In addition, the
The stock markets in general hashave experienced substantial price and volume fluctuationsvolatility that havehas often been unrelated or disproportionate to the operating performance of particular companies affected.companies. These types of broad market and industry factorsfluctuations may materially harmadversely affect the markettrading price of the ADSs andour Series A shares regardless of our operating performance.and ADSs. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of certain companies’their securities. See Item 8: “Financial Information—Legal Proceedings—IPO Securities Litigation” for a description of a securities securities class-action litigationclass action lawsuit (that has been instituteddismissed) against these companies. Suchus, our CEO, CFO, three current directors and our former chairman, brought on behalf of purchasers of ADSs in our initial public offering. Any similar litigation if instituted against us could have a material adverse effect on us.result in substantial costs, divert management’s attention and resources, and harm our business or results of operations.
The relatively low liquidity and high volatility of the Mexican securities market may cause trading prices and volumes of our Series A shares and the ADSs to fluctuate significantly.
The Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of aggregate market capitalization of the companies listed therein, but it remains relatively illiquid and volatile compared to other major foreign stock markets. Although the public participates in the trading of securities on the Mexican Stock Exchange, a substantial portion of trading activity on the Mexican Stock Exchange is conducted by or on behalf of large institutional investors. The trading volume for securities issued by emerging market companies, as Mexican companies, tends to be lower than the trading volume of securities issued by companies in more developed countries. These market characteristics may limit the ability of a holder of our Series A shares to sell its Series A shares and may also adversely affect the market price of the Series A shares and, as a result, the market price of the ADSs.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
If we issue additional equity securities in the future, shareholders may suffer dilution, and trading prices for our securities may decline.
In connection with our business strategy of expanding through acquisitions, we may finance corporate needs and expenditures, or future transactions, by issuing additional capital stock. Any such issuances of capital stock would result in the dilution of shareholders’ ownership stake. In addition, future issuances of our equity securities or sales by our shareholders or management, or the announcement that we or they intend to make such an issuance or sale, could result in a decrease in the market price of the ADSs and Series A shares.
Provisions of Mexican law and ourby-laws make a takeover more difficult, which may impede the ability of holders of Series A shares or ADSs to benefit from a change in control or to change our management and board of directors.
Provisions of Mexican law and ourby-laws may make it difficult and costly for a third party to pursue a tender offer or other takeover attempt resulting in a change of control. Holders of ADSs may desire to participate in one of these transactions, but may not have an opportunity to do so. For example, ourby-laws contain provisions which, among other things, require board approval prior to any person or group of persons acquiring, directly or indirectly, (i) 5% or more of our shares (whether directly or by acquiring ADSs or CPOs), or (ii) 20% or more of our shares (whether directly or by acquiring ADSs or CPOs) and in the case of this item (ii) if such approval is obtained, require the acquiring person to make a tender offer to purchase 100% of our shares and CPOs (or other securities that represent them) at a substantial premium over the market price of our shares to be determined by the board of directors, based upon the advice of a financial advisor.
These provisions could substantially impede the ability of a third party to control us, and be detrimental to shareholders desiring to benefit from any change of control premium paid on the sale of the company in connection with a tender offer. See Item 10: “Additional Information—Memorandum and Articles of Association—Overview—Change of Control Provisions” and “Additional Information—Memorandum and Articles of Association—Overview —Voting Rights.”
Substantial future sales of the ADSs or Series A shares could cause the price of the ADSs or Series A shares to decrease.
We may finance future corporate needs and expenditures by using shares of Series A common stock, to be evidenced by Series A shares or ADSs. Any such issuances of such shares could result in a dilution of our shareholders’your ownership stake or a decrease in the market price of the ADSs or the Series A shares. In addition, our principal shareholders are entitled to rights with respect to registration of their shares under the Securities Act, of 1933, as amended, or the Securities Act, pursuant to athe registration rights agreement.agreement we have on file with the SEC. Please see Item 7: “Major Shareholders and related Party Transactions—Major Shareholders.” If theyFor example, on November 16, 2015, certain of our principal shareholders, including affiliates of Discovery Americas, and Blue Sky Investments, exercised registration rights in the form of ADS’s, pursuant to our shelf registration statement on FormF-3 filed with the Securities and Exchange Commission (the “SEC”), and sold 99,000,000 CPOs in the form of ADSs at a price to the public of U.S. $16.00 per ADS in the United States and the other countries outside of Mexico. In connection with that offering, the underwriters also exercised their option in full to purchase 9,900,000 additional CPOs in the form of ADSs to cover over-allotments, for a total offering of 108,900,000 CPOs in the form of ADSs. This exercise of their registration rights, and any future exercise, with respect to such shares, thenmeans that there will be additionalare Series A shares eligible for trading in the public market, which may have an adverse effect on the market price of our Series A shares and ADSs.
Non-Mexican investors may not hold our Series A shares directly and must have them held in a CPO trust at all times.
Each ADS represents ten CPOs and each CPO represents a financial interest in one Series A share.Non-Mexican investors in the ADSs may not directly hold the underlying Series A shares, but may hold them only indirectly through CPOs issued by a Mexican bank as trustee under the CPO trust or ADSs evidencing CPOs. Upon expiration of the50-year term of our CPO trust agreement, the underlying Series A shares must be placed in a new trust similar to the current CPO trust fornon-Mexican investors to hold an economic interest in such Series A shares, or be sold to third parties or be delivered tonon-Mexican holders to the extent then permitted by applicable law (not currently permitted). We cannot assure you that a new trust similar to the CPO trust will be created if the current CPO trust terminates, or that, if necessary, the Series A shares represented by the CPOs will be sold at an adequate price, or that Mexican law will be amended to permit the transfer of Series A shares tonon-Mexican holders in the event that the trust is terminated. In that event, unless Mexican law has changed to permitnon-Mexican investors to hold our shares directly,non-Mexican holders may be required to cause all of the Series A shares represented by the CPOs to be sold to a Mexican individual or corporation.
We have obtained authorization from the Mexican Ministry of Economy (Secretaría de Economía) for the issuance up to 90% of our outstanding capital stock in CPOs. Sincenon-Mexican investors are required to invest in CPOs in order to hold any interest in our capital stock, if this 90% threshold were to be met, we would be unable to obtain additional capital contributions fromnon-Mexican investors.
Holders of the ADSs and CPOs do not have no voting rights.
Holders of the ADSs and CPOs are not entitled to vote the underlying Series A shares. As a result, holders of the ADSs and CPOs do not have any influence over the decisions made relating to our company’s business or operations, nor are they being protected from the results of any such corporate action taken by our holders of Series A shares and Series B shares. Mexican investors will determine the outcome of substantially all shareholder matters, subject to the rights of the holders of Series B shares that are required to vote affirmatively to approve certain limited matters. For a more complete description of the circumstances under which holders of our securities may vote, see Item 10: “Additional Information—Memorandum and Articles of Association—Overview.”
Preemptive rights may be unavailable tonon-Mexican holders of the ADSs and CPOs and, as a result, such holders may suffer dilution.
Except in certain circumstances, under Mexican law, if we issue new shares of common stock for cash as part of a capital increase, we generallymust grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs and CPOs in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering
qualifies for an exemption from the registration requirements of the Securities Act. Similar restrictions may apply to holders of ADSs and CPOs in other jurisdictions. We cannot assure you that we will file a registration statement with the SEC, or any other regulatory authority, to allow holders of ADSs and CPOs in the United States, or any other jurisdiction, to participate in a preemptive rights offering. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether we will file such a registration statement. Under Mexican law, sales by the depositary of preemptive rights and distribution of the proceeds from such sales to you, the ADS holders, is not possible.
In addition, additional CPOs may be issued only if the CPO deed permits the issuance of a number of CPOs sufficient to represent the shares to be issued to and held by the CPO trustee upon the exercise of preemptive rights. Becausenon-Mexican holders of ADSs and CPOs are not entitled to acquire direct ownership of the underlying Series A shares in respect of such ADSs and CPOs, they may not be able to exercise their preemptive rights if the CPO deed will not permit additional CPOs to be delivered in an amount sufficient to represent the shares of common stock to be issued as a result of the exercise of preemptive rights on behalf of non-Mexicannon-
Mexican ADS or CPO holders, unless the CPO deed is modified, or a new CPO deed is entered into, which permits delivery of the number of CPOs necessary to represent the shares to be subscribed and paid as a result of the exercise of such preemptive rights. Although we expect to take all measures necessary to maintain sufficient CPOs available to permitnon-Mexican holders of ADSs and CPOs to exercise preemptive rights, if and when applicable, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuance and delivery of CPOs. As a result of the limitations described above, if we issue additional shares in the future in connection with circumstances giving rise to preemptive rights, the equity interests of holders of ADSs and CPOs may be diluted. See Item 10: “Additional Information—Memorandum and Articles of Association—Preemptive Rights.”
We do not intend to pay cash dividends for the foreseeable future, and our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends.
We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, will require the approval of our general shareholders meeting, may only be paid if losses for prior fiscal years have been unpaid and if shareholders have approved the net income from which the dividends are paid, and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant. In addition, our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends in the event that we fail to comply with the payment terms thereunder. See Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements” and Item 8: “Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”
Minority shareholders may be less able to enforce their rights against us, our directors, or our controlling shareholders in Mexico.
Under Mexican law, the protections afforded to minority shareholders are different from those afforded to minority shareholders in the United States. For example, because Mexican laws concerning fiduciary duties of directors (i.e., the duty of care and the duty of loyalty) have been in existence for a relatively short period and are not as developed as securities laws in other jurisdictions, it is complex for minority shareholders to bring an action against directors for breach of this duty,these duties, as would be permitted in some other foreign jurisdictions. Also, such actions may not be initiated as a direct action, but as a shareholder derivative suit (that is for the benefit of our company)company and not the initiating shareholder). The grounds for shareholder derivative actions under Mexican law are limited. Even though applicable law has been modified to so permit, and procedures for class action lawsuits have been adopted in Mexico, there is very limited experience with regards to class action lawsuits and how procedures for such suits are followed in Mexico. Therefore, it will be much more difficult for minority shareholders to enforce their rights against us, our directors, or our controlling shareholders than it would be for minority shareholders of a U.S. company.
Mexico has different corporate disclosure and accounting standards than those in the United States and other countries.
A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with highly developed capital markets, including the United States.
We will be required to assess our internal control over financial reporting on an annual basis and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, and significant expenses to remediate any internal control deficiencies and could ultimately have an adverse effect on the market price of the ADSs and Series A shares.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and beginning with our Annual Report on Form 20-F for the year ending December 31, 2014, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, although our independent registered public accounting firm are not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 because we currently meet the emerging growth company definition under the JOBS Act, we have determined that we will not avail ourselves of the exemption to Section 404 for emerging growth companies under Section 404(b) and that, consequently, we intend to cause our independent registered public accounting firm to provide such attestation starting in 2014. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Series A shares and ADSs, fines, sanctions and other regulatory action and potentially civil litigation.
| ITEM | INFORMATION ON THE COMPANY |
| A. | History and Development of the Company |
We were founded on October 27, 2005 under the name Controladora Vuela Compañía de Aviación, S.A. de C.V. by Blue Sky Investments, S.à r.l., Discovery Air Investments, L.P., Corporativo Vasco de Quiroga, S.A. de C.V. and Sinca Inbursa, S.A. de C.V., Sociedad de Inversión de Capitales.
In July 2010, we underwent a change in our ownership with the incorporation of Mexican investors, certain investment funds managed by Discovery Americas (including Discovery Air), Blue Sky Investments and Indigo as new equity shareholders with expertise in the aviation industry.
On July 16, 2010, we became asociedad anónima promotora de inversión de capital variable, or variable capital investment promotion stock corporation. In June 2013, we became asociedad anónima bursátil de capital variable, or variable capital public stock corporation, under the name Controladora Vuela Compañía de Aviación, S.A.B. de C.V. See Item 9: “The Offer and Listing—Markets—The Mexican Stock Market—Mexican Securities Market Law” for a description of the differences between these two forms of legal entities.
On September 23, 2013, we and certain of our shareholders completed a dual-listing initial public offering on NYSE and the Mexican Stock Exchange. The Company raised Ps.2,684,280Ps.2.68 billion (approximately US$207.7U.S. $207.7 million) of gross proceeds from the global offering of 173,076,910 Series A shares, consisting of (i) an offering of Series A shares in Mexico and (ii) a concurrent international offering of CPOs in the form of ADSs in the United States and other countries outside of Mexico, at a public offering price of Ps.15.51 per share (US$1.20(U.S. $1.20 dollars) or US$12.00U.S. $12.00 per ADS. Each ADS represents ten CPOs and each CPO represents a financial interest in one of our Series A shares. The Series A shares were listed on the Mexican Stock Exchange under the trading symbol “VOLAR” and the ADSs were listed on NYSE under the trading symbol “VLRS.” The Series A shares and ADSs began trading on September 18, 2013.
On November 16, 2015, certain of our principal shareholders, including affiliates of Discovery Americas, and Blue Sky Investments, exercised registration rights in the form of ADS’s and sold 99,000,000 CPOs in the form of ADSs, at a price to the public of U.S. $16.00 per ADS in the United States and the other countries outside of Mexico, pursuant to our shelf registration statement on FormF-3 filed with the SEC. In connection with that offering, the underwriters also exercised their option in full to purchase 9,900,000 additional CPOs in the form of ADSs to cover over-allotments, for a total offering of 108,900,000 CPOs in the form of ADSs.
Overview
We are anultra-low-cost carrier, or ULCC, incorporated under the laws of the United Mexican States.Mexico. Our primary corporate offices and headquarters are located in Mexico City at Av. Antonio Dovalí Jaime No.70,No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México D.F.City, México, zip code 01210. Our telephone number is +52-55-5261-6400.+52-55-5261-6400.
Since we began operations in 2006, we have increased our routes from five to more than 100164 and grown our cost-efficient Airbus A320 family aircraft from four to 44.69 as of December 31, 2016. We currently operate up to 215302 daily flight segments on routes that connect 3340 cities in Mexico and 13as well as 28 cities in the United States.States and Central America. We have substantial market presence in the top five airports in Mexico, based on number of passengers, comprising Cancún, Guadalajara, Mexico City, Monterrey and Tijuana. The tenmain cities we currently serve are home to some of the most populous Mexican communities in the United States based on data from the Pew Hispanic Research Center. Additionally, our operating subsidiary in Costa Rica, Vuela Aviación, S.A., began operations on December 1, 2016. We seek to replicate ourultra-low cost model in Central America by offering low base fares andpoint-to-point service in the region.
We are the lowest cost carrier based on CASM among the other Latin American publicly traded airlines. In 2013,2016, our CASM was Ps.1.164Ps.124.4 cents (U.S.$0.089) $6.0 cents), compared to an average CASM of U.S.$0.143 $10.5 cents for the other Latin American publicly traded airlines. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta, JetBlue, Southwest Airlines and United, which had an average CASM of U.S.$0.144 $12.4 cents in 2013.2016. With our ULCC business model, we have grown significantly while maintaining a low CASM over the last five years. We have achieved this through our efficient and uniform fleet, high asset utilization, our emphasis on direct sales and distribution and our variable, performance-based compensation structure. We have a relentless focus on low costs as part of our organizational culture, and we believe that we can further lower our CASM by deploying additional sharklet technology equipped Airbus A320 aircraft and leveraging our existing infrastructure to drive economies of scale. We believe that further reductions to our CASM will allow us to continue to lower base fares, stimulate market demand and increasenon-ticket revenue opportunities.
Our ULCC business model and low CASM allow us to compete principally through offering low base fares to stimulate demand. We use our yield management system to set our fares in an effort to achieve appropriate yields and load factors on each route we operate. We use promotional fares to stimulate demand and our base fares are priced to compete with long-distance bus fares in Mexico. During 2013,2016, our average base fare was Ps.1,243Ps.1,189 (U.S.$95.1) $58) and we regularly offer promotional base fares of Ps.700down to Ps.699 (U.S.$54) or less. $34). Since May 2012, we have unbundled certain components of our air travel service as part of a strategy to enable our passengers to select and pay for the products and services they want to use. This unbundling strategy has allowed us to significantly grow ournon-ticket and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. In 2013,2016, our average load factor was 82.6%85.8%, compared to an average load factor of 77.0%81.7% for the other Latin American publicly traded airlines and 83.9%83.3% for our U.S.-based publicly traded target market competitors. Higher load factors help us generate additionalnon-ticket and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.
In addition to low fares, we also aim to deliver a high quality flying experience to our passengers. We strive to deliveron-time performance to our customers, with an 88.2% 75.4%on-time performance rate in 2013.2016. We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. We believe that our corporate culture of positive “customer relationship management” has also been a key element of our success.
Principal Capital Expenditures
For the years ended December 31, 2011, 20122014, 2015 and 2013,2016, we incurred capital expenditures of Ps.321.3 million, Ps.687.3 millionPs.1.6 billion, Ps.1.5 billion and Ps.1,029.0 million,Ps.2.3 billion, which include acquisitions of two spare engines, rotable spare parts, furniture and equipment and acquisitions of intangible assets. For a discussion of our capital expenditures and future projections, see Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
Mexican Regulation
Operational Regulation
Air transportation services for passengers provided on a regular basis, as opposed to charter flights and permits, are considered a public service in Mexico. To render regular air transportations services, a concession granted by the Mexican federal government is required. The legal framework of the air transportation industry in Mexico is primarily established by the Mexican Aviation Law (Ley de Aviación Civil) and its regulations, the Mexican Airport Law (Ley de Aeropuertos) and its regulations, the General Communications Ways Law (Ley de Vias Generales de Comunicación), and applicable Mexican Official Rules (Normas Oficiales Mexicanas). The main regulatory authority overseeing air transportation is the SCT, acting mainly through the DGAC.
Pursuant to the Mexican Aviation Law, the SCT, through the DGAC, is responsible and has the authority, among others, to (i) impose and conduct the policies and programs for the regulation and development of air transportation services; (ii) grant concessions and permits, oversee compliance with, and, if applicable, resolve amendments to or termination of such concessions or permits; (iii) issue the Mexican Official Rules and other administrative provisions; (iv) provide and control the air navigation services; (v) issue and enforce the safety and health rules that must be observed in air transportation services; (vi) issue certificates of registration, certificates of airworthiness, and certificates to air services providers and declare the suspension, cancellation, revalidation or revocation of such certificates; (vii) maintain and operate the Mexican Aeronautical Registry (Registro Aéronautico Mexicano), where aircraft and leases over aircrafts are regulated; (viii) participate in the international agencies and in the negotiation of treaties; (ix) promote the development and training of the aeronautical technical staff; (x) issue and, if applicable, revalidate or cancel the licenses of the aeronautical technical staff; (xi) interpret the Mexican Aviation Law and its regulations for administrative purposes; (xii) authorize the verification visits; (xiii) appoint or, if applicable, remove the regional commanding officer and the commanding officers for airports, heliports and civil airdromes in general, and (xiv) approve flight plans.
The DGAC primarily oversees and verifies compliance by the concessionaires, licensees, operators and airline services providers with the Mexican Aviation Law, its regulations, the Mexican Official Rules and any other applicable provisions.
A concession granted by the SCT is required to render domestic and regular air transportation services in Mexico. Any such concession may only be granted to Mexican entities which meet certain technical, financial, legal and administrative requirements that are deemed necessary to adequately provide services with quality, safety, and timeliness. Other requirements to be met to obtain a concession are (i) the availability of aircraft and aircraft equipment, which is required to comply with technical requirements of safety, airworthiness conditions and environmental conditions; (ii) the availability of hangars, repair shops and infrastructure needed for operations, as well as the availability of technical and administrative staff trained for the operation of the concession; and (iii) experience in the industry. To provide any other air transportation service in Mexico, different from domestic and regular air transportation, a permit from the SCT is required pursuant to the Mexican Aviation Law.
Concession and Permits
Through our subsidiary Volaris Opco, we hold (i) the Concession, which authorizes us to provide domestic regular passenger, cargo and mail air transportation services within Mexico, (ii) a permit for domestic charter air transportation passenger services, and (iii) a permit for international regular passenger and charter passenger air transportation services.
Our Concession was granted by the Mexican federal government through SCT, on May 9, 2005 originally for a period of five years, and was extended by SCT on February 17, 2010 for an additional period of ten years. The Concession authorizes us the use of certain aircraft and certain routes. Pursuant to the terms of the Mexican Aviation Law, our Concession, together with specific authorizations granted to us by the DGAC, allow us to provide domestic and international regular air transportation services. Pursuant to our Concession, we have to pay to the Mexican federal government certain fees arising from the services we render. The exhibits to the Concession must be updated every time a new aircraft is operated by Volaris Opco, any time new routes are added, or existing routes are modified. For more information regarding our aircraft and routes, see Item 4: Information“Information on the Company—Business Overview.”
The permit for domestic charter air transportation of passengers was granted by the SCT on April 16, 2007, without a termination date; it authorizes certain aircraft to operate under such permit and specifies, among other terms and conditions, that Volaris Opco is required to request authorization from the DGAC before carrying out any charter flight.
The permit for international charter air transportation of passengers was granted by the DGAC on June 3, 2009 for an unspecified period of time; it authorizes certain aircraft to operate under such permit and indicates, among other terms and conditions, that Volaris Opco is required to request authorization from the DGAC, before carrying out any charter flight.
To operate our aircraft, each aircraft is required to have on board its certificate of registration, its certificate of airworthiness, and its insurance policy. All aircraft must have on board all documents and equipment required by the treaties, the Mexican Aviation Law and all applicable provisions. We believe we hold all necessary operating and airworthiness authorizations, certificates and licenses, and carry all necessary insurance policies and are operating in compliance with applicable law.
The Mexican Aviation Law provides that concessions and permits may be revoked for any of the following principal reasons: (i) failure to exercise rights conferred by the concessions or permits for a period exceeding 180 calendar days from the date that such concessions or permits were granted; (ii) failure to maintain in effect the insurance required pursuant to the Mexican Aviation Law; (iii) change of nationality of the holder of the
concession or permit; (iv) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any foreign government or foreign state; (v) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any person without the approval of the SCT; (vi) applying fares different from the registered or approved fares, as applicable; (vii) interruption of the services without authorization from the SCT, except in the events of acts of God or force majeure; (viii) rendering services different to those set forth in the respective permit or concession; (ix) failure to comply with safety conditions; (x) failure to indemnify from damages arising from the services rendered and (xi) in general, failure to comply with any obligation or condition set forth in the Mexican Aviation Law, its regulations or the respective concession or permit. In the event our Concession was revoked, for any of the reasons specified above, we will not be entitled to any compensation and we will be unable to continue to conduct our business.
Aircraft
Pursuant to the Mexican Aviation Law and our Concession, all the aircraft used to provide our services must be registered in Mexico before the Mexican Aeronautical Registry and flagged as Mexican aircraft and, if registered in other countries, such aircraft need to be authorized to operate in Mexico. The registration with the Mexican Aeronautical Registry is granted subject to compliance with certain legal and technical requirements. All the aircraft which comprise our fleet as of this date have been authorized by and registered with the DGAC.
We have to maintain our aircraft in airworthiness condition. The maintenance must be provided as specified in the manufacturers’ maintenance manuals and pursuant to a maintenance program approved by the DGAC. The DGAC has authority to inspect our aircraft, their maintenance records and our safety procedures. Based on such inspections, the DGAC may declare our aircraft unfit to fly and in certain cases revoke our Concession.
Routes
Pursuant to the Mexican Aviation Law and our Concession, we may only provide our services on routes approved under our Concession. Any new route or change in the existing routes must be approved by the DGAC. Domestic Routes are subject to our Concession and the Mexican Aviation Law. As we only fly in internationalInternational routes to the United States such routes are subject to our Concession, the international routes authorization permits issued by the DGAC, the Mexican Aviation Law and the USA Mexico Bilateral Air Transport Agreement dated August 16, 1960, as amended on December 12, 2005.18, 2015, pursuant to which we were granted a general exemption from the DOT to allow us to operate any route into the United States. The USA Mexico Bilateral Air Transport Agreement provides a legal framework for the international routes of Mexican and U.S. carriers between the United States and Mexico and vice versa. Under the USA Mexico Bilateral Air Transport Agreement each of the governments has the rightany American or Mexican carrier may request authorization to appoint two (or three) airlines of eachfly from any city pair, as the airlines authorizedin Mexico to render air transportation services in each route from the United States to Mexico and vice versa.
Fares
According to the Mexican Aviation Law, concessionaries or licensees of air transportation may freely set fares for the services provided by them on terms that permit the rendering of services in satisfactory conditions of quality, competitiveness, safety and consistency. The international fares must be approved by the SCT pursuant to applicable treaties.treaties except that fares for routes to and from the United States do not require approval or registration from either the SCT or any other authority. The fares (both domestic and international) must be registered with the SCT and be permanently available to users of the services. The SCT may deny the registration of fares set by the concessionaires or licensees if such fares imply predatory or monopolistic practices, dominance in the market from a competition perspective or disloyal competition which prevents the participation in the market of other concessionaires or licensees. The SCT may also set minimum and maximum levels of fares (restricting, in that case, the ability of concessionaires and holders of licenses to freely determine rates), as applicable, for the corresponding services, to promote competition. The fares will describe clearly and explicitly the restrictions such fares are subject to and will remain valid for the time and under the conditions offered.
The Mexican Aviation Law provides that in the event that the SCT considers that there is no competition among concession and permit holders, the SCT may request the opinion of the Mexican Antitrust Commission
and then approve regulations governing fares that may be charged for air transportation services, thus limiting the ability of participants to freely determine rates. Such regulations will be maintained only during the existence of the conditions that resulted in the negative competition effects.
Slots
Under Mexican Law, a “slot” is the schedule for the landing and taking off of aircraft. The regulation of the slots is provided by the Mexican Airport Law and its regulations. A slot is assigned to an operator by the airport administrator considering the recommendation of a committee of operations, for the organization and planning of the flights at the relevant airport. According to the regulations to the Mexican Airport Law, the operating rules of each airport in Mexico, must contain the guidelines for the assignment of slots. Therefore, the different airports’ administrations will establish in such guidelines how slots are to be assigned considering (i) the operation schedule of the airport, (ii) safety and efficiency criteria, (iii) capacity of the services providers, (iv) schedule availability, and (v) compliance with the requirements for the assignment of the slots.
Taking or Seizure
Pursuant to Mexican law and our Concession, the Mexican federal government may take or seize our assets temporarily or permanently, in the event of natural disasters, war, serious changes to public order or in the event of imminent danger to the national security, internal peace or the national economy. The Mexican federal government, in all cases, except in the event of international war, must indemnify us by paying the respective losses and damages at market value. See Item 3: “Key Information—Risk Factors—Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances.”
Foreign Ownership
The Mexican Foreign Investment Law (Ley de Inversión Extranjera) limits foreign investment in companies rendering domestic air transportation services up to 25% of such companies’ voting stock. This limit applies to Volaris Opco, but not to us as a holding company. We, as a holding company, must remain a Mexican-investor controlled entity, as a means to control Volaris Opco. The acquisition of our Series A shares through the CPOs, thatstrip-out voting rights but grant any and all economic rights, by foreign investors, is deemed neutral, from a foreign investment perspective, and is not, as a result, counted as foreign investment excluded from this restriction. For a discussion of the procedures we instituted to ensure compliance with these foreign ownership rules, see Item 10: “Additional Information—Memorandum and Articles of Association—Other Provisions—Foreign Investment Regulations.”
Environmental Regulation
We are subject to regulations relating to the protection of the environment such as the General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente), the regulations of the General Law of Ecological Balance and Environmental Protection regarding Environmental Impact, Prevention and Control of Air Pollution and of Hazardous Waste (Reglamentos en Materia de Evaluación del Impacto Ambiental, Prevención y Control de Contaminación del Aire y Desperdicios Peligrosos), the General Law for Prevention and Handling of Wastes (Ley General de Prevención y Gestión Integral de Riesgos) and the National Waters Law(Ley Nacional de AguasAguas)) and its regulations, official Mexican standards, international treaties, bilateral agreements and specifically by an Official Rule NOM 036 SCT3 2000 which regulates the maximum limits of the aircraft noise emissions as well as the requirements to comply with such limits. Volaris Opco is ISO 14,000 certified.
Labor Regulation
We are subject to the provisions of the Mexican Labor Law (Ley Federal del Trabajo) and the provisions contained in the collective bargaining agreements withSindicato de Trabajadores de la Industria Aeronáutica,
Similares y Conexos de la República Mexicana-STIAS. For more information on our relationship with such labor union and our labor collective bargaining agreements, see Item 6: “Directors, Senior Management and Employees—Employees.”
U.S. and International Regulation
Operational Regulation
The airline industry is heavily regulated by the U.S. government. Two of the primary regulatory authorities overseeing air transportation in the United States are the DOT and the FAA. The DOT has jurisdiction over economic issues affecting air transportation, such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. The DOT has authority to issue permits required for airlines to provide air transportation. We hold a general exemption issued by the DOT permits authorizingthat authorizes us to engage in scheduled air transportation of passengers, property and mail to and from certain destinationsany destination in the United States. Each permit is valid for one year and renewable for one-year terms.
The FAA is responsible for regulating and overseeing matters relating to air carrier flight operations, including airline operating certificates, aircraft certification and maintenance and other matters affecting air safety. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate and to comply with Federal Aviation Regulations 129 and 145. This certificate, in combination with operations specifications issued to the airline by the FAA, authorizes the airline to operate at specific airports using aircraft approved by the FAA. As of the date of this annual report, we had FAA airworthiness certificates for 2327 of our aircraft (the remainder being registered with the DGAC), we had obtained the necessary FAA authority to fly to all of the cities we currently serve and all of aircraft had been certified for over-water operations. Pilots operating and mechanics providing maintenance services on “N” or U.S.-registered aircraft require a special license issued by the FAA. We hold all necessary operating and airworthiness authorizations, certificates and licenses and are operating in compliance with applicable DOT and FAA regulations, interpretations and policies.
International Regulation
Our service to the U.S. is also subject to U.S. Customs and Border Protection, or CBP (a law enforcement agency that is part of the U.S. Department of Homeland Security), immigration and agriculture requirements and the requirements of equivalent foreign governmental agencies. Like other airlines flying international routes, from time to time we may be subject to civil fines and penalties imposed by CBP ifun-manifested or illegal cargo, such as illegal narcotics, is found on our aircraft. These fines and penalties, which in the case of narcotics are based upon the retail value of the seizure, may be substantial. We have implemented a comprehensive security program at our airports to reduce the risk of illegal cargo being placed on our aircraft, and we seek to cooperate actively with CBP and other U.S. and foreign law enforcement agencies in investigating incidents or attempts to introduce illegal cargo.
Security Regulation
The TSA was created in 2001 with the responsibility and authority to oversee the implementation, and ensure the adequacy, of security measures at airports and other transportation facilities in the United States. Since the creation of the TSA, airport security has seen significant changes including enhancement of flight deck security, the deployment of federal air marshals onboard flights, increased airport perimeter access security, increased airline crew security training, enhanced security screening of passengers, baggage, cargo and employees, training of security screening personnel, increased passenger data to CBP, background checks and background checks.restrictions oncarry-on baggage. Funding for passenger security is provided in part by a per enplanement ticket tax (passenger security fee) of U.S.$2.50 $2.50 per passenger flight segment, subject to a U.S.$5 $5 perone-way trip cap. The TSA was granted authority to impose additional fees on air carriers if necessary to cover additional federal aviation security costs. Pursuant to its authority, the TSA may revise the way it assesses this fee, which could result in increased costs for
passengers and/or us. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements. The TSA also assess an Aviation Security Infrastructure Fee, or ASIF, on each airline.
Environmental Regulation
We are subject to various federal, state and local U.S. laws and regulations relating to the protection of the environment and affecting matters such as aircraft engine emissions, aircraft noise emissions, and the discharge or disposal of materials and chemicals, which laws and regulations are administered by numerous state and federal agencies. The Environmental Protection Agency, or EPA, regulates our operations in the United States, including air carrier operations, which affect the quality of air in the United States. We believe the aircraft in our fleet meet all emission standards issued by the EPA. Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.
U.S. law recognizes the right of airport operators with special noise problems to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport. None of the airports we serve currently restricts the number of flights or hours of operation, although it is possible one or more of such airports may do so in the future with or without advance notice.
Other Regulations
In the U.S., Wewe are subject to certain provisions of the Communications Act of 1934, as amended, and are required to obtain an aeronautical radio license from the Federal Communications Commission, or FCC. To the extent we are subject to FCC requirements, we will take all necessary steps to comply with those requirements. We are also subject to state and local laws and regulations at locations where we operate and the regulations of various local authorities that operate the airports we serve.
Future Regulations
The Mexican, U.S. and other foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
| B. | Business Overview |
Industry
There are two main categories of passenger airlines that operate in the domestic and international Mexican market: (i) the traditional legacy network carriers, which include Grupo Aeroméxico, and (ii) thelow-cost carriers, which include Interjet, VivaAerobus and Volaris. The ULCC business model is a subset of thelow-cost carrier market.
Legacy carriers offer scheduled flights to major domestic and international routes (directly or through membership in an alliance, such as Star Alliance, Oneworld and/or Skyteam) and serve numerous smaller cities. These carriers operate mainly through a “hub-and-spoke”“hub-and-spoke” network route system. This system concentrates most of an airline’s operations in a limited number of hub cities, serving other destinations in the system by providingone-stop or connecting service through hub airports to end destinations on the spokes. Such an arrangement
permits travelers to fly from a given point of origin to more destinations without switching to another airline. Traditional legacy carriers typically have higher cost structures thanlow-cost carriers due to higher labor costs, flight crew and aircraft scheduling inefficiencies, concentration of operations in higher cost airports, and multiple classes of services. Other examples of legacy carriers in the Latin American market include Avianca-TACA,Avianca, Copa, and LATAM.
Low-cost carriers typically fly direct,point-to-point flights, which tends to improve aircraft and crew scheduling efficiency. In addition,low-cost carriers often serve major markets through secondary, lower cost airports in the same regions as major population centers. Manylow-cost carriers only provide a single class of service, thereby increasing the number of seats on each flight and avoiding the significant and incremental cost of offering premium-class services. Finally,low-cost carriers tend to operate fleets with only one or two aircraft families at most, in order to maximize the utilization of flight crews across the fleet, improve aircraft scheduling flexibility and minimize inventory and aircraft maintenance costs. The Mexican market, which has a large population of VFR and leisure travelers, has seen demand for theselow-cost carriers expand in recent years.Low-cost carriers have made a significant emergence in the Latin American market in recent years, particularly in Brazil, where Gol, Webjet (merged with Gol in 2012), Azul, and Trip (merged with Azul in 2012) have started operations in the last ten years.
In recent years, many traditional legacy network carriers globally have undergone significant financial restructuring, including ceasing operations or merging and consolidating with one another. These restructurings have allowed legacy carriers to reduce high labor costs, restructure debt, modify or terminate pension plans and generally reduce their cost structure. This has resulted in improved workforce flexibility and reduced costs while simultaneously improving product offerings similar to those of otherlow-cost carriers. Furthermore, many of the legacy carriers have made these improvements while still maintaining their expansive route networks, alliances and frequent flier programs.
One result of the restructuring of the network carriers is that the difference in the cost structures, and the competitive advantage previously enjoyed bylow-cost airlines, has somewhat diminished. We believe that this trend has provided an opportunity for the introduction of the ULCC business model in Mexico as a subset of the more mature group oflow-cost carriers. The ULCC business model involves, among other things, intense
focus on low cost, efficient asset utilization, unbundled revenue sources aside from the basic fare with multiple products and services offered for additional fees. Globally, ULCCs with highly successful business models include Allegiant and Spirit in the United States, Ryanair and Wizz in Europe, and AirAsia in Asia.
ULCCs are able to achievelow-cost operations due to highly efficient and uniform fleets with high density seating and single aisle configurations. Additionally, ULCCs provide extremely low fares to customers in order to stimulate market demand and generate high aircraft utilization rates. With high aircraft utilization rates, ULCCs are able to generate substantial ancillary revenues through the offering of additional products and services, such as baggage fees, advanced seat selection, extra legroom, ticket change fees, and/or itinerary attachments such as hotels, airport transportation, and rental cars. ULCCs focus on VFR and leisure customers as opposed to business travelers. The ULCC product appeals to the cost-conscious customer because they are offered a low base-fare and are able to choose to pay for only the additional products and services they want to receive.
Economic and Demographic Trends
We believe the Mexican airline industry has strong potential for growth, given the country’s young demographics, improving macroeconomic base and growing middle class, which will likely facilitate organic expansion of the airline sector. In addition, the national airline industry is relatively underpenetrated when compared to other countries of similar size and demographic characteristics. These elements combine at a time when the industry is under considerable attrition due in part from some of the legacy operators ceasing operations.
In terms of the macroeconomic environment, GDP growth in Mexico is expected to be 3.1%1.5% in 20142017 and 3.9%2.1% in 20152018 according to the Mexican Central Bank (Banco de México).Bank. These estimates are higherlower than the
estimates for the United States by 2.8%81 and 41 basis points in 20142017 and 3.0% in 20152018 according to the International Monetary Fund.Fund, respectively. This projected GDP growth is expected to result in the continuing growth trend of middle-income homes, having already grown from 12.0 million in 2000 to 15.2 million in 2010, according to information derived from the Mexican Association of Market Research and Public Opinion Agencies (Asociación Mexicana de Agencias de Investigación de Mercado y Opinión Pública, A.C.) and the National Statistics and Geography Institute (Instituto Nacional de Estadística y Geografía). As of 2010,2015, according to the INEGI intercensal survey, approximately 39%36% of the Mexican
population was under 20 years of age, which we believe benefits Volaris by providing a strong base of young, potential passengers in the future. This contrasts favorably with more mature aviation markets like the United States, where approximately 27% of the population is currently under 20 years of age. Additionally, the Mexican aviation market is currently underpenetrated, as evidenced by the number of trips per capita. On a global basis the World Bank estimates that there are, on average 0.380.47 annual trips per capita, whereas in Mexico the number is roughly one-thirda portion of that.
The Mexicanlow-cost airline industry competes with ground transportation alternatives, primarilylong-distance bus companies. Given the limited passenger rail services in Mexico, travel by bus has traditionally been the onlylow-cost option for long-distance travel for a significant portion of the Mexican population. In 2013,2016, bus companies transported over 2.83.0 billion passengers in Mexico, of which approximately 7580 million were executive and luxury passenger segments, as measured in segments which include both long- (five hours or greater) and short-distance travel, according to the Mexican General Direction of Ground Transportation Authority. We believe that just a small shift of bus passengers to air travel would significantly increase the number of airline passengers. We believe that an increased shift in demand from bus to air travel in Mexico presents a significant opportunity as the macroeconomic environment improves and rising demographics take shape across the country. Furthermore, we believe that long-distance bus passengers will continue to shift to airplane travel when certain promotional fares are priced lower than bus fares for similar routes.
In recent years the Mexican government has made a substantial investment in developing Mexico’s airport infrastructure. In 1998, the Mexican government created a program to open Mexico’s airports to private investments. Three private airport operators (Grupo Aeroportuario del Pacífico, S.A.B. de C.V., Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. and Aeropuertos del Sureste de Mexico, S.A.B. de C.V.) were incorporated and granted50-year concessions to operate airports in Mexico. In the first stage of the privatization process, the Mexican government sold a minority stake to strategic partners. The privatization process culminated inmid-2006, when the Mexican government sold the balance of its holdings to the public via initial public offerings. The Mexican government still manages and operates the Mexico City International Airport (AICM), which it considers strategic, as well as other minor airports in the country. The National Development Plan, published in the Official Gazette of the Federation on May 20, 2013, describes the plans for the airline sector for the years 2013 to 2018. The plan provides for (i) investments in air transportation and airports; (ii) supervision of airlines to ensure safety, efficiency, and quality standards; (iii) the execution of new bilateral air transportation agreements in order to increase the penetration of the Mexican domestic airline industry in international markets; and (iv) the development of airport services for the metropolitan area of Mexico City, as well as regional airports. In addition, on July 15, 2013 the 2013-2018 Investment in Transportation and Communications Infrastructure Program was announced, which is a program with a multi-modal focus, that is intended to improve highways, railroads, ports, airports, and telecommunications through an investment of Ps. 4.0Ps.4.0 billion. We believe this strong foundational infrastructure, and continued investment and development will result in significant growth potential for the Mexican airline market. In September 2014, the Mexican government announced the construction of a new international airport for Mexico City to replace the current international airport, which is now operating at full capacity at most times of the day. This new international airport is expected to start operations in 2020.
Boeing estimates that the Latin American airline industry will have a higher growth rate than that of the global industry over the next 20 years, with an average passenger to economic growth ratio (RPK/GDP) of 1.62.0 times. As a result, a GDP growth of 4.1%2.9% in the next 20 years could imply an industry growth rate of around 38%33% by 20182021 and over 90%75% by 2023.2026.
The Mexican aviation industry has undergone a significant transformation due to the emergence oflow-cost carriers, including us, Interjet and VivaAerobús, the exit of eight carriers (Aerocalifornia, Aladia, Alma, Aviacsa,
Avolar, Azteca, Nova Air and Grupo Mexicana). Changes in the Mexican airline competitive environment have resulted in an important increase in the domestic market load factor for the remaining carriers. While load factor in Mexico has historically lagged more than in developed markets, this positive trend will likely drive greater profitability among the remaining airlines in Mexico. This dramatic capacity reduction and itslow-fare strategy allowed Volaris to increase load factor to 82.6%85.8% in 2013.2016.
Market Environment
The airline industry is highly competitive. The principal competitive factors in the airline industry include fare pricing, total ticket price, flight schedules, aircraft type, passenger amenities, number of routes/destinations served from a city, customer service, safety record and reputation, code-sharing relationships, frequent flier programs and redemption opportunities. The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. The expenses of a scheduled aircraft flight do not vary significantly with the number of passengers carried, and, as a result, a relatively small change in the number of passengers or in pricing can have a disproportionate effect on an airline’s operating and financial results. Price competition occurs on amarket-by-market basis through price discounts, changes in pricing structures, fare matching, targeted promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize revenue per ASM. The prevalence of discount fares can be particularly acute when an airline has excess capacity and is under financial pressure to sell tickets.
In Mexico and the United States the scheduled passenger service market consists of three principal groups of travelers: business travelers, leisure travelers, and travelers visiting friends and relatives, or VFR. Leisure travelers and VFR travelers typically place most of their emphasis on lower fares, whereas business travelers typically place a high emphasis on flight frequency, scheduling flexibility, breadth of network and service enhancements, including loyalty programs and airport lounges, as well as price.
VFR and leisure passengers travel for a number of reasons, including social visits and vacation travel. We believe that VFR and leisure traffic are the most important components of the traffic in the markets we target and serve and are important contributors to ournon-ticket revenue production. We believe that VFR and leisure passengers represent a significant percentage of our total passenger volume. As part of our route development strategy, we target markets that will likely appeal to VFR and leisure travels at price points that were previously not available. This strategy allows us to stimulate demand in new markets by encouraging travel by VFR and leisure travelers.
Domestic passenger volumes have grown in Mexico by a CAGR of 4.7%6.5% and international volumes have grown by a CAGR of 2.4%4.0% from 2006 to 20132016 according to the DGAC. The following table sets forth the historical passenger volumes on international and domestic routes in Mexico from 2006 to 2013:2016:
Passenger Volumes (millions of segment passengers) | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||||||||||||||||
International | 27.4 | 27.2 | 27.9 | 24.2 | 25.8 | 26.8 | 28.5 | 30.9 | ||||||||||||||||||||||||
% growth | 6.1 | % | (0.5 | %) | 2.5 | % | (13.2 | %) | 6.3 | % | 4.1 | % | 6.5 | % | 8.1 | % | ||||||||||||||||
Domestic | 22.2 | 27.4 | 27.6 | 24.4 | 24.5 | 25.5 | 28.1 | 30.5 | ||||||||||||||||||||||||
% growth | 11.8 | % | 23.6 | % | 0.9 | % | (11.6 | %) | 0.3 | % | 3.9 | % | 10.3 | % | 8.6 | % | ||||||||||||||||
Total | 49.5 | 54.6 | 55.6 | 48.7 | 50.3 | 52.3 | 56.6 | 61.4 | ||||||||||||||||||||||||
% growth | 8.6 | % | 10.3 | % | 1.7 | % | (12.4 | %) | 3.3 | % | 4.0 | % | 8.4 | % | 8.5 | % | ||||||||||||||||
Passenger Volumes (millions of segment passengers) | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||||||||||||||||
International | 27.4 | 27.2 | 27.9 | 24.2 | 25.8 | 26.8 | 28.5 | 30.9 | 33.6 | 37.5 | 40.5 | |||||||||||||||||||||||||||||||||
% growth (decreased) | 6.1 | % | (0.5 | %) | 2.5 | % | (13.2 | %) | 6.3 | % | 4.1 | % | 6.5 | % | 8.1 | % | 9.2 | % | 11.7 | % | 8.0 | % | ||||||||||||||||||||||
Domestic | 22.2 | 27.4 | 27.6 | 24.4 | 24.5 | 25.5 | 28.1 | 30.5 | 32.9 | 37.1 | 41.8 | |||||||||||||||||||||||||||||||||
% growth (decreased) | 11.8 | % | 23.6 | % | 0.9 | % | (11.6 | %) | 0.3 | % | 3.9 | % | 10.3 | % | 8.6 | % | 8.0 | % | 12.9 | % | 12.5 | % | ||||||||||||||||||||||
Total | 49.5 | 54.6 | 55.6 | 48.7 | 50.3 | 52.3 | 56.6 | 61.4 | 66.5 | 74.6 | 82.3 | |||||||||||||||||||||||||||||||||
% growth (decreased) | 8.6 | % | 10.3 | % | 1.7 | % | (12.4 | %) | 3.3 | % | 4.0 | % | 8.4 | % | 8.5 | % | 8.3 | % | 12.3 | % | 10.2 | % | ||||||||||||||||||||||
Source: DGAC
Our international growth strategy has focused on targeting markets in the United States with large Mexican and Mexican-American communities in order to stimulate VFR demand and leisure traffic in those markets. Approximately 68% of international passengers in Mexico fly to the United States, making the United States the largest international destination for air passengers in Mexico. All of the major U.S. legacy carriers fly to and from Mexico, but at a higher cost thanlow-cost carriers. We have learned that many Mexicans in the United States purchase airline tickets for family members living in Mexico to fly to the United States to visit. For this reason, we focus our international routes on U.S. cities with significant Mexican and Mexican-American communities. These cities include Chicago, Los Angeles, San DiegoAntonio and San Francisco-Oakland, with Mexicans andMexican-Americans in each of them amounting to 1.5 million, 4.6 million, 0.9 million and 0.7 million, respectively, according to PEW Research Hispanic Center based on U.S. Census Bureau data.
