2013 2015 2014 2011 2012 2013 2014 2015 Domestic Brasil Domestic SSC International CARGO (tons)

Source: GBM with company data

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iii. Other Income

Other revenues represented 3.8% of the company’ s consolidated revenues in 2016. They consist mainly of those revenues generated through the operation of tour services, leasing of aircrafts, selling products on flights, giving maintenance services to third parties, providing ground handling services, customs, and storage brokerage operations.

B. Profitability Operating Expenses breakdown Aircraft Commissions Passenger Services As an airline, LATAM’ s profitability directly relates to maintenance 3% 3% jet fuel prices, F/X effects, and improvements in its 5% operating leverage through higher load factors and Leases Aircraft asset utilization, which are linked to the size of the 5% company’ s operations and its fleet. LATAM’ s main fuel D&A 28% expenses are: 10%

 Aircraft fuel. Represents around 28% of the Other Rental Wages company’ s expenses, as LATAM consumes Other 11% 22% around 1.2 billion gallons of jet fuel per year. Expenses Fuel prices are directly related to the price of 13% crude oil. In 2015, the average fuel price plus taxes and transportation costs, including Source: GBM with company data hedges, was US$2.19 per gallon.

 Wages and benefits represent about 22% of

LATAM’ s expenses. By 2015, the company had 50,413 employees, approximately 25% of whom worked in Chile, 73% in other Latin American countries, and 2% in the rest of the world. Approximately 68% of employees are members of a union.

 Other rental and landing fees represent 11% of LATAM’ s expenses, related to the aeronautical rates incurred by aircrafts using airport services.

 Leases, represent about 5% of the firm’ s total expenses. By 1Q16, LATAM had 331 aircrafts, 106 of which were under operating leases.

LATAM | Transportation Initiating Coverage

Income Statement Summary - Thousands of USD 2012 2013 2014 2015

3.1% 1.7% 0.0% Passengers '000 64,678 66,696 67,833 67,835 -0.4% -1.1% 3.0% ASK (millions) 132,185 131,690 130,202 134,165 4.5% 0.8% 2.7% RPK (millions) 103,022 107,694 108,534 111,511 4.9% 1.9% -0.3% Load Factor 77.9% 81.8% 83.4% 83.1% 0.0% -6.0% -18.8% Total Revenue 13,264,659 13,265,802 12,471,146 10,125,826 0.4% -4.9% -21.2% RASK 0.100 0.101 0.096 0.075 -4.3% -6.9% -21.1% Yield 10.74 10.27 9.56 7.54 -4.1% -5.3% -19.6% Operating Costs 13,162,081 99.2% 12,622,198 95.1% 11,957,779 95.9% 9,611,907 94.9% -3.9% -5.7% -11.8% Wages and Benefits 2,594,657 19.6% 2,492,768 18.8% 2,350,101 18.8% 2,072,805 20.5% -7.7% -5.6% -36.4% Aircraft Fuel 4,780,289 36.0% 4,414,249 33.3% 4,167,030 33.4% 2,651,066 26.2% -2.0% -10.6% -17.2% Commissions to agents 417,124 3.1% 408,671 3.1% 365,508 2.9% 302,774 3.0% -7.1% -4.8% -5.7% Depreciation and Amortization 1,121,770 8.5% 1,041,733 7.9% 991,264 7.9% 934,407 9.2% -0.3% -3.3% -16.4% Other Rental and Landing Fees 1,377,052 10.4% 1,373,062 10.4% 1,327,237 10.6% 1,109,825 11.0% 5.2% -9.4% -1.6% Passenger Services 314,921 2.4% 331,405 2.5% 300,325 2.4% 295,440 2.9% 3.5% 18.2% 0.7% Aircraft Rentals 426,274 3.2% 441,077 3.3% 521,384 4.2% 525,134 5.2% 12.4% -5.1% -3.4% Aircraft Maintenance 424,349 3.2% 477,088 3.6% 452,732 3.6% 437,236 4.3% -3.7% -9.7% -13.4% Other Operating Expenses 1,705,645 12.9% 1,642,145 12.4% 1,482,198 11.9% 1,283,220 12.7% -3.7% -4.2% -22.1% CASK 1.00 0.96 0.92 0.72 -1.7% -4.0% -13.4% CASK ex-fuel 0.63 0.62 0.60 0.52 527.4% -20.2% 0.1% Operating Profit 102,578 0.8% 643,604 4.9% 513,367 4.1% 513,919 5.1% 28.8% -4.7% -2.6% EBITDAR 1,650,622 12.4% 2,126,414 16.0% 2,026,015 16.2% 1,973,460 19.5% -43.5% -61.0% 99.7% Maj. Net Income -498,008 -3.8% -281,414 -2.1% -109,793 -0.9% -219,274 -2.2% Source: GBM with company data

LATAM | Transportation Initiating Coverage

C. Balance Sheet

As of 1Q16, LATAM had US$2.8 billion in current assets. The greater part was cash and cash equivalents (US$769 million), accounts receivable (US$815.4 million), and other financial assets. Non-current assets totaled US$15.9 billion, US$11.1 billion of which were property and equipment.

