Fitch downgrades TAM's IDR to 'B+'; Outlook revised to stable

--Foreign and local currency long-term Issuer Default Ratings (IDRs) to 'B+' from 'BB-';

--USD300 million senior unsecured note due to 2020 to 'B+/RR4' from 'BB-';

--USD300 million senior unsecured note due to 2017 to 'B+/RR4' from 'BB-';

--Long-term national rating to 'BBB+(bra)' from 'A-(bra)';

--BRL500 million debentures issuance due 2012 to 'BBB+(bra)' from 'A-(bra)'.

The Rating Outlook for the long-term corporate ratings is revised to Stable from Negative.

The downgrades reflect the deterioration in TAM's credit profile due to higher leverage levels as a result of lower operating cash generation. TAM's weak performance largely reflects lower RASK levels (lower yields and load factors) as a result of the adverse operating environment for the airline industry during the first part of 2009 and the strong competition in the market over the last several quarters. Despite the strong recovery of the domestic market, yields are expected to show only a modest recovery and the company's decision to further expand its fleet should limit the benefits of growing market demand on its load factors. The Outlook revision to Stable reflects Fitch's expectations that the company's net leverage will not recover in the near term and will remain around 6.0 times (x) which is consistent with the assigned rating category.

Business Position Continues to Support Ratings:

TAM's ratings continue to reflect the company's strong market presence in the domestic air passenger transportation sector, with a market share of 42%. It also factors in the company's position as the sole Brazilian airline operator in long-haul routes to Europe and USA, which is strengthened by several code-share agreements and recently, as a member of Star Alliance. Further factored in TAM's ratings is the high percentage of business passengers in its ticket sales mix and the revenue diversification. The ratings also consider TAM's exposure to fluctuations in jet fuel prices and exchange rates, the strong correlation of its activities with the performance of the domestic economy and competitive threats.

Competition Significantly Pressured Results:

TAM's EBITDA fell to BRL1.257 billion during last 12 months (LTM) ended on March, 31 2010 from BRL1.411 billion in 2009 and BRL1.613 billion during 2008.

The spread RASK-CASK spread fell to BRL0.5 cents in 2009 and in the first quarter of 2010 (1Q'10) from BRL 1.2 cents in 2008 and BRL 0.9 cents in 2007.

The deterioration in profitability was mainly driven by a contraction in yields and load factor. In the domestic and international market, yields declined 18% and 16%, respectively, in 2009. Load factor decreased 2.7p.p in the domestic market and 3.1p.p in the international market. For the 1Q'10, load factor showed recovery although yields continue to be pressured. As a result, the company's EBITDAR margin decreased to 14.3% and 12.7% in 2009 and in the LTM ended in March 2010, respectively. These margins negatively compares with the margins of 15.2% reached in 2008. For 2010, Fitch expects profitability to remain around 14%.

Limited Improvement in Cash Flow Generation Should Continue to Pressure Leverage:

TAM's leverage is high. High financial leverage is a result of a lower cash generation in the challenging year of 2009 and the effects of the company efforts to enhance liquidity through capital market debt issuances after the cash disbursement related to fuel hedge derivative instruments in amount of BRL591million in 2009. By the end of March 2010, TAM's net leverage, measured by adjusted net debt to Ebitdar, was 6.8x which negatively compared to the ratios of 6.5x in fiscal year (FY) 2009 and 5.7x in FY 2008. The ratings factors expectations that the company's net leverage will not improve in the medium term as the company's fleet expansion is expected to increase the company's levels of total adjusted debt. Fitch expects the company's net leverage to be around 6.0x by the end of FY 2010. Further deleveraging could benefit credit quality.

As of March 31, 2010, TAM's total debt was BRL7.8 billion, mainly comprised of long-term capital leases and capital market issuances. The company's total adjusted debt was BRL11.2 billion, which includes off balance sheet operating leases of BRL3.3 billion. About 83% of TAM's total adjusted debt was denominated in U.S. dollars or linked to the dollar. With about 40% of its revenues tied to the dollar, the company does not hedge the currency of its debt.

Solid Liquidity Helps Mitigate Industry Volatility:

TAM's liquidity remains solid. TAM had BRL2.6 billion of cash and marketable securities and BRL1.4 billion of on balance sheet short-term debt as of March 31, 2010. Of TAM's cash balance, BRL98 million are restricted cash related to hedge contracts. The company's cash position covers 1.9x short-term debt obligations and represented 26% of the net revenue (LTM) or around 3.2x its monthly revenue. Derivatives hedge contracts should not have a major impact on cash flow as for the last three quarter of 2010, TAM expects disbursements of BRL108 million and BRL5 million in 2011, considering oil prices (WTI) at USD70/barril. The current cash balance also reflects the inflow of BRL657 million from the IPO of one of its subsidiaries, Multiplus S.A. Going forward, Fitch expects the company to refinance large part of its short-term debt in order to maintain its strong cash balance as the company's free cash flow will remain negative during 2010. Free cash flow in the LTM ended March 2010 was negative in BRL36 million and for 2009, it were negative in BRL75 million.

The ratings for TAM reflect the application of Fitch's current criteria, which are available at 'www.fitchratings.com' and specifically include the following reports:

--Corporate Rating Methodology (Nov. 24, 2009);

--Liquidity Considerations for Corporate Issuers (June 27, 2007).