In 2013,2016, the Mexicanlow-cost and ULCCs (Interjet, VivaAerobus and Volaris) together maintained 59.9%63.5% of the domestic market, based on passenger flight segments, according to the DGAC. The following table sets forth the historical market shares on domestic routes, based on passenger flight segments, of each major market participant for each of the periods indicated:
Market Share(1) Domestic | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Volaris(2) | 4.04 | % | 7.94 | % | 12.16 | % | 12.82 | % | 14.79 | % | 18.05 | % | 20.48 | % | 23.15 | % | 4.04 | % | 7.94 | % | 12.16 | % | 12.82 | % | 14.79 | % | 18.05 | % | 20.48 | % | 23.15 | % | 23.31 | % | 24.76 | % | 27.50 | % | ||||||||||||||||||||||||||||||||||||||
Grupo Aeroméxico | 32.91 | % | 28.58 | % | 28.01 | % | 32.28 | % | 36.20 | % | 40.10 | % | 37.73 | % | 35.74 | % | 32.91 | % | 28.58 | % | 28.01 | % | 32.28 | % | 36.20 | % | 40.10 | % | 37.73 | % | 35.74 | % | 36.08 | % | 33.81 | % | 31.19 | % | ||||||||||||||||||||||||||||||||||||||
Grupo Mexicana(3) | 26.99 | % | 24.07 | % | 24.05 | % | 27.16 | % | 18.55 | % | — | — | — | 26.99 | % | 24.07 | % | 24.05 | % | 27.16 | % | 18.55 | % | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Interjet(4) | 5.65 | % | 7.04 | % | 10.83 | % | 12.71 | % | 16.35 | % | 24.90 | % | 23.92 | % | 24.46 | % | 5.65 | % | 7.04 | % | 10.83 | % | 12.71 | % | 16.35 | % | 24.90 | % | 23.92 | % | 24.46 | % | 23.75 | % | 24.61 | % | 21.69 | % | ||||||||||||||||||||||||||||||||||||||
VivaAerobus(5) | 0.30 | % | 4.44 | % | 4.83 | % | 5.83 | % | 8.85 | % | 11.54 | % | 12.53 | % | 12.25 | % | 0.30 | % | 4.44 | % | 4.83 | % | 5.83 | % | 8.85 | % | 11.54 | % | 12.53 | % | 12.25 | % | 11.85 | % | 11.74 | % | 14.30 | % | ||||||||||||||||||||||||||||||||||||||
Source: DGAC
| (1) | Market share is obtained by dividing each airline’s number of passengers by the total number of passengers for all airlines for the period indicated. |
| (2) | Began operations in March 2006. |
| (3) | Ceased |
| (4) | Began operations in December 2005. |
| (5) | Began operations in November 2006. |
The airline industry in Mexico has recently seen sharp attrition, with the exit of eight airlines since 2007, including the bankruptcy of Grupo Mexicana in April 2014. This allowed us to further expand our international product offering in a very short timeframe. We have recently requested the DGAC to permanently grant us the six routes from the Mexico City international airport to the United States that we have been operating since late 2010 and 2011, which had been primarily operated by Grupo Mexicana prior to ceasing its operations; however, we cannot be certain that the DGAC will permanently grant us such routes.
The following table sets forth the historical market shares on international routes between Mexico, the United States and other countries, based on passenger flight segments, of key Mexican industry participants for each of the periods indicated:
Market Share(1) International | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Volaris(2) | — | — | — | 2.92 | % | 9.38 | % | 21.95 | % | 21.91 | % | 20.84 | % | — | — | — | 2.92 | % | 9.38 | % | 21.95 | % | 21.91 | % | 20.84 | % | 21.73 | % | 23.08 | % | 24.79 | % | ||||||||||||||||||||||||||||||||||||||||||||
Grupo Aeroméxico | 31.68 | % | 34.05 | % | 31.73 | % | 31.06 | % | 39.83 | % | 74.87 | % | 66.96 | % | 64.46 | % | 31.68 | % | 34.05 | % | 31.73 | % | 31.06 | % | 39.83 | % | 74.87 | % | 66.96 | % | 64.46 | % | 65.71 | % | 61.59 | % | 56.82 | % | ||||||||||||||||||||||||||||||||||||||
Grupo Mexicana(3) | 64.56 | % | 63.85 | % | 66.08 | % | 65.36 | % | 49.94 | % | — | — | — | 64.56 | % | 63.85 | % | 66.08 | % | 65.36 | % | 49.94 | % | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Interjet(4) | — | 0.10 | % | 0.28 | % | — | — | 1.56 | % | 8.95 | % | 13.68 | % | — | 0.10 | % | 0.28 | % | — | — | 1.56 | % | 8.95 | % | 13.68 | % | 11.31 | % | 13.67 | % | 17.86 | % | ||||||||||||||||||||||||||||||||||||||||||||
VivaAerobus(5) | — | — | 0.85 | % | 0.43 | % | 0.84 | % | 1.60 | % | 2.18 | % | 0.68 | % | — | — | 0.85 | % | 0.43 | % | 0.84 | % | 1.60 | % | 2.18 | % | 0.68 | % | 0.93 | % | 1.55 | % | 0.40 | % | ||||||||||||||||||||||||||||||||||||||||||
Source: DGAC
| (1) | Market share is obtained by dividing each Mexican airline’s number of passengers by the total number of passengers for all Mexican airlines for the period indicated. |
| (2) | Began operations in March 2006. |
| (3) | Ceased operation in August 2010. |
| (4) | Began operations in December 2005. |
| (5) | Began operations in November 2006. |
We have been able to grow our international market share substantially over the past five years even with significant competition from leading U.S. carriers including United, American, Alaska Airways,Air, and Delta. As of December 31, 2013,2016, we were the sixthfifth largest international carrier in terms of passenger flight segments out of all airlines flying internationally to and from Mexico. We have been able to grow our international market share substantially due to the Grupo Méxicana reorganization and our strategy to target and stimulate markets in the United States with large Mexican and Mexican-American communities.
In terms of both domestic and international ticketed passengers, our total passenger volume increased at a CAGR of 38.7%32.6% from 2006 to 2013,2016, with approximately 0.9 million booked passengers in 2006 and 8.915.0 million booked passengers in 2013.2016. We attribute the rapid growth of our business to the favorable economic environment in Mexico, our dedicated ULCC strategy targeted at VFR and leisure travelers, our strong focus on delivering high quality customer service, and our tremendous brand recognition among domestic and international travelers in Mexico and the United States.
Our Business Model
Our business model is based on that of other ULCCs operating elsewhere in the world, such as Allegiant and Spirit in the United States, Ryanair and Wizz in Europe and AirAsia in Asia. We utilize our ULCC business model and efficient operations to offer low base fares and to stimulate demand while aiming to provide high quality customer service. Our unbundled pricing strategy allows us to provide low base fares and enables our passengers to select and pay for a range of optional products and services for additional fees. We target VFR, cost-conscious business people and leisure travelers in Mexico and to select destinations in the United States.
Since May 2012, we have unbundled certain components of our air travel service as part of a strategy to enable our passengers to select and pay for the products and services they want to use. This unbundling strategy has allowed us to significantly grow ournon-ticket and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. We believe a small percentage shift of bus passengers to air travel would dramatically increase the number of airline passengers. Higher load factors help us generate additionalnon-ticket and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.
We have a relentless focus on low costs as part of our organizational culture. We are the lowest cost airline carrier in Latin America, based on CASM, compared to the other Latin American publicly traded companies. We are also the lowest cost carrier in our target markets in Mexico and the United States, compared to our target market competitors, according to public information available from such competitors. We are able to keep our costs low due to our efficient and uniform fleet, high asset utilization, our emphasis on direct sales and distribution and our variable, performance-based compensation structure.
We were established and are operated to achieve the following goals: (i) to create a profitable and sustainable business model; (ii) to successfully compete by creating structural advantages over other carriers serving Mexico through our ULCC business model; (iii) to provide affordable air travel with a high quality experience for our customers; and (iv) to create a dynamic, cost conscious and entrepreneurial working culture for our employees. We believe that our strengths are:
Lowest Cost Structure.We believe that in 20132016 we had the lowest cost structure of any of the other Latin American publicly traded airlines, with CASM of Ps.1.164Ps.124.4 cents (U.S.$0.089) $6.0 cents), compared to Avianca-TACAAvianca at U.S.$0.175, $13.2 cents, Copa at U.S.$0.110, $8.8 cents, Gol at U.S.$0.130, $9.8 cents, Grupo Aeroméxico at U.S.$0.145 $9.0 cents and LATAM at
U.S.$0.155. $10.7 cents. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air at U.S.$0.128, $10.4 cents, American at U.S.$0.151, $12.8 cents, Delta at U.S.$0.148 $13.0 cents, Jet Blue at U.S. $10.8 cents, Southwest Airlines at U.S. $11.2 cents and United at U.S.$0.151 $12.7 cents in 2013,2016, according to publicly available financial information. We achieve our low operating costs in large part due to:
| • | Efficient and Uniform |
| • | High Asset |
| • | Direct Sales |
| • | Variable, Performance-Based Compensation |
Ancillary Revenue Generation.We have been able to grow ournon-ticket revenue by allowing our passengers to choose what additional products and services they purchase and use. Thanks to our “Tú Decides” (“You Decide”) strategy, we have increased averagenon-ticket revenue per passenger flight segment from approximately U.S.$7.6 $6.92 in 2009 to U.S.$16.1 $18.45 in 20132016 by, among other things:
Core Focus on VFR, Cost-conscious Business People and Leisure Travelers in High Growth Markets.We primarily target VFR, cost-conscious business people and leisure travelers in Mexico and the United States. We believe these people represent the highest potential for growth in our target markets. By offering low promotional fares, we stimulate demand for VFR and leisure travel, and attract new customers, including those who previously may have only traveled by bus. We use our yield management system to set prices based on the time of booking. We regularly manage yield and load factor, including through targeted promotional fares that can be as low as Ps.700Ps.699 (U.S.$54) $34). We have found that many Mexicans and Mexican Americans living in the United States buy airline tickets for themselves and their family members in Mexico. In addition, we have over 15,00020,000 points of payment throughout Mexico and the United States that allow travelers, particularly in Mexico, who do not have credit cards, or are reluctant to provide credit card information over the web or call center, to reserve seats using the web or call center and pay with cash the next day. Furthermore, we offer night flights, which appeal to our domestic and international customer base that seek to save on lodging expenses.
Disciplined Approach to Market and Route Selection.We select target markets and routes where we believe we can achieve profitability within a reasonable timeframe, and we only continue operating on routes
where we can achieve and maintain our target level of profitability. When developing our route network, we focus on gaining market share on routes that have been underserved or are served primarily by higher cost airlines where we have a competitive cost advantage. We thereby stimulate new demand with low
base fares and attempt to shift market share from incumbent operators. We have developed a profitable route network, on an annual basis based on the results of our most recently completed fiscal year, and built a leading market share in several of our markets. As of December 31, 2013,2016, we had more than 50% passenger market share in 5883 of our 95159 routes. As of December 31, 20132016 we faced no competition from any other carrier on 27%15% of our domestic seat capacity. We entered the U.S. market in July 2009 and by 20132016 derived 26%32% of our passenger revenues from our U.S. routes and attributed 24%30% of our ASMs to U.S. routes.
Market Leading Efficiency and Performance.We believe we are one of the most efficient airline carriers in Latin America. In 2013,2016, we achieved an average passenger load factor of 82.6%85.8% and an average aircraft utilization rate of 10.4 flight12.80 block hours per day with a standard turnaround time between flights of approximately 3562 minutes. For our fleet type, our average aircraft utilization rate of 10.410.2 flight hours per day was among the highest worldwide and was 13.5%24% higher than the industry average of 8.3 flight hours per day for all Airbus A319 aircraft, and 17.5%13% higher than the 9.0 flight hours per day for all Airbus A320 aircraft and 13% higher than the 9.0 flight hours per day for all Airbus A321 aircraft, according to information for the year ended December 31, 20132016 available from Airbus. TheAirbus.The high-density, single-class seating configurations on our aircraft allow us to increase ASMs and reduce fixed costs per seat as compared to a lower density configuration flown by certain of our competitors. In addition, we strive for market-leading operational performance, with an 88.2%a 75.4%on-time performance rate, 99.7 %99.2% flight completion rate and a mishandled baggage rate of only 1.271.20 bags per 1,000 passengers in 2013.2016.
Brand Recognition with a Fast Growing Fan Base.We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. According to a 2011 study made with data obtained from Facebook and published in the magazine Merca 2.0®, we have one of the fastest growing fan bases and number of followers on social media sites in Mexico. As of December 31, 2013,2016, we had approximately 789,2953.1 million fans on Facebook and 460,2811.8 million followers on Twitter, both of which we primarily use for marketing, customer service and promotion. In 2014, the magazine Merca 2.0® further recognized us as the first Mexican company on Twitter. In addition, according to a study by Socialbakers, we were recognized as one of the world’s most socially devoted airlines in 2013. Our social media reach has been a very low cost, yet effective, marketing tool for us and has afforded us the capability to develop highly effective, targeted marketing promotions on a very short notice. We have also established various programs to make air travel more inviting for first time travelers and other passengers who may desire extra services, such as an unaccompanied senior program.
Balance Sheet Positioned for Growth.We have a low level of financial debt, since we have principally financed our operations through equity and operating cash flows and we have only used operating leases for our aircraft. Proceeds from our initial public offering will also further strengthen our balance sheet. We believe that our strong financial position enables us to prudently finance the emerging growth opportunities in our markets and to defend our existing network from our competitors. As of December 31, 2016, we had a balance of Ps.7.1 billion in unrestricted cash and cash equivalents, representing 30.1% of the last twelve month operating revenues. As of December 31, 2016, we had financial debt of approximately Ps.2.0 billion.
Strong Company Culture, Experienced Management Team and Principal Shareholders.We have developed a strong company culture among our employees that is focused on safety, meritocracy, efficiency and profitability, with a significant component of performance-based variable compensation. From 2009 through 2013, we were named a “Great Place to Work” by the Great Place to Work Institute in Mexico. Our management team has been assembled with experienced executives in their respective fields, including in the aviation, sales and marketing, finance or IT industries in Latin America. In addition, our principal shareholders have extensive prior experience in funding, establishing and leading airline carriers around the world. Their expertise has helped us develop our ULCC business model and allowed us to benefit from their procurement power and relationships with key vendors.
Our Growth Strategy
Our goal is to continue to grow profitability on an annual basis and maintain our leadership position in the Mexican aviation market by operating our ULCC business model and focusing on VFR, cost-conscious business people and leisure travelers. The key elements of our growth strategy include:
Remain the Low Cost Carrier of Choice.We believe that by deploying additional cost-efficient Airbus A320 and A321 aircraft with higher seat density, spreading our low fixed cost infrastructure over a larger scale of operations, outsourcing operating functions and keeping sales and marketing overhead low, we can continue to improve operating efficiencies while maintaining low costs. Our ULCC business model enables us to operate profitably, on an annual basis based on the results of our most recently completed fiscal year, at low fare levels, and we intend to continue to maintain low fares to stimulate demand. We also make flying easy and strive to remain thelow-cost carrier of choice for our existing and new customers as we continue to focus on providing an affordable and high quality travel experience to our customers across our expanding operations in Mexico, and the United States.States and Central America.
GrowNon-ticket Revenue while Maintaining Low Base Fare to Stimulate Demand.We intend to increase ournon-ticket revenues by further unbundling our fare structure and by offering our passengers new and innovative products and services. Through our multiple points of interaction with our customers during each stage of their travel, from ticket purchase through flight and post-trip,post- trip, we have the opportunity to offer third party products, such as hotel rooms, car rentals and trip interruption insurance, on which we receive commissions. In addition, we plan to start selling sellin-flight products and we plan to introduce and expand upon products and services that are unrelated to passenger travel. In June 2012, we started a membership basedultra-low-fare subscription service calledV-Club which had approximately 51,259421,000 members as of December 31, 2013.2016. We intend to generate additional fees from proprietary brand-based services such as the Volaris affinity card which was introduced in January 2013. We also continue to aggressively expand the cargo transportation services we provide on our aircraft. As we broaden our ancillary products and services and increase ournon-ticket revenue, we believe that we will be able to further lower base fares and continue to stimulate demand.
Gain Additional Market Share by Stimulating Demand in our Existing Markets.We plan to continue to grow our existing markets by adding routes that connect cities in which we currently have operations and by adding capacity on existing routes where we believe we can continue to stimulate demand. We also intend to continue to aggressively target long-distance bus passengers who we believe may shift to airplaneair travel. We set certain promotional fares at prices lower than bus fares for similar routes, and we believe this will encourage bus travelers to switch to air travel.
Continue our Disciplined Fleet Growth. We currentlyAs of the date of this report, we have firm commitments for 6445 Airbus A320 family aircraft equipped with sharklet technology that will be delivered over the next sevenfour years, including 4039 of the next generation Airbus A320 NEO and six of the next generation Airbus A321 NEO, the delivery of which commenced in 2016 and will commence in 2016 and 2017, respectively. We have obtained committed financing for thepre-delivery payments for the deliveries through 2016. We plan to phase out all2020. During 2016, we incorporated 17 aircraft into our fleet (eight A320 CEOs and eight A321 CEOs as well as our first A320 NEO). Our fleet reached 68 aircraft as of our A319 aircraft with 144 passenger seats by 2019 and operate solely a fleetthe date of Airbus A320 and A321 aircraft.this annual report. Consistent with our ULCC model, our new Airbus A320 aircraft offers 16%19% more passenger seats than Interjet, one of our competitors that offers 150 passenger seats per Airbus A320 aircraft. We believe that a disciplinedramp-up in young and efficient aircraft as our market share expands reduces our exposure to market conditions. We intend to maintain our commitment to a common fleet type because we believe it is the most efficient option for our markets and operations.
Grow Passenger Volume by Profitably Establishing New Routes.We believe our focus on low fares and customer service will stimulate growth in overpriced, underserved and inefficient new markets. We will continue our disciplined approach to domestic and international market entry by using our rigorous selection process where we identify and survey possible target markets that have the potential to be profitable within our business model. For example, in December 2013,2016, we added twothe following 20 new routes: one domestic route from Cancun, one domestic and three international routes from Guadalajara, three domestic and one international routes from Mexico City, to Phoenixone domestic route from Tijuana, five domestic and Chicago/O’Hare in response to strong market demographics and opportunities for market stimulation.four international routes from other cities within Mexico, as well as our first route from our Central American subsidiary. As part of our
continuous monitoring of routes and markets for profitability, we have a proven track record of withdrawing routes that do not meet our profitability expectations. For our future growth opportunities, we have identified approximately 180110 routes within Mexico serving markets in excess of 250,000 inhabitants and other leisure destinations, and that have stage lengths of at least 170 miles, and approximately 150135 routes internationally that have stage lengths of at least 200 miles. Additionally, our operating subsidiary in Costa Rica, Vuela Aviación, S.A., began operations on December 1, 2016. We seek to replicate ourultra-low cost model in Central America by offering low base fares andpoint-to-point service in the region.
Our Operations
Passenger Revenue
Passenger revenues accounted for approximately Ps.11,117 million,Ps.17.8 billion, or 86%76% of our total operating revenues in 2013.2016. VFR traffic makes up the largest component of our customers, and we believe our VFR customers are the most cost-conscious and time/schedule flexible of all of our travelers. Our VFR market tends to complement our leisure-driven market from both a seasonal andweek-day perspective. VFR traffic is strongest during the summer, Christmas and New Year season, followed by Easter. Leisure traffic makes up the second largest component of our customers. This segment responds well to demand stimulation based on low fares. Leisure traffic tends to coincide with holidays, school schedules and cultural events with peaks in July and August and again in December and January. Cost-conscious business people make up the third largest component of our customers. Although business travel can be cyclical with the economy, this segment tends to travel steadily throughout the year regardless of the season. We do not operate a frequent flier program.
Non-Ticket Revenue
Non-ticketOur most significantnon-ticket revenues include revenues generated from (i) air travel-related services,(ii) non-air-travel related services, and (iii) cargo services. In 2016, we derived approximately Ps.5.7 billion, or 24% of our total operating revenues fromnon-ticket revenue.
Air travel-related services include, but are not limited to, fees relating to transportation of cargo, charter flight services,charged for excess baggage, advancebookings through our call center or third-party agencies, advanced seat selection, extra legroom, carriageitinerary changes, charters and passenger charges forno-show tickets. They are recognized as revenue when the related service is provided.
Non-air-travel-related services include commissions charged to third parties for the sale of sports equipmenthotel rooms, trip insurance and pets, ticket changes, V-Club subscription,rental cars. They are recognized as revenue at the Volaris affinity credit card launched in 2013time the service is provided. Additionally, services not directly related to air transportation include Volaris’ sale of VClub membership and onboard advertising. We generatethe sale of advertising spaces to third parties. VClub membership fees from our subscription service V-Club by charging an individual annual membership of U.S.$49 or a group annual membership of U.S.$149. V-Club subscriptions accounted for approximately 1.3% of our non-ticketare recognized as revenues in 2013. Membersover the life of the V-Club have exclusive accessmembership. Revenue from the sale of advertising spaces is recognized over the period in which the space is provided.
Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the lowest fares and promotions available. Members have access to an Internet booking engine similar to our website that displays last minute fares and discounted fares. We generate fees from our affinity credit card by charging fees on all purchases made with the credit card. Fees from the Volaris affinity credit card accounted for approximately 0.7% of our non-ticket revenues as of December 31, 2013. As of December 31, 2013, we had approximately 51,259 V-Club members and 65,928 affinity credit card holders. destination).
The typical fees for advance seat selection, extra legroom, carriage of sports equipment, and pets and ticket changes are approximately U.S.$5 $9.99 to U.S.$7, $16.99, U.S.$7 $15.99 to U.S.$11, $17.99, U.S.$54 $63.99 to U.S.$80, $100, U.S.$89 $89.99 to U.S.$99 $100 and U.S.$58 $73.99 to U.S.$82, $100.99, respectively and we generate such fees in Mexico, and in the United States.States and Central America. We also make available trip insurance commercialized by third parties through our website. In 2013, we derived
We generate fees from our subscription serviceV-Club by charging an individual annual membership of U.S. $49.99 or a group annual membership of U.S. $149.99.V-Club subscriptions accounted for approximately Ps.1,885 million, or 14%1.9% of our total operatingnon-ticket revenues in 2016. Members of theV-Club have exclusive access to the lowest fares and promotions through our website. We also generate revenues from our affinity credit card from multiple revenue streams including electronic credit redemptions earned through credit card purchases. Revenue from the Volaris affinity credit card accounted for approximately 2.4% of ournon-ticket revenues. revenues as of December 31, 2016. As of December 31, 2016, we had approximately 421,000V-Club members and 177,000 affinity credit card holders.
We make efficient use of extra capacity in our aircraft by carrying cargo on our passenger flights. We offer cargo transportation services on all domestic routes. We outsourced all ground cargo handling services, including storage, to several third-party providers and the related cost of such services are paid by our cargo clients. We offer competitive rates and our service includes reception,check-in, shipping and delivery to the final destination.
We also offer charter services, which do not represent a significant part of our total operating revenues.
Route Network
We currently serve 46 airports68 cities throughout Mexico, and the United States and Central America and operate up to 215302 daily segments on routes that connect 3340 cities in Mexico, including highly demanded destinations such as Cancún,
Guadalajara, Mexico City, Monterrey and Tijuana, and ten28 cities in the United States:States and Central America, including: Austin, Chicago, Dallas, Denver, Fresno, Houston, Las Vegas, Los Angeles, Miami, Milwaukee, New York, Oakland, Ontario, Orlando, Phoenix, ,Sacramento,Portland, Reno, Sacramento, San Antonio, San DiegoBernardino, San Francisco, San Jose, CA, Seattle, San Juan (Puerto Rico), San Jose (Costa Rica), Managua (Nicaragua), Guatemala City (Guatemala) and San Jose.Salvador (El Salvador). Our route network is designed to provide service within Mexico and between Mexico and cities in the United States with large Mexican and Mexican American communities, primarily in California. Additionally, our operating subsidiary in Costa Rica, Vuela Aviación, S.A., began operations on December 1, 2016. Vuela Aviación, S.A. currently serves 4 cities throughout Central America and operates 4 daily segments on routes that connect Central America.
As part of ourpoint-to-point strategy and route network, we generally offer direct flights between cities with high traffic volumes. We believe this model of scheduling allows us to more frequently serve a greater number of cities and to generate higher load factors, enabling us to increase aircraft utilization and providing us with greater flexibility in our scheduling options.
We schedule a morning bank and an evening bank of flights, with flights timed to arrive at each destination and depart a short time later in order to minimize turnaround times. Many of our evening flights are intended to providered-eye travel for the longer routes we cover and to appeal to customers who want to save on lodging expenses. Our day flights allow us to maximize our fleet utilization and utilize the employees at our airports efficiently.
The map below sets forth the destinations we currently serve.
Sales, Distribution, Marketing and Advertising
Sales and Distribution.We currently sell our product through four primary distribution channels: our website, our mobile app, our call center, airports and third parties such as travel agents. We use our website, www.volaris.com (the contents of which are not a part of, and are not incorporated by reference into, this Annual report), as the
primary platform for ticket sales. After our website and mobile app, our distribution sources are our outsourced call center, third-party travel agents and airport counter sales. The following table sets forth the approximate percentage of our ticket sales in 20132016 per distribution source and applicable fees:
Distribution Source | % of tickets Sold in 2013 | Fee in pesos(1) | % of tickets Sold in 2016 | Fee in pesos(1) | ||||||||||||
Website | 66 | % | — | |||||||||||||
Website and mobile app | 62.5 | % | — | |||||||||||||
Call center | 17 | % | 99 | 14.6 | % | — | ||||||||||
Third-party travel agents | 12 | % | 99 | 17.6 | % | 119 | ||||||||||
Airport counters | 4 | % | 99 | 5.3 | % | — | ||||||||||
Source: Volaris
| (1) | Standard fee charged per customer. |
Sales through our website and mobile app represent our lowest cost distribution channel, and it is the channel through which we offer our lowest fares. For all other channels, we pass the additional costs associated with them through to our customers.
Our passengers may pay for their tickets at the time of booking on our website or through our call center by credit or debit card, or within 24 hours in cash at one of the various points of payment, located at several different businesses vendors we have made available. Approximately 83%89% of our sales are paid by credit and debit card and 17%11% by cash and other forms of payment. We have entered into agreements with Telecomunicaciones de México, Cadena Comercial OXXO, S.A. de C.V., Sanborn Hermanos S.A., and MoneyGram Payment Services, Inc.certain banks to provide our customers with the possibility to pay in cash for their tickets at over 15,00020,000 points of payment. These agreements are generally entered into forone- ortwo-year periods, are subject to termination upon short notice and are renewable by mutual agreement. In 2013,2016, we expensed an aggregate of Ps.332Ps.669.5 million in commissions, a portion of the cost of which was transferred to the customers using this service.
We have entered into an agreement with Atento Mexicana,One Link, S.A. de C.V., or Atento,One Link, to outsource our call center. Pursuant to this agreement, AtentoOne Link receives calls from our customers to book flights and provides our customers with information about our fares, schedules and availability. AtentoOne Link also makes calls to our customers at our request and provides us with reports. As with our online bookings, purchases through our call center can be paid for at the time of booking by credit or debit card, or within 24 hours in cash at one of our points of payment. The agreement with AtentoOne Link expires in June 2014 and is renewable with 60-day prior notice.March 2018.
We have signed agreements with Sabre Inc.Navitaire LLC and Navitaire LLC,Jeppessen Systems AB, major suppliers of IT solutions in the global airline industry. Through these agreements we are provided with technology systems that allow us to conduct our operations.
Pursuant to our master agreement with Sabre Inc., Sabre Inc. provides us with consulting and technical services. In addition, we may terminate the master agreement with prior notice subject to certain conditions.
Pursuant to our agreement with Navitaire LLC, Navitaire LLC provides us with hosted reservation services, including reservations, revenue accounting, and operations management and recovery, as well as certain services related thereto. This agreement has an initial term of ten years and certain additional renewal periods, unless it is terminated with prior notice subject to certain conditions.
The foregoing description of the terms of the agreementsagreement with Sabre Inc. and Navitaire LLC is intended as a summary only and is qualified in its entirety by reference to the copies theretocopy filed as exhibitsan exhibit to the registration statement which includes this annual report.
Marketing and Advertising.Our marketing and advertising activities include the use of the Internet, television, radio and billboards. We focus on direct consumer marketing for our markets, by offering promotional fares and maintaining a strong presence in digital media, such as Facebook, Twitter, Google+, InstragramInstagram and
YouTube. As of December 31, 2013,2016, we had approximately 789,2953.1 million fans on Facebook and 460,2811.8 million followers on Twitter, which we primarily use for marketing and promotion.
We directly reach our customers by holding promotional events that build brand recognition, such as concerts on our aircraft andon-board runway shows of new crew uniforms. We also advertise on billboards and in venues that our core consumers frequently attend, including concerts, school campuses, and bus stations, among others. We have Internet promotions directed at current customers, who can register on our website. In addition, we send emails with promotions and advertisement to approximately 725,000 2.5 millione-mail addresses on a weekly basis. We also have special promotions like “your name on a plane,” where we place the first name of the winning customer on the fuselage of an aircraft for a one year period. We strive to have the highest marketing impact at the lowest cost.
In June 2012, we started a membership basedultra-low-fare subscription service calledV-Club which had approximately 51,259421,000 members as of December 31, 2013.2016. TheV-Club is an annual subscription based service that allows members exclusive access to the lowest fares on offer and discounted baggage fees.V-Club members pay a small annual fee for first access to offerings of low fares. The membership provides benefits such as guaranteed exclusive, member-only fare sales (at least once every six weeks) and private offers on hotels, rental cars and other travel necessities.
In January 2013, we launched the Volaris affinity credit card program. This credit card provides holders with cash back on Volaris-related purchases, grants priority boarding and ten extra kilograms of luggage on our flights, and access to the Visa lounge in Mexico City’s international airport. We receive a fee from all purchases made with the card.
Pricing and Yield Management
Our emphasis on keeping our operating costs low has allowed us to set low base fares and ancillary revenues while achieving and increasing profitability. We have designed our fare structure to balance our load factors and yields in a way that we believe will generate the highest revenue per block hour on our flights. Most of our seats are sold in the low and mid fare ranges. With the exception of special offers and promotions, we do not have advance purchase restrictions, minimum stays or any other fare restrictions, such as required Saturday night stays. For some of our flights, we set very low discounted base fares based upon the fares charged by bus lines for travel to the same destinations in order to increase our customer base by adding customers who have previously used other forms of transportation.
We have one single base fare type which is a basic, “unbundled fare” that includes 25 kilograms of checked luggage on domestic flights and just a smallcarry-on and one personal item on board the cabin. Starting March 1, 2017, we began charging for the first checked luggage on routes to and from the United States and Puerto Rico. Our fares arenon-refundable and passengers changing their travel plans on our flights are subject to flight alteration fees. In addition to our base fare, customers can choose a variety of additional products and services to customize their travel experience. These include options ofpre-selecting a higher baggage allowance and anon-time performance guarantee, as well as purchasing food, beverages and other products on board. Additional products and services can be purchased at different points in time, including at the time of purchase, before the flight and at the airport. We increase the prices of these products and services the closer the customer purchases them to the departure date.
We use yield management in an effort to maximize revenues per flight, which is also linked to our route and schedule planning and our sales and distribution methods. Yield management is an integrated set of business procedures and mathematical models that provide us with the ability to understand markets, anticipate customer behavior and respond quickly to opportunities. The number of seats we offer at each fare class in each market is based on a continuous process of analysis and forecasting. Past booking history, seasonality, the effects of competition and current booking trends are used to forecast demand. Current fares and knowledge of upcoming events at destinations we serve that we believe will affect traffic volumes are also included in our forecasting model to arrive at an optimal seat allocation for our fares on specific routes. We use a combination of approaches, taking into account yields and flight load factors, depending on the characteristics of the markets served, to design a strategy to achieve the best possible TRASM by balancing the average fare charged and
ancillary services sold against the corresponding effect on our load factors. Since 2009, we have used Sabre Inc.’s AirVision Suite to implement our yield management system, a sophisticated revenue optimization tool.
Customer Service
We are committed to providing our customers with value for their money andon-time and reliable performance. We believe that our low fares initially attract customers and that our exceptional service strengthens customer loyalty and enhances our brand recognition throughword-of-mouth as our customers tell others about their experience.
We hire employees who we believe will treat customers in a courteous and friendly manner, and emphasize customer service during their training and as a general part of our company culture. We call our employees ambassadors. We also focus on other details that can improve the travel experience, including on-line check-inon-linecheck-in and seat assignment options,e-ticket travel, single-class seating, modern aircraft interiors and discounted shuttle services between certain airports anddrop-off zones on certain routes. We provide personalizedin-cabin support for customers who need it and the option of special assistance for unaccompanied minors and seniors. We believe our customer relationship management has been a key element of our success.
We are committed to compensating our employees on the basis of their performance, rewarding them for the contribution that they make to our success instead of seniority. We base part of our employee compensation on customer service, which is measured through a net promoter score obtained from customer interviews. We currently conduct approximately 9009,300 monthly interviews;Net Promoter Score (NPS) surveys; as we expand our operations, this number will likely increase.
We understand that efficient and punctual operations are important to our customers, and we intend to continue to excel in operational performance. The following table sets forth certain performance-related customer service measures for the years ended 2011, 20122014, 2015 and 2013:2016:
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
On-time performance(1) | 82.2 | % | 83.6 | % | 88.2 | % | 86.4 | % | 81.2 | % | 75.4 | % | ||||||||||||
Completion factor(2) | 99.7 | % | 99.7 | % | 99.7 | % | 99.5 | % | 99.8 | % | 99.2 | % | ||||||||||||
Mishandled baggage(3) | 1.24 | 1.92 | 1.27 | 1.26 | 1.13 | 1.20 | ||||||||||||||||||
Source: Volaris
| (1) | Percentage of our scheduled flights that were operated by us and that arrived on time (within 15 minutes of the scheduled arrival time). |
| (2) | Percentage of our scheduled flights that were operated by us, whether or not delayed (i.e., not cancelled). |
| (3) | Our incidence of delayed, mishandled or lost baggage per 1,000 passengers. |
Competition
The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price (including ancillary services), flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record and reputation, code sharing relationships, and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network airlines,low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and otherlow-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital, and serve more routes than we do.
Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which is the lowest among the other Latin American publicly traded airlines. In 2013,2016, our CASM was Ps.1.164Ps.124.4 cents (U.S.$ 0.089) $6.0 cents), compared to an average CASM of U.S.$0.143 $10.5 cents for the other Latin American publicly traded airlines. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta, JetBlue, Southwest Airlines and United, which had an average CASM of U.S.$0.144 $12.4 cents in 2013.2016.
Our principal competitors in Mexico are Grupo Aeroméxico, Interjet and VivaAerobus. Internationally, we compete with Grupo Aeroméxico and many U.S.-based carriers, including Alaska Air, American, Delta and United.
Fleet
Since we began operations in March 2006, we have increased our fleet from four to 4469 aircraft as of December 31, 2013. We fly2016.
As of December 31, 2016 we flew only Airbus A319, A320 and A320A321 aircraft, which provides us with significant operational and cost advantages compared to airlines that operate multiple fleet types. The Airbus A320 family is based on a common aircraft type with the same cabin cross-section, and virtually the same systems, cockpit controls, operating and maintenance procedures, and pilot type rating. The Airbus A320 family aircraft are fuel efficient and allow flight crews to be interchangeable across all of our aircraft while decreasing training, maintenance, spare parts inventory and other operational costs. Due to the commonality among the Airbus A320 family, we can retain the benefits of a fleet comprised of a single type of aircraft while still having the flexibility to match the capacity and range of the aircraft to the demands of each of our routes.
As of December 31, 2013,2016, our fleet of 4469 Airbus narrow-body aircraft consisted of 2015 Airbus A319s, 44 A320s (one of them is NEO) and 24 A320s.ten A321s. We have a young fleet with the average age of our fleet being 4.2 years as of December 31, 2013,2016, as compared to an average of 11.98.6 years for the other Mexican airlines according to the DGAC. A young fleet leads to better reliability in terms of the performance of our aircraft, greater fuel efficiency and lower maintenance costs.
Consistent with our ULCC business model, each of our aircraft is configured with a single-class high density seating configuration. Our Airbus A319s accommodate 138 or 144 passengers, and our Airbus A320s accommodate 174 or 179 or 180 or 186 passengers and our Airbus A321s accommodate 220 or 230 passengers. Each of our Airbus A320 family aircraft is equipped with IAE or P&W engines. We have taken delivery of six13 spare engines (11 leased and two owned) for service replacement and for periodic rotation through our fleet.
The following table shows the historical development of our fleet from the start of our operations in March 2006 through December 31, 2013:2016:
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fleet additions (Returns) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A319 | 6 | 8 | 5 | — | 5 | — | — | (4 | ) | 6 | 8 | 5 | — | 5 | — | — | (4 | ) | (2 | ) | — | (3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
A320 | — | — | 2 | — | — | 8 | 7 | 7 | — | — | 2 | — | — | 8 | 7 | 7 | 8 | 4 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
A321 | — | — | — | — | — | — | — | — | — | 2 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fleet | 6 | 14 | 21 | 21 | 26 | 34 | 41 | 44 | 6 | 14 | 21 | 21 | 26 | 34 | 41 | 44 | 50 | 56 | 69 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The following table shows the development of our fleet from 20142017 to 2020 pursuant to our current contracts:
| 2014E | 2015E | 2016E | 2017E | 2018E | 2019E | 2020E | 2017E | 2018E | 2019E | 2020E | ||||||||||||||||||||||||||||||||||
Fleet additions (Returns) | ||||||||||||||||||||||||||||||||||||||||||||
A319 | (2 | ) | (1 | ) | (5 | ) | (3 | ) | (7 | ) | (2 | ) | — | (3 | ) | (7 | ) | (2 | ) | (1 | ) | |||||||||||||||||||||||
A320 | 7 | (1) | 4 | 7 | 6 | 10 | 10 | 12 | 7 | 10 | 8 | 11 | ||||||||||||||||||||||||||||||||
A321 | — | — | — | 2 | 4 | — | — | 2 | 4 | — | — | |||||||||||||||||||||||||||||||||
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Total fleet | 49 | 52 | 54 | 59 | 66 | 74 | 86 | 75 | 82 | 88 | 98 | |||||||||||||||||||||||||||||||||
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| (1) |
| Pursuant to new aircraft lease agreements executed on February 13, 2014 with a leasing company, we will add 16 new A320/A321NEO family aircraft to our fleet. These aircraft lease agreements require us to accept delivery of ten A320NEO aircraft |
We have financed the acquisition of our aircraft through a combination ofpre-delivery payment financing (including the revolving line of credit with Banco Santander México and Bancomext under which we act as a guarantor), purchase and leaseback transactions and direct lease agreements, all of which meet the conditions for consideration as operating leases. With respect to purchase and leaseback transactions, we have entered into
agreements to purchase aircraft from Airbus which are sold to lessors and are simultaneously leased back through leaseback agreements. We have obtained committed financing for thepre-delivery payments in respect of all the aircraft to be delivered between 2014 and 2015, and four aircraft to be delivered in 2016.through 2020.
As of December 31, 2013,2016, we had 4469 aircraft leased pursuant to long-term lease agreements for an average term of 9.7310.5 years each. The operating leases for these aircraft expire between 20142017 and 2025.2032. We make monthly rent payments and are not required to make termination payments at the end of the lease unless there is an event of default or total loss of the aircraft. Our aircraft leases provide for fixed rent payments except for two, which provide for variable rent payments which fluctuate based on changes in LIBOR. We are required to make certainnon-refundable monthly maintenance payments and to return the aircraft in the agreed upon condition at the end of the lease term. We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease.
The purchase agreement with Airbus requires us to accept delivery of 4530 Airbus A320 family aircraft in the next sevenfour years (from April 20142017 to December 2020). The agreement provides for the addition of 1630 A320 CEOS and 30 NEOs to our fleet as follows: three in 2014, five in 2015, eight in 2016, two in 2017, six in 2018, ten in 2019, and 12 in 2020. The basic price for each of the firm-order aircraft to be delivered pursuant to our contracts may be adjusted for changes in economic conditions as published by the United States Department of Labor. We must makepre-delivery payments at specific dates prior to the scheduled delivery. Although the purchase agreement with Airbus does not include the option to have fewer aircraft delivered, we cannot guarantee that our fleet will increase as indicated in the table above.
Additionally, onOn February 13, 2014, we executed a lease agreement with a leasing company for the lease of ten Airbus A320NEO (one which was delivered in September 2016) and six Airbus A321NEO that will be delivered between 20162017 and 2018. We have decided to move to a bigger gauge aircraft by leasing six A321NEO and by taking delivery of Airbus A320 and A321 aircraft instead of Airbus A319 aircraft, in order to support our growth strategy. During 2015, we executed lease agreements with different leasing companies for the lease of eight Airbus A321 CEO aircraft which were delivered during 2016.
We have 2015 scheduled A319 aircraft returns in the next sixfive years: two in 2014, one in 2015, five in 2016, three in 2017, seven in 2018, two in 2019, one in 2020 and two in 2019,2021, as well as fivethree A320 aircraft returns in the next fourfive years: two in 2019 and one in 2014, one in 2015 and three in 2016.2020. However if necessary, we believe we can negotiate extensions under our lease agreements as we have done in the past, which increases our fleet flexibility. In addition, we have been able to lease aircraft from lessors and have the flexibility to do so again in the future. For certain risks related to our lease agreements, see Item 3: “Key Information—Risk Factors—A failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and our financial condition and results of operations.”
On August 16, 2013 we selected IAE engines for our 14 classic A320 CEO aircraft and Pratt & WhitneyP&W engines for our 30 A320 NEO aircraft.
Maintenance
We have a DGAC and FAA mandated and approved maintenance program administered by our maintenance engineering department. Our maintenance technicians undergo extensive initial and ongoing training to ensure the safety of our aircraft,aircraft. Maintenance is performed by our qualified technicians, some of whom are FAA-certified and all of them are FAA-certified.by maintenance providers which hold the necessary certifications.
Aircraft maintenance and repair consists of routine andnon-routine maintenance, and the work performed is divided into three general categories: line maintenance, major maintenance and component service. Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft, includingpre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled items on an as needed basis. Line maintenance events are currently serviced byin-house mechanics and supplemented by contract labor and are primarily completed at the airports we currently serve. Line maintenance also includes scheduled tasks that can take from seven to 14 days to complete and are typically required approximately every 1822 months.
Heavy airframe maintenance checks consist of a series of more complex tasks that can take from one to four weeks to complete. Heavy engine maintenance is performed approximately every five to six years and includes a more complex work scope. Due to our relatively small fleet size and projected fleet growth, we believe outsourcing all of our major maintenance, such as engine servicing and major part repairs, is more efficient. We have entered into a long-term flight hour agreement with IAE and P&W for our engine overhaul services and Lufthansa Technik AG on apower-by-hour basis for component services. We contract with Lufthansa Technik AG for certain technical services and Aeroman for our heavy airframe maintenance. Aeroman is anFAA-approved maintenance provider, has been named the number one maintenance facility by Airbus, has been awarded the FAA’s Corporate Diamond Certificate of Excellence and airlines like Jet Blue and Southwest Airlines also outsource their maintenance requirements to Aeroman.
Our recent maintenance expenses have been lower than what we expect to incur in the future because of the relatively young age of our aircraft fleet. Our maintenance costs are expected to increase as the frequency of repair increases with our aircraft’s age. As our aircraft age, scheduled scope work and frequency of unscheduled maintenance events are likely to increase as with any mature fleet.
Safety
We are committed to the safety and security of our passengers and employees. Some of the safety and security measures we have taken include (i) aircraft security and surveillance, (ii) positive bag matching procedures, (iii) enhanced passenger and baggage screening and search procedures, and (iv) secured cockpit doors. We strive to comply with or exceed health and safety regulation standards. In pursuing these goals, we maintain an active aviation safety program and all of our personnel are expected to participate in the program and take an active role in the identification, reduction and elimination of hazards.
Our ongoing focus on safety relies on training our employees to use the proper safety equipment and take the proper safety measures by providing them with the tools and equipment they require to perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our operation including flight operations, maintenance,in-flight, dispatch and station operations. We have received the IOSA (IATA’s Operational Safety Audit) certification.
The TSA is charged with aviation security for both airlines and airports in the United States. We maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for the security of our personnel, customers, equipment and facilities are exercised throughout our operation. In Mexico, the Mexican Civil Aeronautic Authority through the Assistant General Aviation Authority(Dirección General Adjunta de Aviaciónn)) is in charge of air traffic safety and has the authority to establish or modify the operations condition of air traffic and to coordinate and control the airports. See Item 4: “Information of the Company—History and Development of the Company.”
Fuel
Fuel is a major cost component for airlines and is our largest operating expense. Fuel accounted for 41%39%, 42%30% and 40%28% of our total operating costs in 2011, 20122014, 2015 and 2013,2016, respectively. We purchase fuel from ASA which also supplies fuel and fills our aircraft tanks in Mexico. Under our agreement with ASA, the price of fuel is determined by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) and this agreement may be terminated by either party upon short notice. In the United States we have entered into fuel supply agreements with suppliers such as World Fuel Services,WFS, BP Products North America, Chevron and Associated Energy Group pursuant to which these suppliers or their affiliates sell fuel to us at various airports as specified in the agreements. See Item 3: “Key Information—Risk Factors—We rely on a number of single suppliers for our fuel, aircraft and engines.”
FuelHistorically, the fuel costs experienced substantial variance in 2008 and 2009, and the cost of fuelvariances, which cannot be predicted with any degree of certainty since it is subject to many global and geopolitical factors. Fuel prices are dependent on
crude oil prices, which are quoted in U.S. dollars. If the value of the U.S. dollar rises against the peso, our fuel costs, expressed in pesos, may increase even absent any increase in the U.S. dollar price of crude oil. Our fuel hedging policy is to enter into fuel derivative contracts to hedge against changes in fuel prices up to 18 months forward subject to certain financing controls. See Item 3: “Key Information—Risk Factors—Our fuel hedging strategy may not reduce our fuel costs.”
Insurance
We maintain insurance policies we believe are of the types customary in the airline industry and as required by the Mexican and U.S. aviation authorities. In connection with our operations, we carry insurance coverage against loss and damages, including war and terrorist risks, for our entire fleet of aircraft, spares and equipment. We carry passenger and third-party liability insurance coverage at levels that we believe are adequate and consistent with general industry standards. We also holdnon-aviation insurance coverage that includes directors’ and officers’ liability, vehicles value and liability and life and major medical expenses insurance for our employees.