On the other hand, LATAM’ s total liabilities summed US$15.4 billion, with US$5.6 billion being short- term liabilities, and US$9.8 billion being long-term liabilities. As such, the company’ s shareholders’ equity stands at US$3.3 billion.

Therefore, by the end of the first quarter of 2016, LATAM held an US$11.62 billion adjusted net debt position equal to a 5.9x adjusted net debt to EBITDAR ratio.

Balance Sheet Summary - Thousands of USD 2012 2013 2014 2015 Cash and equivalents 650,263 1,984,903 989,396 753,497 PP&E 11,807,076 10,982,786 10,773,076 10,938,657 Total Assets 22,326,339 22,631,146 20,484,430 18,101,418 Short-Term Debt 2,047,330 2,039,787 1,624,615 1,644,235 Long-Term Debt 7,698,857 7,859,985 7,389,012 7,532,385 Total Liabilities 17,105,654 17,304,687 15,980,735 15,163,870 Majority Equity 5,112,051 5,238,821 4,401,896 2,856,535 Net Debt 9,095,924 7,269,292 7,283,445 7,700,326 Source: GBM with company data

VI. Corporate Structure

A. Main shareholders

Currently, 25.0% of LATAM’ s common shares are held by the Cueto Group, which is comprised of members of the Cueto family and is LATAM’ s controlling shareholder. Additionally, 12.0% of the company is held by the Amaro Group, which is referred to as TAM’ s controlling shareholders due to their 100% ownership of TEP Chile, and majority ownership of Holdco I. The latter owns 100% of the common shares of TAM. LATAM recognizes two other groups as part of its major shareholders, these being the Bethia (6.1%) and Eblen (5.6) groups.

LATAM’s main shareholders Shareholder # of Shares % of Shares

Cueto Group 136,394,023 25.0% Amaro Group 65,554,075 12.0% Bethia Group 33,367,357 6.1% Eblen Group 30,550,333 5.6% Other minority shareholders 279,692,313 51.3%

Total 545,558,101 100% Source: GBM with company data

LATAM | Transportation Initiating Coverage

B. Board of Directors

LATAM’ s board of directors consists of 9 directors, elected at the annual shareholders’ meeting for a two-year term. Under the company’ s bylaws, directors are elected by cumulative voting. Each shareholder has one vote per share. Thus, a shareholder owning more than 10% of the outstanding shares is able to elect at least one representative to the board of directors. LATAM recognizes 4 major shareholder groups, these being the Cueto, Amaro, Bethia, and Eblen Groups. We must note, that at the beginning of June, Mr. Ricardo Caballero resigned to his post as director and as such, currently the board has 8 directors.

Board of Directors Board Members Position 1 Mauricio Rolim Amaro Major Shareholder Director / Chairman 2 Juan José Cueto Plaza Major Shareholder Director 3 Ramón Obren Kadis Major Shareholder Director 4 Carlos Heller Solari Major Shareholder Director 5 Henri Philippe Reichstul Director 6 Georges de Bourguignon Arndt Director 7 Ricardo Caballero Director 8 Gerardo Jofré Miranda Director 9 Fransisco Luzón López Director

Main Officers Name Position 1 Enrique Cueto Plaza CEO LATAM 2 Ignacio Cueto Plaza CEO LAN 3 Claudia Sender TAM President 4 Armando Valdivieso LAN President 5Cristián Ureta Senior VP Cargo Operations 6Roberto Alvo Senior VP Network and Fleet 7Jerome Cadier CMO 8 Enrique Elsaca Senior VP SSC 9 Juan Carlos Menció Senior VP Legal

Appendix | Transportation Initiating Coverage

A. Appendix I – Mexico and the US Aviation Agreement

In November 2014, the Mexican Ministry of Transportation announced that the Mexican and US governments established a new aviation agreement, granting additional market access to carriers from both countries. The agreement was approved by the Mexican Senate in April 2016, while approval by the DOT is pending but should conclude before yearend.