Social Responsibility
We are committed to social responsibility and sustainable development through the generation of economic, social and environmental value throughout all our operations. We have initiatives that include fundraising, the transportation of organs and tissues for transplants, volunteering, the donation of airplane tickets and toys to nonprofit organizations, activities to help people affected by natural disasters and buying carbon bonds to neutralize our environmental footprint, among others. We also have the Vfundación membership which allows Mexican nonprofit organizations to acquire airline tickets at a 30% discount, allowing them to reduce their operating costs. Additionally, we are part of the Sustainable IPC of the Mexican Stock Exchange. We also maintain several certifications that endorse us as a sustainable company: socially responsible company certification, model for gender equity certification and environmental management systems and quality certification (ISO 14001 and ISO 9001), as well as being a top member in the implementation of The Code (ECPAT), to end child prostitution, pornography and trafficking of children and teenagers.
| C. | Organizational Structure |
The following is an organizational chart showing Volaris and its subsidiaries as well as Volaris’ ownership and voting percentage in each as of the date of this annual reportreport:
Volaris Opco is our airline operating subsidiary. Comercializadora is our operating subsidiary that is primarily engaged in marketing, advertising and other commercial matters. Servicios Corporativos and Servicios Administrativos employ our non-unionizedemployees. Operaciones performs purchase and unionized employees, respectively. Allsales of ourassets and services. These subsidiaries are incorporated in Mexico.
In December 2012, we underwent a reorganization pursuant to which all shareholders who previously held shares Vuela is our operating subsidiary in Guatemala and Servicios Earhart employs some of Volaris Opco became direct shareholders of Volaris by transferring their shares of Volaris Opco to Volaris, with the exception of 2.05% of Volaris Opco shares heldour employees in a Mexican trust thatGuatemala. Both Vuela and Servicos Earhart are incorporated in Guatemala. Vuela Aviación is beneficially owned by Volaris. Once the trust agreementour operating subsidiary in Costa Rica and is executed shares of Volaris Opco held in this Mexican trust may be exchanged for Series A shares of Volaris pursuant to a call option that will expire in 2018. If the call option is not exercised by the expiration date, then the shares will be automatically converted on such date. On April 10, 2013, Volaris signed the adherence agreement to the trust agreement.
We do not legally own all the shares of Volaris Opco as they are owned by the trust (Irrevocable Administrative and Safeguarding Trust denominated “DAIIMX/VOLARIS”, identified administratively under number F/1405 hereinafter the “Trust”,) however, beginning April 22, 2013, we became the beneficiary of those
shares and, therefore, for accounting purposes we obtained control over the shares of Volaris Opco in accordance with the Trust agreement pursuant toIFRS 10 Consolidated Financial Statements. On December 9, 2013, the Trust transferred to us 10,182 shares of Volaris Opco.incorporated there. See Exhibit 8.1 to this annual report for a complete list of our subsidiaries, their country of operation and our percentage and voting ownership in each.
Additionally, under IFRS 10Consolidated Financial Statements, we exercise control over other trusts as described below.
Name | Principal Activities | Country | % Equity interest | |||||||||
| 2016 | 2015 | |||||||||||
Deutsche Bank México, S.A., Trust 1710 | Pre-delivery payments financing | Mexico | 100.00 | % | 100.00 | % | ||||||
Deutsche Bank México, S.A., Trust 1711 | Pre-delivery payments financing | Mexico | 100.00 | % | 100.00 | % | ||||||
Management incentive plan:In December 2012, our shareholders approved a share incentive plan for the benefit of certain executive officers. Under this plan, designated officers generally may receive up to 3.0% of our capital stock on a fully diluted basis immediately prior to the completion of the related performance condition (consummation of our initial public offering or change of control), exercisable after such performance condition and for a period of ten years. To implement the plan, our shareholders approved (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of our capital stock, (ii) the transfer of such shares to the Management Trust number F/307750 (the “Management Trust”) for the benefit of certain officers and (iii) the execution of share sales agreements setting forth the terms and conditions upon which the officers will receive purchased shares from the trustee of the Management Trust. On December 24, 2012, the Management Trust was created and the share sales agreements were executed. On December 27, 2012, the trust acquired the aforementioned shares. The shares will accrue any dividends paid by us during the time elapsing prior to the delivery to officers upon payment therefore.
On September 18, 2013, our Initial Public Offering Date, the key employees participating in the management incentive plan exercised 4,891,410 Series A and Series B shares. The key employees paid Ps.25.9 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
On November 16, 2015, as part of our secondaryfollow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps.23.5 million to the Management Trust corresponding to the exercised shares.
During 2016, the key employees exercised 3,299,999 Series A shares. The key employees paid Ps.17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. See Item 5: “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Long-term Incentive Plans—Management Incentive Plan.”
Management incentive plan II:On February 19, 2016, our board of directors authorized an extension of the management incentive plan for certain key executives (“MIP II”). Such extension was modified and approved November 6, 2016. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise the MIP II once the SARs are vested was also approved. During the year ended December 31, 2016, our recorded expenses related for this plan totaled Ps.54.4 million.
Share purchase plan (equity-settled):On November 6, 2014, we approved an amendment to our long-term retention plan for the benefit of certain key executives, based on the recommendations of our board of directors at its meetings held on July 24 and August 29, 2014. In connection therewith, in November 2014, we established a share purchase plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps.10.8 million to be used to purchase our shares. An irrevocable administrative trust number F/745291 was created by Servicios Corporativos, as trustee, to administer this plan.
In April and October 2016, our board of directors authorized extensions to this plan. The total costs of the plan extensions approved were Ps.14.5 million and Ps.11.6 million, respectively, to be used to purchase our shares.
An irrevocable administrative trust was created by Servicios Corporativos, as trustee, to administer this plan. See Item 5: “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Long-term Incentive Plans—Share Purchase Plan.”
During the year ended December 31, 2015 and 2016, certain of these key employees left the Company. Therefore; the vesting conditions were not fulfilled. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares.
| D. | Property, Plants and Equipment |
We lease all of our facilities at each of the airports we serve. Our leases for our terminal passenger service facilities, which include ticket counter and gate space, operations support area and baggage service offices, generally have terms ranging from one to three years and contain provisions for periodic adjustments of lease rates. We expect to either renew these leases or find alternative space that would permit us to continue providing our services. We also are responsible for maintenance, insurance and other facility-related expenses and services. We have also entered into use agreements at each of the airports we serve that provide for thenon-exclusive use of runways, taxiways and other facilities. Landing fees under these agreements are based on the number of landings and weight of the aircraft.
Our primary corporate offices and headquarters are located in Mexico City at Av. Antonio Dovalí Jaime No.70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México D.F.City, zip code 01210, where we lease 6,656 square meters under a lease that expires in May 2022. We also lease a 1,500 square-meter warehouse for storage, located in Toluca within the airport area, under a lease that expires in 2015.August 2018. In addition, we leasesublease a hangar facility in Toluca, under a lease thatat the Tijuana airport, such sublease expires in December 2014.on July 15, 2017.
| ITEM | UNRESOLVED STAFF COMMENTS |
None.
| ITEM | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| A. | Operating Results |
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”
Description of Our Principal Line Items
Operating Revenues
Passenger RevenueRevenue.. We derive our operating revenues primarily from transporting passengers on our aircraft. Approximately 86%76% of our total operating revenues were derived from passenger fares in 2013.2016. Passenger revenues are based upon our capacity, load factor and the average ticket revenue per booked passenger. Our capacity is measured in terms of ASMs, which represents the number of seats we make available on our aircraft multiplied by the number of miles the seats are flown. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing RPMs by ASMs. The average ticket revenue per booked passenger represents the total passenger revenue divided by booked passengers.
Non-ticket Revenue Revenue.. We derived approximately 14%24% of our total operating revenues in 20132016 fromnon-ticket revenue. Non-ticket revenue is composed ofThe most significantnon-ticket revenues include revenues generated from (i) air travel-related services (ii) revenues fromnon-air-travel related services and (iii) cargo services.
Air travel-related services include, but are not limited to, fees relating to transportation of cargo, charter flight services,charged for excess baggage, advancebookings through our call center or third-party agencies, advanced seat selection, extra legroom, fooditinerary changes, charters and beverages, carriagepassenger charges forno-show tickets. They are recognized as revenue when the related service is provided.
Non-air-travel-related services include commissions charged to third parties for the sale of sports equipmenthotel rooms, trip insurance and pets, ticket changes, V-Club subscriptions,rental cars. They are recognized as revenue at the Volaris affinity credit cardtime the service is provided. Additionally, services not directly related to air transportation include Volaris’ sale of VClub membership and onboard advertising. the sale of advertising spaces to third parties. VClub membership fees are recognized as revenues over the life of the membership. Revenue from the sale of advertising spaces is recognized over the period in which the space is provided.
Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination).
The following table
shows each of the line items in our consolidated statements of operations for the periods indicated as a percentage of our total operating revenues for that period:
| For the Years ended December 31, | For the Years ended December 31, | |||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||
Passenger | 91 | % | 87 | % | 86 | % | 81 | % | 78 | % | 76 | % | ||||||||||||
Non-ticket | 9 | % | 13 | % | 14 | % | 19 | % | 22 | % | 24 | % | ||||||||||||
Total operating revenues | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
Other operating income | (1 | %) | (1 | %) | (1 | %) | 0 | % | (1 | %) | (2 | %) | ||||||||||||
Fuel | 43 | % | 40 | % | 39 | % | 38 | % | 26 | % | 24 | % | ||||||||||||
Aircraft and engine rent expense | 17 | % | 17 | % | 17 | % | 18 | % | 19 | % | 24 | % | ||||||||||||
Landing,take-off and navigation expenses | 15 | % | 14 | % | 14 | % | ||||||||||||||||||
Salaries and benefits | 13 | % | 11 | % | 12 | % | 11 | % | 10 | % | 10 | % | ||||||||||||
Landing, take-off and navigation expenses | 14 | % | 14 | % | 15 | % | ||||||||||||||||||
Sales, marketing and distribution expenses | 9 | % | 7 | % | 5 | % | 6 | % | 6 | % | 6 | % | ||||||||||||
Maintenance expenses | 4 | % | 4 | % | 4 | % | 5 | % | 5 | % | 6 | % | ||||||||||||
Other operating expenses | 4 | % | 3 | % | 4 | % | 3 | % | 4 | % | 4 | % | ||||||||||||
Depreciation and amortization | 1 | % | 2 | % | 2 | % | 2 | % | 3 | % | 2 | % | ||||||||||||
Total operating expenses, net | 104 | % | 97 | % | 98 | % | 99 | % | 86 | % | 88 | % | ||||||||||||
Operating (loss) income | (4 | %) | 3 | % | 2 | % | ||||||||||||||||||
Operating income | 1 | % | 14 | % | 12 | % | ||||||||||||||||||
Finance income | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Finance cost | (1 | %) | (1 | %) | (-1 | %) | 0 | % | 0 | % | 0 | % | ||||||||||||
Exchange gain, net | 1 | % | 0 | % | 1 | % | 3 | % | 5 | % | 9 | % | ||||||||||||
Other financing income, net | 0 | % | 0 | % | 0 | % | ||||||||||||||||||
(Loss) income before income tax | (4 | %) | 2 | % | 2 | % | ||||||||||||||||||
Income before income tax | 5 | % | 19 | % | 21 | % | ||||||||||||||||||
Income tax expense | 0 | % | 0 | % | 0 | % | 0 | % | (6 | %) | (6 | %) | ||||||||||||
Net (loss) income | (4 | %) | 2 | % | 2 | % | ||||||||||||||||||
Net income | 4 | % | 14 | % | 15 | % | ||||||||||||||||||
Revenues from our international operations represented 23.6%27.2%, 24.4%30.8% and 26.0%33.1% of our total revenues in 2011, 20122014, 2015 and 20132016, respectively, and revenues from our domestic operations represented 76.4%72.8%, 75.6%69.2% and 74.0%66.9% of our total revenues in 2011, 20122014, 2015 and 2013,2016, respectively.
Revenue RecognitionRecognition.. Revenues from the air transportation of passengers and commissions from ground transportation services are recognized at the earlier of when the service is provided or when thenon-refundable ticket expires at the date of the scheduled travel. Ticket sales for future flights are initially recognized as liabilities under the caption unearned transportation revenue and, upon provision of the corresponding transportation service or expiration of the ticket, the earned revenue is credited to operations as revenues and the liability account is reduced by the same amount. All of our tickets arenon-refundable, and subject to change upon the payment of a fee. Additionally, we do not operate a frequent flier program. Non-ticket revenue includesOur most significantnon-ticket revenues include revenues generated from (i) air travel-related services,(ii) non-air-travel related services, and (iii) cargo services:
Non-air-travel-related services include commissions charged to third parties for the sale of hotel rooms, trip insurance and rental cars. They are recognized as revenue at the time the service is provided. Additionally, services not directly related to air transportation include Volaris’ sale of VClub membership and the sale of advertising spaces to third parties. VClub membership fees are recognized as revenues over the life of the membership. Revenue from the sale of advertising spaces is recognized over the period in which the space is provided. Revenues from cargo services are recognized when the cargo transportation is provided which is typically(upon delivery of the flight date.cargo to the destination).
We are also required to collect certain taxes and fees from customers on behalf of government agencies and airports and remit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include value added tax, federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. We record a liability upon collection from the customer and discharge the liability when payments are remitted to the applicable governmental entity or airport.
Operating Expenses, net
Our operating expenses consist of the following line items.
Other Operating IncomeIncome.. Other operating income primarily includes the gains from sale and leasebacklease back operations of our aircraft and engines.
FuelFuel.. Fuel expense is our single largest operating expense. It includes the cost of fuel, related taxes, fueling into-plane fees and transportation fees. It also includes realized gains and losses that arise from any fuel price derivative activity qualifying for hedge accounting.
Aircraft and Engine Rent ExpenseExpense.. Aircraft rent expense consists of monthly lease rents for our 4469 aircraft and six11 spare engines, as of December 31, 2013,2016, under the terms of the related operating leases and is recognized on a straight line basis. Aircraft rent expense also includes gains and losses related to our interest rate swap contracts that qualify for hedge accounting. Additionally, if we determine that we will probably not recover partially or completely the maintenance deposits we pay to the lessor as maintenance reserves,deposits, we record these amounts in the results of operations as additional aircraft rent (supplemental and contingent rent) from the time we make the determination.determination over the remaining term of the lease.
Salaries and BenefitsBenefits.. Salaries and benefits expense includes the salaries, hourly wages, employee health insurance coverage and variable compensation that are provided to employees for their services, as well as the related expenses associated with employee benefit plans and employer payroll taxes.
Landing,Take-off and Navigation ExpensesExpenses.. Landing,take-off and navigation expenses include airport fees, handling charges, and other rents, which are fixed and variable facilities’ expenses, such as the fees charged by airports for the use or lease of airport facilities, as well as costs associated with ground handling services that we outsource at certain airports. This expense also includes route charges, which are the costs of using a country’s or territory’s airspace, and are levied depending on the distance flown over such airspace.
Sales, Marketing and Distribution ExpensesExpenses.. Sales, marketing and distribution expenses consist of advertising and promotional expenses directly related to our services, including the cost of web support, our outsourced call center, travel agent commissions, and credit card discount fees that are associated with the sale of tickets and other products and services.
Maintenance ExpensesExpenses.. Maintenance expenses include all parts, materials, repairs and fees for repairs performed by third-party vendors directly required to maintain our fleet. It excludes the direct labor cost of our own mechanics, which is included under salaries and benefits and includes only routine and ordinary maintenance expenses. Major maintenance expenses are capitalized and subsequently amortized as described in “—Depreciation and Amortization—” below.
Other Operating ExpensesExpenses.. Other operating expenses include (i) administrative support such as travel expenses, stationery, administrative training, monthly rent paid for our headquarters’ facility, professional fees and all other administrative and operational overhead expenses; (ii) premiums and all expenses related to the aviation insurance policy (hull and liability); (iii) costs for technological support, communication systems, cell phones, and internal and operational telephone lines; (iii) premiums and all expenses related to the aviation insurance policy (hull and liability); (iv) outsourced ground services and the cost of snacks and beverages that we serve on board to our passengers.passengers; and (v) rent expense associated with the lease of our maintenance warehouse and hangar.
Depreciation and AmortizationAmortization.. Depreciation and amortization expense includes the depreciation of all rotable spare parts, furniture and equipment we own and leasehold improvements to flight equipment. It also includes the amortization of major maintenance expenses we defer under the deferral method of accounting for major maintenance events associated with the aging of our fleet and recognize over the shorter period of the next major maintenance event or the remaining lease term.
A common measure of per unit costs in the airline industry is cost per available seat mile (CASM). The following table shows the breakdown of CASM for the periods indicated:
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2013 | 2014 | 2015 | 2016 | 2016 | |||||||||||||||||||||||||
| (In Ps. cents) | (In U.S.$ cents)(1) | (In Ps.cents) | (In U.S. $ cents)(1) | |||||||||||||||||||||||||||||
Other operating income | (0.9 | ) | (0.7 | ) | (1.0 | ) | (0.1 | ) | (0.2 | ) | (1.4 | ) | (3.0 | ) | (0.1 | ) | ||||||||||||||||
Fuel | 48.2 | 51.2 | 46.7 | 3.6 | 45.3 | 33.6 | 34.4 | 1.6 | ||||||||||||||||||||||||
Aircraft and engine rent expense | 19.0 | 20.4 | 20.1 | 1.5 | 21.4 | 25.1 | 33.5 | 1.6 | ||||||||||||||||||||||||
Landing,take-off and navigation expenses | 17.5 | 18.5 | 19.6 | 0.9 | ||||||||||||||||||||||||||||
Salaries and benefits | 14.1 | 14.0 | 14.3 | 1.1 | 13.3 | 13.5 | 14.5 | 0.7 | ||||||||||||||||||||||||
Landing, take-off and navigation expenses | 16.1 | 17.7 | 17.6 | 1.3 | ||||||||||||||||||||||||||||
Sales, marketing and distribution expenses | 9.5 | 8.1 | 6.5 | 0.5 | 6.9 | 7.7 | 8.5 | 0.4 | ||||||||||||||||||||||||
Maintenance expenses | 4.8 | 5.4 | 5.2 | 0.4 | 5.6 | 6.2 | 8.0 | 0.4 | ||||||||||||||||||||||||
Other operating expenses | 4.4 | 3.9 | 4.2 | 0.3 | 4.1 | 5.0 | 5.7 | 0.3 | ||||||||||||||||||||||||
Depreciation and amortization | 1.3 | 2.3 | 2.8 | 0.2 | 2.9 | 3.3 | 3.2 | 0.2 | ||||||||||||||||||||||||
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Total operating expenses, net | 116.5 | 122.3 | 116.4 | 8.9 | 116.9 | 111.5 | 124.4 | 6.0 | ||||||||||||||||||||||||
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| (1) | Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of |
Trends and Uncertainties Affecting Our Business
We believe our operating and business performance is driven by various factors that affect airlines and their markets, trends affecting the broader travel industry, and trends affecting the specific markets and customer base that we target. The following key factors may affect our future performance.
Economic Conditions in Mexico.Mexico’s GDP is expected to grow by 3%2% to 5%3% per year for the next ten years according to the Mexican Central Bank, which is 1%0% to 2%1% above the expected annual growth for the United States during the same period as reported by the U.S. Federal Reserve. Mexico’s projected GDP growth is expected to result in the number of middle-income homes continuing their growth trend, having already grown from 5.1 million in 1992 to 15.8 million in 2008. Regarding population dynamics as of 2010,2015, according to the INEGI intercensal survey, around 39%36% of the Mexican population was under 20 years of age, which benefits us by providing a strong base of potential customer growth. Inflation in Mexico during 20132016 was 3.97%3.36% according to the INEGI. As of December 31, 2013,2016, international reserves were at U.S.$ 178.7 million. $176.5 billion.
CompetitionCompetition.. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities and related services, number of routes served from a city, customer service, safety record and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network airlines,low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and otherlow-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital and may serve more routes than we do.
Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which at Ps.1.164Ps.124.4 cents (U.S.$0.089) $6.0 cents) we believe was the lowest CASM in Latin America in 2013,2016, compared to Avianca-TACAAvianca at U.S.$ 0.175, $13.2 cents, Copa at U.S.$0.110, $8.8 cents, Gol at U.S.$0.130, $9.8 cents, Grupo Aeroméxico at U.S.$0.145 $9.0 cents and LATAM at U.S.$0.155. $10.7 cents. We also have lower costs than our publicly traded target market competitors in the United States, including Alaska Air at U.S.$0.128, $10.4 cents, American at U.S.$0.151, $12.8 cents, Delta at U.S.$0.148 $13.0 cents, JetBlue at U.S. $10.8 cents, Southwest Airlines at U.S. $11.2 cents and United at U.S.$0.151. $12.7 cents.
Our principal competitors for the domestic market are Grupo Aeroméxico, Interjet and VivaAerobus, Interjet and VivaAerobus arelow-cost carriers in Mexico. In 2013,2016, the Mexicanlow-cost carriers (including us) combined had 59.9%63.5% of the domestic market based on passenger flight segments. We had 23.2%27.5% of the domestic market which placed us third,second, according to the DGAC.
We also face domestic competition from ground transportation alternatives, primarily long-distance bus companies. There are limited passenger rail services in Mexico. There is a large bus industry in Mexico, with total passenger segments of approximately 2.83.0 billion in 2013,2016, of which approximately 7580 million were executive and luxury passenger segments, according to the Mexican Authority of Ground Transportation (Dirección General de Autotransporte Federal) and which could include both long- and short-distanceshort-
distance travel. We set certain of our promotional fares at prices lower than bus fares for similar routes in order to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus. We believe a small shift of bus passengers to air travel would dramatically increase the number of airline passengers and bring the air trips per capita figures in Mexico closer to those of other countries in the Americas.
Our principal competitors for the international routes between Mexico and the United States are Grupo Aeroméxico, Alaska Air, Delta and United. We have grown rapidly in the international market since we started international operations in 2009, reaching 36.9%35% market share on the routes that we operate and 6.8%10% market share considering all routes between Mexico and the United States in 2013,2016, according to the DGAC.
Seasonality and VolatilityVolatility.. Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. We generally expect demand to be greater during the summer in the northern hemisphere, in December and around Easter, which can fall either in the first or second quarter, compared to the rest of the year. Our business is also volatile and highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, health outbreaks, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, weather and other factors have resulted in significant fluctuations in our revenues and results of operations in the past. Particularly, in 2008, the demand for air transportation services was significantly adversely affected by both the severe economic recession and the record high fuel prices. We believe, however, that demand for business travel historically has been more sensitive to economic pressures than demand forlow-price leisure and VFR travel, which are the primary markets we serve.
In addition, on January 20, 2017, Donald Trump became president of the United States. President Trump has already implemented immigration policies that have adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets, and there is a possibility that further immigration policy changes are to come. President Trump’s immigration policies had a negative impact on our results of operations during the first quarter of 2017 and this negative impact can be expected to continue if the Trump administration continues to carry out such immigration policies.
FuelFuel.. Fuel costs represent the single largest operating expense for most airlines, including ours. Fuel costs have been subject to wide price fluctuations in recent yearsours, accounting for 39%, 30% and could continue to rise. In 2013,28% of our total operating expenses for example, our fuel costs increased 7.5% due to an increase in our operations coupled with a 6.5% decrease in average economic fuel cost per gallon.2014, 2015 and 2016. Fuel availability and pricing are also subject to refining capacity, periods of market surplus and shortage, and demand for heating oil, gasoline and other petroleum products, as well as economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining sources located in Mexico. For
During 2016, we did not enter into US Gulf Coast Jet Fuel 54 swap contracts. During the yearyears ended December 31, 2013,2014 and 2015 we hedgedentered into US Gulf Coast Jet fuel 54 swap contracts to hedge approximately 11%20% and 5% of our forecasted fuel requirements using over-the-counter swaps.consumption, respectively. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within other comprehensive income, while the effects of transforming into a fixed jet fuel prices by these hedges are presented as part of jet fuel costs when recognized in the consolidated statements of operations. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under swap agreements and the pricing of hedges and other derivative products in the market.
Additionally, during the year ended December 31, 2016, we also entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge approximately 52% and 24% of our 2017 and 2018 projected fuel consumption, respectively. During the year ended December 31, 2015, we entered into US Gulf Coast fuel 54 Asian call options designated to hedge approximately 55% and 23% of our 2016 and 2017 projected fuel consumption, respectively.
As of December 31, 2013, we had hedged approximately 11.9% and 4.0% of our projected fuel requirements for the first and second quarter of 2014, respectively. As of December 31, 2013,2016, we purchased our domestic fuel under the ASA fuel service contract, and the international fuel under the WFS, BP Products North America, Chevron and ChemoilAssociated Energy Group fuel service contracts. The cost and future availability of fuel cannot be predicted with any degree of certainty.
Foreign Exchange Gains and Losses.We receive allWhile most of our revenue is generated in Mexican pesos, 33% of our revenues came from our operations in the United States and Central America during the year ended December 31, 2016 (compared to 31% during the year ended December 31, 2015) and U.S. dollars. U.S.dollar-denominateddollar denominated collections accounted for 34%36% and 31%38% of our total collections in 20122015 and 2013, respectively, which provides a natural partial hedge against a portion of our U.S. dollar costs. However,2016, respectively. In addition, the majority of our operating costs are denominated in or indexed to U.S. dollars, constituting 69%67% and 75%69% of our
total operating costs in 20122015 and 2013.2016. Our key U.S. dollar-denominated operating costs include fuel, aircraft rentals maintenance, and material and repairmaintenance costs.
We manage our foreign exchange risk exposure by a policy of matching, to the extent possible, receipts and local payments in each individual currency. Most of the surplus funds are converted into U.S. dollars. However, we are exposed to fluctuations in exchange rates between the peso and the U.S. dollar.
As of December 31, 2015, and 2016, our net asset position denominated in U.S. dollars was U.S. $390.1 million and U.S. $584.5 million, respectively. As a result of the significant depreciation and appreciation of the peso against the U.S. dollar in the last three years and our net U.S. dollar asset position, we recorded a foreign exchange gain/(loss),gain, net of Ps.110.1Ps.448.7 million in 2011, Ps.(95.3)2014, Ps.966.6 million in 20122015 and Ps.66.4 millionPs.2.2 billion in 2013.2016.
Maintenance ExpensesExpenses.. We are required to conduct varying levels of aircraft and engine maintenance which involve significantly different labor and materials inputs. Maintenance requirements depend on the age and type of aircraft and the route network over which they operate. Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks. Aircraft maintenance and repair costs for routine andnon-routine maintenance are divided into three general categories:
| (i) | Routine maintenance requirements consist of daily and weekly scheduled maintenance checks on our aircraft, includingpre-flight, daily, weekly and overnight checks, diagnostic and routine repairs and any necessary unscheduled tasks performed. These types of line maintenance are currently serviced by our mechanics and are primarily completed at the main airports that we currently serve. All other maintenance activities aresub-contracted to qualified maintenance, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and are required approximately every 22 months. All routine maintenance costs are expensed as incurred. |
| (ii) | Major maintenance consists of a series of more complex tasks that can take from one to eight weeks to accomplish and are generally required approximately every five to six years. Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized as improvements to leased assets and amortized over the shorter period of the next major maintenance event or the remaining lease term. |
| (iii) | Engine services are provided pursuant to an engine flight hour agreement that guarantees a cost per overhaul, provides miscellaneous engine coverage, caps the cost of foreign objects damage events, ensures protection from annual escalations and grants an annual credit for scrapped components. We also have apower-by-hour agreement for component services, which guarantees the availability of aircraft parts for our fleet when they are required and provides aircraft parts that are not included in the redelivery conditions of the contract without constituting an additional cost at the time of redelivery. The costs associated with the miscellaneous engine coverage and the component services agreements are recorded in the consolidated statement of operations. |
Due to the young age of our fleet (approximately 4.2 years on average as of December 31, 2013)2016), maintenance expense in 20122015 and 20132016 remained relatively low. For the years ended December 31, 2011, 20122015 and 20132016 we capitalized major maintenance events as part of leasehold improvements to the flight equipment in the amount of Ps.162.6 million, Ps.129.9Ps.295.8 million and Ps.309.4Ps.226.5 million, respectively. For the years ended December 2011, 201231, 2014, 2015 and 20132016 the amortization of these deferred major maintenance expenses was Ps.37.5Ps.253.4 million, Ps.126.3Ps.352.9 million and Ps.210.5Ps.404.7 million, respectively. The amortization of deferred maintenance expenses is included in depreciation and amortization rather than total maintenance costs as described in “—Critical Accounting Polices and Estimates.” In 20122014, 2015 and 2013,2016, total maintenance costs amounted to Ps.498.8Ps.664.6 million, Ps.874.6 million and Ps.572.1 million,Ps.1.3 billion, respectively. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot
reliably quantify future maintenance expenses for any significant period of time. However, we estimate that based on our scheduled maintenance events, current maintenance expense and maintenance-related amortization expense will be approximately Ps.374.4 millionPs.2.1 billion (U.S.$28.7 $107.1 million) in 2014.2017.
Aircraft Maintenance Reserve ObligationsDeposits Paid to Lessors.. The terms of our aircraft lease agreements require us to pay maintenance reservesdeposits to lessors to be paid to the lessor in advance of andheld as collateral for the performance of major maintenance events,activities, resulting in our recording significant prepaid deposits on our consolidated statements of financial position. As a result, the cash costs of scheduled major maintenance events are paid well in advance of the recognition of the maintenance event in our results of operations. Please see Item 5: —Critical—Critical Accounting Policies and Estimates.”
Ramp-up Period for New RoutesRoutes.. In late 2010 and 2011,During 2014 we took advantage of the opportunity to start operating 15 routes that had been primarily operated by Grupo Mexicana before it ceased operations. This allowed us to, among other things, obtain access to six bi-lateral routes from the Mexico City international airport to the United States that were otherwise unavailable. It also meant additional costs and operational challenges as we had to change certain routes in Mexico City from the Toluca airport to the busier and more complex Mexico City international airport. We launched theopened 38 new routes, on short notice. Since then and after a ramp-up period, we have regularized our performance-related customer service measures and load factor. We have requested the DGAC to permanently grant us the six routes from the Mexico City international airport to the United States that we have been operating since late 2010 and 2011, which had been primarily operated by Grupo Mexicana prior to ceasing its operations. However, we cannot be certain that the DGAC will permanently grant us such routes. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorganizations could adversely affect the industry.”
During 2012 we opened 18 new routes and added 2722 more in 2013.2015 and 20 more in 2016. As we continue to grow, we would expect to continue to experience a lag between when new routes are put into service and when they reach their full profit potential. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorganizations could adversely affect the industry.”
Critical Accounting Policies and Estimates
The following discussion and analysis of our consolidated financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Note 1 to our consolidated financial statements included herein provides a detailed discussion of our significant accounting policies.
Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters that are both inherently uncertain and material to our financial condition or results of operations.
Aircraft Maintenance Reserves.Deposits Paid to Lessors.Our lease agreements provide that we pay maintenance reservesdeposits or supplement rent to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. Maintenance reservesdeposits are held as collateral in cash. These lease agreements provide that maintenance reservesdeposits are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance reservedeposits held by the lessor associated with the specific maintenance event or (ii) the qualifying costs related to the specific maintenance event. Substantially all of these maintenance reserve paymentsdeposits are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft.aircraft and engines. We paid Ps.674.0Ps.834.9 million, Ps.349.2 millionPs.1.4 billion and Ps.544.3 millionPs.2.2 billion in maintenance reserves,deposits, net of reimbursements, to our lessors for the years ended December 31, 2011, 20122014, 2015 and 2013,2016, respectively.
At lease inception and at each consolidated statement of financial position date, we assess whether the maintenance reservedeposit payments required by the lease agreements are substantively and contractually related to the
maintenance of the leased asset. Maintenance reservedeposit payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position.
The portion of prepaid maintenance deposits that are deemed unlikely to be recovered, primarily relate to the rate differential between the maintenance reservedeposits payments and the expected cost for the next related maintenance event that the reservesdeposits serve to collateralize is recognized as supplemental rent.
Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent starting from the period the determination is made. When it is not probable that we will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. We expensed Ps.36.7Ps.43.0 million in 2011, Ps.27.22014, Ps.73.3 million in 20122015 and Ps.38.4Ps.143.9 million in 20132016 of maintenance reserve paymentsdeposits as supplemental rent.
As of December 31, 2011, 20122014, 2015 and 20132016 we had prepaid maintenance deposits of Ps.1,713.7 million, Ps.2,063.0 millionPs.3.4 billion, Ps.4.9 billion and Ps.2,607.3 million,Ps.7.1 billion, respectively, recorded in our consolidated statement of financial position. We have concludedcurrently expect that these prepaid maintenance deposits are likely to be recovered primarily because there is no rate differential between the maintenance reservedeposit payments and the expected cost for the related next maintenance event that the reservesdeposits serve to collateralize.
Our lease agreements also provide that all maintenance reserves held by the lessor at the expiration of the lease are nonrefundable to us and will be retained by the lessor. Consequently, we have determined that anyusage-based maintenance reserve payments after the last major maintenance event are not substantively related to the maintenance of the leased asset and therefore are accounted for as contingent rent. We accrue contingent rent beginning when it becomes probable and reasonably estimable we will incur such nonrefundable maintenance reserve payments. Maintenance reserves held by lessors that are refundable to us at the expiration of the lease are accounted for as prepaid maintenance deposits on the consolidated statement of financial position when they are paid to the lessors. ForDuring the years ended December 31, 2011, 20122014, 2015 and 2013, we expensed as contingent rent Ps.94.6 million, Ps.99.4 million and Ps.102.7 million, respectively.
During the year ended December 31, 2011,2016 we extended the lease termsterm of sixone aircraft leaseagreement, three aircraft agreements whichand two agreements, respectively. These extensions made available to us maintenance deposits that were recognized in prior periods in the consolidated statementstatements of operations as supplementalcontingent rent of Ps.163.0 million. The maintenance event for which the maintenance deposits were previously expensed was scheduled to occur after the original lease termPs.47.4 million, Ps.92.6 million and as such, the supplemental rental payments were expensed, as they were not substantiallyPs.92.5 million during 2014, 2015 and contractually related to maintenance. When the leases were amended, however, the maintenance deposits amounts became probable of recovery due to the longer lease term and, as such, they are being recognized as an asset.2016, respectively.
Because the lease extension benefits are considered lease incentives, the benefits are deferred in the caption other liabilities and are being amortized on a straight-line basis over the remaining revised lease terms. For the years ended December 31, 2011, 20122014, 2015 and 2013,2016, we amortized Ps.10.4Ps.26.9 million, Ps.23.3Ps.45.3 million and Ps.25.6Ps.74.7 million respectively, of this amount which was recognized as a reduction of rent expenses in the consolidated statements of operations.
Additionally, duringDuring the year ended December 31, 2013,2016, we extendedadded 13 new net aircraft to our fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so we do not record guarantee deposits regarding these aircraft. However, some of these agreements provide the obligation to make a maintenance adjustment payment to the lessors at the end of the contract period. This adjustment covers maintenance events that are not expected to be made before the termination of the contract. We recognize this cost as a contingent rent during the lease term of two spare engine agreements, which made available to the Company maintenance deposits that were recognized in prior periodsrelated aircraft, in the consolidated statementsstatement of operationsoperations.
For the years ended December 31, 2014, 2015 and 2016, we expensed as supplementalcontingent rent of Ps.22.9 million. The effect of these lease extensions also were recognized as a guarantee depositPs.110,736, Ps.290,857 and a deferred liability in the consolidated statements of financial position at the time of lease extension.Ps.201,434, respectively.
Aircraft Maintenance Deposits Paid to Lessorsand Engine Maintenance.. We account for major maintenance under the deferral method. Under the deferral method, the cost of major maintenance is capitalized (leasehold improvements)improvements to flight equipment) and
amortized as a component of depreciation and amortization expense until the next major maintenance event or during the remaining contractual lease term, whichever occurs first. The next major maintenance event is estimated based on assumptions including estimated usage maintenance intervals mandated by the FAA in the United States and the DGAC in Mexico and average removal times suggested by the manufacturer. These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and changes in suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a major maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated useful life would decrease before the next maintenance event, resulting in additional amortization expense over a shorter period.
In 2011, 20122014, 2015 and 2013,2016, we capitalized costs of major maintenance events of Ps.162.6Ps.585.7 million, Ps.129.9Ps.415.0 million and Ps.309.4Ps.226.5 million, respectively and we recognized amortization expenses of Ps.37.5Ps.253.4 million, Ps.126.3Ps.352.9 million and Ps.210.5Ps.404.7 million, respectively. The amortization of deferred maintenance expenses is included under the caption depreciation and amortization expense in our consolidated statement of operations. If the amortization of major maintenance expenditures were classified as maintenance expense, they would amount to Ps.417.2Ps.918.0 million, Ps.625.1Ps.1,227.5 million and Ps.782.6Ps.1,748.8 million for the years ended December 31, 2011, 20122014, 2015 and 2013,2016, respectively.
Fair value:The fair value: Our of our financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets. They are determined using valuation techniques such as the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions regarding these factors could affect the reported fair value of financial instruments.
Gains and Losses on Sale and LeasebackLeaseback.. For aircraft acquired through a sale and leaseback transaction, any profit or loss is accounted for as follows: (i) profit or loss is recognized immediately when it is clear that the transaction is established at fair value; (ii) if the sale price is below fair value, any profit or loss is recognized immediately; however, if the loss is compensated for by future lease payments at below market price, such loss is recognized as an asset on the consolidated statements of financial position and loss recognition is deferred and amortized to the consolidated statements of operations in proportion to the lease payments over the contractual lease term; and (iii) if the sale price is above fair value, the excess is deferred and amortized to the consolidated statements of operations over the asset’s expected lease term, including probable renewals, with the amortization recorded as a reduction of rent expense.
During the year ended December 31, 2011, 20122014, 2015 and 2013,2016 we sold and transferred aircraft and engines to third parties, giving rise to a gain of approximately Ps.72.8Ps.14.2 million, Ps.61.3Ps.181.7 million and Ps.106.6Ps.484.8 million respectively, that was recorded underas other operating income in the consolidated statement of operations.
During the year ended December 31, 2011, we entered into aaircraft and spare engine sale and leaseback transaction, resultingtransactions, which resulted in a loss of approximately Ps.30.7 million on the sale.million. This loss was recorded indeferred on the consolidated statements of financial position as an asset and is being amortized as a portion of the aircraft rent over the contractual lease term. AtFor the years ended December 201231, 2014, 2015 and 2013, the current portion of Ps.3.0 million was recorded as prepaid expenses and other current assets, and the non-current portion of Ps.26.6 million and Ps.23.6 million was recorded as other assets, respectively.
During 2011, 2012 and 2013,2016, we amortized a loss of Ps.1.0Ps.3.0 million, Ps.3.0 million and Ps.3.0 million, respectively. After the sale, therespectively, as additional aircraft and engines were leased back under operating lease agreements.rental expense.
In August 2012, we entered into a total support agreement with Lufthansa Technik AG (LHT) for a six-year term,, as amended in December 2016, that expires December 31, 2022, which includes a total component support agreement(power-by-hour) and ensures the availability of aircraft components for our fleet when they are required. The cost of the total component support agreement is applied monthly to the results of operations. Additionally, this transaction includes a sale and leaseback
agreement for certain components. As part of this total support agreement, we received credit notes of Ps.46.5 million, which was deferred on the consolidated statement of financial position and is being amortized on a straight line basis, prospectively during the term of the agreement.
As of December 31, 2012During 2014, 2015 and 2013,2016, we amortized a corresponding benefit from these credit notes of, Ps.3.5Ps.9.3 million, Ps.9.3 million and Ps.9.3 million, respectively, which is recognized in the consolidated statements of operations as a reduction of maintenance expenses.
During 2012 and 2013,2014, we applied Ps.25.3 million and Ps.11.2Ps.21.1 million, to outstanding LHT invoices andinvoices. Additionally, as of December 31, 2013, we also recorded an account receivable of Ps.21.2 million and Ps.10.0Ps.10 million for the unused portion of the credit notes. This account receivable will be applied against future invoices payable to LHT underThe credit notes were used during the total support agreement.year ended December 31, 2014.
Equity-settled TransactionsTransactions.. Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. The Equity-settled Transactions include a share purchase plan and a management incentive plan.
Long-term Incentive Plans
Share Purchase Plan
In November 2014, we established a share purchase plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps.10.8 million to be used to purchase our shares. On April 21, 2016, an amendment to this plan was approved at our annual ordinary shareholders’ meeting. The key components of the plan are as follows:
| (i) | Servicios Corporativos granted a bonus to each key executive. |
| (ii) | Pursuant to the instructions of such key executives, on November 11, 2014, an amount equal to Ps.7.1 million (the fair value of the bonus net of withheld taxes) was transferred to an administrative trust for the acquisition of our Series A shares through an intermediary authorized by the Mexican stock market, based on the instructions of the administration trust’s technical committee. |
| (iii) | Subject to the terms and conditions set forth in the administrative trust agreement signed in connection thereto, the acquired shares are to be held in escrow in the administrative trust until the applicable vesting period date for each key executive, which is the date as of which each such key executive can fully dispose of the shares as desired. |
| (iv) | If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale. |
| (v) | Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee. |
The total cost of this share purchase plan approved in November 2014 is Ps.10.8 million. This valuation is the result of multiplying the total number of our Series A shares deposited in the administrative trust and the price per share, plus the balance in cash deposited in the administrative trust. This amount is being expensed over the vesting period, which commenced on November 11, 2014 and will end in November 2019.
In April and October 2016, extensions to this share purchase plan were approved by our board of directors. The total cost of the extensions approved was Ps.14.5 million (or Ps.9.5 million, net of withheld taxes) and Ps.11.6 million (or Ps.7.6 million, net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares.
During 2014, 2015 and 2016, we recognized Ps.1.1 million, Ps.6.0 million and Ps.7.8 million, respectively, as compensation expense associated with the complete share purchase plan in our consolidated statement of operations.
Movements during the year
The following table illustrates the number of shares associated with our share purchase plan during the year:
| Number of Series A shares | ||||
Outstanding as of December 31, 2015 | *617,001 | |||
Purchased during the year | 513,002 | |||
Granted during the year | — | |||
Exercised during the year | (425,536 | ) | ||
Forfeited during the year | (86,419 | ) | ||
Outstanding as of December 31, 2016 | *618,048 | |||
| * | These shares were presented as treasury shares in the consolidated statement of financial position as of December 31, 2015 and 2016 and all are considered outstanding for basic and diluted earnings per share purposes because the holders are entitled to dividends if and when distributed. |
The vesting period of the shares granted under the Company’s share purchase plan is as follows:
Number of Series A shares | Vesting period | |||
| 345,270* | November 2016 - 2017 | |||
| 171,010 | November 2017 - 2018 | |||
| 101,768 | November 2018 - 2019 | |||
| 618,048 | ||||
| * | Includes the shares acquired during November 2015. |
During the years ended December 31, 2015 and 2016, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2016, 86,419 shares were forfeited.
Management Incentive Plan
The management incentive plan has been classified as an equity-settled transaction because as of the grant date the fair value of the transaction is fixed and is not adjusted by subsequent changes in the fair value of capital instruments.
The total cost of the management incentive plan is Ps.2.7 million. This amount is being expensed over the vesting period, which commenced retroactively upon consummation of our initial public offering and will end on December 31, 2015. During 2012, we did not recognize any compensation expense associated with the management incentive plan in our consolidated statement of operations. During 2013, 2014 and 2015, we recorded Ps.2.1 million Ps.0.3 million and Ps.0.3 million, respectively, as a cost of the management incentive plan related to the vested shares, as recorded in our consolidated statement of operations.
The factors considered in the valuation model for the management incentive plan included a volatility assumption estimated from historical returns on common stock of comparable companies and other inputs obtained from independent and observable sources, such as Bloomberg. The share spot price fair value was determined using the market approach valuation methodology, with the following assumptions:
| 2012 | ||||
Dividend yield (%) | 0.00 | |||
Volatility (%) | 37.00 | |||
| 5.96 | |||
Expected life of share options (years) | 8.80 | |||
Exercise share price (in Mexican pesos) | 5.31 | |||
Exercise multiple | 1.10 | |||
Fair value of the stock at grant date | 1.73 | |||
The dividend yield was set at zero because at the time the management incentive plan was valued and as of the date of this annual report, we do not have any plans to pay a dividend.
The volatility was determined based on average historical volatilities. Such volatilities were calculated according to a database including up to 18 months of historical stock price returns of U.S. and Latin American publicly traded airlines. The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome.
The risk-free interest rate is the interbank interest rate in Mexico, continuously expressed, accordingly to the corresponding term.
The expected life of the share options is an output of the valuation model, and represents the average time the option is expected to remain viable, assuming the employee does not leave during the vesting period.
The management incentive plan explicitly incorporates expectations of the employee’s early exercise behavior by assuming that early exercise happens when the stock price is a certain multiple,M,, of the exercise price. The exercise multipleM,, of 1.1x incorporates the assumption that the employee’s exercise of the options can occur when the share prices are 1.1 times the exercise price, i.e. 10% above the exercise price.
On September 18, 2013, the key employees participating in the management incentive plan exercised 4,891,410 shares. As a result, the key employees paid Ps.25,792Ps.25.9 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
On November 16, 2015, as part of the secondaryfollow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps.23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps.17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
Movements during the year
The following table illustrates the number of share options and fixed exercise prices during the year:
| Number | Exercise price in Mexican pesos | Total in thousands of Mexican pesos | Number | Exercise price in Mexican pesos | Total in thousands of Mexican pesos | |||||||||||||||||||
Outstanding as of December 31, 2011 | — | — | — | |||||||||||||||||||||
Granted during the year | 25,164,126 | Ps. 5.31 | Ps. 133,723 | |||||||||||||||||||||
Forfeited during the year | — | — | — | |||||||||||||||||||||
Exercised during the year | — | — | — | |||||||||||||||||||||
Outstanding as of December 31, 2012 | 25,164,126 | Ps. 5.31 | Ps. 133,723 | 25,164,126 | Ps. | 5.31 | Ps. | 133,723 | ||||||||||||||||
Granted during the year | — | — | — | — | — | — | ||||||||||||||||||
Forfeited during the year | — | — | — | — | — | — | ||||||||||||||||||
Exercised during the year | (4,891,410 | ) | 5.31 | (25,993 | ) | (4,891,410 | ) | 5.31 | (25,993 | ) | ||||||||||||||
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Outstanding as of December 31, 2013 | 20,272,716 | Ps. 5.31 | Ps. 107,730 | 20,272,716 | Ps. | 5.31 | Ps. | 107,730 | ||||||||||||||||
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Granted during the year | — | — | — | |||||||||||||||||||||
Forfeited during the year | — | — | — | |||||||||||||||||||||
Exercised during the year | — | — | — | |||||||||||||||||||||
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Outstanding as of December 31, 2014 | 20,272,716 | Ps. | 5.31 | Ps. | 107,730 | |||||||||||||||||||
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Granted during the year | — | — | — | |||||||||||||||||||||
Forfeited during the year | — | — | — | |||||||||||||||||||||
Exercised during the year | (4,414,860 | ) | 5.31 | (23,461 | ) | |||||||||||||||||||
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Outstanding as of December 31, 2015 | 15,857,856 | Ps. | 5.31 | Ps. | 84,269 | |||||||||||||||||||
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Granted during the year | — | — | — | |||||||||||||||||||||
Forfeited during the year | — | — | — | |||||||||||||||||||||
Exercised during the year | (3,299,999 | ) | 5.31 | (17,536 | ) | |||||||||||||||||||
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Outstanding as of December 31, 2016 | 12,557,857 | Ps. | 5.31 | Ps. | 66,733 | |||||||||||||||||||
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At December 31, 2012, 2013, 2014, 2015 and December 31, 2013,2016, the shares held in trust to satisfy the management options were considered as treasury shares. As of December 31, 2015, and 2016, 15,857,856 and 12,557,857 share options were vested, respectively. As of December 31, 2014, the total number of vested and unvested shares amounted to 17,246,405 and 3,026,311, respectively. As of December 31, 2013, the total number of vested and unvested shares amounted to 14,228,364 and 6,044,352, respectively.
Management Incentive Plan II
On November 6, 2016, our board of directors approved an extension of the management incentive plan to certain key employees, known as MIP II. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested was also approved.
The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.
The carrying amount of the liability relating to these SARs as of December 31, 2016 was Ps.54.4 million. The compensation cost is recognized in our consolidated statement of operations under the caption salaries and benefits over the service period. During the year ended December 31, 2016, we recorded Ps.54.4 million associated with these SARs in our consolidated statement of operations.
| Number of SARs (Grant date: November 6, 2016) | Exercisable date | |||||
| 2,030,540 | November 2017 | |||||
| 2,030,540 | November 2018 | |||||
| 2,030,540 | November 2019 | |||||
| 3,384,240 | November 2020 | |||||
| 4,061,100 | November 2021 | |||||
| 13,536,960 | ||||||
Cash-settled Transactions. Cash-settled transactions include a share appreciation rights (“SARs”) plan.
Long-term Retention Plan
During 2010, we adopted an employee long-term retention plan, the purpose of which is to retain high-performing employees within the organization by paying incentives depending on our performance. Incentives under this plan were payable in three annual installments, following the provisions for other long-term benefits under IAS 19. During the year ended December 31, 2013 and 2012 we expensed Ps.6.3 million and Ps.6.5 million respectively, as bonuses as part of the caption salaries and benefits. During 2014, this plan was structured as a long-term incentive plan, which consists of a share purchase plan (equity-settled) and share appreciation rights plan (cash-settled).
Long-term Incentive Plan
Share Appreciation Rights
On November 6, 2014 we granted 4,315,264 Series A SARs to key executives. The SARs vest during a three-year period as long as the employee completes the required service period, and entitle them to a cash payment. As of the grant date the amount of SARs granted under this plan totaled Ps.10.8 million.
Under the share purchase program extensions described above, the number of SARs granted to certain of our key executives totaled 1,793,459 and 2,044,604, respectively, which amounts to a cost of Ps.11.6 million (or Ps.7.6 million, net of withheld taxes) and Ps.14.5 million (or Ps.9.5 million, net of withheld taxes), for the years ended December 31, 2015 and 2016, respectively. The SARs vest during a three-year period as long as the employee completes the required service period.
The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.
The carrying amount of the liability relating to the SARs as of December 31, 2015 and 2016 was Ps.14.5 million and Ps.15.7 million, respectively. The compensation cost is recognized in our consolidated statement of operations under the caption of salaries and benefits over the service period. During the years ended December 31, 2014, 2015 and 2016, we recorded Ps.1.7 million, Ps.44.7 million and Ps.31.7 million, respectively, in respect of these SARs in our consolidated statement of operations.
| Number of SARs (Grant date: November 6, 2014) | Exercisable date | |||
2,301,000 | November 2016-2017 | |||
1,055,996 | November 2017-2018 | |||
482,475 | November 2018-2019 | |||
3,839,471 | ||||
Derivative Financial Instruments and Hedge Accounting. We mitigate certain financial risks, such as volatility in the price of aircraft fuel, adverse changes in interest rates and exchange rate fluctuations, through a controlled risk management policy that includes the use of derivative financial instruments. The derivative financial instruments are recognized in the consolidated statement of financial position at fair value. The effective portion of a cash flow hedge’s unrecognized gain or loss is recognized in “Accumulated other comprehensive income (loss) items,” while the ineffective portion is recognized in current year earnings. The realized gain or loss of derivative financial instruments that qualify as hedging is recorded in the same statements of operations as the realized gain or loss of the hedged item. Derivative financial instruments that are not designated as or not effective as a hedge are
recognized at fair value with changes in fair value recorded in current year earnings. During 2013,2016, all derivative financial instruments held qualified for hedge accounting. Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in guarantee, which is presented as part of “Guarantee deposits,” is reviewed and adjusted on a daily basis, based on the fair value of the derivative position. As of December 31, 2016 we did not have any collateral recorded as a guarantee deposits.
| (i) | Aircraft Fuel Price Risk. We account for derivative financial instruments at fair value and recognize them in the consolidated statement of financial position as an asset or liability. The cost of aircraft fuel consumed in |
| During 2016, we did not enter into US Gulf Jet Fuel 54 swap contracts. During the years ended December 31, 2014 and 2015, we entered into US Gulf Coast Jet fuel 54 swap contracts to hedge approximately 20% and 5% of our fuel consumption, respectively. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within other comprehensive income, while the effects of transforming into a fixed jet fuel prices by these hedges are presented as part of jet fuel costs when recognized in the consolidated statements of operations. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under swap agreements and the pricing of hedges and other derivative products in the market. |
| Additionally, during the year ended December 31, 2016, we entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge approximately 52% and 24% of our 2017 and 2018 fuel consumption. |
| During the year ended December 31, 2014, we elected to adopt IFRS 9 (2013), which comprises aspects related to classifications and measurement of financial assets and financial liabilities, as well as hedge accounting treatment. Paragraph 6.2.4 (a) of IFRS 9 (2013) allows us to separate the intrinsic value and time value of an option contract and to designate as the hedging instrument only the change in the intrinsic value of the option. As further required in paragraph 6.5.15 therein, because the external value (time value) of the Jet fuel 54 Asian call options are related to a “transaction related hedged item,” it is required to be segregated and accounted for as a “cost of hedging” in other comprehensive income (“OCI”) and accrued as a separate component of stockholders’ equity until the related hedged item affects profit and loss. Since monthly forecasted jet fuel consumption is considered the hedged item of the “related to a transaction” type, then the time value included as accrued changes on external value in capital is considered as a “cost of hedging” under IFRS 9 (2013). The hedged item (jet fuel consumption) of the Jet fuel 54 Asian call options contracted by us represent anon-financial asset (energy commodity), which is not in our inventory. Instead, it is directly consumed by our aircraft at different airport terminals. Therefore, although anon-financial asset is involved, its initial recognition does not generate a book adjustment in our inventories. Rather, it is initially accounted for in our other comprehensive income (OCI) and a reclassification adjustment is made from OCI toward the profit and loss and recognized in the same period or periods during which the hedged item is expected to be allocated to profit and loss (in accordance with IFRS 9.6.5.15, B6.5.29 (a), B6.5.34 (a) and B6.5.39). As of January 2015, we began to reclassify these amounts (previously recognized as a component of equity) to our statement of operations in the same period in which our expected jet fuel volume consumed affects our jet fuel purchase line item therein. As of December 31, 2016, the fair value of our outstanding U.S. Gulf Coast Jet fuel 54 Asian call options was Ps.867.8 million, which was presented as part of the financial assets line item of our consolidated statement of financial position. As of December 31, 2016, the hedging costs attributable to extrinsic value changes in these options as recognized in other comprehensive income totaled Ps.218 million. They were, and will be, recycled to our fuel cost throughout 2017 and until 2018, as these options expire on a monthly basis. |
| (ii) | Foreign Currency Risk.Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities (when revenue or expense is denominated in a different currency than pesos). Exchange exposure relates to amounts payable arising from U.S. |
| dollar-denominated and U.S. dollar-linked expenses and payments. To mitigate this risk, we may use foreign exchange derivative financial instruments. |
During the year ended on December 31, 2013 and 2012, the Company did not enter into exchange rate derivatives financial instruments. For the year ended December 31, 2011 the Company entered into exchange rate derivatives that resulted in a loss of Ps.1,069, which matured in January 2011. Accordingly, there was no fair value as of December 31, 2011.
Our foreign exchange exposure as of December 31, 2011, 2012 and 2013 was a net asset position of U.S.$169.7 million, U.S.$197.1 million and U.S. $368.9 million, respectively.
| During the years ended on December 31, 2014, 2015 and 2016 the Company did not enter into exchange rate derivatives financial instruments. |
| Our foreign exchange exposure as of December 31, 2014, 2015 and 2016 was a net asset position of U.S. $234.0 million, U.S. $390.1 million and U.S. $584.5 million, respectively. |
| (iii) | Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt and lease obligations with floating interest rates. As of December 31, |
The table below presents the payments required by our financial liabilities:
| Year ended December 31, 2013 | Year ended December 31, 2016 | |||||||||||||||||||||||||||||||
| Within one Year | One to five Years | In five Years or more | Total | Within one Year | One to five Years | In five Years or more | Total | |||||||||||||||||||||||||
| (In thousands of pesos) | (In thousands of pesos) | |||||||||||||||||||||||||||||||
Interest-bearing borrowings | ||||||||||||||||||||||||||||||||
Pre-delivery payment facilities | 266,121 | 293,824 | — | 559,945 | 328,845 | 943,046 | — | 1,271,891 | ||||||||||||||||||||||||
Short-term working capital facilities | 716,290 | — | — | 716,290 | ||||||||||||||||||||||||||||
Derivative financial instruments | ||||||||||||||||||||||||||||||||
Fuel swaps | (11,133 | ) | — | — | (11,133 | ) | ||||||||||||||||||||||||||
Interest rate swaps | 31,845 | 74,306 | — | 106,151 | 14,144 | — | — | 14,144 | ||||||||||||||||||||||||
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Total | 286,833 | 368,130 | — | 654,963 | 1,059,279 | 943,046 | — | 2,002,325 | ||||||||||||||||||||||||
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Deferred TaxesTaxes.. We account for income taxes using the liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry-forwards. In assessing our ability to realize deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. At December 31, 2011, 20122014, 2015 and 2013,2016 we had tax losscarry-forwards amounting to Ps.2,200.0 million, Ps.2,014.9Ps.1.7 billion, Ps.194.5 million and Ps.2,071.2Ps.111.1 million, respectively. These losses relate to our and our subsidiaries’ operations on a stand-alone basis, which in conformity with current Mexican Income Tax Law may be carried forward against taxable income generated in the succeeding ten years and may not be used to offset taxable income elsewhere in our consolidated group. During the years ended December 31, 2011, 20122014, 2015 and 2013,2016 we usedtax-loss carry-forwards of Ps.0.8Ps.424.5 million, Ps.256.6Ps.1.6 billion and Ps.195.1 million, respectively.
Central America (Guatemala and Ps.204.4Costa Rica)
According to Guatemala corporate income tax law, under the regime on profits from business activities net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2016, we obtained a net operating loss which has not been recognized as a deferred tax asset. We recognized Ps. 17.2 million respectively.of recoverable deferred taxes due to the carryforward tax loss in Costa Rica.
Impairment of Long-Lived AssetsAssets.. The carrying value of rotable spare parts, furniture and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of rotable spare parts, furniture and equipment.
We record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value in use.
The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
For the years ended December 31, 2011, 20122014, 2015 and 2013,2016, no impairment charges were recorded in respect of our long-lived assets.
Allowance for Doubtful Accounts.An allowance for doubtful accounts receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. At December 31, 2011, 20122014, 2015 and 2013,2016, the allowance for doubtful accounts was Ps.21.3Ps.27.8 million, Ps.21.7Ps.24.6 million and Ps.29.8Ps.19.3 million, respectively.
Operating Revenues
20122015 compared to 20132016
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2012 | 2013 | Variation | 2015 | 2016 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for % and operating data) | (In thousands of pesos, except for % and operating data) | |||||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||
Passenger | 10,176,747 | 11,117,327 | 940,580 | 9.2 | % | 14,130,365 | 17,790,130 | 3,659,765 | 25.9 | % | ||||||||||||||||||||||
Non-ticket | 1,509,668 | 1,885,144 | 375,476 | 24.9 | % | 4,049,339 | 5,722,321 | 1,672,982 | 41.3 | % | ||||||||||||||||||||||
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Total operating revenues | 11,686,415 | 13,002,471 | 1,316,056 | 11.3 | % | 18,179,704 | 23,512,451 | 5,332,747 | 29.3 | % | ||||||||||||||||||||||
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Operating Data | ||||||||||||||||||||||||||||||||
Capacity (in ASMs in thousands) | 9,244,425 | 10,899,486 | 1,655,061 | 17.9 | % | 14,052,298 | 16,703,949 | 2,651,651 | 18.9 | % | ||||||||||||||||||||||
Load factor booked | 83 | % | 83 | % | 0 | % | (0.4 | %) | ||||||||||||||||||||||||
%Load factor booked | 82 | % | 86 | % | 4.0p | p | ||||||||||||||||||||||||||
Booked passengers (in thousands) | 7,408 | 8,942 | 1,534 | 20.7 | % | 11,983 | 15,005 | 3,022 | 25.2 | % | ||||||||||||||||||||||
Average ticket revenue per booked passenger | 1,374 | 1,243 | (130 | ) | (9.5 | %) | 1,181 | 1,189 | 8 | 0.7 | % | |||||||||||||||||||||
Average non-ticket revenue per booked passenger | 204 | 211 | 7 | 3.5 | % | 338 | 381 | 43 | 12.9 | % | ||||||||||||||||||||||
Revenue passenger miles (RPMs in thousands) | 7,668,202 | 9,002,831 | 1,334,629 | 17.4 | % | 11,561,859 | 14,325,898 | 2,764,039 | 23.9 | % | ||||||||||||||||||||||
Passenger RevenueRevenue.. The 9.2%25.9% increase in passenger revenue in 20132016 was primarily due to growth in ASMsASM capacity resulting from the incorporation of three13 new net aircraft. We also benefited from a 20.7% increase in booked passengers.aircraft and our demand stimulation strategies. Our traffic as measured in terms of RPMs increased by 17.4%23.9% in 2013,2016, also resultingresulted from the incorporation of three new net aircraft. This increase in our fleet size. Additionally, our average ticket revenue per booked passenger increased 0.7% year over year.
Non-ticket Revenue.The 41.3% increase innon-ticketrevenue in 2016 was partially offset by a lower base fareprimarily due to a slower economic environmenthigher volume of passengers electing to purchasenon-ticket items. Additionally, we continued executing our fare unbundling and an increase in the domestic competitive market.demand stimulation strategies.
Non-ticket Revenue. The 24.9% increase in non-ticket revenue in 2013 was primarily driven by a 20.7% increase in booked passengers, which resulted in more passengers purchasing non ticket items, and a 3.5% increase in average non-ticket revenue per passenger, mainly attributed to changes in our excess baggage policy.
20112014 compared to 20122015
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2011 | 2012 | Variation | 2014 | 2015 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for % and operating data) | (In thousands of pesos, except for % and operating data) | |||||||||||||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||||||||||||||
Passenger | 8,036,275 | 10,176,747 | 2,140,472 | 26.6 | % | 11,303,327 | 14,130,365 | 2,827,038 | 25.0 | % | ||||||||||||||||||||||
Non-ticket | 842,341 | 1,509,668 | 667,327 | 79.2 | % | 2,733,415 | 4,049,339 | 1,315,924 | 48.1 | % | ||||||||||||||||||||||
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Total operating revenues | 8,878,616 | 11,686,415 | 2,807,799 | 31.6 | % | 14,036,742 | 18,179,704 | 4,142,962 | 29.5 | % | ||||||||||||||||||||||
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Operating Data | ||||||||||||||||||||||||||||||||
Capacity (in ASMs in thousands) | 7,939,365 | 9,244,425 | 1,305,060 | 16.4 | % | 11,829,865 | 14,052,298 | 2,222,433 | 18.8 | % | ||||||||||||||||||||||
Load factor booked | 79 | % | 83 | % | 4 | % | 4.7 | % | ||||||||||||||||||||||||
%Load factor booked | 82 | % | 82 | % | — | 0.1p | p | |||||||||||||||||||||||||
Booked passengers (in thousands) | 5,934 | 7,408 | 1,474 | 24.8 | % | 9,809 | 11,983 | 2,174 | 22.2 | % | ||||||||||||||||||||||
Average ticket revenue per booked passenger | 1,354 | 1,374 | 20 | 1.4 | % | 1,152 | 1,181 | 29 | 2.5 | % | ||||||||||||||||||||||
Average non-ticket revenue per booked passenger | 142 | 204 | 62 | 43.6 | % | 279 | 338 | 59 | 21.3 | % | ||||||||||||||||||||||
Revenue passenger miles (RPMs in thousands) | 6,290,707 | 7,668,202 | 1,377,495 | 21.9 | % | 9,722,538 | 11,561,859 | 1,839,321 | 18.9 | % | ||||||||||||||||||||||
Passenger RevenueRevenue.. The 26.6%25.0% increase in passenger revenue in 20122015 was primarily due to a 16.4% growth in ASM capacity resulting from the incorporation of sevensix new net aircraft. We also benefited from a 4.7% increase in the load factor, mainly as the result of our stimulation of demand and an increase of 1.4% in average ticket revenue per passenger. Our traffic as measured in terms of RPMs increased by 21.9%18.9% in 20122015, also resultingresulted from the incorporation of seven new aircraft.
Non-ticket Revenue. The 79.2% increase in our fleet size. Additionally, our average ticket revenue per booked passenger increased 2.5%.
Non-ticket Revenue.The 48.1% increase innon-ticket revenue in 20122015 was primarily driven bydue to the higher volume of passengers electing to purchasenon-ticket items. Additionally, we continued implementing dynamic pricing strategies and launching new products, such as a 24.8% increase in booked passengers, which resulted in more passengers purchasing non-ticket items,fast pass and a 43.6% increase in average non-ticket revenue per passenger. Such increases were mainly the result of launching unbundled fares in the second quarter of 2012 in order to lower base fares to increase the load factor, as well as increasing fees for baggage, premium distribution channels and seat selection. In addition, we started a membership basedultra-low-fare subscription service called V-Club which has attracted approximately 35,200 members as of December 31, 2012.rental car on board.
Operating Expenses, net
20122015 compared to 20132016
| For the years ended December 31, | ||||||||||||||||
| 2012 | 2013 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Other operating income | (68,800 | ) | (111,277 | ) | (42,477 | ) | 61.7 | % | ||||||||
Fuel | 4,730,089 | 5,085,829 | 355,740 | 7.5 | % | |||||||||||
Aircraft and engine rent expense | 1,885,696 | 2,187,339 | 301,643 | 16.0 | % | |||||||||||
Salaries and benefits | 1,302,971 | 1,563,239 | 260,268 | 20.0 | % | |||||||||||
Landing, take-off and navigation expenses | 1,639,945 | 1,923,673 | 283,728 | 17.3 | % | |||||||||||
Sales, marketing and distribution expenses | 751,919 | 704,146 | (47,773 | ) | (6.4 | %) | ||||||||||
Maintenance expenses | 498,836 | 572,114 | 73,278 | 14.7 | % | |||||||||||
Other operating expenses | 356,517 | 458,500 | 101,983 | 28.6 | % | |||||||||||
Depreciation and amortization | 211,002 | 301,531 | 90,529 | 42.9 | % | |||||||||||
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Total operating expenses, net | 11,308,175 | 12,685,094 | 1,376,919 | 12.2 | % | |||||||||||
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Other operating income Fuel Aircraft and engine rent expense Landing,take-off and navigation expenses Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Other operating expenses Depreciation and amortization Total operating expenses, net For the years ended December 31, 2015 2016 Variation (In thousands of pesos, except for %) (193,155 ) (496,742 ) (303,587 ) >100 % 4,721,108 5,741,403 1,020,295 21.6 % 3,525,336 5,590,058 2,064,722 58.6 % 2,595,413 3,272,051 676,638 26.1 % 1,902,748 2,419,537 516,789 27.2 % 1,088,805 1,413,348 324,543 29.8 % 874,613 1,344,110 469,497 53.7 % 697,786 952,452 254,666 36.5 % 456,717 536,543 79,826 17.5 % 15,669,371 20,772,760 5,103,389 32.6 %
Total operating expenses, net increased 12.2%32.6% in 20132016 primarily as a result of growth of operations and other factors described below.
Other Operating Income.Other operating income increased Ps.303.6 million or >100% in 2016, primarily because of a higher number of sale and leaseback transactions, which resulted in higher profit realized during 2016.
Fuel.Fuel expense increased 21.6% in 2016 as a result of an increase in the average fuel cost per gallon of 1.4% and an increase in fuel gallons consumed of 19.9% which, in turn, was primarily due to more aircraft in operation and a 15.8% increase in our departures.
During the years ended December 31, 2016 and 2015, we entered into Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2016, their extrinsic value of Ps.305.2 million was recycled to the cost of fuel.
Additionally, during the year ended December 31, 2015, we entered into US Gulf Coast Jet Fuel 54 swaps positions, which were accounted for as cash flow hedges that gave rise to a loss of Ps.128.3 million. All of the US Gulf Coast Jet Fuel 54 swaps positions matured on June 30, 2015, and therefore there was no balance outstanding as of December 31, 2015.
Aircraft and Engine Rent Expense.Aircraft and engine rent expense increased 58.6%. This increase was primarily driven by: (i) an increase in our supplemental and contingent rent of Ps.853.7 million, (ii) the depreciation of approximately 17.7% of the average exchange rate of the peso against the U.S. dollar, which negatively affected our aircraft rent in peso terms in an amount of Ps.508.8 million, (iii) higher aircraft and engine rent expenses related to 13 new net aircraft and three new engines of Ps.475.1 million, and (iv) an increase of Ps.263.6 million relating to the full year operation of the seven new A320 aircraft received during the year ended December 31, 2015. These increases were partially offset by a decrease in other rent expenses of Ps.36.2 million.
Landing,Take-off and Navigation Expenses.The 26.1% increase in landing,take-off and navigation expenses in 2016 was primarily due to a 6.6% increase in the number of airports served. In addition, our operations as measured by number of departures increased by 15.8%. These increases were partially offset by incentives received from certain airport groups as a result of the growth of our operations.
Salaries and Benefits.The 27.2% increase in salaries and benefits in 2016 was primarily the result of a 37.7% increase in our total number of employees, which were required for our increased operations and fleet size. Additionally, the variable compensation of our workforce increased also due to the increased operations recorded during 2016. See Item 6: “Directors, Senior Management and Employees—Employees.”
Sales, Marketing and Distribution Expenses.The 29.8% increase in sales, marketing and distribution expenses was primarily due to the increase of 29.3% in operating revenues and additional marketing expenses related to our efforts to promote the new routes.
Maintenance Expenses.The 53.7% increase in maintenance expenses in 2016 was the result of a 23.2% increase in the size of our fleet due to the addition of 13 new net aircraft in 2016. Additionally, during 2016, our maintenance expenses on a peso basis increased due to the depreciation of approximately 17.7% in the average exchange rate of the peso against the U.S. dollar during 2016.
Other Operating Expenses.Other operating expenses increased 36.5%. This increase was primarily the result of additional administrative support expenses and technical and communication support required for the growth of our operations.
Depreciation and Amortization.Depreciation and amortization increased 17.5% in 2016 primarily due to the amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2016 and 2015, we recorded amortization of major maintenance leasehold improvements of Ps.404.7 million and Ps.352.9 million, respectively.
2014 compared to 2015
| For the years ended December 31, | ||||||||||||||||
| 2014 | 2015 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Other operating income | (22,107 | ) | (193,155 | ) | (171,048 | ) | >100 | % | ||||||||
Fuel | 5,363,864 | 4,721,108 | (642,756 | ) | (12.0 | %) | ||||||||||
Aircraft and engine rent expense | 2,534,522 | 3,525,336 | 990,814 | 39.1 | % | |||||||||||
Landing,take-off and navigation expenses | 2,065,501 | 2,595,413 | 529,912 | 25.7 | % | |||||||||||
Salaries and benefits | 1,576,517 | 1,902,748 | 326,231 | 20.7 | % | |||||||||||
Sales, marketing and distribution expenses | 817,281 | 1,088,805 | 271,524 | 33.2 | % | |||||||||||
Maintenance expenses | 664,608 | 874,613 | 210,005 | 31.6 | % | |||||||||||
Other operating expenses | 489,938 | 697,786 | 207,848 | 42.4 | % | |||||||||||
Depreciation and amortization | 342,515 | 456,717 | 114,202 | 33.3 | % | |||||||||||
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Total operating expenses, net | 13,832,639 | 15,669,371 | 1,836,732 | 13.3 | % | |||||||||||
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Total operating expenses, net increased 13.3% in 2015 primarily as a result of the growth of our operations and higher fuel costs and the other factors described below.
Other Operating IncomeIncome.. Other operating income increased Ps.42.5Ps.171.0 million or 61.7%>100% in 2013,2015, primarily because of higher profit margins from sale and lease back transactions compared to 2012.2014.
FuelFuel.. Fuel expense increased 7.5%decreased 12.0% in 20132015 as a result of an increasea decrease in the average fuel gallons consumedcost per gallon of 15.0% which, in turn, was due to an increase in capacity and operations.25.7%. This increasedecrease was partially offset by a lower average economican increase 18.4% in the fuel cost per gallon. gallons consumed due to the increase in our fleet.
During the years ended December 31, 20132015 and 2012,2014, we entered into fuel swap contracts that gave rise to a gainloss of Ps.6,694Ps.128.3 million and Ps.19,984,Ps.85.7 million, respectively. These instruments qualify for hedge accounting. Accordingly, the effects of the hedges were presented as part of the cost of the fuel.
Additionally, during the years ended December 31, 2015 and 2014, we entered into Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2015, their extrinsic value of Ps.112.7 million was recycled to the cost of fuel.
Aircraft and Engine Rent ExpenseExpense.. Aircraft and engine rent expense increased 16.0%39.1%. This increase was primarily driven by: (i) an increase of Ps.195.5Ps.246.9 million in rent expense relating to sevennew A-320A320 aircraft, and one new engine received in 2013, (ii) a Ps.229.5 millionan increase of Ps.279.4 relating to the sevenfull year operation of the new A-320A320 aircraft received during 2012 which were financed via operating leases, and (iii) an increase in our supplemental and contingent rent of Ps.14.6 million. These increases were partially offset by: (i) a Ps.38.9 million decrease in the aircraft and engine rent expense as a result of the extension of two engine lease agreements during 2013 and the decrease in rent expense under certain aircraft lease extensions negociated in 2011, (ii) a Ps.60.4 million decrease related to the redelivery of four aircraft to the lessors, andyear ended December 31, 2015, (iii) the appreciationdepreciation of approximately 3.0%19.22% of the average exchange rate of the peso against the U.S. dollar, positivelynegatively affecting our aircraft rent in peso terms in an amount of Ps.39.1 million.
SalariesPs.353.6 million, and Benefits. The 20.0% increase in salaries and benefits in 2013 was primarily the result of growing our operations by 16.9% (measured in departures), which increased the variable compensation of our workforce. Additionally, we required a 4.8%(iv) an increase in our total employeessupplemental and contingent rent of Ps.192.1 million. These increases were partially offset by: (i) a Ps.74.0 million decrease related to operate the three new netredelivery of one aircraft incorporated in our fleet during 2013. See Item 6: “Directors, Senior Managementto the lessors, and Employees—Employees”.(ii) other rent expenses of Ps.7.2 million.
Landing,Take-off and Navigation Expenses.The 17.3%25.7% increase in landing,take-off and navigation expenses in 20132015 was primarily due to a 24.3%15.1% increase in the number of airports served. In addition, our operations as measured by number of departures increased by 16.9%17.8%. These increases were partially offset by incentives received from certain airport groups as a result of our increased operations.
Salaries and Benefits.The 20.7% increase in salaries and benefits in 2015 was primarily the result of 17.8% increase in our total employees, which were required for our increased operations and fleet size. Additionally, the variable compensation of our workforce increased also due to the increased operations recorded during 2015. See Item 6: “Directors, Senior Management and Employees—Employees.”
Sales, Marketing and Distribution Expenses.The 33.2% increase in sales, marketing and distribution expenses was primarily due to the increase of 29.5% in operating revenues and additional marketing expenses related to our efforts to promote the new routes.
Maintenance ExpensesExpenses.. The 14.7%31.6% increase in maintenance expenses in 20132015 was the result of a 7.3%12% increase in the size of our fleet due to the addition of threesix net aircraft in 2013.2015. Additionally, maintenance expenses also increased as a result of the aging of our fleet (4.2(4.6 years as of December 31, 2013)2015), which requires more comprehensive work during routine scheduled maintenance, as well as the timing of the maintenance checks performed during 20132015 as compared to 2012.2014. During 2015, our maintenance expenses on a peso basis increased due to the depreciation of approximately 19.2% in the average exchange rate of the peso against the U.S. dollar during 2015.
Other Operating ExpensesExpenses.. Other operating expenses increased 28.6%42.4%. This increase was primarily the result of (i) additional administrative support expenses related to the expansion of our flight operations and (ii) additional technical and communication support required to the growth of our operations, (iii) servicing more passengers on board, (iv) Ps.21.8 million in penalty costs related to cancelling an information technology contract, and (v) Ps.9.4 million in equity transaction costs related to our initial public offering transaction in September 2013.operations.
Depreciation and AmortizationAmortization.. Depreciation and amortization increased 42.9%33.3% in 20132015 primarily due to the amortization of major maintenance events associated with the aging of our fleet, the cost of which is accounted for under the deferral method. During 20132015 and 2012,2014, we recorded as amortization of major maintenance leasehold improvement costs Ps.210.5Ps.352.9 million and Ps.126.3Ps.253.4 million, respectively.
2011 compared to 2012
| For the years ended December 31, | ||||||||||||||||
| 2011 | 2012 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Other operating income | (73,831 | ) | (68,800 | ) | 5,031 | (6.8 | %) | |||||||||
Fuel | 3,823,232 | 4,730,089 | 906,857 | 23.7 | % | |||||||||||
Aircraft and engine rent expense | 1,508,135 | 1,885,696 | 377,561 | 25.0 | % | |||||||||||
Salaries and benefits | 1,120,359 | 1,302,971 | 182,612 | 16.3 | % | |||||||||||
Landing, take-off and navigation expenses | 1,281,583 | 1,639,945 | 358,362 | 28.0 | % | |||||||||||
Sales, marketing and distribution expenses | 750,474 | 751,919 | 1,445 | 0.2 | % | |||||||||||
Maintenance expenses | 379,626 | 498,836 | 119,210 | 31.4 | % | |||||||||||
Other operating expenses | 359,046 | 356,517 | (2,529 | ) | (1.0 | %) | ||||||||||
Depreciation and amortization | 102,977 | 211,002 | 108,025 | 104.9 | % | |||||||||||
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Total operating expenses, net | 9,251,601 | 11,308,175 | 2,056,574 | 22.2 | % | |||||||||||
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Total operating expenses, net increased by 22.2% in 2012 primarily as a result of the growth of our operations and higher fuel costs and the other factors described below.
Other Operating Income. Other operating income decreased by Ps.5.0 million, or 6.8%, in 2012 primarily because of lower gains from sale and leaseback transactions.
Fuel. Fuel expense increased 23.7% in 2012 as a result of an increase in average economic fuel cost per gallon of 8% and an increase in fuel gallons consumed of 14.6%, which in turn was due to an increase in capacity and operations.
Aircraft and Engine Rent Expense. Aircraft and engine rent expense increased 25% mainly because of: (i) a Ps.127.2 million increase in rent expenses relating to seven new Airbus A320 aircraft received in 2012, and (ii) a Ps.238.7 million increase relating to the eight new aircraft received in late 2011 which were financed via operating leases. In addition, aircraft rent in peso terms also increased because of the depreciation of approximately 5.9% of the average exchange rate of the peso against the U.S. dollar. This increase was partially offset by Ps.23.2 million in 2012 corresponding to the amortization of the benefit of the lease term extension of six aircraft lease agreements renegotiated during 2011 which allowed us to recognize maintenance deposits from prior periods in the amount of Ps.163.0 million as lease extension benefit.
Salaries and Benefits. The 16.3% increase in salaries and benefits in 2012 was primarily the result of growing our operations by 14.7% (measured in departures), which required a 9.0% increase in our total employees, as we increased our fleet size by 20.6% via the addition of seven aircraft in 2012. The increase in labor costs was also driven by the increase in crew labor rates by approximately 4.2% during 2012 due to the renegotiation of our collective bargaining agreements and the fact that we achieved the financial result required for the payments of higher bonuses, which we did not do in 2011.
Landing, Take-off and Navigation Expenses. The 28.0% increase in landing, take-off and navigation expenses in 2012 was primarily due to a 19.4% increase in airports served. In addition, our operations as measured by number of departures increased by 14.7%.
Maintenance Expenses. The 31.4% increase in maintenance expenses in 2012 was the result of a 20.6% increase in the size of our fleet due to the addition seven new aircraft in 2012. The maintenance expenses increased as a result of the timing of scheduled maintenance events and the aging of our fleet. As the fleet ages, we expect that maintenance costs and related out-of-service time to complete the maintenance will increase.
Other Operating Expenses. Other operating expenses decreased 1.0%. This was due to the fact that in 2012 we did not record any additional transaction costs related to a suspended equity transaction, compared to 2011. The decrease in the operating expenses was partially offset by:
Depreciation and Amortization. Depreciation and amortization increased 104.9% in 2012 primarily due to the amortization of major maintenance events associated with the aging of our fleet under the deferral method, which increased by Ps.88.8 million from 2011 to 2012.
Operating Results
20122015 compared to 20132016
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2012 | 2013 | Variation | 2015 | 2016 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for %) | (In thousands of pesos, except for %) | |||||||||||||||||||||||||||||||
Operating Results | ||||||||||||||||||||||||||||||||
Total operating revenues | 11,686,415 | 13,002,471 | 1,316,056 | 11.3 | % | 18,179,704 | 23,512,451 | 5,332,747 | 29.3 | % | ||||||||||||||||||||||
Total operating expenses, net | 11,308,175 | 12,685,094 | 1,376,919 | 12.2 | % | 15,669,371 | 20,772,760 | 5,103,389 | 32.6 | % | ||||||||||||||||||||||
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Operating income | 378,240 | 317,377 | (60,863 | ) | (16.1 | %) | 2,510,333 | 2,739,691 | 229,358 | 9.1 | % | |||||||||||||||||||||
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Operating Income.As a result of the factors outlined above, our operating income was Ps.317.4 millionPs.2.7 billion in 2013,2016, a 16.1% decrease9.1% increase compared to our operating income of Ps.378.2 millionPs.2.5 billion in 2012.2015.
20112014 compared to 20122015
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2011 | 2012 | Variation | 2014 | 2015 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for %) | (In thousands of pesos, except for %) | |||||||||||||||||||||||||||||||
Operating Results | ||||||||||||||||||||||||||||||||
Total operating revenues | 8,878,616 | 11,686,415 | 2,807,799 | 31.6 | % | 14,036,742 | 18,179,704 | 4,142,962 | 29.5 | % | ||||||||||||||||||||||
Total operating expenses, net | 9,251,601 | 11,308,175 | 2,056,574 | 22.2 | % | 13,832,639 | 15,669,371 | 1,836,732 | 13.3 | % | ||||||||||||||||||||||
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Operating (loss) income | (372,985 | ) | 378,240 | 751,225 | n.a. | |||||||||||||||||||||||||||
Operating income | 204,103 | 2,510,333 | 2,306,230 | >100 | % | |||||||||||||||||||||||||||
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Operating Income.As a result of the factors outlined above, our operating income was Ps.378.2 millionPs.2.5 billion in 2012,2015, a 201.4%100% increase compared to our operating lossincome of Ps.373.0Ps.204.1 million in 2011.
Financial Results2014.
2012Financial Results
2015 compared to 20132016
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2012 | 2013 | Variation | 2015 | 2016 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for %) | (In thousands of pesos, except for %) | |||||||||||||||||||||||||||||||
Financing Results | ||||||||||||||||||||||||||||||||
Finance income | 13,611 | 24,774 | 11,163 | 82.0 | % | 47,034 | 102,591 | 55,557 | >100 | % | ||||||||||||||||||||||
Finance cost | (89,731 | ) | (125,737 | ) | 36,006 | (40.1 | %) | (21,703 | ) | (35,116 | ) | (13,413 | ) | 61.8 | % | |||||||||||||||||
Exchange (loss) gain, net | (95,322 | ) | 66,428 | 161,750 | n.a. | |||||||||||||||||||||||||||
Exchange gain, net | 966,554 | 2,169,505 | 1,202,951 | >100 | % | |||||||||||||||||||||||||||
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Total financing results | (171,442 | ) | (34,535 | ) | 136,907 | (79.9 | %) | 991,885 | 2,236,980 | 1,245,095 | >100 | % | ||||||||||||||||||||
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Total Financing ResultsResults.. The variation in financing results was primarily due to we recorded a net exchange gain related to the depreciation of the peso against the U.S. dollar at the end of 2013 because we have a U.S. dollar net asset position. This exchange gain was partially offset by an increase in our finance cost relating to the debt prepayment premium of Ps.65.2 million paid during 2013.
2011 compared to 2012
| For the years ended December 31, | ||||||||||||||||
| 2011 | 2012 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Financing Results | ||||||||||||||||
Finance income | 5,539 | 13,611 | 8,072 | n.a. | ||||||||||||
Finance cost | (57,718 | ) | (89,731 | ) | (32,013 | ) | 55.5 | % | ||||||||
Exchange gain (loss), net | 110,150 | (95,322 | ) | (205,472 | ) | n.a. | ||||||||||
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Total financing results | 57,971 | (171,442 | ) | (229,413 | ) | n.a. | ||||||||||
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Total Financing Results. The variation in financing results was primarily due to the appreciationincrease in our exchange gain. This exchange gain resulted from the significant 20.1% depreciation of the peso against the U.S. dollar, at the endsince we maintained a net asset position of 2012 because we have aU.S. $584.5 million in 2016. Our U.S. dollar net asset position.position mainly resulted from the value of our cash and cash equivalents, security deposits and aircraft maintenance deposits. Additionally, our finance income increased Ps.55.6 million, mainly due to an increase in our cash and equivalents during the year ended December 31, 2016, and consequently, an increase in short-term investments.
2014 compared to 2015
| For the years ended December 31, | ||||||||||||||||
| 2014 | 2015 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Financing Results | ||||||||||||||||
Finance income | 23,464 | 47,034 | 23,570 | >100 | % | |||||||||||
Finance cost | (32,335 | ) | (21,703 | ) | 10,632 | (32.9 | %) | |||||||||
Exchange gain, net | 448,672 | 966,554 | 517,882 | >100 | % | |||||||||||
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Total financing results | 439,801 | 991,885 | 552,084 | >100 | % | |||||||||||
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Total Financing Results.The variation in financing results was primarily due to our exchange gain. This exchange gain resulted from the significant 16.91% depreciation of the peso against the U.S. dollar since we maintained a net asset position of U.S. $390.1 million in 2015. Our U.S. dollar net asset position mainly resulted from our aircraft maintenance deposits paid to the lessors. Additionally, our finance income increased Ps.23.6 million, due to an increase in short-term investments.
Income Tax Expense and Net Income
20122015 compared to 20132016
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||
| 2012 | 2013 | Variation | 2015 | 2016 | Variation | |||||||||||||||||||||||||||
| (In thousands of pesos, except for %) | (In thousands of pesos, except for %) | |||||||||||||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||||||
Income before income tax | 206,798 | 282,842 | 76,044 | 36.8 | % | 3,502,218 | 4,976,671 | 1,474,453 | 42.1 | % | ||||||||||||||||||||||
Income tax expense | (3,481 | ) | (17,550 | ) | (14,069 | ) | >100 | % | (1,038,348 | ) | (1,457,182 | ) | (418,834 | ) | 40.3 | % | ||||||||||||||||
Attribution of net income (loss) | ||||||||||||||||||||||||||||||||
Equity holders of the parent | 215,239 | 268,678 | 53,439 | 24.8 | % | |||||||||||||||||||||||||||
Non-controlling interest | (11,922 | ) | (3,386 | ) | 8,536 | (71.6 | %) | |||||||||||||||||||||||||
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Net income | 203,317 | 265,292 | 61,975 | 30.5 | % | 2,463,870 | 3,519,489 | 1,055,619 | 42.8 | % | ||||||||||||||||||||||
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We recorded net income of Ps.265.3 millionPs.3.5 billion in 20132016 compared to a net income of Ps.203.3 millionPs.2.5 billion in 2012.2015. At December 31, 20132016 and 2012,2015, we had tax loss carry-forwards amounting to Ps.2,071.24Ps.111.1 million and Ps.2,014.9Ps.194.5 million, respectively. These losses relate to our operations, which in conformity with current Mexican Income Tax Law may be carried forward and used to offset taxable income generated in the succeeding ten years by the entityyears. The effective tax rate during 2015 and may not be used to offset taxable income elsewhere in our consolidated group.2016 was of 29.7% and 29.3%, respectively.
During the years ended December 31, 20132016 and 20122015 we used Ps.204,403Ps.195.1 million and Ps.256,589,Ps.1.6 billion, respectively, in available tax loss carry-forwards.
20112014 compared to 20122015
| For the years ended December 31, | ||||||||||||||||
| 2011 | 2012 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Net (loss) income | ||||||||||||||||
(Loss) income before income tax | (315,014 | ) | 206,798 | 521,812 | n.a. | |||||||||||
Income tax (expense) benefit | (476 | ) | (3,481 | ) | (3,005 | ) | n.a. | |||||||||
Attribution of net (loss) income | ||||||||||||||||
Equity holders of the parent | (293,540 | ) | 215,239 | 508,779 | n.a. | |||||||||||
Non-controlling interest | (21,950 | ) | (11,922 | ) | 10,028 | (45.7 | %) | |||||||||
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Net (loss) income | (315,490 | ) | 203,317 | 518,807 | n.a. | |||||||||||
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| For the years ended December 31, | ||||||||||||||||
| 2014 | 2015 | Variation | ||||||||||||||
| (In thousands of pesos, except for %) | ||||||||||||||||
Net income | ||||||||||||||||
Income before income tax | 643,904 | 3,502,218 | 2,858,314 | >100 | % | |||||||||||
Income tax expense | (38,720 | ) | (1,038,348 | ) | (999,628 | ) | >100 | % | ||||||||
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Net income | 605,184 | 2,463,870 | 1,858,686 | >100 | % | |||||||||||
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We recorded net income of Ps.203.3 millionPs.2.4 billion in 20122015 compared to a net lossincome of Ps.315.5Ps.605.2 million in 2011. The net loss in 2011 was primarily due to the ramp-up period of the new 15 routes that we launched in late 2010 and 2011. See Item 3: “Operating and Financial Review and Prospects—Operating Results—Trends and Uncertainties Affecting our Business.”
2014. At December 31, 20122015 and 2011,2014, we had tax loss carry-forwards amounting to Ps.2,014.9Ps.194.5 million and Ps.2,200.0 million,Ps.1.7 billion, respectively. These losses relate to our operations, which in conformity with current Mexican Income Tax Law may be carried forward and used to offset taxable income generated in the succeeding ten yearsyears. The effective tax rate during 2014 and 2015 was of 6.0% and 29.7%, respectively.
The increase in the effective tax rate was due to a higher tax profit recorded during the year, which was partially offset by the entity and may not be usedamortization of tax losses by an amount of Ps. 2,500 million. Up to offset taxable income elsewhere in our consolidated group. December 2014, tax losses had been considered as a deferred tax asset.
During the years ended December 31, 2012,2015 and 2011,2014 we used Ps.256.6 millionPs.1.6 billion and Ps.0.8Ps.424.5 million, respectively, in available tax losscarry-forwards.
B. Liquidity and Capital Resources
Liquidity
Our primary source of liquidity is cash provided by operations, with our primary uses of liquidity being working capital and capital expenditures.
| For the years ended December 31, | ||||||||||||
| 2011 | 2012 | 2013 | ||||||||||
| (In thousands of pesos) | ||||||||||||
Net cash flows (used in) provided by operating activities | (147,705 | ) | 497,448 | 38,757 | ||||||||
Net cash flows (used in) provided by investing activities | (628,030 | ) | 187,161 | (311,926 | ) | |||||||
Net cash flows provided by (used in) financing activities | 562,373 | (271,898 | ) | 1,860,504 | ||||||||
| For the years ended December 31, | ||||||||||||
| 2014 | 2015 | 2016 | ||||||||||
| (In thousands of pesos) | ||||||||||||
Net cash flows provided by operating activities | 333,783 | 3,069,613 | 978,732 | |||||||||
Net cash flows used in investing activities | (1,184,968 | ) | (601,277 | ) | (27,958 | ) | ||||||
Net cash flows provided by financing activities | 524,704 | 65,086 | 10,765 | |||||||||
In recent years, we have been able to meet our working capital requirements through cash from our operations. Our capital expenditures consist primarily of the acquisition of rotable spare parts, furniture and equipment, includingpre-delivery payments for aircraft acquisitions. From time to time, we financepre-delivery payments related to our aircraft with revolving lines of credit with the commercial banks and/or aircraft leasing companies.banks. We have obtained committed financing forpre-delivery payments in respect of all the aircraft to be delivered between 2014 and 2015, and for four aircraft to be delivered in 2016.through 2020.
Our cash and cash equivalents increased by Ps.1,628.7 million,Ps.1.9 billion, from Ps.822.1 millionPs.5.2 billion at December 31, 20122015 to Ps.2,450.8 millionPs.7.1 billion at December 31, 2013.2016. At December 31, 2013,2016, we had available credit lines totaling Ps.1,159.1 million,Ps.6.9 billion, of which Ps.935.0 millionPs.5.0 billion were related to financial debt and Ps.224.1 millionPs.1.9 billion were related to
letters of credit (Ps.402.0 million(Ps.3.7 billion were undisbursed). At December 31, 2012,2015, we had available credit lines totaling Ps.1,403.5 million,Ps.3.0 billion, of which Ps.1,206.4 millionPs.1.8 billion were related to financial debt and Ps.197.1 millionPs.1.2 billion were related to letters of credit (Ps.59.3(Ps.680.4 million were undisbursed).
We have an investment policy to optimize the performance and ensure availability of, and minimize the risk associated with, the investment of cash, cash equivalents and short-term investments. Such policy provides for guidelines regarding minimum balance, currency mix, instruments, deadlines, counterparties and credit risk. At December 31, 2013, 19%2016, 87% of our cash, cash equivalents and short-term investments were denominated in pesosU.S. dollars and 81%13% were denominated in U.S. dollars.pesos. See note 3 to our audited consolidated financial statements included elsewhere in this annual report.
Net cash flows (used in) provided by operating activities.We rely primarily on cash flows from operating activities to provide working capital for current and future operations. Net cash flows provided by operating activities totaled Ps.38,757Ps.978.7 million and Ps.497,448 millionPs.3.1 billion in 20132016 and 2012,2015, respectively. Despite higher profitability, theThe decrease in operating cash flow was primarily due to costsan increase in payments of Ps.349.2 millionguarantee deposits and Ps.544.3prepaid expenses in 2016 as compared to 2015.
Net cash flows provided by operating activities totaled Ps.3.1 billion and Ps.333.8 million in guarantee deposits, net of reimbursements, for 20122015 and 2013,2014, respectively. Additionally, we paid Ps.293.7 million and Ps.404.1 million to our lessors for flight equipment rental in 2012, and 2013, respectively,The increase was primarily due to an increase in our fleet size. operating profits in 2015 as compared to 2014.