In terms of passenger flights, the agreement opens the 3rd and 4th freedoms of the skies, removing all restrictions, so that Mexican and US airlines are able to fly either inbound or outbound between both countries without limits. As such, some players will gain entry into currently capped routes. Current regulation allows both governments to select 2 or 3 domestic airlines to serve a specific route. Three airlines are allowed mainly to beach and tourist destinations in Mexico, while only 2 airlines are allowed to all other destinations. Only four routes are currently capped on both sides, while 3 are limited only to Mexican carriers, and 10 to US carriers. We should note that the 5th freedom wasn’ t waived, restricting the implementation of cabotage (transport traffic to a third country through a foreign country).

International PAX Traffic Breakdown International Cargo Traffic Breakdown European LatAm Carriers Carriers 6% 7% LatAm Asian Mexican Carriers Carriers Mexican 8% Carriers 11% Carriers 27% Canadian 31% Carriers European 8% Carriers US 22% Carriers US 51% Carriers 29%

Source: GBM with DGAC data

On the other hand, cargo traffic should benefit from the opening of the 3rd, 4th, 5th and 7th freedoms, allowing both Mexican and US cargo carriers to reach other destinations, as they will be able to take off from foreign airports to fly to another country. The 7th freedom allows foreign carriers to perform flights from the home country to another foreign country.

Freedom Example Status Mexico – Canada 1: Overfly Open Overflying the US Home A B Mexico – Canada 2: Technical stop Open Stop in the US for fuel Home A B Mexico – US 3: Set Down Traffic Open By a Mexican Carrier Home A B US - Mexico 4: Pick Up Traffic Open By a Mexican Carrier HomeHom Statee A B 5: Carry traffic to/from third Mexico – US – Canada Certain state By a Mexican Carrier HomeHom Statee A B Routes US - Mexico - Brazil Cargo 6: Carry traffic via home state By a Mexican Carrier HomeA State Home B Only 7: Operate from second state US - Canada Cargo to/from third state By a Mexican Carrier Home A B Only 8: Carry traffic between 2 Mexico – Miami – Chicago Closed points in foreign state By a Mexican Carrier Home A B 9: Operate only in a foreign Mexico – Miami – Chicago Closed State By a Mexican Carrier Home A B

Appendix | Transportation Initiating Coverage

B. Appendix II– Oil Price Latest Update from our O&G team

Updating oil prices estimates, no support coming from OPEC. The oil cartel is clearly failing to rebalance the global oil market. Saudi Arabia—the largest producer in OPEC—continues to be the major obstacle to production cuts as it is not willing to lose any market share, while requires all the producers to join any agreement in order to rebalance the market. Earlier this year, oil rallied as some OPEC members and Russia proposed a deal to freeze crude output at January levels, but it failed as Iran was confirmed not to join the deal during the Doha meeting in April. And now, the market seems to be bullish again, helped by the dollar losing some strength. Overall, this does not seems sustainable, as the dollar should not remain at these levels for a long time, supply remains huge, and demand is not helping. Oil consumption should reach around 95 million bpd (1.4% YOY) as signs of slower global demand growth persist, mainly coming from Europe and Japan. Thereby, production should continue to outpace consumption by around 1.4 million bpd this year, leading to inventory buildups—on top of the highest inventory in the history. Thus, our O&G team is cutting its WTI price estimates to US$42.5 per barrel for 2016, US$49.9 for 2017, and US$65.0 and for the long term vs. previous estimates of US$55 for 2016, US$60 for 2017 and US$70 for the long term.

GBM Estimates (Old vs. New) GBM Estimates New Old % 2016 42.5 55.0 ‐22.7% 2017 49.9 60.0 ‐16.9% 2018 55.1 70.0 ‐21.3% 2019 60.1 70.0 ‐14.1% 2020 ‐ LT 65.0 70.0 ‐7.1%

WTI vs Brent Spread WTI Crude Oil Forward Contract - As of December 2015 (Figures USD / bbl)

105 27% $70.0 24% $67.5 90 21% $65.0

75 18% $62.5

15% $60.0 60 12% $57.5 9% 45 $55.0 6% $52.5 30 3% $50.0 0% 15 $47.5 -3% 0 -6% $45.0 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Jan-17 Jan-18 Jan-19 Jan-20 Apr-14 Jan-14 Jun-15 Jun-14 Feb-16 Mar-16 Feb-14 Feb-15 Mar-15 Aug-15 Sep-15 Nov-15 Dec-15 Aug-14 Sep-14 Nov-14 Dec-14 May-16 May-15 May-14 May - 2016 May - 2015 Dec - 2015 Spread (right axis) BRENT WTI Average Spread