Net cash flows used in operating activities totaled Ps.147.7 million in 2011, including Ps.24.7 million used in settlements of derivative financial instruments. The increase in operating cash flows from 2011 to 2012 was primarily due to the ramp-up period of the 15 new routes that we launched in late 2010 and 2011.
Net cash flows (used in) provided by investing activitiesactivities.. During 2013, the2016, net cash flow used in investing activities totaled Ps.311.9Ps.28.0 million, which consisted primarily ofpre-delivery payments for aircraft and engine acquisitions totaling Ps.1.3 billion, partially offset bypre-delivery payments reimbursements totaling Ps.1.7 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, net of Ps.717.1disposals of Ps.416.0 million. These reimbursements were
During 2015, net cash flow used in investing activities totaled Ps.601.3 million, which consisted primarily ofpre-delivery payments for aircraft acquisitions totaling Ps.835.5 million, partially offset by Ps.1,029 million primarily due topre-delivery payments reimbursements totaling Ps.669.7 million. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, net of disposals of Ps.435.5 million.
During 2014, net cash flow used in investing activities totaled Ps.1.2 billion, which consisted primarily ofpre-delivery payments for aircraft acquisitions totaling Ps.906.1 million, partially offset bypre-delivery payments reimbursements totaling Ps.395.6 million. Additionally, we recorded other capital expenditures relatedrelating to flight equipment,aircraft parts and rotable spare parts acquisitions and major maintenance costs, net of disposals during the same period. During 2012, the cash flow generated by investing activities totaled Ps.187.2 million, which consisted primarily of aircraft pre-delivery payments reimbursements of Ps.874.5Ps.674.5 million. These reimbursements were offset by Ps.687.3 million primarily due to capital expenditures, which consisted of expenditures related to flight equipment, spare parts acquisitions and major maintenance costs, net of disposals during the same period. During 2011, the cash flow generated by investing activities totaled Ps.628.0 million, which consisted primarily of expenditures related to aircraft pre-delivery payments and major maintenance cost. During 2010, capital expenditures totaled Ps.321.3 million.
Net cash flows provided by (used in) financing activities. FinancingDuring 2016, net cash flows provided by financing activities during 2013totaled Ps.10.8 million, which consisted primarily of the initial public offeringproceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps.1.0 billion, and additional short-term working capital facilities with Banco Nacional de México, S.A. and Bank of America México, S.A. of Ps.716.0 million; which were partially offset by payments of aircraft financingpre-delivery payments for a net amount of Ps.1.5 billion, other financing payments of Ps.134.7 million and interest paid of Ps.39.4 million.
During 2015, net cash flows provided by financing activities totaled Ps.65.1 million, which consisted primarily of proceeds of Ps.2,578.2from disbursements under our revolving credit facility with Banco Santander and Bancomext totaling Ps.924.6 million and proceeds from exercised treasury shares of Ps.26.0Ps.23.5 million, and additional finance of pre-delivery payments of Ps.444.1 million. These inflows were partially offset by the debt prepayments and payments of aircraft financingpre-delivery payments. In September 2013, we made prepayments on the loan agreements with Banco Inbursa (the Inbursa loan) and with Pasprot, S.A. de C.V. (the Pasprot loan), each dated May 12, 2009, in a total amount of Ps.260.4 million and 25% debt prepayment premium of Ps.65.2 million, according to the prepayment conditions established in the respective loan agreements. Additionally, in September 2013, we made prepayments on tranche C of the loan agreement with the IFC, dated June 23, 2006 (the IFC loan agreement) in a total amount of US$10 million (Ps.130.1 million) with an unwinding cost premium of Ps.50,000 due to the fact that the payment was not made on an interest payment date.
Financing activities during 2012 consisted primarily of interest paid on aircraft financing pre-delivery facilities and financial debt for Ps.127.4 million. In addition, financing activities during 2012 included payments
of aircraft financing pre-delivery payments under Mexican trust structures for an aggregate net amount of Ps.144.5Ps.801.3 million, (through saleinterest paid of Ps.41.5 million and leaseback transactions).other minor financing payments totaling Ps.40.1 million.
FinancingDuring 2014, net cash flows provided by financing activities during 2011totaled Ps.524.7 million, which consisted primarily of interest paid onproceeds from new disbursements under our revolving credit facility with Banco Santander and Bancomext totaling Ps.965.9 million, partially offset by payments of aircraft financingpre-delivery payments and credit lines in the amount of Ps.55.2 million. In addition, financing activities during 2011 included aircraft financing pre-delivery payments under Mexican trust structures for an aggregate net amount of Ps. 617.6Ps.399.8 million, interest paid of Ps.23.2 million and other minor financing payments totaling Ps.18.2 million.
Loan Agreements
In September 2013, the Inbursa and Pasprot loans were prepaid in a total amount of Ps. 260.4 million. The Company paid a 25% debt prepayment premium of Ps. 65.2 million according to the prepayment conditions established in the respective loan agreements. The debt prepayment premium was recorded as finance cost in the consolidated statement of operations.
In September 2013, tranche C of the IFC loan agreement was prepaid in a total amount of US$ 10 million (Ps. 130.1 million) with an unwinding cost premium of Ps. 50 thousand due to the fact that the payment was not made on an interest payment date. The total amount of unwinding cost premium was recorded as finance cost in the consolidated statement of operations.
The revolving credit facility with Banco Santander México and Bancomext, dated July 27, 2011 as amended and restated on August 1, 2013 and as further amended on February 28, 2014 and November 27, 2014, under which we are a guarantor, provides financing forpre-delivery payments in connection with our purchase of fifteen Airbusnineteen A320 aircraft. On August 25, 2015, we entered into an additional amendment to such loan agreement to financepre-delivery payments of eight additional A320 aircraft. Finally, we entered into one further amendment to this loan agreement on November 30, 2016, to finance thepre-delivery payments for thetwenty-two remaining A320 aircraft under the Airbus purchase agreement.
The aggregate principal amount of this revolving line is for up to U.S.$71.5 $199.6 million, of which U.S.$37.7 $113.1 million is provided by Banco Santander México and U.S.$33.8 $86.5 million by Bancomext. Interest is payableThis revolving credit facility bears annual interest at an annual rate of three-month LIBOR plus 2.50%.a spread according to the contractual conditions of each disbursement in a range of 1.99 to 2.25 percentage points. The final maturity is on November 1, 2016.May 31, 2021. Any principal repaid may bere-borrowed until November 30, 2015.October 31, 2020. This revolving line of credit may limit our ability to, among others, declare and pay dividends in the event that we fail to comply with the payment terms thereunder, dispose of certain assets, incur indebtedness and create certain liens.
In December 2016, we entered into two short-term working capital facilities: the first with Bank of America México, S.A. Institución de Banca Múltiple in the amount of U.S. $15.0 million, bearing annual interest atone-month LIBOR plus a spread of 1.60 percentage points, and the other with Banco Nacional de México S.A. in the amount of Ps.406.3 million, bearing annual interest at TIIE 28 days plus a spread of 0.80 percentage points (the Interbank Equilibrium Interest Rate (tasa de interés interbancaria de equilibrio) or the TIIE).
As of December 31, 2013,2016, we were current with principal and interest payments as well as in compliance with the covenants under our loan agreementsrevolving credit facility and revolving line of credit.short-term working capital facilities.
C. Research and Development, Patents and Licenses, Etc.
We have registered the trademark “Volaris” with the trademark office in Mexico and the United States. We have also registered several additional trademarks and slogans with the trademark office in Mexico.
We operate software products under licenses from our vendors, including Sabre Inc.Jeppesen Systems AB and Navitaire LLC. Under our agreements with Airbus, we use Airbus’ proprietary information to maintain our aircraft.
See Item 5: “Operating and Financial Review and Prospects—Operating Results—Trends and Uncertainties Affecting our Business”
E.Off-Balance Sheet Arrangements
None of our operating lease obligations are reflected on our statements of financial position. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value guarantee to our lessors.
| F. | Tabular Disclosure of Contractual Obligations |
The following table sets forth certain contractual obligations as of December 31, 2013:2016:
| Contractual Obligations Payments due by Period | Contractual Obligations Payments due by Period | |||||||||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | |||||||||||||||||||||||||||||||
| (In thousands of pesos) | (In thousands of pesos) | |||||||||||||||||||||||||||||||||||||||
Debt(1) | 562,292 | 268,468 | 293,824 | — | — | 1,994,283 | 1,051,237 | 785,022 | 158,024 | — | ||||||||||||||||||||||||||||||
Operating lease obligations(2) | 12,924,918 | 2,033,678 | 3,599,826 | 2,522,558 | 4,768,856 | 35,700,045 | 4,795,923 | 9,297,224 | 8,666,500 | 12,940,398 | ||||||||||||||||||||||||||||||
Flight equipment, spare engines and spare parts purchase obligations(3) | 6,197,831 | 777,787 | 1,243,339 | 2,643,522 | 1,533,183 | 6,515,893 | 1,615,828 | 4,369,175 | 530,890 | — | ||||||||||||||||||||||||||||||
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Total future payments on contractual obligations | 19,685,041 | 3,079,933 | 5,136,989 | 5,166,080 | 6,302,039 | 44,210,221 | 7,462,988 | 14,451,421 | 9,355,414 | 12,940,398 | ||||||||||||||||||||||||||||||
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| (1) | Includes scheduled interest payments. |
| (2) | Does not include maintenance |
| (3) | Our contractual purchase obligations consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. |
Committed expenditures for these aircraft, spare engines, spare parts and related flight equipment, including estimated amounts for contractual price escalations ofpre-delivery payments, will be approximately Ps.6,198 millionPs.6.5 billion from 20142017 to 2020.
In 2014,2017, we expect our capital expenditures, excludingpre-delivery payments, to be Ps.737.0 million,Ps.1.8 billion, consisting primarily of aircraft parts and rotable spare parts, construction and improvements to leased assets, and major maintenance costs (leasehold improvements to flight equipment recorded into rotable spare parts furniture and equipment, net).
| G. | Safe Harbor |
Not applicable.
| ITEM | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and Senior Management |
Board of Directors
Ourby-laws provide that the board of directors be comprised of no more than 21 members and their corresponding alternates, in which at least 25% of the members and their corresponding alternates are required to be independent pursuant to the Mexican Securities Market Law. A determination about independence must be made by our shareholders and it may be challenged by the CNBV. Upon the closingAs of the offering,date of this annual report, our board of directors will beis comprised of 11 principal members, of which 25%45.45% are independent and three of which have been appointed by our Series B shareholders.
Under ourby-laws, Series B shareholders will have the right to appoint three directors as long as the Series B shares represent at least 12% of Volaris’ outstanding capital stock. If the Series B shares, which are convertible into Series A Shares, represent less than 12% of our outstanding capital stock, the right to appoint directors by Series B shareholders will be based on the Mexican Securities Market Law.
Under ourby-laws and the Mexican Securities Market Law, any shareholder or group of shareholders representing 10% of Volaris’ outstanding capital stock, have the right to appoint one director for each such 10% ownership stake.
Set forth below are the name, age, position and biographical description of each of our directors as of the date of this report. The business address of our directors is that of our principal office.
Name | Age | Title | Alternate* | |||||
| Independent Director and Chairman of the Board | |||||||
Brian H. Franke | 53 | Director | Andrew Broderick | |||||
William A. Franke | 80 | Director | John R. Wilson | |||||
Harry F. Krensky | 53 | Director | ||||||
Roberto José Kriete Ávila | 64 | Director | Rodrigo Salcedo Moore | |||||
| Independent Director |
| Title | Alternate* | ||||||
William Dean Donovan | 55 | Independent Director | ||||||
| 54 | Director | Marco Baldocchi Kriete | |||||
José Luis Fernández Fernández | 57 | Independent Director | José Carlos Silva Sánchez-Gavito | |||||
Joaquín Alberto Palomo Déneke | 66 | Independent Director | José Carlos Silva Sánchez-Gavito | |||||
John A. Slowik | 66 | Independent Director | José Carlos Silva Sánchez-Gavito |
| * | Alternate directors are authorized to act on behalf of their respective directors in the event of such directors’ inability to attend board meetings. |
Gilberto Perezalonso CifuentesAlfonso González Migoyahas been one of our directors and chairman of the board since 2011.November 2014. He is also a director at Grupo Gigante, Grupo Marhnos,FEMSA, Coca Cola FEMSA, Bolsa Mexicana de Valores and Southern Copper.Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM), among others. Previously, Mr. PerezalonsoGonzález was chief executive officer of Aeroméxico, executive vice president of Administration and Finance of Grupo Televisachairman and chief executive officer of Corporación Geo.Grupo Industrial Saltillo, chief executive officer of Servicios Interpuerto Monterrey, held different senior roles in Grupo ALFA and was executive vice president and chief financial officer of senior executive Grupo Financiero BBVA Bancomer. Mr. PerezalonsoGonzález holds a Bachelor of LawsScience in Electromechanical Engineering from the Universidad Iberoamericana,ITESM and a Master of Business Administration from INCAE. He has also completed the Corporate Finance Program at Harvard University.Stanford University Graduate School of Business.
Brian H. Frankehas been one of our directors since 2010. Mr. Franke has previously been a member of the board of directors of Tiger Airways Holdings (Singapore) since 2008 and Tiger Airways Australia since May 2009. Currently, he is a principal specializing in aviation investments with Indigo Partners LLC, a private equity firm based in the United States. He is also a member of the board of directors of Falcon Acquisitions Group, Inc.Frontier. Prior to that, Mr. Franke was vice president of Franke & Company Inc., a boutique private equity firm focused on small and medium enterprises investments. He was also a director in marketing for Anderson Company, a U.S. real estate developer, from 1989 to 1992 and a marketing manager for United Brands Inc., a U.S. distribution and licensing company for consumer goods, from 1987 to 1989. Mr. Franke holds a Bachelor of Science in Business from the University of Arizona and a Masters of International Management from Thunderbird School of Global Management. He is William A. Franke’s son.
William A. Frankehas been one of our directors since 2010. He is also a member of the board of directors of Wizz Air Holdings Plc (Hungary). He is currently the managing member of Indigo Partners LLC (since 2002) and a managing partner of Newbridge Latin America L.P. (since 1996), both of which are private equity firms. Mr. Franke is chairman of the board of directors of Frontier and JetSmart Airlines (Chile) and was the founding chairman of Tiger Airways Holdings (Singapore), a member of the board of directors of Spirit and the chief executive officer/chairman of America West Airlines from 1993 to 2001. He is also a member of the board of directors of Falcon Acquisitions Group, Inc. Mr. Franke has undergraduate and graduate degrees from Stanford University. He also has an honorary doctorate from Northern Arizona University awarded in 2008. He is Brian H. Franke’s father.
Harry F. Krenskyhas been one of our directors since our founding. He is also a member of the board of directors of transportation companies Corporación Lipu, Fondo de Transporte México and Ike Asistencia,
company Traxion, hospital operator H+ABC (SISI) and education company AMCO International. Mr. Krensky is managing partner of the private equity firms Discovery Americas and Discovery Air. Previously, he was a founder of emerging market hedge fund managers Discovery Capital Management and Atlas Capital Management, and a founder of Deutsche Bank’s emerging market hedge fund. He has also served as an adjunct professor of international business at New York University’s Stern School of Business. He iswas a member of the Board of Trustees of Colby College, where he is chairman of its investment committee.College. Mr. Krensky has a Bachelor of Arts from Colby College, a master’s degree from the London School of Economics and Political Science and a Master of Business Administration from the Columbia University Graduate School of Business.
Roberto José Kriete Avilawas a founder of Volaris and has been one of our directors since 2005. He has an active role in managing private investments in sectors such as aviation, real estate, agribusiness and hotels. Mr. Kriete is also chairman of the board of AviancaTaca,Aeromantenimiento, S.A., a member of the board of Avianca Holdings, president of the Latin American and Caribbean Air Transport Association (ALTA), and a member of the boards of Teléfonos de Mexico, S.A.B. de C.V. and vice chairman of the board of the Agape Foundation in El Salvador and Escuela Superior de Economía y Negocios (ESEN). He has also served as a member of the boards of Banco Agrícola of El Salvador, Fundación Empresarial para el Desarrollo Educativo (FEPADE) and Fundación Salvadoreña para la Salud y el Desarrollo Humano (FUSAL). Mr. Kriete has an undergraduate degree from the University of Santa Clara and a Master of Business Administration from Boston College. He is Marco Baldocchi Kriete’s uncle.
Carlos Mendozawas a co-founder and co-project-leader of Volaris from 2004 to 2005, and has been a member of the board since our founding (previously as an alternate director and now as one of our directors). He is a managing partner at Discovery Americas II, senior managing director of Discovery Americas I and co-founder and partner of Quantica. Formerly, he was head of investment banking and private equity of Multivalores and chief executive officer of Interacciones Bank. He served as the chief of staff for the Minister of Communications and Transport of Mexico, general director of public credit at the Ministry of Finance and Public Credit of Mexico and deputy chief executive officer at Nacional Financiera (NAFIN). Mr. Mendoza has also served on the boards of various companies, such as: Iké, Egoba, MyM, H+ , AMCO, LIPU, Médica Sur, Grupo Desc, Aeroméxico, Mexicana, Minera Autlán, Petróleos Mexicanos, Banco Nacional de Obra y Servicios Públicos, Banco Nacional de Comercio Exterior and Nacional Financiera. He has also served on in the board of governors of the Banking and Securities Commission, and the Insurance Commission of Mexico. Mr. Mendoza has also served as a professor of corporate and international finance at Universidad Anáhuac. He holds a Master of Business Administration from Stanford University, where he was a Fulbright Scholar, and graduated with honors as an actuary from Universidad Anáhuac.
Rodolfo Montemayor Garza has been one of our directors since 2010. He also sits on the board of directors of Financiera Educativa de Mexico, INITE, Mexfund, LG Capital Fund and Grupo Empresarial Guerra. He is a founder and sits as chairman of the board of Human Capital International, Legare, Consultora Tecnológico Administrativa de México and SDS Latam. He worked in several responsibilities in Grupo CYDSA and served as managing director for the North Latin American Region in Uniroyal Chemical & Crompton and Knowles, and as chief executive officer at Grupo Guepell. Mr. Montemayor has a college degree in accounting from Instituto Tecnológico de Monterrey, and Master of Business Administration from Tulane and AD-2 degree from the Instituto Panamericano de Alta Dirección de Empresa.
Jorge Antonio Vargas Diez BarrosoStanley L. Pacehas been one of our directors since 2012.April 2017. He is a senior partner and director at Bain & Company where he has served as a member and chairman of most of the company’s key governance boards. Mr. Pace was the founder of the transformation and airline practices at Bain & Company and has led many of the company’s largest and most successful relationships and transformations. For a period of two years in the late 1990s, Mr. Pace became the chief executive officer of ATA. At that time, ATA was the largest charter airline in the world. Mr. Pace received an undergraduate degree in finance from the University of Utah where he graduated as valedictorian. He later received his Master of Business Administration from Harvard Business School where he graduated with high distinction.
William Dean Donavanhas been one of our directors since 2010 (prior to April 2017, he served as an alternate director). He is a Managing Director of Columbia Equity Partners and is a senior advisor to Discovery Americas, a Mexico City based private equity fund. Mr. Donovan sits on the boards of Prophet Brand Strategy, a marketing consultancy, and Metropolitan Bank. In 2005, he co-founded Volaris along with several other parties. Between 1989 and 2003, Mr. Donovan worked with Bain & Company. He was Managing Director of Bain Africa between 1999 and 2002 and head of Bain’s airline practice and auto practice at various times. He is also an advisor to Stellar Labs, a membersoftware company focused on floating fleet optimization and revenue management in the private aviation space. In 2005, Mr. Donovanco-founded Diamond Stream, a SaaS analytics application for the Travel and Entertainment industry. Mr. Donovan has served as chief operating officer of Nimblefish Technologies, a specialized micromarketing agency and as chief executive officer of SearchForce, a paid search workflow management and optimization platform. Mr. Donovan received his Bachelor of Arts from the University of California Berkeley, where he graduated Phi Beta Kappa and Summa Cum Laude, and his Master of Business Administration from the Wharton School at the University of Pennsylvania.
Enrique Beltranenahas been our chief executive officer since March 2006 and one of our directors since September 2016. Previously he worked as Grupo TACA’s chief operating officer, human resources and institutional relations vice president, cargo vice president and commercial director for Mexico and Central America. He also held the position of general director of Aviateca in Guatemala. Mr. Beltranena started his career in the aerospace industry in 1988. During the 1990s, he was responsible for the commercial merger of Aviateca, Sahsa, Nica, Lacsa and TACA Peru, which consolidated them into a single management entity called Grupo TACA. While at Grupo TACA, Mr. Beltranena also led the development of single operating codeshare and the negotiation of open skies bilateral agreements among each of the boardsCentral American countries and the United States. In 2001, Mr. Beltranena led Grupo TACA’s complete restructuring as its chief operating officer. Mr. Beltranena was named to the Entrepreneur of Grupo Lipu, S.A. de C.V., Inmuebles Metro Park, S.A. de C.V.,The Year Hall of Fame in Monaco after being nominated by Ernst & Young—Innovation in 2012. He was also named Entrepreneur of The Year in Mexico after being nominated by Ernst & Young—Mexico in 2011.He also received the National Order of Merit (Knight’s Badge) from the President of France. Currently Mr. Beltranena serves as Chairman of the Superior Council of the Universidad Panamericana in Mexico and Dilomak S.A. de C.V. Mr. Vargas has beenof the director of Corporación Triangulo, S.A. de C.V. since 1996. He worked at Grupo Televisa as vice president of news and sports from 1982 until 1996. Mr. Vargas has a college degree in public accounting from Universidad Nacional Autónoma de México.IPADE Business School.
José Luis Fernández Fernándezhas been one of our independent directors since 2012 and he also serves as the chairman of our audit committee. He is also a member of the audit committees of various companies, including Grupo Televisa, S.A.B., Grupo Financiero Banamex and Genomma Lab Internacional, S.A.B.Banco Nacional de C.V. (of which he is the chairperson)Mexico, S.A., and an alternate member of the board of Mexichem, S.A.B. de C.V., Grupo Pochteca, S.A.B. de C.V. and Arca Continental, S.A.B. de C.V. Mr. Fernández is a partner at Chevez Ruiz Zamarripa. Mr. Fernández has a degree in Public Accounting from Universidad Iberoamericana and a certification issued by the Mexican Institute of Public Accountants.
Joaquín Alberto Palomo Déneke has been one of our directors since 2005 and he also serves as a member of our audit committee. He is also a member of the boards of directors of Aeroman and Avianca-TACA.Avianca. Mr. Palomo has over two decades of experience in the financial air transportation and commercial aerospace sectors, where he created and implemented the first organization for Grupo TACA. He also actively participated in the planning, purchasing negotiations, closing, organization and final merger of AVIATECA, Tan/Sahsa, TACA de Honduras, Nica, Lacsa, Isleña de Inversiones, La Costeña, Aeroperlas and Trans American Airlines to form Grupo TACA. Mr. Palomo negotiated the financing of more than $1 billion in aircraft leases, sales and leasebacks. Mr. Palomo has a Bachelor of Science degree in Agricultural Economics from Texas A&M University.
John A. Slowikhas been one of our directors since 2012 and he also serves as a member of our audit committee. He has over three decades of experience in the air transportation and commercial aerospace sectors as a banker at Citi (and its predecessors) and Credit Suisse, where he managed its America’s Airline Industry investment banking practice. His extensive experience includes corporate and investment banking, where his activities involved public and private capital raising, structured debt issuance, aircraft leasing, principal investment and mergers and acquisitions advisory work. Mr. Slowik is also a member of the board of directors of Rotor Engine Securitization, Ltd. and Turbine USA LLC, private commercial jet engine leasing companies operating out of Ireland and the United States, respectively. Mr. Slowik is a board member and chairs the audit committees of two related, but separately incorporated, privately held companies – Quintillion Holdings, LLC and Quintillion Subsea Holdings, LLC. These companies are building and will operate a subsea system connecting Nome, Alaska to Prudhoe Bay, Alaska, with four landing stations in between, and a terrestrial fiber optic cable system connecting Prudhoe Bay to Fairbanks, Alaska. Mr. Slowik has an undergraduate degree in Mechanical Engineering from Marquette University and a Masters in Management from the Kellogg School, Northwestern University.
Senior Management
Our executive officers are appointed by our board of directors, pursuant to a proposal made by our compensation committee, for an indefinite term and may be removed by our board of directors at will, provided the corresponding severance payments are made, if applicable, in accordance with Mexican labor law and the applicable labor contract.
Set forth below are the name, age, position and a description of the business experience of each of our executive officers not described above, as of the date of this annual report. The business address of our executive officers is that of our principal office.
Name | Age |
| ||||
Enrique Beltranena | 54 | Chief Executive Officer | ||||
Fernando Suárez | 43 | Chief Financial Officer | ||||
Jaime Pous | Chief Legal Officer | |||||
José Luis Suárez | 49 | Chief Operating Officer | ||||
Holger Blankenstein | 42 | Chief Commercial | ||||
| ||||||
Carlos Alberto González | 43 | Corporate | ||||
Jimmy Zadigue | 44 | Internal Audit Director |
Enrique Beltranena has been our chief executive officer since March 2006. Previously he worked as Grupo TACA’s chief operating officer, human resources and institutional relations vice president, cargo vice president and commercial director for Mexico and Central America. He also held the position of general director of Aviateca in Guatemala. Mr. Beltranena started his career in the aerospace industry in 1988. During the 1990s he was responsible for the commercial merger of Aviateca, Sahsa, Nica, Lacsa and TACA Peru, which consolidated them into a single management entity called Grupo TACA. While at Grupo TACA, Mr. Beltranena also led the development of single operating codeshare and the negotiation of open skies bilateral agreements among each of the Central American countries and the United States. In 2001, Mr. Beltranena led Grupo TACA’s complete restructuring as its chief operating officer. Mr. Beltranena was named to the Entrepreneur of The Year Hall of Fame in Monaco after being nominated by Ernst & Young—Innovation in 2012. He was also named Entrepreneur of The Year in Mexico after being nominated by Ernst & Young—Mexico in 2011.
Fernando Suárezhas been our chief financial officer since January 2006. Mr. Suárez worked as an investment banker for Salomon Brothers in New York. Mr. Suárez has been responsible for negotiatingpre-delivery payment financing, purchase and leaseback transactions and direct leases for all of our aircraft. Prior to joining us, he worked at Grupo Televisa where he had been director of corporate finance. Mr. Suárez received his Master of Business Administration from University of California, Los Angeles and holds a Bachelor of Arts in Economics from the Instituto Tecnológico Autónomo de México.xico (ITAM).
Jaime Poushas been our general counsel since January 2013. Prior to joining us, Mr. Pous worked at Grupo Televisa, where he had been legal director from 1999 to 2012. Mr. Pous received his LLM from The University of Texas at Austin, School of Law and holds a law degree from the Instituto Tecnológico Autónomo de México.xico (ITAM).
José Luis Suárezhas been our chief operating officer since October 2015. He joined Volaris in early 2006 as sales director. In 2012, he occupied the position of Retail and Customer Service Director, where he supervised the airport operations, ramp management, flight attendants and customer solutions. Prior to joining us, Mr. Suárez Durán worked for ten years at Sabre Holdings. Mr. Suárez Durán received his Masters in Science in Industrial Engineering and Masters in Business Administration from the University of Missouri, Columbia. He also holds a degree in Executive Management from IPADE and a Bachelor of Science in Industrial Engineering (Cum Laude) from the Universidad Iberoamericana.
Holger Blankensteinhas been our chief commercial officer since 2009. He heads the areas of sales, marketing, and planning, which includes revenue management, and he also oversees the cargo business. Mr. Blankenstein was responsible for structuring our various channels of distribution and entrance into the U.S. market as well as developing and implementing our unbundled fares and ancillary products. Previously, Mr. Blankenstein was director of strategic development planning at Grupo TACA and was a consultant at Bain & Company. He has a Master’s of Business Administration and a Bachelor of Arts in Business degrees from Goethe University in Frankfurt.
James Nideshas been our chief operating officer since July 2011. Mr. Nides was previously the vice president flight operations and maintenance at ExpressJet Airlines (doing business as Continental Express and United Express) from July 1998 to July 2011. Mr. Nides was responsible for the operation of more than 450 aircraft, over 4,000 pilots, 1,100 mechanics, six nose-to-tail heavy check maintenance bases in Shreveport and Knoxville, astate-of the art paint facility in Saltillo, Mexico, and an interior shop in Houston, Texas. He was responsible for the combination of Atlantic Southeast Airlines and ExpressJet Airlines, and successfully obtaining a single operating certificate from the FAA in less than one year. Prior to working at ExpressJet Airlines, he held the position of vice president of flight operations for Northwest Airlink’s operation in Memphis, Tennessee, from 1995 to 1998. Before working at Northwest Airlink, Mr. Nides held various positions in flight operations and maintenance at Comair Airlines for 18 years, including captain, chief pilot, director of operations and director of technical services. Mr. Nides is a licensed commercial pilot with over 14,000 hours of flight time and is qualified on more than five different aircraft. He graduated from the University of Cincinnati with a degree in Economics.
Carlos Alberto Gonzálezhas been our corporate controllercontrol and compliance director since June 2010.2016 and was our corporate control director from June 2010 to May 2016. Currently, he is responsible for accounting, reporting, controls,internal control, revenue assurance, and taxes and accounting operations. He has been with us since April 2006. Prior to joining us, he worked as a financial planning and control manager in Mexico and in Spain for Grupo Telefonica Moviles. Additionally, he previously was a senior associate at PricewaterhouseCoopers and an internal auditor analyst at Scotiabank Inverlat. Mr. González is a Certified Public Accountant with apost-graduate degree in Corporate Finance from ISEC University and he also holds a Masters of Business Administration degree from Antonio de Nebrija University in Spain.
Jimmy Zadiguehas been our internal audit director since April 2011. Previously, Mr. Zadigue worked as the director of operations, finance and administration at Swarovski in Mexico and as the director of finance and business control at Bombardier North America. Mr. Zadigue is also a Certified Management Accountant in Canada. He holds a Bachelor of Business Administration degree fromHEC-Montreal and a Master of Science degree in Accounting Sciences from the Université du Québec.
Activities of Senior Management
Our chief executive officer and members of our senior management (directivos relevantes) are required to focus their activities on creating value for the company and will be liable for damages to the corporation for: (i) favoring a shareholder or group of shareholders, (ii) approving transactions between the company (or its subsidiaries) with related persons without satisfying legal requirements, such as obtaining a fairness opinion and
the approval of our board of directors, on acase-by-case basis, (iii) using (or authorizing a third party to use) our assets in a manner that is against our policies, (iv) making inappropriate use of ournon-public information, (v) taking advantage of corporate opportunities or consulting a third party to take advantage of corporate opportunities without approval from our board of directors, (vi) knowingly disclosing or revealing false or misleading information or omitting the disclosure of material information, (vii) ordering that transactions undertaken be omitted from registration, (viii) destroying or modifying company results or information and (ix) filing false or misleading information with the CNBV.
Our chief executive officer is required, primarily, to (i) implement the instructions established at our shareholders’ meeting and that of our board of directors, (ii) submit to the board of directors for approval the principal strategies for the business, (iii) submit to the audit and corporate governance committee proposals for our internal control system, (iv) disclose all material information to the public, (v) comply with applicable law in connection with share repurchases and subsequent purchases, (vii) initiate actions in respect of liabilities caused by us, (viii) comply with applicable law in respect of dividend payments, and (ix) maintain adequate accounting and registration internal control systems and mechanisms.
| B. | Compensation |
Director and Executive Compensation
In 2013,2016, the senior managers positions listed in this annual report, received an aggregate compensation of approximately Ps.65.5Ps.160.8 million. The chairman and the independent members of our board of directors received an aggregate compensation of approximately Ps.5.0Ps.7.8 million, and the rest of the directors received a compensation of Ps.0.78Ps.7.3 million.
Our directors or executive officers are not entitled to any benefits upon termination, except for indemnification payments provided under the Mexican Federal Labor Law (Ley Federal del Trabajo), if any.
Long-term Retention Plan
During 2010, we adopted an employee long-term retention plan, the purpose of which is to retain high-performing employees within the organization by paying incentives depending on our performance. During the year ended December 31, 2013 and 2012 we expensed Ps.6.3 million and Ps.6.5 million respectively, as bonuses as part of the caption salaries and benefits. During 2014, this plan was structured as a long-term incentive plan, which consists of a share purchase plan (equity-settled) and share appreciation rights plan (cash-settled).
Long-term Incentive Plan
Share Purchase Plan
In November 2014, we have established a share purchase plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps.10.8 million to be used to purchase our shares. In April 2016, an extension to this plan was approved at our annual ordinary shareholders’ meeting, with an effective date in November 2015. The key components of the plan are as follows:
| (i) | Servicios Corporativos granted a bonus to each key executive. |
| (ii) | Pursuant to the instructions of such key executives, on November 11, 2014, an amount equal to Ps.7.1 million (the fair value of the bonus net of withheld taxes) was transferred to an administrative trust for the acquisition of our Series A shares through an intermediary authorized by the Mexican stock market based on the instructions of the administration trust’s technical committee. An amount equal to Ps.7.5 million (the fair value of the bonus net of withheld taxes) was approved in April 2016 as an extension of this plan for the acquisition of our Series A shares, following the same mechanism. |
| (iii) | Subject to the terms and conditions set forth in the administrative trust agreement signed in connection thereto, the acquired shares are to be held in escrow in the administrative trust until the applicable vesting period date for each key executive, which is the date as of which each such key executive can fully dispose of the shares as desired. |
| (iv) | If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale. |
| (v) | Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee. |
In April and October 2016, extensions to this share purchase plan were approved by our board of directors. The total cost of the extensions approved was Ps.14.5 million (or Ps.9.5 million, net of withheld taxes) and Ps.11.6 million (or Ps.7.6 million, net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares.
During 2014, 2015 and 2016, we recognized Ps.1.1 million, Ps.6.0 million and Ps.7.8 million, respectively, as compensation expense associated with the share purchase plan in our consolidated statement of operations.
During the years ended December 31, 2015 and 2016, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2016, 86,419 shares were forfeited.
At December 31, 2016, 618,048 shares were held in trust under this share purchase plan as all shares granted remained unvested. Such shares were considered as treasury shares and considered outstanding for diluted earnings per share purposes because the holders are entitled to dividends if and when distributed.
Share Appreciation Rights
On November 6, 2014, November 6, 2015 and November 6, 2016, we granted 4,315,264 SARs, 1,793,459 SARs and 2,044,604 SARs, respectively to key executives. The SARs vest during a three-year period as long as the employee completes the required service period, and entitle them to a cash payment. As of the grant date, the valuation of the SARs granted under this plan totaled Ps.10.8 million, Ps.11.6 million and Ps.14.5 million, respectively.
During the year ended December 31, 2015 and 2016, we made a cash payment to key employees related to the SARs plan of Ps.31.3 million and Ps.31.1 million, respectively. These amounts were determined based on the increase in the share price of the Company between the grant date and the exercisable date of November 2016 and November 2015, respectively.
Management Incentive Plan
In December 2012, our shareholders approved a share incentive plan for the benefit of certain executive officers. Under this plan, designated officers generally may receive up to 3.0% of our capital stock on a fully diluted basis immediately prior to the completion of the related performance condition (consummation of our initial public offering or change of control), exercisable after such performance condition and for a period of ten years. To implement the plan, our shareholders approved (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of our capital stock, (ii) the transfer of such shares to a Mexican trustthe Management Trust for the benefit of certain officers and (iii) the execution of share sales agreements setting forth the terms and conditions upon which the officers will receive purchased shares from the trustee forof the Mexican trust.Management Trust.
On December 24, 2012, the trustManagement Trust was created and the share sales agreements were executed. On December 27, 2012, the trust acquired the aforementioned shares. The shares will accrue any dividends paid by us during the time elapsing prior to the delivery to officers upon payment therefor.therefore.
On September 18, 2013, the key employees participating in the management incentive plan exercised 4,891,410 shares. As a result, the key employees paid Ps.25,993Ps.25.9 million to the trust corresponding to the exercised shares. Thereafter, we received from the trust the payment related to the exercised shares by the key employees as a repayment of the loan between the company and the trust.
On November 16, 2015, as part of our secondaryfollow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps.23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the management trust.
During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps.17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
At December 31, 20132016, 2015 and December 31, 2012,2014, the shares held in trust to satisfy the management options were considered as treasury shares. As of December 31, 2013,2015 and 2016, 15,857,856 and 12,557,857 share options were vested, respectively.
Management Incentive Plan II
On November 6, 2016, our board of directors approved an extension of the total numbermanagement incentive plan to certain key employees, known as MIP II. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested and unvested shares amounted to 14,228,364 and 6,044,352, respectively.was also approved.
The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table above, see Item 5: “Long-term Incentive Plans—Management Incentive Plan II”). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.
The carrying amount of the liability relating to these SARs as of December 31, 2016 was Ps.54.4 million. The compensation cost is recognized in our consolidated statement of operations under the caption salaries and benefits over the service period. During the year ended December 31, 2016, we recorded Ps.54.4 million associated with these SARs in our consolidated statement of operations.
| C. | Board Practices |
Board Practices
The members of our board of directors are elected annually at our ordinary general meeting of shareholders. All board members hold their positions for one year and may be reelected. The current members of the board of directors were reelected or selected pursuant to the unanimous resolutions adopted by our shareholders prior to the offering referred to herein.
Authority of the Board of Directors
For a description of the authority of our directors, see Item 10: “Additional Information—Memorandum and Articles of Association—Provisions of OurBy-laws and Mexican Law Relating to Directors.”
Duty of Care and Duty of Loyalty
The Mexican Securities Market Law imposes duties of care and of loyalty on directors.
For a description of the duties of care and loyalty of our directors, see Item 10: “Additional Information—Memorandum and Articles of Association—Provisions of OurBy-laws and Mexican Law Relating to Directors.”
Audit and Corporate Governance Committee
The Mexican Securities Market Law requires us to have an audit and corporate governance committee, which must be comprised of at least three independent members. We established an audit and corporate governance committee pursuant to the unanimous resolutions adopted by our shareholders outside of a general shareholders meeting in June 2013. We believe that all of the members of the audit and corporate governance committee are independent under the Mexican Securities Market Law and Exchange ActRule 10A-3.
The audit and corporate governance committee’s principal duties are (i) supervising and evaluating our external auditors and analyzing their reports (including their opinion of our annual report), (ii) analyzing and supervising the preparation of our financial statements and making a recommendation to the board of directors on their approval, (iii) informing the board of directors of the status of our internal controls, our internal audit and their adequacy, (iv) supervising the execution of related party transactions and transactions representing 20% or more of consolidated assets being undertaken pursuant to applicable law, (v) requesting reports from our executive officers or independent experts whenever it deems appropriate, (vi) investigating and informing the board of directors of any irregularities that it may encounter, (vii) receiving and analyzing recommendations and observations made by the shareholders, members of the board of directors, executive officers or any third party and taking the necessary actions, (viii) calling shareholders’ meetings, (ix) supervising compliance by our chief executive officer of instructions provided by our board or shareholders, (x) providing an annual report to the board in respect of accounting policies, their sufficiency and adequacy, and consistency, (xi) rendering opinions to the board of directors in connection with the designation of our chief executive officer, his compensation and removal and policies for the description and comprehensive remuneration of other executive officers, (xii) supervising and reporting on the performance of our key officers, (xiii) rendering its opinion to the board of directors in connection with transactions with related parties, (xiv) requesting opinions from independent third party experts, (xv) calling shareholders’ meetings, (xvi) providing assistance to the board of directors in the preparation of reports for the annual shareholders’ meeting and (xvii) hiring or recommending auditors to shareholders and approving them.
As of the date of this annual report, the audit and corporate governance committee has at least one financial expert, José Luis Fernández Fernández, and is composed of three members.
The current members of our audit and corporate governance committee are:
Name | Title | |
José Luis Fernández Fernández | Chairman of the Audit and Corporate Governance Committee, Independent Director | |
Joaquín Alberto Palomo Déneke | Independent Director | |
John A. Slowik | Independent Director |
Mr. José Carlos Silva Sanchez-Gavito is the alternate member of the Audit and Corporate Governance Committee.
Compensation and Nominations Committee
Our board of directors has created a compensation and nominations committee, which is comprised by fivenon-independent members, as determined by our board of directors from time to time, appointed by our board of directors. We established a compensation and nominations committee pursuant to the unanimous resolutions adopted by our shareholders in June 2013.
The compensation and nominations committee is responsible for, among other things, (i) submitting proposals to the board of directors relating to the removal of officers within the first two corporate levels, (ii) proposing the creation, amendment or termination of any incentive plan for officers, (iii) consulting with third-party experts in connection with any issues related to compensation, organizational development, and other related matters, (iv) proposing compensation packages for officers within the first four corporate levels, (v) proposing to our board of directors the entering into, amendment or termination of any collective bargaining agreements, (vi) informing our board of directors of any material contingencies, and (vii) submitting periodic reports to our board of directors.
As of the date of this annual report, the current members of the compensation and nominations committee are:
Name | Title | |
Roberto José Kriete Ávila | Chairman | |
Brian H. Franke | Member | |
Harry F. Krensky | Member | |
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| D. | Employees |
We believe that having well-trained and driven employees impacts our growth potential and the quality of the service we provide. We therefore expend significant effort on selecting and training individuals who we believe are the best qualified for our company and will fit well within our corporate culture of customer service, meritocracy and efficient operations.
As of December 31, 2013,2016, we had 2,6924,550 employees, which consisted of 445892 pilots, 833flight1,415 flight attendants, 11588 ramp operations personnel, 4661,044 airport and customer service personnel, 185272 maintenance personnel and 648839 management and administrative personnel. 1,9553,386 of our employees (approximately 73%74%) are part of theSindicato de Trabajadores de la Indústria Aeronaútica, Similares y Conexos de la República Méxicana—STIAS and the remaining 27%26% of our employees are not part of any union. We and each of our subsidiaries entered into substantially the same collective bargaining agreement with our pilots and flight attendants on February 16, 201315, 2017 for a term of two years.one year. Salaries under these collective bargaining agreements are negotiated yearly, whereas other benefits are negotiated every two years. We believe we have a good relationship with our employees, and have never had labor strikes or work stoppages.
The following table sets forth the number of our employees per category and average of employees per aircraft for the periods indicated below:
| For the Years ended December 31, | For the Years ended December 31, | |||||||||||||||||||||||
Employees | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
Pilots | 388 | 404 | 445 | 509 | 616 | 892 | ||||||||||||||||||
Flight attendants | 602 | 715 | 833 | 930 | 1,091 | 1,415 | ||||||||||||||||||
Ramp operations personnel | 108 | 114 | 115 | 110 | 84 | 88 | ||||||||||||||||||
Airport and customer service personnel | 413 | 548 | 466 | 392 | 573 | 1,044 | ||||||||||||||||||
Maintenance personnel | 144 | 180 | 185 | 236 | 250 | 272 | ||||||||||||||||||
Management and administrative personnel | 624 | 608 | 648 | 628 | 690 | 839 | ||||||||||||||||||
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Total | 2,279 | 2,569 | 2,692 | 2,805 | 3,304 | 4,550 | ||||||||||||||||||
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Average of employees per aircraft | 67 | 63 | 61 | 56 | 59 | 66 | ||||||||||||||||||
We provide extensive training to our pilots, flight attendants, technical staff and customer service representatives, which complies with Mexican and international standards. We have implemented employee accountability initiatives both at the time of hiring and on an ongoing basis in order to maintain the quality of our crew and customer service.
Our compensation strategy is meant to retain talented and motivated employees and is designed to align the interests of our employees with our own. Approximately 100% of our employees, including pilots, flight attendants, ground employees and management, are subject to variable compensation employment arrangements, which are intended to promote efficiency, operating performance and profitable results. In addition, there is no seniority pay escalation among our pilots in order to encourage meritocracy.
| E. | Share Ownership |
As of the date of this annual report, John A. Slowik, one of our independent directors and James Nides, our chief operating officer,officers owned 12,500 and 95,000 shares through ADSs, respectively. as follows:
Name | Title | Number of shares | ||||
Harry F. Krensky | Director | 5,120,990* | ||||
Carlos Mendoza Valencia | Director | 879,240 | * | |||
John A. Slowik | Independent director | 30,500 | * | |||
Rodrigo Salcedo | Alternate director | 120,000* | ||||
William Dean Donovan | Director | 1,590,590 | * | |||
Alfonso González Migoya | Chairman of the Board | 107,791 | ||||
Marco Baldocchi | Alternate director | 630,500 | * | |||
Enrique Beltranena | Chief Executive Officer | 39,253 | ||||
Fernando Suárez | Chief Financial Officer | 112,007 | ||||
Jaime Pous | Chief Legal Officer | 23,430 | ||||
José Luis Suárez | Chief Operating Officer | 16,866 | ||||
Holger Blankenstein | Chief Commercial Officer | 23,073 | * | |||
Carlos Alberto González | Corporate Control and Compliance Director | 20,655 | ||||
Jimmy Zadigue | Internal Audit Director | 19,507 | * | |||
| * | Shares owned through CPOs or ADSs. |
This share ownership represents less than 0.01%0.86% of our shares. No other director or member of senior management owns any of our capital stock as of the date of this annual report. Except for the management incentive plan disclosed in this annual report, we have no arrangements for the issuing or granting of our options, shares or securities to our employees, nor do we have any other arrangement for involving our employees in our capital.
| ITEM | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. | Major Shareholders |
Our Principal Shareholders
Our shareholders are Mexican investors, international investors, investment funds managed by Discovery Americas and Columbia Equity Partners, or Discovery Air, investment funds managed by Blue Sky Investments, and investment funds managed by Indigo Partners LLC, or Indigo. Our shareholders have a long history of investing in Mexico and some of them have experience in the airline industry by having formed, or by holding interests in, Avianca-TACA,Avianca, Frontier, Spirit, Tiger and Wizz.
Major Shareholders and Share Ownership
The following table sets forth information as of the date of this report with respect to beneficial ownership of our capital stock, after giving effect to the stock split described in note 18 to our audited consolidated financial statements included elsewhere in this annual report:
| Common Stock | Common Stock | |||||||||||||||||||||||||||||||
Shareholders | Number | Percentage | Number | Percentage | ||||||||||||||||||||||||||||
5% Shareholders: | Series A | Series B | Series A | Series B | Series A | Series B | Series A | Series B | ||||||||||||||||||||||||
Blue Sky Investments, S.à. r.l.(1) | 118,126,502 | 44,857,124 | 18.5661 | 33.4704 | 70,201,880 | 44,857,124 | 8.0 | 33.5 | ||||||||||||||||||||||||
Discovery Air and other funds managed by Discovery Americas(2) | 163,335,939 | 45,968,598 | 23.8427 | 34.2997 | 32,959,868 | 45,968,598 | 3.8 | 34.3 | ||||||||||||||||||||||||
Funds managed by Indigo(3) | 139,380,926 | 43,194,749 | 15.9914 | 32.2300 | 139,380,920 | 43,194,749 | 15.9 | 32.2 | ||||||||||||||||||||||||
Named Executive Officers and Directors: | ||||||||||||||||||||||||||||||||
William A. Franke(3) | 139,380,926 | 43,194,749 | 15.9914 | 32.2300 | 139,380,920 | 43,194,749 | 15.9 | 32.2 | ||||||||||||||||||||||||
Harry Krensky(2) | 163,335,939 | 45,968,598 | 23.8427 | 34.2997 | 36,837,488 | 45,968,598 | 4.2 | 34.3 | ||||||||||||||||||||||||
All Executive officers and directors as a group (three persons) HSBC trust F/307750 | 20,272,716 | — | 2.3093 | — | 12,557,857 | — | 1.4 | — | ||||||||||||||||||||||||
| (1) | Consists of 44,857,124 Series B shares and |
| (2) | Consists of 45,968,598 Series B shares and |
| (3) | Consists of 42,194,100 Series B shares and |
| (4) | Certain executive officers benefit from a share incentive plan pursuant to which they have the right to receive an aggregate of |
Securities Held in Host Country
As of December 31, 2013, 25,388,3002016, 66,327,780 ADSs (equivalent to 253,883,000663,277,800 shares, or 25.1%66% of the total outstanding shares of our common stock) were outstanding and held of record by 5619 institutional depositary receipts. We are aware that many ADSs are held of record by brokers and other nominees, and accordingly the above numbers are not necessarily representative of the actual number of U.S. persons who are beneficial holders of ADSs or the number of ADSs beneficially held by such persons.
Registration Rights
We have granted the registration rights described below to our principal shareholders, to register shares of capital stock (and/or CPOs having such shares as underlying securities) owned by each of them after our initial public offering with the Securities and Exchange Commission (the “SEC”)SEC under the Securities Act, pursuant to the terms of a registration rights agreement filed as Exhibit 4.7 to our registration statement onForm F-1 field with the SEC on September 16, 2013, or the Registration Rights Agreement. No registration rights were granted to our principal shareholders in respect of the registration of our shares with the RNV maintained by the CNBV, because all of our Series A shares were registered thereat concurrently with our initial public offering, and such registration will be updated, from time to time, as required under applicable Mexican law.
The following description of the terms of the Registration Rights Agreement is intended as a summary only and is qualified in its entirety by reference to the copy filed as Exhibit 4.7 to our registration statement onForm F-1 field with the SEC on September 16, 2013.
Demand and Short-Form Registration Rights
Since the completion of our initial public offering, our principal shareholders are entitled to certain demand and short-form registration rights. The holders of at least a majority of the shares (and/or CPOs having such shares as underlying securities) subject to the registration rights can, on not more than two occasions, request that we register all or a portion of their shares (and/or CPOs having such shares as underlying securities) under the Securities Act.
In addition, since our initial public offering, these holders became entitled to certain short-form registration rights. The holders of shares (and/or CPOs having such shares as underlying securities) with a proposed aggregate offering price of at least U.S.$20 $20 million at the time of the request may make a written request that we register their shares (and/or CPOs having such shares as underlying securities) on a short form registration, if we are eligible to file a registration statement onForm F-3. These holders may make an unlimited number of requests for registration onForm F-3. However, we will not be required to effect a demand or short-form registration within 90 days after the effective date of a previous demand or short-form registration.
Moreover, once every 12 months, we may postpone for up to six months the filing or the effectiveness of a registration statement for a demand or a short-form registration, if our board of directors determines that such registration would have a material adverse effect on any of our proposals or plans to engage in any acquisitions of assets, merger, consolidation, tender offer or any other material transaction.
Piggyback Registration Rights
In the event that we propose to register any of our securities under the Securities Act, our principal shareholders will be entitled to certain “piggyback” registration rights allowing the holder to include their shares
(and/ (and/or CPOs having such shares as underlying securities) in such registration, subject to certain marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act (pursuant to a demand or short-form registration, or pursuant to a registration onForm F-4 orF-8 or any successor or similar forms), our current principal shareholders holding these shares (and/or CPOs having such shares as underlying securities) are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares (and/or CPOs having such shares as underlying securities) included in the registration, to include their shares (and/or CPOs having such shares as underlying securities) in the registration.
Expenses of Registration, Restriction and Indemnification
We will pay all registration expenses, including the legal fees of one counsel for all holders under the Registration Rights Agreement. In addition, we will reimburse such holders for the reasonable fees and disbursements of each additional counsel retained for the purpose of rendering any legal opinion if and to the extent required by underwriters or us.
The demand, short-form and piggyback registration rights are subject to customary restrictions such as blackout periods and any limitations on the number of shares (and/or CPOs having such shares as underlying securities) to be included in the underwritten offering imposed by any lead underwriter. The Registration Rights Agreement also contains indemnification provisions that we believe are customary for similar transactions.
Significant Changes in Share Ownership
On July 16, 2010 each of Corporativo Vasco de Quiroga, S.A. de C.V. and Sinca Inbursa, S.A. de C.V. sold their shares, which together represented 50% of our outstanding capital stock.
Differences in Voting Rights
See Item 10: “Additional Information—Memorandum and Articles of Association—Overview—Voting Rights.”
| B. | Related Party Transactions |
We have engaged in a number of transactions with related parties.
Aeroman
Aeroman is a related party because Roberto José Kriete Ávila, a member of our board of directors, and members of his immediate family are shareholders of Aeroman. We entered into an aircraft repair and maintenance service agreement with Aeroman on March 6, 2007.January 1, 2017. This agreement provides that we have to use Aeroman, exclusively for our aircraft repair and maintenance services, subject to availability. Under this agreement, Aeroman provides us with inspection, maintenance, repair and overhaul services for our aircraft. We make payments under this agreement depending on the services performed. This agreement is for a 10 yearfive-year term. As of December 31, 2011, 20122014, 2015 and 2013,2016, the balances due under our prior agreement with Aeroman, dated March 6, 2007, were Ps.0.6 million, Ps.3.4Ps.4.5 million and Ps.2.8Ps.30.6 million, respectively. We also incurred expense under this agreement of Ps.72.9Ps.163.3 million, Ps.135.6Ps.114.2 million and Ps.124.3Ps.308.7 million for the years ended December 31, 2011, 20122014, 2015 and 2013,2016, respectively.
Grupo TACA
Grupo TACA, together with Technical and Training Services, S.A. de C.V. and Aeroman, are a related party because Roberto José Kriete Ávila is a member of our board of directors and a shareholder of each of these
companies. We incurred an expense under this agreement of Ps.0.4 million, Ps.0.3 million for the year ended December 31, 2011 and 2012, respectively.
We have received consulting, training and technical support from Grupo TACA in the past, for which we paid fees of Ps.1 million in 2011. As of December 31, 2013, we had no balance due in connection therewith and we did not incur any expense thereunder for the year ended December 31, 2013.
IKÉ
ARSA Asesoría Integral Profesional, S.A. de C.V. is a related party because Discovery Americas I, LP, an affiliate of Discovery Air Investments, LP, one of our principal shareholders, is also a shareholder of ARSA Asesoría Integral Profesional, S.A. de C.V. We have entered into an advertising agreement with ARSA Asesoría Integral Profesional, S.A. de C.V. Under this agreement, we advertise and offer optional and additional travel insurance commercialized by IKÉ to our passengers. As of December 31, 2013, the balance due under this agreement to us from ARSA Asesoría Integral Profesional, S.A. de C.V. was Ps.0.9 million in 2013, Ps.2.2 million in 2012 and Ps.2.6 million in 2011. We received Ps.42.2 million as payment of advertising commissions under this agreement for the year ended December 31, 2013, Ps.44.2 million in 2012 and Ps.23.4 million in 2011. As of the date hereof, IKE is no longer a related party to the Company.
Human Capital International
We entered into a professional services agreement with Human Capital International HCI, S.A. de C.V. (formerly Expediente, S.A. de C.V.), or Human Capital International, on December 15, 2011,February 25, 2015, for the selection and hiring of executives. Rodolfo Montemayor Garza, alternate member of our board of directors, is a founder and chairman of the board of directors of Human Capital International. As of December 31, 2013, our balance due under this agreement was Ps.0.2 million and2016, we accrued an expense under this agreement of Ps.0.4Ps.3.1 million for the year ended December 31, 2013.
Pasprot
Pasprot was a related party because Pedro Carlos Aspe Armella, shareholder of 99% of its capital stock, has been one of our directors since the date we were founded and was the chairman of our board of directors until 2011. On May 12, 2009, we entered into a loan agreement with Pasprot which provides for a general corporate purpose loan of Ps.3.3 million. We used a portion of the net proceeds from our initial public offering to prepay this loan, on September 24, 2013.2016.
Servprot
Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena Mejicano, our Chief Executive Officer, and Rodolfo Montemayor Garza, aan alternate member of our board of directors, are shareholders of such company. Servprot provides security services for the Mr. Beltranena and his family, as well as for Mr. Montemayor. At December 31, 20132016, we accrued an expense of Ps.0.1Ps.1.7 million in connection with these services.
One Link, S.A. de C.V.
One Link, S.A. de C.V. (“One Link”) is a related party because Marcho Baldochi, an alternate member of our board, is a director of this company. One Link is our call center service provider. As of December 31, 2016, our balance due under this agreement was Ps.33.8 million, and we accrued an expense under this agreement of Ps.168.3 million for the year ended December 31, 2016.
SearchForce, Inc.
SearchForce, Inc.(“SearchForce”) is a related party because William Dean Donovan, a member of our board, is a director of this company. SearchForce provides us with consultation services and advertising management. As of December 31, 2016, our balance due under this agreement was Ps.0.6 million, and we accrued an expense under this agreement of Ps.3.4 million for the year ended December 31, 2016.
| C. | Interests of Experts and Counsel |
Not Applicable.
| ITEM | FINANCIAL INFORMATION |
| A. | Consolidated Statements and Other Financial Information |
Our annual consolidated financial statements prepared in accordance with IFRS on pagesF-1 through F-57F-75 are filed as part of this annual report.
Legal Proceedings
We are subject to various legal proceedings in the ordinary course of our business whichthat we believe are incidental to the operation of our business. business, except as noted below:
IPO Securities Litigation
We, believeas well as our CEO, CFO, three current directors and certain of our directors, were among the defendants in a putative class action commenced on February 24, 2015 in the United States District Court for the Southern District of New York brought on behalf of purchasers of ADSs in and/or traceable to our September 2013 initial public offering. The complaint, which also named as defendants the underwriters of the IPO, generally alleged that the outcomeregistration statement and prospectus for the ADSs contained misstatements and omissions with respect to our recognition ofnon-ticket revenue in violation of the proceedingsfederal securities laws, and sought unspecified damages and rescission. Pavers and Road Builders Pension Fund was appointed as lead plaintiff for the action. On August 22, 2016, our and the other defendants’ motion to which we are currently a party willdismiss was granted with prejudice in favor of us and the rest of the defendants. The plaintiff did not individually or inappeal the aggregate, have a material adverse effect on our consolidated financial statements.judge’s decision and the time to appeal has expired. Accordingly, any right of the plaintiff to pursue the litigation has ended.
Dividend Policy
We have not paid any cash dividends in the past and do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our shareholders on the recommendation of our board of directors and will depend on our earnings, financial condition, results of operations, capital requirements and contractual, regulatory and other restrictions on the payment of dividends and other factors our shareholders deem relevant. In addition, we may not pay any dividend unless such dividend is paid from our net profit account and the financial statements including such net profit and the payment of the relevant dividend have been approved by a shareholder resolution. Furthermore, our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends in the event that we fail to comply with the payment terms thereunder. See Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements.”
Mexican law requires that at least 5% of a company’s net income each year (after profit sharing and other deductions required by Mexican law) be allocated to a legal reserve fund until such fund reaches an amount equal to at least 20% of its capital stock from time to time (without adjustment for inflation). In 2011, we allocated Ps.38.2 million, corresponding to our net income for 2010, to the legal reserve fund. For the years ended December 31, 20122014, 2015 and 2013,2016, we havedid not created such reserve.allocate any amount to our legal reserve fund. As of December 31, 2012,2014, our reserve fund was Ps.38.2 million, or 1.7%1.3% of our capital stock. As of December 31, 2013,2015, our reserve fund was Ps.38.2 million or 1.3% of our capital stock. As of December 31, 2016, our reserve fund was Ps.291.2 million or 9.8% of our capital stock.
Mexican companies may pay dividends only out of earnings (including retained earnings after all losses have been absorbed or paid up), after allocation to the legal reserve fund and only if shareholders have approved the yearly financials from which such earnings are derived and the payment of the dividend. The reserve fund is required to be funded on a stand-alone basis for each company, rather than on a consolidated basis. The level of earnings available for the payment of dividends is determined under IFRS. Our subsidiaries are required to allocate earnings to their respective legal reserve funds prior to paying dividends to us.
Dividends that are paid from a company’s distributable earnings that have not been subject to corporate income tax are subject to a corporate-level tax payable by us. Companies are entitled to apply any such tax on the distribution of earnings as a credit against their Mexican corporate income tax corresponding to the fiscal year in which the dividend was paid or against the Mexican corporate income tax of the two fiscal years following the date in which the dividend was paid. Dividends paid from a company’s distributable earnings that have been subject to corporate income tax are not subject to this corporate-level dividend income tax. Dividends paid to resident andnon-resident holders with respect to the CPOs and ADSs were not subject to Mexican withholding or similar tax until December 31, 2013. As of January 1, 2014, a 10% Mexican withholding tax will apply.applies.
In the event we were to declare dividends, they would be in pesos. In the case of CPOs represented by ADSs, the cash dividends would be paid to the depositary and, subject to the terms of the Deposit Agreement,
converted into and paid in U.S. dollars at the prevailing rate of exchange, net of conversion expenses of the depositary and applicable Mexican withholding tax. Fluctuations in exchange rates would affect the amount of dividends that ADS holders would receive. For a more detailed discussion, see Item 12: “Description of Securities Other than Equity Securities—American Depositary Shares.”
| B. | Significant changes |
Except as otherwise disclosed in this annual report, there has been no undisclosed significant change since the date of our annual consolidated financial statements.
| ITEM | THE OFFER AND LISTING |
| A. | Offer and Listing Details |
New York Stock Exchange
American Depositary Shares
Our ADSs, each representing 10 of our Series A shares, are listed on the NYSE under the trading symbol “VLRS.” The ADSs began trading on the NYSE on September 18, 2013 and were issued initially by the Bank of New York Mellon. The following table sets forth, for the periods indicated, the high and low closing sales price in U.S. Dollars of the ADSs on the NYSE:
| High | Low | |||||||
Year | ||||||||
2013 | 15.14 | 12.65 | ||||||
Quarter | ||||||||
Fourth Quarter, 2013 (since September 18, 2013) | 15.14 | 12.65 | ||||||
First Quarter, 2014 | 13.97 | 7.97 | ||||||
Recent Six Months | ||||||||
November 2013 | 14.24 | 12.65 | ||||||
December 2013 | 15.00 | 13.55 | ||||||
January 2014 | 13.97 | 11.63 | ||||||
February 2014 | 11.54 | 9.28 | ||||||
March 2014 | 9.68 | 7.97 | ||||||
April 2014 (through April 28, 2014) | 8.31 | 7.01 | ||||||
| High | Low | |||||||
Year | ||||||||
2013 | 15.14 | 12.65 | ||||||
2014 | 13.97 | 6.92 | ||||||
2015 | 18.96 | 8.61 | ||||||
2016 | 21.52 | 13.77 | ||||||
Quarter | ||||||||
First Quarter 2017 | 15.00 | 11.50 | ||||||
Recent Six Months | ||||||||
November 2016 | 19.30 | 14.65 | ||||||
December 2016 | 15.23 | 13.77 | ||||||
January 2017 | 15.00 | 12.85 | ||||||
February 2017 | 14.87 | 11.50 | ||||||
March 2017 | 14.09 | 12.15 | ||||||
April 2017 (through April 26, 2017) | 14.39 | 12.74 | ||||||
Mexican Stock Exchange
Series A Shares
The Series A shares are listed on the Bolsa Mexicana de Valores, S.A.B. de C.V., or the Mexican Stock Exchange, under the trading symbol “VOLAR.” The Series A shares began trading on the Mexican Stock Exchange on September 18, 2013. The following table sets forth, for the periods indicated, the high and low closing sales price in Pesos of the Series A shares on the Mexican Stock Exchange:
| High | Low | |||||||
Year | ||||||||
2013 | 19.97 | 16.48 | ||||||
Quarter | ||||||||
Fourth Quarter, 2013 (since September 18, 2013) | 19.97 | 16.48 | ||||||
First Quarter, 2014 | 18.95 | 10.50 | ||||||
Recent Six Months | ||||||||
November 2013 | 19.17 | 16.48 | ||||||
December 2013 | 19.39 | 17.62 | ||||||
January 2014 | 18.95 | 15.63 | ||||||
February 2014 | 15.47 | 12.33 | ||||||
March 2014 | 12.78 | 10.50 | ||||||
April 2014 (through April 28, 2014) | 10.91 | 9.20 | ||||||
| High | Low | |||||||
Year | ||||||||
2013 | 19.97 | 16.48 | ||||||
2014 | 18.95 | 9.00 | ||||||
2015 | 31.33 | 12.67 | ||||||
2016 | 37.92 | 28.36 | ||||||
Quarter | ||||||||
First Quarter 2017 | 32.20 | 22.84 | ||||||
Recent Six Months | ||||||||
November 2016 | 35.77 | 30.30 | ||||||
December 2016 | 31.04 | 28.36 | ||||||
January 2017 | 32.20 | 27.86 | ||||||
February 2017 | 30.14 | 22.84 | ||||||
March 2017 | 26.71 | 24.02 | ||||||
April 2017 (through April 26, 2017) | 27.03 | 24.58 | ||||||
Source: Bloomberg
On April 28, 2014,26, 2017, the last reported sale price of the Series A shares on the Mexican Stock Exchange was Ps.9.45Ps.24.58 per share.
| B. | Plan of Distribution |
Not Applicable.
| C. | Markets |
The Mexican Stock Market
The information concerning the Mexican securities market set forth below has been prepared based on materials obtained from public sources, including the CNBV, the Mexican Stock Exchange and information made public by market participants. The following summary does not purport to be a comprehensive description of all of the material aspects related to the Mexican securities market.
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, located in Mexico City, is the only stock exchange currently operating in Mexico. Operating continuously since 1907, the Mexican Stock Exchange is organized as a variable capital public stock corporation. Securities trading on the Mexican Stock Exchange occurs each business day from 8:30 a.m. to 3:00 p.m., Mexico City time subject to adjustments to operate uniformly with certain markets in the United States.
Since January 1999, all trading on the Mexican Stock Exchange has been effected electronically. The Mexican Stock Exchange may impose a number of measures to promote an orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer, when price fluctuations exceed certain limits.
Settlement of transactions with equity securities on the Mexican Stock Exchange are effected three business days after a share transaction is agreed to. Deferred settlement is not permitted without the approval of the Mexican Stock Exchange, even where mutually agreed. Securities traded on the Mexican Stock Exchange are on deposit in book-entry form through the facilities of Indeval, a privately owned securities depositary that acts as a clearinghouse, depositary, and custodian, as well as a settlement, transfer, and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities. Transactions must be settled in pesos except under limited circumstances and in respect of limited transactions in which settlement in foreign currencies may be permitted.
Market Regulation
In 1925, the Mexican National Banking Commission (Comisió(Comisión Nacional Bancaria)Bancaria) was established to regulate banking activity and in 1946, the Mexican Securities Commission (Comisió(Comisión Nacional de Valores)Valores) was established to regulate stock market activity. In 1995, these two entities merged to form the CNBV.
Among other things, the CNBV regulates the public offering and trading of securities, public companies and their regime and participants in the Mexican securities market (including brokerage houses and the Mexican Stock Exchange), and imposes sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law. The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms, through its staff and a board of governors comprised of thirteen members.
Mexican Securities Market Law
The current Mexican Securities Market Law was enacted on December 8, 2005, published in the Official Gazette of the Federation(Diario Oficial de la Federaciónn)) or Official Gazette of the Federation on December 30, 2005, and became effective on June 28, 2006, and is referred to as the Mexican Securities Market Law. The Mexican Securities Market Law changed Mexican securities laws in various material respects to further align Mexican laws with the securities and corporate governance standards laws in effect in other jurisdictions that maintained more developed securities markets.
In particular, the Mexican Securities Market Law:
| • | establishes thesociedad anónima promotora de inversión, |
defines the standards applicable to the board of directors and the duties and potential liabilities and penalties applicable to each director, the chief executive officer and other executive officer and of members of the technical committee and the corporate governance committee (introducing concepts as
the duty of care, duty of loyalty and safe harbors for actions attributable to directors, committee members and officers);
|
| • | replaces the statutory auditor |
In March 2003, the CNBV issued certain general regulations applicable to issuers and other securities market participants, which regulations have since been amended, or the General Regulations, and in September 2004, the CNBV issued certain general regulations applicable to brokerage firms. The General Regulations, which repealed several previously enacted CNBV regulations, provide a consolidated set of rules governing public offerings, reporting requirements and issuer activity, among other things.
Registration and Listing Standards
In order to offer securities to the public in Mexico, an issuer must meet specific qualitative and quantitative requirements. Only securities that have been registered with the Mexican National Securities Registry (Registro Nacional de Valores) or the RNV, pursuant to an approval by the CNBV may be listed on the Mexican Stock Exchange. In addition, the Mexican Stock Exchange has created a parallel quotation system, named the international quotation system or “SIC,” where debt and equity securities issued bynon-Mexican issuers may be listed, for trading by institutional and accredited investors. Issuers listed on the SIC have limited disclosure and reporting requirements and may comply with obligations through a sponsor and by providing disclosure made available in their home market. These securities may be listed through the SIC if (i) the securities are not already listed on the RNV, (ii) the market of origin of the company issuing the shares has received, based on its characteristics, recognition from the CNBV, and (iii) the securities satisfy the listing requirements of the applicable stock exchange.
The General Regulations require the Mexican Stock Exchange to adopt minimum requirements for issuers that seek to list their securities in Mexico. These requirements relate to operating history, financial and capital structure, and minimum public floats applicable to shares of public companies, among other things. The General Regulations also require the Mexican Stock Exchange to implement minimum requirements (including minimum public floats) for issuers to maintain their listing in Mexico. These requirements relate to the issuer’s financial condition, capital structure and public float, among others. The CNBV may waive some of these requirements in certain circumstances. In addition, some of the requirements are applicable for each series of shares of the relevant issuer.
The CNBV’s approval for registration with the RNV does not imply any kind of certification or assurance related to the investment quality of the securities, the solvency of the issuer, or the accuracy or completeness of any information delivered to the CNBV or included in any offering document.
The Mexican Stock Exchange may review compliance with the foregoing requirements and other requirements at any time, but will normally do so on an annual, semi-annual and quarterly basis. The Mexican Stock Exchange must inform the CNBV of the results of its review, and this information must, in turn, be disclosed to investors. If an issuer fails to comply with any of these minimum requirements, the Mexican Stock Exchange will request that the issuer propose a plan to cure the violation. If the issuer fails to propose a plan, if the plan is not satisfactory to the Mexican Stock Exchange, or if an issuer does not make substantial progress with respect to the implementation of the corrective plan, trading of the relevant series of shares on the Mexican Stock Exchange may be temporarily suspended. In addition, if an issuer fails to implement the plan in full, the CNBV may cancel the registration of the shares, in which case the majority shareholder or any controlling group will be required to carry out a tender offer to acquire all of the outstanding shares of the issuer in accordance with the tender offer provisions set forth in the Mexican Securities Market Law (under which all holders must be treated in the same manner).
Reporting Obligations
Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements (together with an explanation thereof) and periodic reports, in particular reports dealing with material events, with the CNBV and the Mexican Stock Exchange. Mexican issuers must file the following reports with the CNBV:
Pursuant to the General Regulations, the internal rules of the Mexican Stock Exchange were amended to implement an automated electronic information transfer system (Sistema Electrónico de Envío y Difusión deInformación, or SEDI) calledSistema Electrónico de Comunicación con Emisoras de Valores, or EMISNET, for information required to be filed with the Mexican Stock Exchange. Issuers of listed securities must prepare and disclose their financial and other information via EMISNET. Immediately upon receipt, the Mexican Stock Exchange makes this financial and other information available to the public.
The General Regulations and the rules of the Mexican Stock Exchange require issuers of listed securities to file through SEDI information that relates to any event or circumstance that could influence an issuer’s share prices and investor decisions to acquire stock. If listed securities experience unusual price volatility, the Mexican Stock Exchange must immediately request that an issuer inform the public as to the causes of the volatility or, if the issuer is unaware of the causes, that it make a statement to the effect that it is unaware of the causes of such volatility. In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to material events when it deems the available public information to be insufficient, as well as instruct issuers to clarify information when necessary. The Mexican Stock Exchange may request that issuers confirm or deny any material event that has been disclosed to the public by third parties when it deems that the material event may affect or influence the price of the listed securities. The Mexican Stock Exchange must
immediately inform the CNBV of any such request. In addition, the CNBV may also make any of these requests directly to issuers. An issuer may delay the disclosure of material events if:
Similarly, if an issuer’s securities are traded on both the Mexican Stock Exchange and a foreign securities exchange, the issuer must simultaneously file the information that it is required to file pursuant to the laws and regulations of the foreign jurisdiction with the CNBV and the Mexican Stock Exchange.
Suspension of Trading
In addition to the authority of the Mexican Stock Exchange under its internal regulations described above, the CNBV and the Mexican Stock Exchange may suspend trading in an issuer’s securities:
The Mexican Stock Exchange must immediately inform the CNBV and the general public of any suspension. An issuer may request that the CNBV or the Mexican Stock Exchange permit trading to resume if it demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with periodic reporting requirements. If an issuer’s request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading (which may include a bidding process to determine applicable prices). If trading in an issuer’s securities is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose via SEDI, before trading may resume, a description of the causes that resulted in the suspension.
Under consent regulations, the Mexican Stock Exchange may consider the measures adopted by othernon-Mexican exchanges to suspend and/or resume trading of an issuer’s shares, in cases where the relevant securities are simultaneously traded on stock exchanges located outside of Mexico.
Insider Trading, Trading Restrictions and Tender Offers
The Mexican Securities Market Law contains specific regulations regarding insider trading, including the requirement that persons in possession of information deemed privileged abstain (i) from directly or indirectly, trading in the relevant issuer’s securities, or derivatives with respect to such securities, the trading price of which may be affected by such information, (ii) from making recommendations or providing advice to third parties to trade in such securities, and (iii) disclosing or communicating such privileged information to third parties (except for persons to whom such information must be disclosed as a result of their positions or employment, as governmental authorities).
Pursuant to the Mexican Securities Market Law, the following persons must notify the CNBV of any transactions undertaken by them with respect to a listed issuer’s securities, whether on acase-by-case basis or quarterly:
These persons must also inform the CNBV of the effect of the transactions within five days following their completion, or, alternatively, that the transactions have not been consummated. In addition, insiders must abstain from purchasing or selling securities of the issuer within three months from the last sale or purchase, respectively.
Also, for purposes of preparing annual reports, holders of 1% or more of the outstanding shares of a Mexican public company, must disclose their holdings and the relevant issuer.
Subject to certain exceptions, any acquisition of a public company’s shares that results in the acquirer owning 10.0% or more, but less than 30.0%, of an issuer’s outstanding capital stock, must be publicly disclosed to the CNBV and the Mexican Stock Exchange by no later than one business day following the acquisition.
Any acquisition or disposition by an insider that results in the insider holding an additional 5% or more of a public company’s outstanding capital stock or that reduces such insider’s holdings by 5% or more, must also be publicly disclosed to the CNBV and the Mexican Stock Exchange no later than one business day following the acquisition or disposition. Some insiders must also notify the CNBV of share purchases or sales that occur within any three-month orfive-day period and that exceed certain value thresholds. The Mexican Securities Market Law requires that convertible securities, warrants and derivatives to be settled in kind be taken into account in the calculation of share ownership percentages of public companies.
The Mexican Securities Market Law requires that convertible securities, warrants, and derivatives to be settled in kind be considered in determining whether any of the foregoing percentages is reached or affected.
Tender Offers
The Mexican Securities Market Law contains provisions relating to public tender offers and certain other share acquisitions occurring in Mexico. Under the Securities Market Law, tender offers may be voluntary or mandatory. Voluntary tender offers, or offers where there is no requirement that they be initiated or completed, are required to be made pro rata. Any intended acquisition of a public company’s shares that results in the acquirer owning 30% or more, but less than a percentage that would result in the acquirer obtaining control, of a company’s voting shares requires the acquirer to make a mandatory tender offer for the greater of (a) the percentage of the capital stock intended to be acquired, or (b) 10% of the company’s outstanding capital stock. Finally, any intended acquisition of a public company’s shares that is aimed at obtaining control requires the potential acquirer to make a mandatory tender offer for 100% of the company’s outstanding capital stock (however, under certain circumstances, the CNBV may permit an offer for less than 100%). The tender offer must be made at the same price to all shareholders and classes of shares. The board of directors, with the advice of the audit committee, must issue its opinion in respect of the fairness of the price applicable to any tender offer resulting in a change of control, which opinion must take minority shareholder rights into account and which may be accompanied by an independent fairness opinion. Directors and officers of a public company, in respect of which a tender offer has been made, must disclose whether or not each of them will tender his respective shares in the tender offer.
Under the Mexican Securities Market Law, all tender offers must be open for at least 20 business days and purchases thereunder are required to be made pro rata to all tendering shareholders. The Mexican Securities Market Law also permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the board of directors, and paid solely in connection withnon-compete or similar obligations. The law also provides exceptions to the mandatory tender offer requirements and specifically sets forth remedies fornon-compliance with these tender offer rules (e.g.(e.g., suspension of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.
Joint Trading of Common Shares and Limited orNon-Voting Shares
The Mexican Securities Market Law does not permit issuers to implement mechanisms for common shares and limited ornon-voting shares to be jointly traded or offered to public investors, unless the limited ornon-voting shares are convertible into common shares within a period of up to five years, or when, because of the nationality of the holder, the shares or the securities representing the shares limit the right to vote to comply with foreign investment laws. In addition, the aggregate amount of shares with limited ornon-voting rights may not exceed 25% of the aggregate amount of publicly held shares. The CNBV may increase this 25% limit by an additional 25%, provided that the limited ornon-voting shares exceeding 25% of the aggregate amount of publicly held shares are convertible into common shares within five years of their issuance.
Anti-Takeover Protections
The Mexican Securities Market Law provides that public companies may include anti-takeover provisions in theirby-laws if such provisions (i) are approved by a majority of the shareholders, without shareholders representing 5% or more of the capital stock present at the meeting voting against such provision, (ii) do not exclude any shareholders or group of shareholders, (iii) do not restrict, in an absolute manner, a change of control, and (iv) do not contravene legal provisions related to tender offers or have the effect of disregarding the economic rights related to the shares held by the acquiring party.
Board of Directors and Committees
Under the Mexican Securities Market Law, public companies must have a board of directors comprised of no more than 21 members, of which at least 25% must be independent. Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether or not a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the CNBV. As a departure from legislative precedents, the Mexican Securities Market Law permits then-acting members of the board of directors (as opposed to shareholders) to select, under certain circumstances, on a temporary basis, new members of the board of directors.
Boards of directors of public companies are required to meet at least four times during each calendar year and have the following principal duties:
Directors have the general duty to act for the benefit of the issuer, without favoring any shareholder or groups of shareholders.
The Mexican Securities Market Law requires the creation of two committees, the audit committee and the corporate governance committee, each of which must maintain at least three members appointed by the board of directors and which members must all be independent (except for the corporate governance committee of corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock, where the majority must be independent). The audit committee (together with the board of directors, which has added duties) replaces the statutory auditor (comisario)(comisario) that had been previously required under the Mexican Corporations Law.
The corporate governance committee is required to provide opinions to the board of directors, request and obtain opinions from independent third-party experts, call shareholders’ meetings, provide assistance to the board in the preparation of annual reports and provide a report to the board of directors.
The audit committee’s principal role is to supervise the external auditors of the issuer, analyze the external auditor’s reports, discuss yearly financial statements and, when applicable, recommend their approval, inform the board of directors in respect of existing internal controls, require the issuer’s executive to prepare reports when deemed necessary, inform the board of directors of any irregularities that it encounters, investigate breaches of operating policies internal control and internal audit systems, supervise the activities of the issuer’s chief executive officer, call shareholders’ meetings, and provide an annual report to the board of directors.
Disclosure of Shareholders’ Agreements
Any shareholders’ agreements containingnon-compete clauses, any agreements related to the sale, transfer or exercise of preemptive rights, any agreements which allow for the sale and purchase of shares (including anytag-along, drag-along and put or call rights), voting rights, and sale of shares in a public offering, must be notified to the company within five business days following their execution, to allow the company to disclose such agreements to the investors through the stock exchanges on which its securities are traded and to be made public in an annual report prepared by the company. These agreements (i) will be available for the public to review at the company’s offices, (ii) will not be enforceable against the company and a breach of such agreements will not affect the validity of the vote at a shareholders’ meeting, and (iii) will only be effective among the relevant parties once they have been disclosed to the public.
Miscellaneous
The Mexican Securities Market Law also specifies that any transaction or series of transactions that, during any fiscal year, represent 20% or more of the consolidated assets of a public company, must be considered and approved by a meeting of shareholders.
In addition to the right granted to minority shareholders of a public company representing 5% or more of the outstanding shares to initiate a shareholder derivative suit against directors for a breach of the duty of care or the duty of loyalty, the Mexican Securities Market Law recognizes the right of shareholders representing 10% or more of the outstanding shares to appoint a director and call a shareholders’ meeting and request that vote on resolutions in respect of which they were not sufficiently informed be postponed. Holders of 20% or more of the outstanding voting shares may judicially oppose resolutions that were passed by a shareholders’ meeting and file a petition for a court order to suspend the resolution, if the claim is filed within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or the company’sby-laws, (ii) the opposing stockholders either did not attend the meeting or voted against the challenged resolution, and (iii) the opposing stockholders deliver a bond to the court to secure payment of any damages that the company may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing stockholder; these provisions have seldom been invoked in Mexico and, as a result, any action that may be taken by a competent court is uncertain.
The New York Stock Market
NYSE traces its origins to 1792, when 24 New York City stockbrokers and merchants signed the Buttonwood Agreement. This agreement set in motion the NYSE’s unwavering commitment to investors and issuers. NYSE
Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V., was launched on April 4, 2007. NYSE Euronext (NYSE/New York and Euronext/Paris: NYX) operates the world’s largest and most liquid exchange group and offers the most diverse array of financial products and services. NYSE Euronext, which brings together six cash equities exchanges in five countries and six derivatives exchanges, is a world leader for listings, trading in cash equities, equity and interest rate derivatives, bonds and the distribution of market data. NYSE Euronext is a leading provider of securities listing, trading and market data products and services. To protect investors, the health of the financial system and the integrity of thecapital-formation process, the SEC has designated the NYSE as the examining authority for its members and member firms. Listed companies, individual investors, institutional investors and member firms create the NYSE market. A member organization is a registeredbroker-dealer organized as a corporation, a partnership or an LLC, which is regulated by the Exchange. A member organization may, or may not, hold a trading license. At the NYSE, two types of members work on the Trading Floor, each playing a distinct role in the trade execution process: Floor Brokers and Specialists. NYSE is open from Monday through Friday 9:30 a.m. to 4:00 p.m. EST each business day of the year.
On June 19, 2008, the NYSE Regulation, Inc. announced that “eGovDirect.com” was being offered tonon-U.S. foreign private issuers listed on NYSE, including companies that trade American Depositary Shares on the NYSE through their Depositary Bank. Thispassword-protected website assistsNYSE-listed companies to meet their corporate governance and compliance requirements and allows issuers to save time and resources by filing annual and interim financial reports, disclosing officer and audit committee member information, and publishing declarations of dividends, shareholder meeting dates, shares outstanding and press releases through this website.
On January 29, 2009,,NYSE Euronext and BIDS Holdings, L.P., launched a joint venture, the New York Block Exchange (“NYBX”), an innovative new platform designed to maximize access to liquidity and improve execution quality in the U.S. equity block trading market. Institutional investors and other market participants can execute block trades on NYBX, the first venue of its kind to allownon-displayed liquidity to anonymously access both the displayed and reserve liquidity of the NYSE order book, creating an innovative platform tore-aggregate blocks of stock. BIDS Holdings and the NYSE Euronext each have a 50% ownership stake in NYBX.
On November 12, 2009, NYSE Euronext established its commission on corporate governance to address U.S. corporate governance and the overall proxy process. Consistent with the NYSE’s role as a leading advocate on governance issues, the commission brings together leading experts and representatives from public companies, institutional and individual investors, broker/dealers and other advisors.
On November 13, 2013, NYSE Euronext was acquired by IntercontinentalExchange Group, Inc. NYSE Euronext continues to operate under its brand name as a wholly-owned subsidiary of IntercontinalExchange Group, Inc.
| D. | Selling Shareholders |
Not Applicable.
| E. | Dilution |
Not Applicable.
| F. | Expenses of the Issue |
Not Applicable.
| ITEM | ADDITIONAL INFORMATION |
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
Register
Ourby-laws were filed as an Exhibit 3.1 to our registration statement onForm F-1 filed with the SEC on September 16, 2013, and as of the date of this annual report have not been amended.
Corporate Object and Purpose
Article 2 of our by lawsby-laws state that our corporate purpose is, in general, to undertake any type of act, and execute any type of agreements, instruments and documents, including those of commercial and civil nature, permitted by the applicable law, in Mexico or in any other jurisdiction.
Overview
Our capital stock is divided into two series of shares, Series A shares and Series B shares. Series A shares are common shares and may only be owned directly by Mexican individuals or entities controlled by Mexican individuals. Series B Shares are common shares and may be purchased by Mexican ornon-Mexican individuals or entities.
Series B shares may be convertible at any time into Series A shares pursuant to a mechanism set forth in ourby-laws. Series A shares may underlie CPOs, but while Series B shares are not transferable to third parties (other than our principal shareholders or their affiliates) as Series B shares, may not represent more than 49% of our outstanding capital stock that is not underlying CPOs and will maintain minority rights provided for in ourby-laws so long as Series B shares represent at least 12% of our outstanding capital stock. The Series B shares will be automatically converted into Series A shares upon their transfer to a third party (other than our principal shareholders or their affiliates).
Holders of Series B shares have the right to appoint and revoke the designation of three directors, so long as such Series B shares represent 12% or more of our outstanding capital stock. The Series B shares will not be listed on the Mexican Stock Exchange or any other stock market nor registered in the Mexican National Securities Registry.
Since we are a variable capital public stock corporation, our capital stock must have a fixed portion, currently represented by Series A shares and may have a variable portion currently represented both by Series A shares and Series B shares. Ourby-laws set forth that Series B shares may not represent more than 49% of our outstanding capital stock that is not underlying CPOs at any time. Upon completionAs of our initial public offering,the date of this report our outstanding capital stock will consistconsisted of 877,856,219877,856,206 Series A shares and 134,020,471 Series B shares. All or a portion of our Series A shares may underlie CPOs and can be purchased bynon-Mexican investors.
Our current Upon the consummation of our initial public offering in September 2013, ournon-Mexican shareholders will beat that time became the holders of all the outstanding Series B shares and a certain number of CPOs and our current Mexican shareholders will holdat that time became holders of Series A shares directly.
Non-Mexican investors are only entitled to hold Series A shares through CPOs (including CPOs in the form of ADSs), which will givenon-Mexican investors economic rights but not voting rights.
We have obtained authorization from the Mexican Ministry of Economy (Secretarí(Secretaría de Economía)a) to issue up to 90% of our outstanding shares representing capital stock in the form of CPOs.
Changes to Capital Stock
The fixed portion of our capital stock may be increased or decreased by a resolution adopted at a general extraordinary shareholders’ meeting and upon amendment of ourby-laws. The variable portion of our capital
stock may be increased or decreased by a resolution adopted at a general ordinary shareholders’ meeting without amending ourby-laws. Increases or decreases in the fixed or variable portion of the capital stock must be recorded in our registry of capital variations. New shares cannot be issued unless the then-issued shares have been paid in full.
Registration and Transfer
Our shares are evidenced by share certificates in registered form. Our shareholders may hold their Series A shares in the form of physical certificates if they are Mexican, investors (although no Series A shares are being offered in the international offering), or through Series A shares (in the case of Mexican investors) or CPOs (in the case ofnon-Mexican investors) that are maintained in book-entry form with institutions which have accounts with the Mexican depositary institution, S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V., or Indeval. The CPO trustee will beis the holder of record of the Series A shares underlying our CPOs. Accounts may be maintained at Indeval by brokers, banks and other financial institutions and entities authorized for this purpose. We maintain a stock registry and only those persons listed in such stock registry and holding certificates issued in their name as registered holders, or persons holding Series A shares or CPOs through institutions that maintain accounts with Indeval, will be recognized as our shareholders.
Pursuant to Mexican law, any transfer of shares must be registered in our stock registry, if effected physically, or through book entries that may be traced back from our stock registry to the records of Indeval, if effected through book-entry CPOs or Series A shares.
Change of Control Provisions
Subject to certain exceptions (including those applicable to transfers or acquisitions or certain other transactions by or among our current shareholders), ourby-laws require that any acquisition of our Series A shares (whether directly or by acquiring ADSs or CPOs), resulting in beneficial ownership of shares representing 5% or more of our outstanding capital stock, or any proposal by any person or group of persons to enter into an agreement among shareholders that would result in such person or group of persons effectively having control of the voting rights of 20% or more of our outstanding capital stock or will result in a change of control, will require the prior approval of our board of directors.
In the event that approval is not granted, our board of directors or our shareholders may decide, among other things, to require any such person or group of persons to reverse the transaction or to transfer the Series A shares (whether held directly or through ADSs or CPOs) to a third party interested in acquiring the securities at a reference price specified by our board of directors. In addition, such person or group of persons desiring to purchase 5% or more of our outstanding capital stock will be required to follow certain procedures, including observing certain time periods specified in ourby-laws.
Any potential purchaser who proposes to acquire our Series A shares (whether directly or by acquiring ADSs or CPOs), resulting in beneficial ownership of 20% or more of our outstanding capital stock, will be required to make a tender offer for 100% of our outstanding capital stock (including any Series A shares evidenced by CPOs or ADSs) at a price at least equal to the highest of (i) the most recent publicly reported book value per share, (ii) the highest trading price of our Series A shares on the Mexican Stock Exchange within the 365 days prior to the request for approval or approval of the board of directors of the relevant transaction, and (iii) the highest price per share or CPO, as the case may be, paid by the purchaser or, in the case of the ADSs the equivalent thereto, plus, in each case, a 30% premium or a different premium determined by our board of directors, considering the opinion of a reputable investment bank.
Any acquisition of our Series A shares, CPOs or ADSs in contravention of the procedures described above will result in the purchaser not having any voting rights in respect to the purchased securities. No transfer in breach of these provisions will be registered in our stock registry.
Shareholders’ Meetings
Calls.Under Mexican law and ourby-laws, shareholders’ meetings may be called by:
Calls for shareholders’ meetings will be required to be published in the Official Gazetteelectronic system implemented by the ministry of the Federation or in a newspaper of general circulation of our corporate domicile, such asEl Universal,Reforma orEl Financieroeconomy at least 15 days before the scheduled date of the shareholders’ meeting in the case of first call. Calls will have to contain the matters to be addressed at the meeting. From the date on which a call is published until the date of the corresponding meeting, all relevant information will be made available to the shareholders at our executive offices. To attend a shareholders’ meeting, shareholders will have to be either registered in the stock registry, present evidence of the deposit of their certificates with a financial institution or deposit them with our secretary, or present certificates issued by the custodian of the holder of our Series A shares, together with an Indeval certification. Investors holding our CPOs may not vote nor cause the underlying Series A shares to be voted by the CPO trustee.
Shareholders’ Meetings.General shareholders’ meetings may be general ordinary shareholders’ meetings or general extraordinary shareholders’ meetings. Shareholders may also hold special meetings for classes of shares outstanding (as for example, meetings of Series B shareholders, as a means to exercise their rights).
General ordinary shareholders’ meetings will be those called to discuss any issues not reserved for extraordinary meetings. General ordinary shareholders’ meetings will have to be held at least once a year, during the first four months following the end of each fiscal year to:
General extraordinary shareholders’ meetings will be those called to consider:
A special shareholders’ meeting, comprising a single class of shares, may be called if an action is proposed to be taken that may only affect such class. After giving effect to the unanimous shareholder resolution proposed before the initiation of the offering we expect to hold special Series B shareholders’ meetings from time to time. The quorum for a special meeting of shareholders and the vote required to pass a resolution at a special Series B shareholders’ meeting are identical to those required for extraordinary meetings of shareholders, except that the calculations are based upon the number of outstanding Series B shares.
Except as described below, the attendance quorum for general ordinary shareholders’ meetings will be 51% of the outstanding capital stock, and resolutions may be taken by a majority of the capital stock represented therein. If the attendance quorum is not met upon the first call, a subsequent meeting may be called, the attendance quorum of which will also be 51% of the outstanding capital stock and resolutions may be taken by a majority of the capital stock represented at such meeting. Except as described below, the attendance quorum for general extraordinary shareholders’ meetings will be at least 75% of our outstanding capital stock. If an attendance quorum is not met upon the first call, a subsequent meeting may be called, at which at least 51% of the capital stock must be represented. In either case, resolutions must be taken by the vote of shares representing at least 50% plus one of the shares representing our outstanding capital stock, except for resolutions in respect to the cancellation of the registration of shares at the Mexican National Securities Registry which require that at least 95% of the outstanding capital stock vote in favor of such resolution.
As long as the Series B shares represent at least 12% of our outstanding capital stock, the attendance and affirmative vote of at least 75% of the outstanding Series B shares is required at all times, if the following matters are discussed and resolved:
Holders of our shares will not have cumulative voting rights.
Voting Rights
Holders of ADSs and CPOs will not be entitled to vote, at any time, the underlying Series A shares. Mexican holders of Series A shares will be entitled to vote their shares on all matters. Holders of Series B shares
will be entitled to vote their shares on all matters and will have the specific voting rights described under “—Shareholders’ Meetings.”
Series A shares underlying the CPOs and CPOs underlying the ADSs will be voted by the CPO trustee in the same manner as the majority of Series A shares votes cast at the relevant shareholders’ meeting under all circumstances.circumstances.
Provisions of ourBy-laws and Mexican Law Relating to Directors
Election of Directors
Our board of directors is currently comprised of eleven principal members and seven alternate members. ThreeFive members of our board of directors currently qualify as independent. Whether a director qualifies as independent must be determined by our shareholders (at the general shareholders’ meeting at which the director is elected), and such determination may be challenged by the CNBV within 30 days following the date in which the appointment of the director is notified to the CNBV. The CNBV may only challenge the appointment after a hearing with us and the affected director. Our officers, individuals who have a material influence on us or authority to direct our management or business decisions, and individuals who are part of our group of controlling shareholders may not be deemed independent directors.