Airport Industry | Transportation Initiating Coverage

Company Rating Price Target Downside Company Rating Price Target Downside ASUR Market Underperformer P$265.3 -6.4% GAP Market Underperformer P$165.4 -13.2% Stock Price Performance vs Analyst Estimates Stock Price Performance vs Analyst Estimates

300.0 200.0

290.0 190.0 180.0 280.0 170.0 270.0 160.0 260.0 150.0 250.0 140.0 240.0 130.0 230.0 120.0

220.0 110.0

Jul-15 Jul-15 Jul-16 Jul-15 Jul-15 Jul-16 Oct-15 Oct-15 Apr-16 Apr-16 Oct-15 Oct-15 Apr-16 Apr-16 Jan-16 Jan-16 Jun-16 Jun-16 Jun-16 Jun-16

Feb-16 Feb-16 Mar-16 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 May-16 May-16

Price Price Target Price Price Target

Company Rating Price Target Upside

OMA Market Performer P$108.8 1.0%

Stock Price Performance vs Analyst Estimates 110.0

105.0

100.0 95.0

90.0

85.0

80.0

75.0

Jul-15 Jul-15 Jul-16 Apr-16 Apr-16 Oct-15 Oct-15 Jan-16 Jun-16 Jun-16 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 May-16

Price Price Target

Transportation| Appendix Initiating Coverage

Company Rating Price Target Upside Company Rating Price Target Upside

AEROMEX Market Outerformer P$44.6 21.7% COPA Market Outerformer US$64.0 15.8% Stock Price Performance vs Analyst Estimates Stock Price Performance vs Analyst Estimates 90.0 45.0 85.0 80.0 40.0 75.0 70.0 35.0 65.0

60.0 30.0 55.0 50.0 25.0 45.0

40.0 20.0

Jul-15 Jul-15 Jul-16 Oct-15 Oct-15 Apr-16 Apr-16 Jan-16 Jun-16 Jun-16 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 May-16 Jul-15 Jul-15 Jul-16 Oct-15 Oct-15 Apr-16 Apr-16 Jan-16 Jun-16 Jun-16 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 May-16 Price Price Target Price Price Target Company Rating Price Target Upside Company Rating Price Target Upside GOL Market Performer R$3.5 5.4% LATAM Market Performer US$7.2 7.5%

Stock Price Performance vs Analyst Estimates Stock Price Performance vs Analyst Estimates

8.0 8.0

7.0 7.5

7.0 6.0 6.5 5.0 6.0 4.0 5.5

3.0 5.0

2.0 4.5

1.0 4.0

Jul-15 Jul-15 Jul-16 Jul-15 Jul-15 Jul-16 Apr-16 Apr-16 Oct-15 Oct-15 Jan-16 Jun-16 Jun-16 Apr-16 Apr-16 Oct-15 Oct-15 Jan-16 Jun-16 Jun-16 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 Feb-16 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 Dec-15 May-16 May-16 Price Price Target Price Price Target

Transportation| Appendix Initiating Coverage

Investment Risks

Risks related to macroeconomic aspects, we believe the most relevant risks in the Mexican Airport Market are:1) changes in government policy which might or might not affect the aeronautical industry 2) unexpected changes in regulation by regulatory authorities such as: SCT, DGAC, etc.

Some of the risks regarding our airports are: 1) limited operating flexibility given its condition as borrower of a public service regulated by the federal government. 2) possibility of losing the concession to the federal government under certain circumstances not controlled by the company 3) negative performance produced by terrorism and international conflicts as well as their consequences; 4) adverse impact of natural disasters on the company’ s activities; 5) strong dependence on airlines’ ability to operate.

Some of the risks regarding ASUR are: 1) Strong dependence on the results of Cancun’ s International Airport.

Some of the risks regarding OMA are: 1) relative dependence on the results of Monterrey’ s International Airport.

Besides macroeconomic risks, the following threats regarding the Mexican airline market are considered relevant: 1) Possible negative impacts from fuel price volatility. 2) Decreasing demand due to terrorism or epidemic outbreaks. 3) Significant correlation with the performance of the US economy.

AEROMEX competes against several airlines such as VOLAR, Interjet, and VivaAerobus, in addition to international carriers on the various routes it operates. There is no guarantee that the company’ s development won’ t be affected by increased competition from these sources.

Some of the risks regarding our South American sample are: 1) an economic slowdown; 2) fuel price volatility; 3) an increase in competition

Some of the risks regarding COPA are: 1) the cash pending repatriation in Venezuela.

Some of the risks regarding LATAM are: 1) risks related to the merger; 2) dilution risk due to a potential capital increase.

Some of the risks regarding GOL are: 1) execution risk of its cost reduction plan; 2) exchange rate volatility

Transportation| Appendix Initiating Coverage

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