Under ourby-laws, Series B shareholders will have the right to appoint three directors as long as the Series B shares represent at least 12% of our outstanding capital stock. If the Series B shares, which are convertible into Series A Shares, represent less than 12% of our outstanding capital stock, the right to appoint directors by Series B shareholders will be based on the Securities Market Law.
Under ourby-laws and the Securities Market Law, any shareholder or group of shareholders representing 10% of our outstanding capital stock, have the right to appoint one director for each such 10% ownership stake.
Authority of the Board of Directors
Our management is entrusted to a chief executive officer and a board of directors. The board of directors sets forth the guidelines and general strategy for the conduct of our business and supervises the execution thereof.
Pursuant to the Mexican Securities Market Law and ourby-laws, the board of directors must approve, among other matters:
Ourby-laws provide that meetings of our board of directors are validly convened and held if a majority of the members or their respective alternates are present. Resolutions passed at these meetings will be valid if approved by a majority of the disinterested members of the board of directors (i.e. members that do not have a conflict of interest). The chairman of the board of directors will not have atie-breaking vote.
Meetings of our board of directors may be called by (i) 25.0% of our board members, (ii) the president of the board of directors, and (iii) the president of the audit or the corporate governance committee.
Duty of Care and Duty of Loyalty
The Mexican Securities Market Law imposes duties of care and loyalty on directors.
The duty of care generally requires that our directors obtain sufficient information and be sufficiently prepared to act in our best interest. The duty of care is discharged, principally, by (i) requesting and obtaining from us all information that may be necessary to make decisions, (ii) obtaining information from third parties, (iii) requiring the attendance of, and information from, our officers that may be necessary to make decisions, and (iv) attending board meetings and disclosing to the board of directors material information in possession of the relevant director. Failure to act with care by a director subjects the relevant director to joint and several liability with other directors involved in the act, for damages and losses caused to us and our subsidiaries. An indemnity for claims related to a breach of a director’s duty of care has been incorporated into ourby-laws. Furthermore, we carry insurance to protect our directors for breaches of their duty of care.
The duty of loyalty consists, primarily, of a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties, to abstain from discussing or voting on matters where the director has a conflict of interest and to abstain from taking advantage of corporate opportunities resulting from its actions as a director. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored.
The duty of loyalty is also breached if the director uses corporate assets or approves the use of corporate assets in violation of our policies, discloses false or misleading information, orders not to or causes the failure to, register any transaction in our records that could affect our financial statements, or causes material information not to be disclosed or to be modified.
The violation of the duty of loyalty will render the breaching director jointly and severally liable with all breaching directors, for damages and losses caused to us and to the persons we control. Liability may also arise if damages and losses result from benefits obtained by the directors or third parties as a result of activities carried out by such directors.
Claims for breach of the duty of care and the duty of loyalty may be brought solely for our benefit (as a derivative suit), as opposed to for the benefit of the claimant, and may only be brought by us or by shareholders or groups of shareholders representing at least 5.0% of our outstanding shares. Claims may be exercised by the trustee issuing CPOs or by holders of CPOs, in each case holding underlying shares representing at least 5% of our outstanding Series A shares.
As a safe harbor for the benefit of directors, the Mexican Securities Market Law provides that liabilities arising from a breach of the duty of care or the duty of loyalty will not arise if the director acted in good faith and
(i) complied with applicable law and our by-laws,by- laws, (ii) acted based upon facts and information provided by officers, external auditors or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, and (iii) selected the more adequate alternative in good faith, or if the negative effects of the director’s decision could not have been reasonably foreseeable, based upon the then available information. Mexican courts have not yet interpreted the meaning of this provision and, as a result, the extent and enforceability of this safe harbor remains uncertain.
Under the Mexican Securities Market Law and ourby-laws, our chief executive officer and our principal officers are also required to act for our benefit and not for the benefit of a shareholder or group of shareholders. Our officers are required to submit to the board of directors for approval, the principal strategies for our business and the business of the companies we control, to submit to the audit committee proposals relating to internal control systems, to prepare all material information related to our activities and the activities of the companies we control, to disclose all material information to the public, to maintain adequate accounting and registration systems and internal control mechanisms, to prepare and submit to the board the yearly financial statements, and to implement internal control mechanisms.
Committees of the Board of Directors
Like all public companies in Mexico, we are required to have an audit and corporate governance committee. The members of our audit and corporate governance committee must be independent members, elected by our board of directors except for the chairman who is elected by our shareholders. Our audit and corporate governance committee is required to prepare an annual report, to be submitted to our board of directors, that must include (i) a report of our internal control systems and our internal audit procedures and any deficiencies, (ii) the evaluation of our external auditors, (iii) the results arising from the review of our financial statements, and (iv) any amendments to our accounting policies. The quorum for any session of our audit and corporate governance committee is the majority of its members and decisions must be taken by majority of its members.
In addition, our audit and corporate governance committee has the following principal duties:
We also maintain a compensation and nominations committee, which is comprised of, five fournon-independent members, as determined by our board of directors from time to time, appointed by our board of directors. We established a compensation and nominations committee pursuant to the unanimous resolutions adopted by our shareholders in June 2013.
The compensation committee is responsible for, among other things:
Preemptive Rights
Under Mexican law, our shareholders (holding shares directly or through CPOs) have preemptive rights for all share issuances except in the cases noted below. Generally, if we issue additional shares of capital stock, our shareholders will have the right to purchase the number of shares necessary (or CPOs, subject to applicable U.S. securities laws, representing such shares and subject to the CPO trustee being permitted to issue or release the necessary additional CPOs) to maintain their existing ownership percentage. Shareholders must exercise their preemptive rights within the time period set forth by our shareholders at the meeting approving the relevant issuance of additional shares. This period must be equal to at least 15 days following the publication of notice of the issuance in the Official Gazetteofficial newspaper or our corporate domicile and in the electronic system implanted by the ministry of the Federation.economy. Under Mexican law, shareholders cannot waive their preemptive rights in advance, and preemptive rights may not be represented by an instrument that is negotiable separately from the corresponding share.
The preemptive rights specified in the prior paragraph will not apply (i) in the case of shares issued in connection with mergers, (ii) in the case of resale of shares held in our treasury, as a result of repurchases of shares conducted on the Mexican Stock Exchange or otherwise, (iii) in the event that holders of our shares entitled to vote approve the issuance of the unsubscribed shares for purposes of a public offering at an extraordinary shareholders’ meeting called for such purpose provided requirements specified in Article 53 of the Mexican Securities Market Law are satisfied, and (iv) in respect of shares issued for conversion of any convertible securities.
If we issue new Series A shares for cash, in accordance with ourby-laws and the CPO trust,non-Mexican holders of our CPOs (directly or through ADSs) may not exercise their preemptive rights, unless we cause the
CPO trustee to issue additional CPOs (to the extent possible), to permit thenon-Mexican holders of CPOs to exercise preemptive rights by purchasing and holding newly issued Series A shares through CPOs. Although we expect to take all measures necessary to maintain sufficient CPOs available to permitnon-Mexican holders of CPOs to exercise preemptive rights in respect of underlying Series A shares, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuances of additional CPOs. Mexican holders of Series A shares may exercise their preemptive rights if we issue new Series A shares for cash.Non-Mexican holders of CPOs may suffer dilution if we issue new Series A shares in exchange for cash and CPOs are not available to represent the additional Series A shares.
Dividends
Our board of directors must submit our financial statements for the previous fiscal year, proposed and prepared by our chief executive officer and supplemented by a report of our board of directors, at our annual ordinary general shareholders’ meeting for approval. Once our shareholders approve our financial statements, they are required to allocate net profits for the previous fiscal year. Under Mexican law and ourby-laws, prior to any distribution of dividends, 5% of our net earnings must be allocated to a legal reserve fund, until such legal reserve fund is equal to at least 20% of ourpaid-in capital stock. Additional amounts may be allocated to other reserve funds as the shareholders may determine, including the amount allocated to the reserve fund for the repurchase of shares. The remaining balance, if any, may be distributed as dividends. See also Item 8: “Financial Information—Consolidated Statements and Other Financial Information —Dividend Policy”.Information—Dividend Policy.”
Redemption
In accordance with ourby-laws, shares representing our capital stock are subject to redemption in connection with either (i) a reduction of capital stock, or (ii) a redemption with retained earnings, which in either case must be approved by our shareholders. In connection with a capital reduction, the redemption of shares will be madepro rataamong the shareholders but in no case will the redemption price be less than the book value of such shares as determined pursuant to our latest statements of financial position approved at a general ordinary shareholders’ meeting or by means of a tender offer conducted on the Mexican Stock Exchange at prevailing market prices, in accordance with the Mexican Corporations Law, the Mexican Securities Market Law and ourby-laws.
Dissolution or Liquidation
Upon our dissolution or liquidation, our shareholders will appoint one or more liquidators at an extraordinary general shareholders’ meeting to wind up our affairs. All fully paid and outstanding shares of capital stock will be entitled to participate equally in any liquidating distributions.
Certain Minority Protections
Pursuant to the Mexican Securities Market Law and the Mexican Corporations Law, ourby-laws include a number of minority shareholder protections. These minority protections will include provisions that permit:
holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders’ meeting and file a petition for a court order to suspend the resolution temporarily, within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the
challenged resolution violates Mexican law or ourby-laws, (ii) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution, and (iii) the opposing shareholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution, in the event that the court ultimately rules against the opposing shareholder; and
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Other Provisions
Foreign Investment Regulations
Mexico’s Foreign Investment Law restricts ownership bynon-Mexicans of our capital stock to 49% of the capital stock not otherwise represented by CPOs. Our amendedby-laws establish that only Mexican investors may acquire our Series A shares directly.Non-Mexican investors may acquire our Series B shares directly. As required by Mexican law, ourby-laws provide that if anon-Mexican investor acquires a direct interest or participation in a Series A share representing the capital stock of our company at any time, such Series A share will be forfeited to the Mexican government. The Foreign Investment Law permitsnon-Mexican investors to hold our Series A shares indirectly through neutral shares or securities such as the CPOs.
Duration
Our corporate existence under ourby-laws is indefinite.
Purchase of Shares by Us
We will be able to purchase our shares (or CPOs evidencing such shares) through the Mexican Stock Exchange at the prevailing market prices for the shares at the time of purchase. The economic and voting rights corresponding to repurchased shares will not be exercised during the period the shares are owned by us, and the shares will not be deemed outstanding for purposes of calculation any quorum or vote at any shareholders’ meeting. We will not be required to create a special reserve for the repurchase of shares and we will not require the approval of our board of directors to effect share repurchases. However, we will require the approval of our shareholders in respect of the maximum amount that may be used for share repurchases and our board of directors must appoint an individual or group of individuals for effecting share repurchases. Share repurchases will have to be made subject to the provisions of applicable law, including the Mexican Securities Market Law, and carried out, reported and disclosed in the manner specified by the CNBV. If we intend to repurchase shares representing more than 1% of our outstanding capital stock at a single trading session, we will be required to inform the public of such intention, at least ten minutes before submitting our bid. If we intend to repurchase shares representing 3% or more of our outstanding capital stock during any rolling period of twenty trading days, we will be required to conduct a public tender offer for such shares.
Purchases of Shares by our Subsidiaries
Our subsidiaries or other entities controlled by us may not purchase, directly or indirectly, shares representing our capital stock or shares of companies or entities that are our shareholders.
Conflicts of Interest
Under Mexican law, any shareholder that has an opposing interest to ours, must abstain from discussing and voting on the relevant matter. Any such shareholder that votes in a transaction in which its interests conflict with our interest may be liable for damages and losses, but only if the transaction would not have been approved without such shareholder’s vote.
A member of the board of directors that has an opposing interest to ours must disclose such opposing interest and abstain from any deliberation or vote in connection therewith. A breach by any member of the board of directors of any such obligations may result in the director being liable for damages and losses.
Exclusive Jurisdiction
Ourby-laws provide that, in connection with any controversy between our shareholders and us, or between our shareholders, in connection with any matter related to us, both we and our shareholders must submit to the jurisdiction of the courts of Mexico City, Federal District, Mexico.
Appraisal Rights
Whenever our shareholders approve a change in our corporate purpose, jurisdiction of organization or transformation from one corporate form to another, any shareholder entitled to vote that voted against the matters approved has the right to withdraw and receive the book value of its shares as set forth in the financial statements last approved by our shareholders, provided that the shareholder exercises this appraisal right within 15 days after the meeting at which the relevant matter was approved. Since holders of our CPOs may have no voting rights, appraisal rights generally will generally not be available to them.
Cancellation of Registration in the Mexican National Securities Registry
In accordance with ourby-laws, and as set forth in the Mexican Securities Market Law, we will be required to make a public tender offer for the purchase of stock held by minority shareholders, in the event that the registration of our Series A shares with the Mexican National Securities Registry is cancelled, either as a result of our determination or by an order of the CNBV. Our controlling shareholders will be secondarily liable for these obligations. A controlling shareholder will be deemed to be a shareholder that holds a majority of our capital stock, has the ability to control the outcome of decisions made at a shareholders or board of directors meeting, or has the ability to appoint a majority of the members of our board of directors. The price at which the stock must be purchased is the higher of
If the tender for cancellation is requested by the CNBV, it must be initiated within 180 days from the date of the request. If initiated by us, under the Mexican Securities Market Law, the cancellation must be approved by 95% of our shareholders.
Our board of directors must make a determination with respect to fairness of the tender offer price, taking into consideration the minority shareholders’ interest, and disclose its opinion within 10 business days from the commencement of the offering. The resolution of the board of directors may be accompanied by a fairness opinion issued by an expert selected by our audit committee. Directors and first level officers are required to disclose whether or not each of them will sell their shares in connection with the tender offer.
| C. | Material Contracts |
For a description of material contracts relating to our indebtedness, see Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements.”
| D. | Exchange Controls |
Mexico has had a free market for foreign exchange since 1991, and the Mexican government has allowed the peso to float freely against the U.S. dollar since December 1994. We have no control over or influence on this
exchange rate policy. The Mexican government has announced that it does not intend to change its floating exchange rate policy, but there is no guarantee that the Mexican government will not change this policy. See Item 3: “Key Information—Exchange Rates”.Rates.”
| E. | Taxation |
The following summary contains a general description of certain U.S. federal income tax consequences and Mexican federal tax consequences relating to the acquisition, ownership and disposition of ADSs and CPOs. This summary is based on laws and regulations now in effect in Mexico, laws, regulations, rulings and decisions now in effect in the United States, and the provisions of the tax treaty for the avoidance of double taxation between the United States and Mexico and protocols thereto, referred to herein as the “U.S.-Mexico Tax Treaty.” It is also based in part on representations by the CPO trustee and the ADS depositary and assumes that each obligation under the CPO trust agreement, the ADS deposit agreement and any related agreements will be performed in accordance with their terms.
This summary does not describe all of the tax considerations that may be relevant to a specific investor, including Mexican investors, particularly if such investor is subject to special tax rules. Prospective investors are encouraged to consult their own independent tax advisors with respect to the tax consequences to them of the acquisition, ownership and disposition of ADSs in light of their own particular circumstances, including the tax consequences under state, local, municipal, or other tax laws.
U.S. Federal Income Taxation
The following is a general discussion of certain U.S. federal income tax consequences relating to the acquisition, ownership and disposition of ADSs. This discussion deals only with U.S. Holders (as defined below) that hold ADSs as capital assets (generally, property held for investment). This discussion does not address the tax considerations that may be relevant to certain types of investors subject to special treatment under the U.S. federal income tax laws (such as banks or other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, partnerships or other pass-through entities for U.S. federal income tax purposes or investors in such entities, investors liable for the alternative minimum tax, individual retirement accounts and othertax-deferred accounts,tax-exempt organizations, dealers in securities or currencies, investors that hold ADSs as part of a straddle or hedging, constructive sale, integrated or conversion transactions for U.S. federal income tax purposes, a person that actually or constructively owns 10% or more of the total combined voting power in Volaris stock, traders in securities that have elected themark-to-market method of accounting for their securities, U.S. expatriates or persons whose functional currency is not the U.S. dollar).
The discussion is based on the U.S. Internal Revenue Code of 1986, as amended through the date hereof, or the Code, its legislative history, existing and proposed U.S. Treasury regulations thereunder, published rulings and court decisions, all as of the date hereof and all subject to change at any time, perhaps with retroactive effect. No assurance can be given that the Internal Revenue Service, or the IRS, will agree with the views expressed in this discussion, or that a court will not sustain any challenge by the IRS in the event of litigation. This discussion does not include any description of the tax laws of any state, local, municipal ornon-U.S. government (except for certain Mexican federal tax consequences, discussed below) that may be applicable to a particular investor and does not consider any aspects of U.S. federal tax law other than income taxation.
As used herein, the term “U.S. Holder” means a beneficial owner of an ADS that is, for U.S. federal income tax purposes: (a) an individual who is a citizen or resident of the United States; (b) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (d) a trust if (i) a court within the United States can exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of the substantial decisions of that trust or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If a partnership or an entity or an arrangement that is treated as a partnership for U.S. federal income tax purposes holds ADSs, the tax treatment of a partner generally will generally depend upon the status of the partner and the activities of the partnership. Partners in partnerships that hold ADSs are encouraged to consult their tax advisors.
Except where specifically described below, this discussion assumes that Volaris is not a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes. See the discussion under “—Passive Foreign Investment Company Considerations” below.
The discussion below assumes that the representations contained in the CPO trust agreement and ADS deposit agreement are true and that the obligations in the CPO trust agreement, ADS deposit agreement and any related agreements will be complied with in accordance with their terms. In general, for U.S. federal income tax purposes, U.S. Holders who own ADSs will be treated as the beneficial owners of the CPOs represented by those ADSs and each CPO should represent a beneficial interest in the Series A Shares represented by those CPOs. The U.S. Treasury Department has expressed concern that depositaries for ADRs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. Holders of such receipts or shares. These actions would also be inconsistent with claiming the reduced rate for “qualified dividend income” described below. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Mexican withholding taxes and availability of the reduced rate for qualified dividend income could be affected by future actions that may be taken by the ADS depositary and the U.S. Treasury Department.
For U.S. federal income tax purposes, U.S. Holders who own ADSs will be treated as the beneficial owners of the CPOs represented by those ADSs. Based on the nature of the CPO trust and the applicable legal authorities, a U.S. Holder who owns CPOs, or is treated as owning CPOs, should be treated as the beneficial owner of the Series A Shares represented by the CPOs. However, the U.S. federal income tax treatment of U.S. Holders that are beneficial owners of CPOs is not entirely clear. The IRS could assert that such U.S. Holders should be treated as owning an interest in an entity or arrangement treated as a foreign trust for U.S. federal income tax purposes. In that case, the U.S. federal income tax consequences to the U.S. Holder should be the same as outlined below; however, the U.S. Holder may also be subject to certain additional tax reporting obligations under the foreign trust rules. If these tax reporting obligations were determined to apply to a U.S. Holder and the U.S. Holder did not comply with such obligations, the U.S. Holder could be subject to substantial penalties. U.S. Holders seeking to obtain CPOs in exchange for ADSs are encouraged to consult their own tax advisors regarding the treatment of the CPOs, including the possibility, and U.S. federal income tax consequences of, the CPO trust being treated as a foreign trust.
EACH PERSON CONSIDERING THE ACQUISITION OF ADSs IS ENCOURAGED TO CONSULT ITS OWN INDEPENDENT TAX ADVISOR REGARDING THE SPECIFIC U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSIDERATIONS OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE ADSs.
Taxation of Dividends and Other Distributions
Subject to the “passive foreign investment company” rules discussed below, distributions of cash or property with respect to ADSs (including the amount of any Mexican taxes withheld on any such distribution, if any) will constitute ordinary dividend income to the extent of Volaris’ current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), which generally will be includible in a U.S. Holder’s gross income on the day on which the dividends are received by the CPO trustee. Any distributions in excess of such earnings and profits will constitute a nontaxable return of capital and reduce a U.S. Holder’s tax basis in such ADSs. To the extent such distributions exceed a U.S. Holder’s tax basis in its ADSs, such excess will constitute capital gain and generally will generally be treated as described below under “—Sale or Other Taxable Disposition of ADSs.” Dividends on ADSs will not be eligible for the dividends received deduction allowed to U.S. corporations. We do not currently intend to maintain calculations of our earnings and profits under
U.S. federal income tax principles. Accordingly, U.S. Holders should expect that all distributions made with respect to the ADSs generally will generally be treated as dividends (as described above).
A U.S. Holder may be entitled, subject to a number of complex limitations and conditions (including a minimum holding period requirement), to claim a U.S. foreign tax credit in respect of any Mexican income taxes withheld on dividends received in respect of the ADSs. A U.S. Holder who does not elect to claim a credit for any foreign income taxes paid during the taxable year may instead claim a deduction in respect of such income taxes provided the U.S. Holder elects to deduct (rather than credit) all foreign income taxes for that year. Dividends received in respect of ADSs generally will be treated as foreign-source income, subject to various classifications and other limitations and generally will be treated as passive category income for most U.S. Holders. The rules relating to computing foreign tax credits or deducting foreign taxes are extremely complex, and U.S. Holders are encouraged to consult their own tax advisors regarding the availability of foreign tax credits under their particular circumstances.
Dividends paid in pesos (including the amount of any Mexican taxes withheld therefrom, if any) will be includible in a U.S. Holder’s gross income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the pesos are actually or constructively received by the CPO trustee, regardless of whether the dividends are converted into U.S. dollars at that time. If the pesos are converted to U.S. dollars on the date of such receipt, a U.S. Holder generally will not recognize an exchange gain or loss. However, if the U.S. Holder converts the pesos into U.S. dollars on a later date, the U.S. Holder must include in gross income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount included in income when the dividend was received and (ii) the amount received on the conversion of the pesos into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in a U.S. Holder’s gross income to the date such payment is converted into U.S. dollars will be exchange gain or loss and will be treated as ordinary income or loss. Such gain or loss generally will generally be treated as income from sources within the United States. U.S. Holders are encouraged to consult their own independent tax advisors regarding the treatment of exchange gain or loss, if any, on any pesos received that are converted into U.S. dollars on a date subsequent to receipt by the CPO trustee.
Distributions treated as dividends that are received by anon-corporate U.S. Holder (including an individual) from “qualified foreign corporations” generally qualify for a reduced rate of taxation so long as certain holding period and other requirements are met. Dividends paid on ADSs should qualify for the reduced rate if Volaris is treated as a “qualified foreign corporation.” For this purpose, a qualified foreign corporation means any foreign corporation provided that: (i) the corporation was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a “passive foreign investment company” (as discussed below), (ii) certain holding period requirements are met and (iii) either (A) the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules or (B) the stock with respect to which such dividend was paid is readily tradable on an established securities market in the United States. The ADSs should be considered to be readily tradable on an established securities market in the United States as they are listed on the NYSE. U.S. Holders are encouraged to consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to the ADSs.
Sale or Other Taxable Disposition of ADSs
Subject to the passive foreign investment company rules discussed below, upon the sale or other taxable disposition of ADSs, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and such U.S. Holder’s tax basis in such ADSs. The amount realized on a sale or other taxable disposition of ADSs generally will be equal to the sum of the amount of cash and the fair market value of any other property received. Gain or loss recognized by a U.S. Holder on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the
time of the sale or other taxable disposition, the ADSs have been held for more than one year. Certainnon-corporate U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deduction of a capital loss is subject to limitations for U.S. federal income tax purposes. Deposits and withdrawals of CPOs by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
If Mexican income tax is withheld on the sale or other taxable disposition of ADSs, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale or other taxable disposition before deduction of the Mexican income tax. A U.S. Holder who is eligible for the benefits of the U.S.-Mexican income tax treaty, can elect to treat capital gain or loss, if any, realized on the sale or other taxable disposition of ADSs that is subject to Mexican income tax as foreign source gain or loss for U.S. foreign tax credit purposes. Consequently, in the case of a gain from the disposition of an ADS that is subject to Mexican income tax, a U.S. Holder, subject to a number of complex limitations and conditions (including a minimum holding period requirement), may be able to benefit from the foreign tax credit for that Mexican income tax. Otherwise, any gain from the disposition of an ADS that is subject to Mexican income tax will be treated as a U.S. source gain and a U.S. Holder may not be able to benefit from the foreign tax credit for that Mexican income tax (i.e., because the gain from the disposition would be U.S. source), unless the U.S. Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. Alternatively, the U.S. Holder may elect to take a deduction for the Mexican income tax, provided that the U.S. Holder elects to deduct all foreign taxes paid or accrued for the taxable year. The rules governing foreign tax credits are complex and a U.S. Holder are encouraged to consult its own tax advisor regarding the availability of foreign tax credits under its particular circumstances.
Passive Foreign Investment Company Considerations
Special U.S. federal income tax rules apply to U.S. persons owning shares of a PFIC. Anon-U.S. corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either:
For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets (other than gains from the disposition of property that is inventory) and gains from commodities and securities transactions. In addition, if thenon-U.S. corporation owns, directly or indirectly, at least 25%, by value, of the shares of another corporation, it will be treated as if it holds directly its proportionate share of the assets and receives directly its proportionate share of the income of such other corporation.
The determination as to whether anon-U.S. corporation is a PFIC is based on the application of complex U.S. federal income tax rules, which are subject to differing interpretations, the composition of the income and assets of thenon-U.S. corporation from time to time and the nature of the activities performed by suchnon-U.S. corporation. Based on current estimates of Volaris’ gross income and gross assets, the nature of its business and its current business plans (all of which are subject to change), Volaris does not believe it was classified as a PFIC for its 20132016 taxable year and it does not expect to be classified as such for its current taxable year (although the determination cannot be made until the end of such taxable year), and Volaris intends to continue its operations in such a manner that it does not expect to be classified as a PFIC in the foreseeable future. There can be no assurance in this regard, because the PFIC determination is made annually and is based on the portion of Volaris’ assets and income that is characterized as passive under the PFIC rules. Moreover, Volaris’ business plans may change, which may affect the PFIC determination in future years. Because of these uncertainties, it is possible that Volaris may be a PFIC for the current or any other taxable year.
If Volaris is or becomes a PFIC for any taxable year during which a U.S. Holder holds ADSs, the U.S. Holder will be subject to special tax rules with respect to any “excess distributions” that the U.S. Holder receives and any gain realized from a sale or other disposition of the ADSs, unless the U.S. Holder makes a “mark-to-market”“mark-to-market” election or a “qualified electing fund” election, as discussed below. Distributions received by a U.S. Holder in a taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the ADSs will be treated as excess distributions. Under these special tax rules:
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs cannot be treated as capital, even if a U.S. Holder holds the ADSs as capital assets. If Volaris were a PFIC, certain subsidiaries and other entities in which Volaris has a direct or indirect interest may also be PFICs, or Lower-tier PFICs. Under attribution rules, U.S. Holders would be deemed to own their proportionate shares of Lower-tier PFICs and would be subject to U.S. federal income tax according to the rules described above on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though such U.S. Holder had not received the proceeds of those distributions or dispositions.
If Volaris is a PFIC, a U.S. Holder may avoid taxation under the rules described above by making a “qualified electing fund” election to include such U.S. Holder’s share of Volaris’ income on a current basis, provided that Volaris furnishes such U.S. Holder annually with certain tax information. If Volaris concludes that it should be treated as a PFIC for any taxable year, Volaris intends to notify each U.S. Holder of such fact. However, there can be no guarantee that Volaris will be willing or able to provide the information needed by any U.S. Holder to make a “qualified electing fund” election with respect the ADSs.
If a U.S. Holder makes a “qualified electing fund” election, such U.S. Holder generally will generally be taxable currently on its pro rata share of Volaris’ ordinary earnings and net capital gains (at ordinary income and capital gain rates, respectively) for each taxable year during which Volaris is treated as a PFIC, regardless of whether or not such U.S. Holder receives distributions, so that the U.S. Holder will recognize taxable income without the corresponding receipt of cash from Volaris with which to pay the resulting tax obligation. The basis in the ADSs held by such U.S. Holder will be increased to reflect taxed but undistributed income. Distributions of income that were previously taxed will result in a corresponding reduction of basis in the ADSs, and will not be taxed again as distributions to the U.S. Holder.
Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make amark-to-market election with respect to such stock (but not for the shares of any Lower-tier PFIC) to elect out of the tax treatment discussed above. A U.S. Holder electing themark-to-market regime generally would compute gain or loss at the end of each taxable year as if the ADSs had been sold at fair market value. Any gain recognized by the U.S. Holder undermark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of its ADSs as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously includedmark-to-market income not offset by previously deducted decreases in value. Any loss on an actual sale of ADSs would be a capital loss to the extent it exceeds previously includedmark-to-market
income not offset by previously deducted decreases in value. A U.S. Holder’s basis in ADSs will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes such an election, the tax rules that apply to distributions by corporations that are not PFICs would apply to distributions by Volaris, except that the reduced rate discussed above under “—Taxation of Dividends and Other Distributions” would not apply.
Themark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. NYSE is a qualified exchange and, consequently, if the ADSs are regularly traded, themark-to-market election would be available to a U.S. Holder of ADSs if Volaris were treated as a PFIC.
A U.S. Holder who owns ADSs during any taxable year that Volaris is treated as a PFIC would be required to file IRS Form 8621 including in order to comply with an additional annual filing requirement imposed under legislation enacted in 2010.requirement. U.S. Holders are encouraged to consult their own tax advisors regarding the application of the PFIC rules to the ADSs, the availability and advisability of making amark-to-market election to avoid the adverse tax consequences of the PFIC rules should Volaris be considered a PFIC for any taxable year and the application of the information reporting requirements to their particular situation.
Additional Tax on Net Investment Income
If a U.S. holder is not a corporation, a U.S. Holder generally will generally be subject to a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. Holder’s net investment income generally will generally include any dividend income on the ADSs and gain recognized by the U.S. holder with respect to the sale or other taxable disposition of the ADSs, unless such income or gain is derived in the ordinary course of the U.S. Holder’s trade or business (other than a trade or business that consists of certain passive or trading activities). U.S. Holders that are individuals, estates or trusts are encouraged to consult their own tax advisors regarding the applicability of the additional tax on net investment income to their income and gain in respect of the ADSs.
U.S. Information Reporting and Backup Withholding
Dividend payments with respect to ADSs and proceeds from the sale, exchange or redemption of ADSs may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding and establishes such exempt status. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund in a timely manner with the IRS and furnishing any required information. U.S. Holders are encouraged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
In addition, U.S. Holders should be aware that additional reporting requirements with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by certain financial institutions, if the aggregate value of all of such assets exceeds U.S.$50,000. $50,000. U.S. Holders are encouraged to consult their own tax advisors regarding the application of the information reporting rules to ADSs and the application of these additional reporting requirements to their particular situations.
PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSULT THEIR OWN INDEPENDENT TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ADSs.
Mexican Taxation
General
The following summary of certain Mexican federal income tax consequences of the purchase, ownership and disposition of ADSs or CPOs or the Series A shares underlying the CPOs, is based upon the federal tax laws of Mexico as in effect on the date of this annual report, which are subject to change. Prospective purchasers of ADSs or CPOs are encouraged to consult their own tax advisors as to the Mexican or other tax consequences of the purchase, ownership and disposition of ADSs or CPOs and indirectly the Series A shares underlying the CPOs, including, in particular, the effect of any foreign, state or municipal tax laws.
This summary is based upon the Mexican federal income tax laws in effect on the date of this annual report, which are subject to change and does not describe any tax consequences arising under the laws of any state or municipality, other than the federal laws of Mexico.
Holders of ADSs or CPOs are encouraged to consult their own tax advisors as to their entitlement to the benefits, if any, afforded by the U.S.-Mexico Tax Treaty regarding income tax.
Mexico has also entered into and is negotiating several other tax treaties with various countries, that may have an impact on the tax treatment of the purchase, ownership and disposition of ADSs, CPOs or the Series A shares underlying the CPOs. Prospective purchasers of the ADSs or CPOs are encouraged to consult their own tax advisors as to the tax consequences, if any, of any such treaties.
The following summary of the Mexican federal income tax consequences of the purchase, ownership or disposition of ADSs or CPOs is a general summary of the principal consequences, under Mexican tax law and the U.S.-Mexico Tax Treaty, as currently in effect, of such purchase, ownership or disposition of ADSs or CPOs bynon-Mexican holders (but not by holders who are or may be deemed residents of Mexico for tax purposes), that will not hold ADSs or CPOs in connection with the conduct of a trade or business through a permanent establishment for tax purposes, in Mexico.
For purposes of Mexican taxation, individuals are residents of Mexico for tax purposes if they have established their place of residence in Mexico, unless they have a place of residence in a different country, in which case such individuals will only be considered residents of Mexico for tax purposes if they have their center of vital interests(centro de intereses vitalesvitales)) in Mexico. Mexican law considers individuals to have their center of vital interests in Mexico if (i) at least 50% of their income is derived from Mexican sources or (ii) their principal center of professional activities is located in Mexico, among others. An individual will also be considered a resident of Mexico if such individual is a state employee, regardless of the location of such person’s core of vital interests. A legal entity is a resident of Mexico if it is incorporated under the laws of Mexico, or if it maintains the principal administration of its business or the effective location of its management in Mexico.
A permanent establishment in Mexico of anon-Mexican resident will be regarded as a resident of Mexico for tax purposes, and any and all income attributable to such permanent establishment will be required to pay taxes in Mexico in accordance with applicable law.
Dividends
Under the provisions of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta), dividends paid tonon-Mexican holders with respect to ADSs or CPOs are currently not subject to Mexican withholding or similar taxes.
Dividends paid from distributable earnings that have not been subject to Mexican corporate income tax, are subject to a tax at the corporate level payable by usus. (and not by shareholders or holders of ADSs or CPOs). This corporate tax on the distribution of earnings is not final for us, and may be credited by us against income tax
payable during the fiscal year in which the tax was paid and for the following two fiscal years. Dividends paid from distributable earnings, after corporate income tax has been paid with respect to those earnings, are not subject to this corporate tax.
Disposition of ADSs or CPOs
The sale or the disposition of ADSs or CPOs by anon-Mexican holder will not be subject to any Mexican tax, if the transaction is carried out through the Mexican Stock Exchange or other securities markets approved by the Ministry of Finance and Public Credit (Secretariá de Hacienda y Crédito Público).
The exemption referred to in the previous paragraph would not be applicable (i) if the person or group of persons that directly or indirectly hold 10% or more of the shares of Volaris, in a period of 24 months, sell 10% or more of such shares, through one transaction or through more than one simultaneous or successive transactions, including transactions conducted through derivatives or in any other analogous or similar manner, and (ii) if a person or group of persons who control Volaris sell their control through one transaction or more than one simultaneous or successive transactions in a period of 24 months, including transactions conducted through derivatives or in any other analogous or similar manner. For purposes of the above, “control” and “group of persons” have the meaning ascribed to them in the Mexican Securities Market Law. Gains received by anon-resident holder arising out of the sale or other transfers of ADSs or CPOs made in any of the circumstances described in (i) and (ii) above, are deemed as income arising from Mexican source subject to Mexican income tax.
Gain on sales or other dispositions of ADSs or CPOs made in circumstances other than those described in the first paragraph of this section, generally would be subject to Mexican tax at a rate of 25% based on the aggregate proceeds received from the transaction or, subject to certain requirements applicable to the seller (including the appointment of a representative in Mexico for tax purposes to pay the applicable taxes), on any gain arising from a sale or other disposition as described in the next paragraph. If income of anon-resident holder is subject to a preferential tax regime (as defined by the Mexican Income Tax Law), the applicable rate may be up to 40% on the gross income obtained.
Anon-resident holder may elect to pay taxes on the gains realized from the sale of our shares on a net basis (sales price less tax cost basis) at a rate of 30%, provided that the income of thenon-resident holder is not subject to a preferential tax regime (as such terms are defined by the Mexican Income Tax Law), thenon-resident holder appoints a legal representative in Mexico for purposes of the disposition of the shares and the representative files a tax notice claiming the election and a tax return coupled with a report issued by a public accountant.
Pursuant to the U.S.-Mexico Tax Treaty, gains realized by a holder of ADSs or CPOs that is eligible to claim benefits thereunder may be exempt from Mexican income tax on gains realized on a sale or other disposition of shares, if such holder owned, directly or indirectly, less than 25% of our outstanding capital stock during the12-month period preceding such disposition provided certain requirements are met. These requirements include the obligation to (i) prove tax treaty residence, (ii) appoint a legal representative in Mexico for taxation purposes, and (iii) present tax reports prepared by authorized certified public accountants.
Single Rate Business Tax Law and Value Added Tax
The disposition of the ADSs or CPOs made by non-resident holders would be exempt from the payment of the Single Rate Business Tax, pursuant to the Single Rate Business Tax Law (Ley del Impuesto Empresarial a Tasa Única).
Likewise, accordingAccording to the provisions of the Value Added Tax Law (Ley del Impuesto al Valor Agregado), the disposition of the ADSs or CPOs made bynon-resident holders would be exempt from the Value Added Tax.
Other Mexican Taxes
There are currently no Mexican estate, gift, inheritance or value added taxes applicable to the purchase, ownership or disposition of ADSs or CPOs. However, gratuitous transfers of ADSs or CPOs may result in the imposition of a Mexican federal income tax upon the recipient in certain circumstances.
There are currently no Mexican stamp, registration or similar taxes payable with respect to the purchase, ownership or disposition of ADSs or CPOs.
| F. | Dividends and Paying Agents |
Not Applicable.
| G. | Statement by Experts |
Not Applicable.
| H. | Documents on Display |
We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers and, in accordance therewith, file reports and other information with the SEC. Accordingly, we will be required to file reports and other information with the SEC, including annual reports onForm 20-F and reports onForm 6-K. You may inspect and copy reports and other information to be filed with the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at1-800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov, from which you can electronically access the registration statement and its materials.
As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. Registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we will be required to file annual reports onForm 20-F within the time period required by the SEC, which is currently four months from December 31, the end of our fiscal year. As a foreign private issuer, we are exempt from Exchange Act rules regarding proxy statements and short-swing profits.
We will provide the depositary with annual reports in English, which will include a review of operations and annual audited consolidated financial statements prepared according to IFRS.
You may request a copy of our SEC filings, at no cost, by contacting us at: Av. Antonio Dovalí Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México, D.F. 01210, Attention: Investor Relations, Email: ir@volaris.com, Tel.: +52-55-5261-6400.+52-55-5261-6400.
| I. | Subsidiary Information |
Not Applicable.
| ITEM | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
We are subject to certain market risks, including commodity prices, specifically fuel. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided below does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
FuelFuel.. Our results of operations can vary materially due to changes in the price and availability of fuel. Fuel expense for the years ended December 31, 2011, 20122014, 2015 and 20132016 represented approximately 41%39%, 42%30% and 40%28%, respectively, of our operating expenses. Increases in fuel prices or a shortage of supply could have a material adverse effect on our operations and operating results. We source a significant portion of our fuel from refining resources located in Mexico. Gulf Coast fuel is subject to volatility and supply disruptions, particularly during hurricane season when refinery shutdowns have occurred, or when the threat of weather-related disruptions has caused Gulf Coast fuel prices to spike above other regional sources. For
During 2016, we did not enter into US Gulf Coast Jet Fuel 54 swap contracts. During the years ended December 31, 2014 and 2015 we entered into US Gulf Coast Jet fuel 54 swap contracts to hedge approximately 20% and 5% of our fuel consumption, respectively. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within other comprehensive income, while the effects of transforming into a fixed jet fuel prices by these hedges are presented as part of jet fuel costs when recognized in the consolidated statements of operations. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under swap agreements and the pricing of hedges and other derivative products in the market.
Additionally, during the year ended December 31, 2013,2016, we hedgedentered into US Gulf Coast fuel 54 Asian call options designated to hedge approximately 11%52% and 24% of our forecasted2017 and 2018 projected fuel requirements using swaps. consumption, respectively. During the year ended December 31, 2015, we entered into US Gulf Coast fuel 54 Asian call options designated to hedge approximately 55% and 23% of our 2016 and 2017 projected fuel consumption, respectively.
US Gulf Coast Jet Fuelfuel 54 is the crude utilized to determine the cost of the fuel produced by our suppliers. Based on our 20132016 annual fuel consumption, a 10% increase in the average price per gallon of the U.S.US Gulf Coast Jet Fuelfuel 54, would have increased our fuel budget expense for 20132016 by approximately Ps.528.2Ps.458 million.
To attempt to manage fuel price risk, from time to time we use derivative financial instruments to mitigate the risk in cash flows attributable to changes in the fuel price. The fair value of our fuel swaps derivative contracts as of December 31, 2011, 20122013 and 20132014 was Ps.0.93 million, Ps.2.36a net asset position of Ps.11.1 million and Ps.11.1a net liability position of Ps.169.6 million, respectively. All of our US Gulf Coast Jet fuel 54 swaps positions matured on June 30, 2015, and therefore there was no balance outstanding as of December 31, 2015. The fair value of our fuel call options as of December 31, 2016 and 2015 was a net asset position of Ps.867.8 million and Ps.78.7 million, respectively. We measure our derivative financial instruments at fair value. We measure the fair value of the derivative instruments based on quoted market prices. Outstanding derivative financial instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet their obligations. As of December 31, 2013,2016, we believe the credit exposure related to these fuel forward contracts was minor.
The following table illustratesOur fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the sensitivitycapital necessary to support margin requirements under swap agreements and the pricing of hedges and other derivative products in the market. As of December 31, 2016, we had hedged approximately 52% and 24% of our derivative financial instruments to a possible five percent positive or negative change inprojected fuel requirements for the reference fuel price, the U.S. Gulf Coast Jet Fuel 54 forward level, with all other variables held constant, in our statement of financial position.years ended December 31, 2017 and 2018, respectively.
US Gulf Coast Jet Fuel 54 | Position as of December 31, 2013 effect on equity (thousands of U.S. dollars) | |
+5% | 820 | |
-5% | (820) |
Foreign ExchangeExchange.. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities (when revenue or expense is denominated in a different currency from our functional currency). In order to mitigate such risk, we use from time to time derivative financial instruments. Although 26%33% of our revenues came from operations in the United States for the year ended December 31, 20132016 (compared to 24%31% in 2012)2015), the U.S. dollar denominated collections accounted for 31%38% and 34%36% of our total collections in 20132016 and 2012, respectively.2015. Our foreign exchange exposure as of December 31, 2011, 20122014, 2015 and 20132016 are a net asset position by, U.S.$169.7 $234.0 million, U.S.$197.1 $390.1 million and U.S.$368.8 $584.5 million, respectively. During the yearyears ended December 31, 20132016, 2015 and 2012,2014, we did not enter into exchange rate derivatives financial instruments. During
As a result of the year ended December 31, 2011,significant depreciation and appreciation of the peso against the U.S. dollar in the last three years, as applicable, we entered intorecorded a foreign exchange rate derivatives financial instruments resultinggain of Ps.448.7 million, Ps.966.6 million and Ps.2.2 billion in a loss of Ps.1,069 million. All our derivatives positions matured in January 2011, accordingly, there is no fair value as of December 31, 2011.2014, 2015 and 2016, respectively.
Interest RatesRates.. We have market risk associated with changes in variable interest rates due to the LIBOR-based rates in two of our aircraft leases. A hypothetical 100 bps increase in LIBOR in 20132016 would have affected our aircraft rent expense in 20132016 by Ps.6.9Ps.10.2 million. We use derivative financial instruments to reduce our exposure to fluctuations in market interest rates. At December 31, 2011, 20122014, 2015 and 2013,2016, we had derivative financial instruments in the form of interest rate swaps with net liability of Ps.162.7Ps.83.5 million, Ps.147.7Ps.55.8 million and Ps.106.2Ps.14.1 million, respectively.
Our debt, as recognized in our consolidated statements of financial position, consists of the revolving line of credit with Banco Santander México and Bancomext.Bancomext and the short-term working capital facilities with Banco Nacional de México, S.A. and Bank of America México, S.A. A hypothetical 100 bps increase in market interest rates as of December 31, 20132016 would have increased our debt interest payment in 20132016 on our consolidated statement of financial position by Ps.5.5Ps.12.6 million.
The following table illustrates the sensitivity of our derivative financial instruments on the Company’s accumulated other comprehensive income (due to changes in the fair value of forward contracts) to a 100 basis point positive or negative change in the referenced interest rate, the LIBOR curve, with all other variables held constant, in our statement of financial position.
Increase (decrease) in LIBOR curve | Position as of December 31, on equity (thousands of U.S. dollars) | |
+100 basis points | ||
-100 basis points |
| ITEM | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| A. | Debt Securities |
Not Applicable.
| B. | Warrants and Rights |
Not Applicable.
| C. | Other Securities |
Not Applicable.
| D. | American Depositary Shares |
The Bank of New York Mellon, as depositary, will register and deliver American Depositary shares, also referred to as ADSs. Each ADS will represent ten CPOs (or a right to receive ten CPOs) deposited with Indeval , as custodian for the depositary. Each ADS will also represent any other securities, cash or other property which may be held by the depositary. The depositary’s office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286.
ADSs may be held either (a) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs, registered in the holder’s name, or (ii) by having ADSs registered in the holder’s name in the Direct Registration System, or DRS, or (b) indirectly by holding a security entitlement in ADSs through a broker or other financial institution.
The DRS is a system administered by The Depository Trust Company, also referred to as DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership is confirmed by periodic statements sent by the depositary to the registered holders of uncertificated ADSs.
We will not treat ADS holders as one of our shareholders and ADS holders will not have shareholder rights under Mexican law and ourby-laws. A deposit agreement among us, the depositary and ADS holders, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADSs.
Dividends and Other Distributions
The depositary has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian receives in respect of the underlying CPOs or other deposited securities, after deducting its fees and expenses described below. ADS holders will receive these distributions in proportion to the number of CPOs their ADRs represent.
Cash Dividends and DistributionsDistributions.. The depositary will convert any cash dividend or other cash distribution we pay on the shares underlying the applicable CPOs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any Mexican government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest. If the depositary can only convert a portion of the cash dividend into U.S. dollars, it can either distribute the unconverted portion in the foreign currency or hold the foreign currency on the account of the ADS holders. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, ADS holders may lose some or all of the value of the distributions. Before making a distribution, the depositary will deduct any withholding taxes that must be paid. See Item 10: “Additional Information—Taxation.” It will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent.
Share Dividends and DistributionsDistributions.. The depositary may distribute additional ADSs representing any additional CPOs issued as a result of our issuing a share dividend or distribution. The depositary will only distribute whole ADSs. It will sell CPOs or Series A Shares, which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new CPOs. The depositary may sell a portion of the distributed CPOs or Series A shares sufficient to pay its fees and expenses in connection with that distribution.
Rights to Purchase Additional CPOsCPOs.. If the CPO trustee offers CPO holders any rights to subscribe for additional CPOs or any other rights, the depositary may make these rights available to ADS holders. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary will use reasonable efforts to sell the rights and distribute the proceeds in the same way as it does with cash. Under current Mexican law, preemptive rights with respect to our common stock may not be sold apart from the applicable shares. The depositary will allow rights that are not distributed or sold to lapse. In that case, ADS holders will receive no value for them. If the depositary makes rights to purchase CPOs available to ADS holders, it will exercise the rights and purchase the CPOs on their behalf. The depositary will then deposit the CPOs and deliver ADSs to the applicable holders. It will only exercise rights if holders pay it the exercise price and any other charges required by the terms of the rights. U.S. securities laws may restrict transfers and cancellation of the ADSs representing CPOs purchased upon exercise of rights. For example, holders may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.
Other DistributionsDistributions.. The depositary will send to ADS holders anything else the CPO trustee distributes on deposited securities by any means it determines to be legal, fair and practical. If the depositary determines that it cannot make the distribution in a legal, fair and practical manner, it may sell the distributed assets and distribute the net proceeds, in the same way as it does with cash or determine to hold the distributed assets, in which case ADSs will also represent the newly distributed assets. However, the depositary is not required to distribute any securities (other than ADSs) unless it receives satisfactory evidence from us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution.
Unlawful or Impracticable DistributionsDistributions.. The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, CPOs, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, CPOs, rights or anything else to ADS holders. This means that ADS holders may not receive the distributions we make on our common stock or any value for such distributions if it is illegal or impractical for us to make them available to such holders.
Deposit, Withdrawal and Cancellation
The depositary will deliver ADSs upon the deposit of CPOs or evidence of rights to receive CPOs with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names requested and will deliver the ADSs to the persons requested.
Upon surrender of ADSs to the depositary, upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the CPOs and any other deposited securities underlying the surrendered ADSs to the person surrendering the ADSs or a person designated by them at the office of the custodian or, at the holder’s request, risk and expense, the depositary will deliver the deposited securities at its office, if feasible; provided, however, thatnon-Mexican holders may not hold Series A shares directly, but will hold CPOs representing a financial interest in such Series A shares as described in this prospectus.
Voting Rights
ADS holders have no voting rights and do not have the power to instruct the depositary to vote the shares underlying the CPOs underlying such ADSs.
Fees and Expenses
The following table sets forth the applicable fees for various services, transactions and activities related to the ADSs.
| Persons Depositing CPOs or ADR Holders Must Pay: | For: | |
| U.S. | Issuance of ADSs, including issuances resulting from a distribution of CPOs or rights or other property | |
| Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | ||
| U.S. | Any cash distribution to ADS holders | |
| A fee equivalent to the fee that would be payable if securities distributed to you had been CPOs and the CPOs had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders | |
| U.S. | Depositary services | |
| Registration or transfer fees | Transfer and registration of CPOs on our CPO register to or from the name of the depositary or its agent when you deposit or withdraw CPOs | |
| Expenses of the depositary | Conversion of foreign currency to U.S. dollars | |
| Expenses of the depositary | Cable, telex and facsimile transmission (when expressly provided in the deposit agreement) | |
| Persons Depositing CPOs or ADR Holders Must Pay: | For: | |
| Taxes and other governmental charges the depositary or the custodian have to pay on any ADSs or CPOs underlying ADSs, for example, stock transfer taxes, stamp duty or withholding taxes, any charges incurred by the depositary or its agents for servicing deposited securities | ||
| The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging thebook-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable to ADS holders that are obligated to pay those fees. The depositary may generally refuse to providefee-attracting services until its fees for those services are paid. | As necessary | |
| From time to time, the depositary may make payments to us to reimburse and / or share revenue from the fees collected from ADS holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS program. In performing its duties under the deposit agreement, the depositary may use brokers, dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions. | ||
Payment of Taxes
The depositary may deduct the amount of any taxes owed from any payments to ADS holders. It may also sell deposited securities, by public or private sale, to pay any taxes owed. ADS holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay or distribute to applicable ADS holder any proceeds or property remaining after it has paid the taxes.
Reclassifications, Recapitalizations and Mergers
| If We: | Then: | |
| Change the nominal or par value of the CPOs | The cash, shares or other securities received by the depositary will become deposited securities. Each ADS will automatically represent its equal share of the new deposited securities. | |
| Reclassify, split up or consolidate any of the deposited securities | The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADRs or ask ADR holders to surrender their outstanding ADRs in exchange for new ADRs identifying the new deposited securities. | |
| Distribute securities on the CPOs that are not distributed to ADS holders | ||
| Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action | ||
Amendment and Termination
We may agree with the depositary to amend the deposit agreement and the ADRs for any reason without the consent of the ADS holders. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended.
The depositary will terminate the deposit agreement if we ask it to do so. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary bank within 60 days. In either case, the depositary must notify ADS holders at least 30 days before termination.
After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: (a) advise ADS holders that the deposit agreement is terminated, (b) collect distributions on the deposited securities, (c) sell rights and other property, and (d) deliver CPOs and other deposited securities upon surrender of ADSs. Four months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash. After termination our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay.
Shareholder Communications and Inspection of Register of Holders of ADSs
The depositary will make available for shareholders’’shareholders” inspection at its office all communications that it receives from us or the CPO trustee as a holder of deposited securities that we or the COP trustee make generally available to holders of deposited securities. The depositary will send shareholders copies of those communications if we ask it to. Shareholders have a right to inspect the register of holders of ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the ADSs.
Limitations on Obligations and Liability
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:
In the deposit agreement, we agree to indemnify the depositary for acting as depositary, except for losses caused by the depositary’s own negligence or bad faith, and the depositary agrees to indemnify us for losses resulting from its negligence or bad faith.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of an ADS, make a distribution of ADSs, or permit withdrawal of CPOs, the depositary may require:
The depositary may refuse to deliver ADSs or register transfers of ADSs generally when the transfer books of the depositary, the CPO trustee or our transfer books are closed or at any time if the depositary or we think it advisable to do so.
ADS Holders’ Right to Receive the CPOs Underlying ADSs
ADS holders have the right to surrender their ADSs and withdraw the underlying CPOs at any time except:
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Pre-release of ADSs
The deposit agreement permits the depositary to deliver ADSs before deposit of the underlying CPOs. This is called apre-release of the ADSs. The depositary may also deliver CPOs upon cancellation ofpre-released ADSs (even if the ADSs are surrendered before thepre-release transaction has been closed out). Apre-release is closed out as soon as the underlying CPOs are delivered to the depositary. The depositary may receive ADSs instead of CPOs to close out apre-release. The depositary maypre-release ADSs only under the following conditions: (a) before or at the time of thepre-release, the person to whom thepre-release is being made represents to the depositary in writing that it or its customer owns the CPOs or ADSs to be deposited; (b) thepre-release is fully collateralized with cash or other collateral that the depositary considers appropriate; and (c) the depositary must be able to close out thepre-release on not more than five business days’ notice. In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result ofpre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so.
Depositary Payments
US$601,184.00During 2016, U.S. $406.1 thousand was received by us from the depositary relating to our American Depositary Shares program, consisting of reimbursements for continuing annual stock exchange listing fees, standardout-of-pocket maintenance costs for the ADRs (e.g., the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
| ITEM | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
| A. | Use of Proceeds |
Not applicable.
| ITEM | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We carried out an evaluation under the supervision of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013.2016. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting dueas defined in Rules13a-15(f) and15(d)-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with IFRS, and it includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, effective control over financial reporting cannot, and does not, provide absolute assurance of achieving our control objectives. Also, projection of any evaluation of the effectiveness of the internal controls to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As of the year ended December 31, 2016, our management conducted an assessment of the effectiveness of our internal control over financial reporting in accordance with the criteria established in 2013 in the publication “Internal Control—Integrated Framework,” issued by the Treadway Commission’s Committee of Sponsoring Organizations (COSO), as well as the rules prescribed by the SEC for newly public companies.in its Final Rule “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports.”
Based on the assessment performed, management concluded that our internal control over financial reporting was effective as of the end of the period covered by this annual report.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include anThe attestation report of the company’sMancera, S.C., an independent registered public accounting firm, due to a transition period established by rules ofon our internal control over financial reporting is included with the SEC for newly public companies.audit report accompanying our audited financial statements included in this annual report.
Changes in Internal Control over Financial Reporting
During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM | [Reserved] |
| ITEM | Audit Committee Financial Expert |
Our board of directors has determined that José Luis Fernández Fernández, a member of our audit and corporate governance committee, meets the requirements of an “audit committee financial expert,” as defined by the SEC.
See Item 6: “Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors—Audit and Corporate Governance Committee.”
| ITEM | Code of Ethics |
We currently have a code of ethics which has been accepted by all of our directors and executive officers and other personnel. Our Code of Ethics is available on our website at www.ir.volaris.com under the “Corporate Governance—Code of Ethics” tab. The information on our website is not incorporated into this annual report.
| ITEM | Principal Accountant Fees and Services |
Mancera, S.C., independent registered public accounting firm and a member practice of Ernst & Young Global, acted as our independent registered public accounting firm for the years 20132016 and 2012.2015. The table below sets forth the fees for services performed by Mancera, S.C. for the years 20132016 and 20122015 (including related expenses), and categorized by service in Pesos.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
| (in Pesos) | (in Pesos) | |||||||||||||||
Audit Fees(1) | 10,189,132 | 2,257,050 | 13,385,051 | 10,079,185 | ||||||||||||
Audit-Related Fees(2) | 1,195,856 | — | 2,511,333 | 3,973,979 | ||||||||||||
Tax Fees(3) | 979,800 | 465,000 | 676,930 | 1,116,530 | ||||||||||||
All Other Fees | — | — | — | — | ||||||||||||
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Total | 12,364,788 | 2,722,050 | 16,573,314 | 15,169,694 | ||||||||||||
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| (1) | “Audit Fees” are the aggregate fees billed for professional services rendered by our |
| (2) | “Audit-Related Fees” are the aggregate fees billed for professional services rendered by our |
| (3) | “Tax Fees” are the aggregate fees billed for professional services rendered by |
Our audit committeepre-approves all audit andnon-audit services provided by our independent auditor pursuant to the Sarbanes-Oxley Act of 2002.
| ITEM | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
| ITEM | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Not applicable.
| ITEM | Change in Registrant’s Certifying Accountant |
During the years ended December 31, 2013, 20122016, 2015 and 20112014 and through the date of this annual report, Mancera, S.C., our independent registered public accounting firm and a member of Ernst & Young Global ,Limited, has not resigned, has not indicated that it will decline to stand forre-election after the completion of its current audit nor has it been dismissed. For each of the years ended December 31, 2013, 20122016, 2015 and 2011,2014, Mancera S.C. has not expressed reliance on another accountant or accounting firm in its report on our audited consolidated financial statements for such periods.
During the years ended December 31, 2013, 20122016, 2015 and 20112014 and through the date of this annual report, we have not engaged a new independent accountant as either the principal accountant to audit our financial statements, or as an independent accountant to audit a significant subsidiary and on whom the principal accountant is expected to express reliance in its report.
| ITEM | Corporate Governance |
As a foreign private issuer, we may follow our home country’s corporate governance practices in lieu of most of the NYSE’s corporate governance listing standards. Pursuant to Section 303A.11 of the Listed Company Manual of the New York Stock Exchange and Rule 4350(a)(1) of the NASDAQ Stock Market, Inc. Marketplace Rules, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE and NASDAQ listing standards. The table below discloses the significant differences between our corporate governance practices and the NYSE and NASDAQ standards.
NYSE Standards | NASDAQ Standards | Our Corporate Governance Practices | ||
| Director Independence. Majority of board of directors must be independent. “Controlled companies,” which would include our company if we were a U.S. issuer, are exempt from this requirement. A controlled company is one in which more than 50% of the voting power is held by an individual, group or another company, rather than the public. §303A.01 | Director Independence. Majority of board of directors must be independent and directors deemed independent must be identified in a listed company’s proxy statement (or annual report on Form10-K or20-F if the issuer does not file a proxy statement). “Controlled companies,” which would include our company if we were a U.S. issuer, are exempt from this requirement. A controlled company is one in which more than 50% of the voting power is held by an individual, group or another company, rather than the public. Rules 4350(c)(1) & (c)(5) | Director Independence. Pursuant to the Mexican Securities Market Law and ourby-laws, our shareholders are required to appoint the members of our board of directors comprised of no more than 21 members, 25% of whom must be independent. Certain persons are per senon-independent, including insiders, control persons, major suppliers and relatives of such persons. In accordance with the Mexican Securities Market Law, our shareholders’ meeting is required to make a determination as to the independence of our directors, though such determination may be challenged by the CNBV. See Item 6: “Directors, Senior Management and Employees—Directors and Senior Management” and Item 10: “Additional Information— Memorandum and Articles of Association—Provisions of OurBy-laws and Mexican Law Relating to Directors—Election of Directors.” | ||
| Executive Sessions.Non-management directors must meet regularly in executive sessions without management. Independent directors should meet alone in an executive session at least once a year. §303A.03 | Executive Sessions. Independent directors must meet regularly in executive sessions at which only independent directors are present. Rule 4350(c)(2) | Executive Sessions.Non-management directors are not required to meet in executive sessions without management. | ||
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Nominating/Corporate Governance Committee. Nominating/corporate governance committee of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies” are exempt from these requirements. §303A.04 As a controlled company, we would be exempt from this requirement if we were a U.S. issuer. | Nominating Committee. Director nominees must be selected, or recommended for the board’s selection, either by a nominating committee comprised solely of independent directors or by a majority of independent directors. Each listed company also must certify that it has adopted a formal charter or board resolution addressing the nominations process. “Controlled companies” are exempt from this requirement. Rules 4350(c)(4)(A)-(B) & (c)(5)
As a controlled company, we would be exempt from this requirement if we were a U.S. issuer. | Nominating Committee. We are not required to have a nominating committee. However, we maintain a compensation committee which may, among other things, submit proposals to our board of directors in respect of the appointment of principal officers, the inaction, amendment or formation of incentive plans for officers and compensation of officers within the first four corporate levels. See Item 6: “Directors, Senior Management and Employees— Directors and Senior Management—Board of Directors” and Item 10: “Additional Information— Memorandum and Articles of Association—Provisions of OurBy-laws and Mexican Law Relating to Directors” for further information. | ||||
Compensation Committee. Compensation committee of independent directors is required, which must evaluate and approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies” are exempt from this requirement. §303A.05 As a controlled company, we would be exempt from this requirement if we were a U.S. issuer. | Compensation Committee. CEO compensation must be determined, or recommended to the board for determination, either by a compensation committee comprised solely of independent directors or a majority of the independent directors and the CEO may not be present during voting or deliberations. Compensation of all other executive officers must be determined in the same manner, except that the CEO, and any other executive officers, may be present. “Controlled companies” are exempt from this requirement. Rules 4350(c)(3)(A)-(B) & (c)(5)
As a controlled company, we would be exempt from this requirement if we were a U.S. issuer. | Compensation Committee. We are not required to have a compensation committee. However, we maintain a compensation committee that makes proposals to the board of directors in respect of compensation of officers within the first four corporate levels. See Item 10: “Additional Information—Memorandum and Articles of Association— Provisions of OurBy-laws and Mexican Law Relating to Directors” for further information. | ||||
NYSE Standards | NASDAQ Standards | Our Corporate Governance Practices | ||
| Audit Committee. Audit committee satisfying the independence and other requirements of Exchange ActRule 10A-3 and the more stringent requirements under the NYSE standards is required. §§303A.06, 303A.07 | Audit Committee. Audit committee satisfying the independence and other requirements of Exchange ActRule 10A-3 and the more stringent requirements under the NASDAQ standards is required. Rule 4350(d) | Audit Committee. We have an audit committee comprised of three members. Each member of the audit committee is independent, as independence is defined under the Mexican Securities Market Law, and also meets the independence requirements of Exchange ActRule 10A-3. Our audit committee operates primarily pursuant to Mexican Securities Market Law and ourby-laws. For a detailed description of the duties of our audit committee, see Item 6: “Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors—Audit and Corporate Governance Committee.” | ||
| Equity Compensation Plans. Equity compensation plans require shareholder approval, subject to limited exemptions. §§303A.08 & 312.03 | Equity Compensation Plans. Equity compensation plans require shareholder approval, subject to limited exemptions. Rule 4350(i)(1)(A) | Equity Compensation Plans. Shareholder approval is required for the adoption and amendment of anequity-compensation plan based upon the recommendation of our board of directors and the opinion of our compensation committee. | ||
| Shareholder Approval for Issuance of Securities. Issuances of securities (1) that will result in a change of control of the issuer, (2) that are to a related party or someone closely related to a related party, (3) that have voting power equal to at least 20% of the outstanding common stock voting power before such issuance or (4) that will increase the number of shares by at least 20% of the number of outstanding shares before such issuance require shareholder approval. | Shareholder Approval for Issuance of Securities. Issuances of securities (1) that will result in a change of control of the issuer, (2) in connection with certain acquisitions of the stock or assets of another company or (3) in connection with certain transactions other than public offerings require shareholder approval. Rules 4350(i)(1)(B)-(D) | Shareholder Approval for Issuance of Securities. Mexican law and ourby-laws require our shareholders to authorize any share issuance. Any issuance of shares is subject to mandatory preemptive rights, except in the event of a public offering and other limited circumstances. Shares issued that have cleared preemptive rights or that are the subject of public offerings, may be allocated as a result of a resolution from our directors. Shares repurchased by us in the open market may be placed again based upon resolutions by our directors. | ||
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| Code of Business Conduct and Ethics. Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver for directors or executive officers. The code must contain compliance standards and procedures that will facilitate the effective operation of the code. §303A.10 | Code of Business Conduct and Ethics. Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver and the reasons for such waiver for directors or executive officers. The code must include an enforcement mechanism. Rule 4350(n) | Code of Business Conduct and Ethics. We have adopted a code of ethics, which has been accepted by all of our directors and executive officers and other personnel. | ||||
| Conflicts of Interest. Determination of how to review and oversee related party transactions is left to the listed company. The audit committee or comparable body, however, could be considered the forum for such review and oversight. §307.00. Certain issuances of common stock to a related party require shareholder approval. §312.03(b) | Conflicts of Interest. Appropriate review of all related party transactions for potential conflict of interest situations and approval by an audit committee or another independent body of the board of directors of such transactions is required. Rule 4350(h) | Conflicts of Interest. In accordance with Mexican law and ourby-laws, our board of directors is required to approve, on acase-by-case basis, transactions involving a conflict of interest (other than transactions in the ordinary course of business that satisfy our procedures), based upon the opinion of our corporate governance committee, that may request the opinion of a third- party expert. Pursuant to the Mexican Securities Market Law, our board of directors may establish guidelines regarding related party transactions that do not require the board of | ||||
NYSE Standards | NASDAQ Standards | Our Corporate Governance Practices | ||
| Solicitation of Proxies. Solicitation of proxies and provision of proxy materials is required for all meetings of shareholders. Copies of such proxy solicitations are to be provided to NYSE. §§402.00 & 402.04 | Solicitation of Proxies. Solicitation of proxies and provision of proxy materials is required for all meetings of shareholders. Copies of such proxy solicitations are to be provided to NASDAQ. Rule 4350(g) | Solicitation of Proxies. We are required under Mexican law to solicit proxies and provide proxy materials for meetings of shareholders. In accordance with Mexican law and ourby-laws, we are also required to inform shareholders of all meetings by notice provided in newspapers of wide distribution in Mexico, and which specify the requirements for admission to the meeting, provides a mechanism by which shareholders can vote by proxy, and makes proxies available. Shareholders that are Mexican investors and are entitled to vote, may attend a shareholders’ meeting and cast votes at such meeting. Under the deposit agreement relating to the ADSs, holders of the ADSs receive notices of shareholders’ meetings. As foreign investors, holders of ADSs (or CPOs underlying the securities) are not entitled to vote at our shareholders’ meetings. | ||
Peer Review. A listed company must be audited by an independent public accountant that (i) has received an external quality control review by an independent public accountant (“peer review”) that determines whether the auditor’s system of quality control is in place and operating effectively and whether established policies and procedures and applicable auditing standards are being followed or (ii) is enrolled in a peer review program and within 18 months receives a peer review that meets acceptable guidelines. Rule 4350(k) | Peer Review. Under Mexican law we must be audited by a public accountant that qualifies as independent, and satisfies the requirements specified under applicable law, maintaining certain quality standards. | |||
| ITEM | MINE SAFETY DISCLOSURE |
Not applicable.
| ITEM | FINANCIAL STATEMENTS |
Not applicable.
| ITEM | FINANCIAL STATEMENTS |
See pagesF-1 throughF-57. F-75.
| ITEM | EXHIBITS |
EXHIBIT INDEX
Exhibit Number | Exhibit | |
| 1.1 | By-laws of the Company (estatutos) (English translation) (incorporated by reference to Exhibit 3.1 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013(File No. 333-189121)) | |
| 4.1† | Engine Lease Agreement, dated as of November 24, 2009, between the Company, RRPF Engine Leasing Limited and Rolls-Royce & Partners Finance Limited (incorporated by reference to Exhibit 10.1 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | |
| 4.2† | Engine Lease Agreement, dated as of June 28, 2007, between the Company and Celestial Aviation Trading 50 Limited, as amended by the Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013 between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.2 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (File | |
| Lease Agreement, dated as of August 21, 2008, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.4 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Fleet Hour Agreement, dated as of June 8, 2007, between the Company and IAE International Aero Engines AG including Side Letter dated as of May 31, 2012 (incorporated by reference to Exhibit 10.5 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 | ||
| Lease Agreement, dated as of April 28, 2006, between the Company and Engine Lease Finance Corporation, as amended by the Lease Extension and Amendment Agreement No. 1, dated as of September 30, 2011, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.6 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 28, 2006, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.7 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
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| Aircraft Repair and Maintenance Service Agreement, dated as of March 6, 2007, between the Company and Aeromantenimiento, S.A. (incorporated by reference to Exhibit 10.8 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| General Terms of Sale Agreement, dated as of December 8, 2006, between the Company and IAE International Aero Engines AG (incorporated by reference to Exhibit 10.9 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| A320 Family Purchase Agreement, dated as of October 28, 2005, between the Company and Airbus S.A.S., including Amendment No. 1, dated as of June 22, 2007, Amendment No. 2, dated as of July 11, 2008, Amendment No. 3, dated as of January 30, 2009, Amendment No. 4, dated as of October 28, 2010, Amendment No. 5, dated as of December 15, 2010, Amendment No. 6, dated as of December 15, 2010, Amendment No. 7, dated as of January 4, 2011 and Amendments Nos. 8 and 9 both dated as of December 28, 2011 (incorporated by reference to Exhibit 10.10 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 9, 2007, between the Company Concesionaria Vuela and International Lease Finance Corporation (incorporated by reference to Exhibit 10.11 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 9, 2007, between the Company Concesionaria Vuela and International Lease Finance Corporation (incorporated by reference to Exhibit 10.12 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited (incorporated by reference to Exhibit 10.13 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited (incorporated by reference to Exhibit 10.14 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited Amendment Agreement, dated as of September 17, 2007, between Company and RBS Aerospace Limited with Wells Fargo Northwest, National Association (incorporated by reference to Exhibit 10.15 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 | ||
Exhibit Number | Exhibit | |
| Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited Amendment Agreement, dated as of October 10, 2007, between Company and RBS Aerospace Limited with Wells Fargo Northwest, National Association (incorporated by reference to Exhibit 10.16 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 | ||
| Lease Agreement, dated as of March 26, 2007, between the Company and Arrendadora Financiera Inbursa, S.A. de C.V. Sociedad Financiera de Objeto Múltiple, Entidad Regulada Grupo Financiero Inbursa (incorporated by reference to Exhibit 10.17 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 20, 2007, between the Company and International Lease Finance Corporation (incorporated by reference to Exhibit 10.18 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
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| Lease Agreement, dated as of June 18, 2007, between the Company and Arrendadora Financiera Inbursa, S.A. de C.V. Sociedad Financiera de Objeto Múltiple, Entidad Regulada Grupo Financiero Inbursa (incorporated by reference to Exhibit 10.19 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of January 25, 2008, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.20 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of January 25, 2008, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.21 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of November 30, 2009, between the Company and CIT Aerospace International (incorporated by reference to Exhibit 10.23 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of November 30, 2009, between the Company and CIT Aerospace International (incorporated by reference to Exhibit 10.24 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of August 23, 2010, as amended between the Company and Macquarie Airfinance Acquisitions (Ireland) Limited (incorporated by reference to Exhibit 10.25 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013(File No. 333-189121)) | ||
| Lease Agreement, dated as of August 23, 2010, as amended between the Company and Macquarie Aerospace Ireland Limited (incorporated by reference to Exhibit 10.26 of the Company’s registration statement onForm F-1 filed with the SEC on September 12, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 7, 2011, between the Company and MASL Ireland (22) Limited (incorporated by reference to Exhibit 10.30 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 13, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.31 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 29, 2011, between the Company and Amentum Leasing No. Three Limited (incorporated by reference to Exhibit 10.32 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
|
| |
| Lease Agreement, dated as of April 29, 2011, between the Company and Amentum Leasing No. Three Limited (incorporated by reference to Exhibit 10.33 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Common Terms Agreement, dated as of June 28, 2007, between the Company and GE Commercial Aviation Services Limited, as amended by the Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.34 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
| Fuel Sales Agreement, dated as of January 1, 2012, between the Company and World Fuel Services, Inc., as amended (incorporated by reference to Exhibit 10.35 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | ||
Exhibit Number | Exhibit | |
| Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.36 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of June 26, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.37 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.38 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.39 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.40 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of March 15, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.41 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Lease Agreement, dated as of June 26, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.42 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Aircraft Lease Agreement “A”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.43 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Aircraft Lease Agreement “B”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.44 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Aircraft Lease Agreement “C”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.45 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
|
| |
| Aircraft Lease Agreement “D”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.46 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | ||
| Agreement on Technical Services for A319/A320 Aircraft, dated as of August 15, 2012 between the Company and Lufthansa Technik AG; Attachment 1: Total Component Support to Agreement on Technical Services for A310/320 Aircraft between Concesionaria Vuela Compañía de Aviación S.A.P.I. de C.V. and Lufthansa Technik AG dated August 15, 2012 (incorporated by reference to Exhibit 10.47 of the Company’s registration statement onForm F-1 filed with the SEC on September 12, 2013 | ||
| | Aircraft Lease Agreement “A”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.48 of the Company’s registration statement onForm F-1 filed with the SEC on September 12, 2013 (FileNo. 333-189121)) | |
| | Aircraft Lease Agreement “B”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.49 of the Company’s registration statement onForm F-1 filed with the SEC on September 12, 2013 (FileNo. 333-189121)) | |
| | Aircraft Lease Agreement “C”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.50 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | |
| | The Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.51 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | |
Exhibit Number | Exhibit | |
| | Revolving Credit Line Agreement dated July 27, 2011, as amended among the Company, Deutsche Bank México, S.A., Institución de Banca Múltiple, División Fiduciaria, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander Mexico and Banco Nacional de Comercio Exterior, S.N.C. | |
| | Master Agreement, dated as of July 20, 2009, between the Company and Sabre, Inc. | |
| | Navitaire Hosted Services Agreement, dated January 29, 2013 (incorporated by reference to Exhibit 10.54 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | |
| | Aircraft Lease Agreement “D”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.55 of the Company’s registration statement onForm F-1 filed with the SEC on August 16, 2013 (FileNo. 333-189121)) | |
| 8.1 | List of the Subsidiaries of the Company | |
|
| |
| 12.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 12.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 13.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 15.1 | Concession Title, dated as of May 9, 2005, as amended from time to time, granted to the Company by the Ministry of Communications and Transportation (Secretaria de Comunicaciones y Transportes) (incorporated by reference to Exhibit 99.1 of the Company’s registration statement onForm F-1 filed with the SEC on June 20, 2013 (FileNo. 333-189121)) | |
| 15.2 | Consent Letter of Mancera, S.C., a member practice of Ernst & Young Global Limited. | |
| † | Portions of the exhibit were omitted pursuant to a request for confidential treatment. |
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing onForm 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. | ||
| By: | /s/ Enrique Beltranena | |
| Name: | Enrique Beltranena | |
| Title: | Chief Executive Officer | |
| By: | /s/ Fernando Suárez | |
| Name: | Fernando Suárez | |
| Title: | Chief Financial Officer | |
| By: | /s/ Jaime Pous | |
| Name: | Jaime Pous | |
| Title: | ||
Date: April 29, 201427, 2017
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN,
S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSConsolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Report of Independent Registered Accounting Firm on Internal Control Over Financial Reporting | F-2 | |||
Audited Consolidated Financial Statements: | ||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To theThe Board of Directors and Shareholders of
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and Subsidiariessubsidiaries
We have audited Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries as of December 31, 20132016 and 2012,2015, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013.2016 and our report dated April 27, 2017 expressed an unqualified opinion thereon.
Mancera, S.C.
A member practice of
Ernst & Young Global Limited
/s/ MANCERA, S.C.
Mexico City, Mexico
April 27, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries
We have audited the accompanying consolidated statements of financial position of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries at December 31, 20132016 and 2012,2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2016, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 2017 expressed an unqualified opinion thereon.
Mancera, S.C. A member practice of Ernst & Young Global Limited | ||
| /s/ MANCERA, S.C. | ||
Mexico City, Mexico April 27, 2017
| ||
Mexico City, Mexico
April 24, 2014
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Consolidated Statements of Financial Position
(In thousands of Mexican pesos)
| 2013 (Thousands of U.S. dollars) | At December 31, | 2016 (Thousands of U.S. | At December 31, | |||||||||||||||||||||
| 2013 | 2012 | dollars*) | 2016 | 2015 | ||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents (Note 6) | US$ | 187,418 | Ps. | 2,450,773 | Ps. | 822,076 | US$ | 342,201 | Ps. | 7,071,251 | Ps. | 5,157,313 | ||||||||||||
Accounts receivable: | ||||||||||||||||||||||||
Related parties (Note 7) | 68 | 885 | 3,619 | |||||||||||||||||||||
Other accounts receivable, net (Note 8) | 20,632 | 269,795 | 237,331 | 20,683 | 427,403 | 263,022 | ||||||||||||||||||
Recoverable taxes | 25,349 | 331,479 | 146,366 | |||||||||||||||||||||
Recoverable value added tax and others | 16,567 | 342,348 | 156,905 | |||||||||||||||||||||
Recoverable income tax | 9,338 | 192,967 | 15,028 | |||||||||||||||||||||
Inventories (Note 9) | 8,705 | 113,835 | 97,150 | 11,802 | 243,884 | 163,073 | ||||||||||||||||||
Prepaid expenses and other current assets (Note 10) | 24,698 | 322,971 | 267,874 | 75,616 | 1,562,526 | 585,276 | ||||||||||||||||||
Financial instruments (Note 3) | 851 | 11,133 | 2,360 | |||||||||||||||||||||
Financial instruments (Notes 3 and 5) | 26,303 | 543,528 | 10,123 | |||||||||||||||||||||
Guarantee deposits (Note 11) | 38,167 | 499,089 | 238,242 | 56,485 | 1,167,209 | 873,022 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total current assets | 305,888 | 3,999,960 | 1,815,018 | 558,995 | 11,551,116 | 7,223,762 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Non-current assets: | ||||||||||||||||||||||||
Rotable spare parts, furniture and equipment, net (Note 12) | 102,575 | 1,341,323 | 1,195,319 | 122,194 | 2,525,008 | 2,549,650 | ||||||||||||||||||
Intangible assets, net (Note 13) | 6,063 | 79,282 | 60,235 | 5,519 | 114,041 | 94,649 | ||||||||||||||||||
Deferred income tax (Note 19) | 23,288 | 304,525 | 319,969 | |||||||||||||||||||||
Financial instruments (Notes 3 and 5) | 15,693 | 324,281 | 68,602 | |||||||||||||||||||||
Deferred income taxes (Note 19) | 27,054 | 559,083 | 544,598 | |||||||||||||||||||||
Guarantee deposits (Note 11) | 199,096 | 2,603,481 | 2,244,665 | 317,454 | 6,559,878 | 4,692,603 | ||||||||||||||||||
Other assets | 3,763 | 49,213 | 54,045 | 7,180 | 148,364 | 57,640 | ||||||||||||||||||
Assets classified as held for sale (Note 12) | — | — | 12,307 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Totalnon-current assets | 495,094 | 10,230,655 | 8,007,742 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total assets | US$ | 640,673 | Ps. | 8,377,784 | Ps. | 5,701,558 | US$ | 1,054,089 | Ps. | 21,781,771 | Ps. | 15,231,504 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Short-term liabilities: | ||||||||||||||||||||||||
Unearned transportation revenue | US$ | 106,563 | Ps. | 1,393,469 | Ps. | 1,258,670 | US$ | 104,218 | Ps. | 2,153,567 | Ps. | 1,957,254 | ||||||||||||
Accounts payable: | ||||||||||||||||||||||||
Suppliers | 40,802 | 533,555 | 520,345 | 41,706 | 861,805 | 781,094 | ||||||||||||||||||
Related parties (Note 7) | 232 | 3,036 | 3,399 | 3,147 | 65,022 | 14,316 | ||||||||||||||||||
Accrued liabilities (Note 15a) | 78,972 | 1,032,682 | 805,791 | 86,402 | 1,785,439 | 1,379,575 | ||||||||||||||||||
Taxes and fees payable (Note 1q) | 45,806 | 598,976 | 560,418 | |||||||||||||||||||||
Financial instruments (Note 3) | 2,435 | 31,845 | 37,011 | |||||||||||||||||||||
Other taxes and fees payable (Note 1q) | 71,440 | 1,476,242 | 1,106,726 | |||||||||||||||||||||
Income taxes payable | 9,497 | 196,242 | 308,536 | |||||||||||||||||||||
Financial instruments (Notes 3 and 5) | 684 | 14,144 | 44,301 | |||||||||||||||||||||
Financial debt (Note 5) | 20,531 | 268,468 | 527,383 | 50,873 | 1,051,237 | 1,371,202 | ||||||||||||||||||
Other liabilities (Note 15c) | 727 | 9,498 | 8,880 | 13,752 | 284,200 | 110,368 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total short-term liabilities | 296,068 | 3,871,529 | 3,721,897 | 381,719 | 7,887,898 | 7,073,372 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Long-term liabilities: | ||||||||||||||||||||||||
Financial instruments (Note 3) | 5,682 | 74,306 | 110,702 | |||||||||||||||||||||
Financial instruments (Notes 3 and 5) | — | — | 11,473 | |||||||||||||||||||||
Financial debt (Note 5) | 22,470 | 293,824 | 632,540 | 45,637 | 943,046 | 219,817 | ||||||||||||||||||
Accrued liabilities (Note 15b) | 10,521 | 137,584 | 139,774 | 8,218 | 169,808 | 157,331 | ||||||||||||||||||
Other liabilities (Note 15c) | 870 | 11,381 | 7,155 | 6,608 | 136,555 | 49,131 | ||||||||||||||||||
Employee benefits (Note 16) | 402 | 5,260 | 4,111 | 650 | 13,438 | 10,056 | ||||||||||||||||||
Deferred income taxes (Note 19) | 1,645 | 21,530 | 10,712 | 88,896 | 1,836,950 | 885,493 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total long-term liabilities | 150,009 | 3,099,797 | 1,333,301 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total liabilities | 337,658 | 4,415,414 | 4,626,891 | 531,728 | 10,987,695 | 8,406,673 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Equity (Note 18): | ||||||||||||||||||||||||
Capital stock | 227,397 | 2,973,559 | 2,376,098 | 143,900 | 2,973,559 | 2,973,559 | ||||||||||||||||||
Treasury shares | (8,238 | ) | (107,730 | ) | (133,723 | ) | (4,034 | ) | (83,365 | ) | (91,328 | ) | ||||||||||||
Contributions for future capital increases | — | 1 | 1 | — | 1 | 1 | ||||||||||||||||||
Legal reserve | 2,925 | 38,250 | 38,250 | 1,851 | 38,250 | 38,250 | ||||||||||||||||||
Additional paid-in capital | 136,561 | 1,785,744 | (190,850 | ) | 87,138 | 1,800,613 | 1,791,040 | |||||||||||||||||
Accumulated losses | (50,546 | ) | (660,967 | ) | (929,645 | ) | ||||||||||||||||||
Accumulated other comprehensive losses | (5,084 | ) | (66,487 | ) | (107,910 | ) | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total equity attributable to equity holders of the parent | 303,015 | 3,962,370 | 1,052,221 | |||||||||||||||||||||
Non-controlling interest | — | — | 22,446 | |||||||||||||||||||||
Retained earnings | 286,855 | 5,927,576 | 2,408,087 | |||||||||||||||||||||
Accumulated other comprehensive income (loss) | 6,651 | 137,442 | (294,778 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total equity | 303,015 | 3,962,370 | 1,074,667 | 522,361 | 10,794,076 | 6,824,831 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total liabilities and equity | US$ | 640,673 | Ps. | 8,377,784 | Ps. | 5,701,558 | US$ | 1,054,089 | Ps. | 21,781,771 | Ps. | 15,231,504 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| * | Convenience translation to U.S. dollars (Ps.20.6640) – Note 1z. |
The accompanying notes are an integral part of these consolidated financial statements.
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Consolidated Statements of Operations
(In thousands of Mexican pesos, except for earnings per share expressed enin Mexican pesos)
| 2013 (Thousands of U.S. dollars, except for earnings per share) | For the years ended December 31, | |||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||
Operating revenues (Note 1d): | ||||||||||||||||
Passenger | US$ | 850,176 | Ps. | 11,117,327 | Ps. | 10,176,747 | Ps. | 8,036,275 | ||||||||
Non-ticket | 144,162 | 1,885,144 | 1,509,668 | 842,341 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 994,338 | 13,002,471 | 11,686,415 | 8,878,616 | |||||||||||||
Other operating income (Note 20) | (8,509 | ) | (111,277 | ) | (68,800 | ) | (73,831 | ) | ||||||||
Fuel | 388,929 | 5,085,829 | 4,730,089 | 3,823,232 | ||||||||||||
Aircraft and engine rent expense (Note 14c) | 167,273 | 2,187,339 | 1,885,696 | 1,508,135 | ||||||||||||
Landing, take-off and navigation expenses | 147,109 | 1,923,673 | 1,639,945 | 1,281,583 | ||||||||||||
Salaries and benefits | 119,546 | 1,563,239 | 1,302,971 | 1,120,359 | ||||||||||||
Sales, marketing and distribution expenses | 53,848 | 704,146 | 751,919 | 750,474 | ||||||||||||
Maintenance expenses | 43,751 | 572,114 | 498,836 | 379,626 | ||||||||||||
Other operating expenses (Note 20) | 35,063 | 458,500 | 356,517 | 359,046 | ||||||||||||
Depreciation and amortization | 23,059 | 301,531 | 211,002 | 102,977 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | 24,269 | 317,377 | 378,240 | (372,985 | ) | |||||||||||
Finance income (Note 21) | 1,895 | 24,774 | 13,611 | 5,539 | ||||||||||||
Finance cost (Note 21) | (9,615 | ) | (125,737 | ) | (89,731 | ) | (57,718 | ) | ||||||||
Exchange gain (loss), net | 5,080 | 66,428 | (95,322 | ) | 110,150 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income tax | 21,629 | 282,842 | 206,798 | (315,014 | ) | |||||||||||
Income tax expense (Note 19) | (1,342 | ) | (17,550 | ) | (3,481 | ) | (476 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | US$ | 20,287 | Ps. | 265,292 | Ps. | 203,317 | Ps. | (315,490 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Attribution of net income (loss): | ||||||||||||||||
Equity holders of the parent | US$ | 20,546 | Ps. | 268,678 | Ps. | 215,239 | Ps. | (293,540 | ) | |||||||
Non-controlling interest | (259 | ) | (3,386 | ) | (11,922 | ) | (21,950 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | US$ | 20,287 | Ps. | 265,292 | Ps. | 203,317 | Ps. | (315,490 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Earnings (loss) per share basic: | US$ | 0.024 | Ps. | 0.310 | Ps. | 0.294 | * | Ps. | ( 0.403 | )* | ||||||
Earnings (loss) per share diluted: | US$ | 0.024 | Ps. | 0.310 | Ps. | 0.294 | * | Ps. | ( 0.403 | )* | ||||||
2016 (Thousands of U.S. for earnings | For the years ended December 31, | |||||||||||||||
| per share) | 2016 | 2015 | 2014 | |||||||||||||
Operating revenues (Notes 1d and 24): | ||||||||||||||||
Passenger | US$ | 860,924 | Ps. | 17,790,130 | Ps. | 14,130,365 | Ps. | 11,303,327 | ||||||||
Non-ticket (Note 1d) | 276,922 | 5,722,321 | 4,049,339 | 2,733,415 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 1,137,846 | 23,512,451 | 18,179,704 | 14,036,742 | |||||||||||||
Other operating income (Note 20) | (24,039 | ) | (496,742 | ) | (193,155 | ) | (22,107 | ) | ||||||||
Fuel | 277,846 | 5,741,403 | 4,721,108 | 5,363,864 | ||||||||||||
Aircraft and engine rent expenses (Note 14c) | 270,522 | 5,590,058 | 3,525,336 | 2,534,522 | ||||||||||||
Landing,take-off and navigation expenses | 158,345 | 3,272,051 | 2,595,413 | 2,065,501 | ||||||||||||
Salaries and benefits | 117,089 | 2,419,537 | 1,902,748 | 1,576,517 | ||||||||||||
Sales, marketing and distribution expenses | 68,397 | 1,413,348 | 1,088,805 | 817,281 | ||||||||||||
Maintenance expenses | 65,046 | 1,344,110 | 874,613 | 664,608 | ||||||||||||
Other operating expenses (Note 20) | 46,093 | 952,452 | 697,786 | 489,938 | ||||||||||||
Depreciation and amortization (Notes 12 and 13) | 25,965 | 536,543 | 456,717 | 342,515 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 132,582 | 2,739,691 | 2,510,333 | 204,103 | ||||||||||||
Finance income (Note 21) | 4,965 | 102,591 | 47,034 | 23,464 | ||||||||||||
Finance cost (Note 21) | (1,699 | ) | (35,116 | ) | (21,703 | ) | (32,335 | ) | ||||||||
Foreign exchange gain, net | 104,990 | 2,169,505 | 966,554 | 448,672 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income tax | 240,838 | 4,976,671 | 3,502,218 | 643,904 | ||||||||||||
Income tax expense (Note 19) | (70,518 | ) | (1,457,182 | ) | (1,038,348 | ) | (38,720 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | US$ | 170,320 | Ps. | 3,519,489 | Ps. | 2,463,870 | Ps. | 605,184 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Earnings per share basic: | US$ | 0.168 | Ps. | 3.478 | Ps. | 2.435 | Ps. | 0.598 | ||||||||
Earnings per share diluted: | US$ | 0.168 | Ps. | 3.478 | Ps. | 2.435 | Ps. | 0.598 | ||||||||
| * |
The accompanying notes are an integral part of these consolidated financial statements.
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Consolidated Statements of Comprehensive Income
(In thousands of Mexican pesos)
| 2013 (Thousands of U.S. dollars) | For the years ended December 31, | |||||||||||||||
| 2013 | 2012 | 2011 | ||||||||||||||
Net income (loss) for the year | US$ | 20,287 | Ps. | 265,292 | Ps. | 203,317 | Ps. | (315,490 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss): | ||||||||||||||||
Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods: | ||||||||||||||||
Net gain (loss) on cash flow hedges (Note 22) | 3,657 | 47,819 | 16,325 | (66,720 | ) | |||||||||||
Income tax effect | (1,097 | ) | (14,346 | ) | (4,900 | ) | 20,016 | |||||||||
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods: | ||||||||||||||||
Remeasurement gain (loss) of employee benefits (Note 16) | 843 | 11,026 | (235 | ) | (5,823 | ) | ||||||||||
Income tax effect | (235 | ) | (3,076 | ) | (101 | ) | 1,749 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) for the year, net of tax | US$ | 3,168 | Ps. | 41,423 | Ps. | 11,089 | Ps. | (50,778 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income (loss) for the year, net of tax | US$ | 23,455 | Ps. | 306,715 | Ps. | 214,406 | Ps. | (366,268 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Attributable to: | ||||||||||||||||
Equity holders of the parent | US$ | 23,714 | Ps. | 310,101 | Ps. | 216,449 | Ps. | (339,351 | ) | |||||||
Non-controlling interest | (259 | ) | (3,386 | ) | (2,043 | ) | (26,917 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
| US$ | 23,455 | Ps. | 306,715 | Ps. | 214,406 | Ps. | (366,268 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
| 2016 (Thousands of U.S. dollars*) | For the years ended December 31, | |||||||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||
Net income for the year | US$ | 170,320 | Ps. | 3,519,489 | Ps. | 2,463,870 | Ps. | 605,184 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss): | ||||||||||||||||
Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods: | ||||||||||||||||
Net gain (loss) on cash flow hedges (Note 22) | 30,231 | 624,694 | (193,869 | ) | (129,506 | ) | ||||||||||
Income tax effect (Note 19) | (9,069 | ) | (187,408 | ) | 58,161 | 38,852 | ||||||||||
Exchange differences on translation of foreign operations | (230 | ) | (4,756 | ) | — | — | ||||||||||
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods: | ||||||||||||||||
Remeasurement loss of employee benefits (Note 16) | (21 | ) | (442 | ) | (1,174 | ) | (1,581 | ) | ||||||||
Income tax effect (Note 19) | 6 | 132 | 352 | 474 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) for the year, net of tax | US$ | 20,917 | Ps. | 432,220 | Ps. | (136,530 | ) | Ps. | (91,761 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Total comprehensive income for the year, net of tax | US$ | 191,237 | Ps. | 3,951,709 | Ps. | 2,327,340 | Ps. | 513,423 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| * | Convenience translation to U.S. dollars (Ps.20.6640) – Note 1z. |
The accompanying notes are an integral part of these consolidated financial statements.
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Consolidated Statements of Changes in Equity
For the years ended December 31, 2013, 20122016, 2015 and 20112014
(In thousands of Mexican pesos)
Attributable to the equity holders of the parent
| Capital stock | Treasury shares | Contributions for future capital increases | Legal reserve | Additional paid-in capital | Retained earnings (Accumulated losses) | Remeasurement of employee benefits | Cash flow hedges | Exchange differences on translation of foreign operations | Total equity | |||||||||||||||||||||||||||||||
Balance as of January 1, 2014 | Ps. | 2,973,559 | Ps. | (107,730 | ) | Ps. | 1 | Ps. | 38,250 | Ps. | 1,785,744 | Ps. | (660,967 | ) | Ps. | (375 | ) | Ps. | (66,112 | ) | Ps. | — | Ps. | 3,962,370 | ||||||||||||||||
Treasury shares | — | (7,059 | ) | — | — | — | — | — | — | — | (7,059 | ) | ||||||||||||||||||||||||||||
Long-term incentive plan cost (Note 17) | — | — | — | — | 1,046 | — | — | — | — | 1,046 | ||||||||||||||||||||||||||||||
Net income for the period | — | — | — | — | — | 605,184 | — | — | — | 605,184 | ||||||||||||||||||||||||||||||
Other comprehensive loss items | — | — | — | — | — | — | (1,107 | ) | (90,654 | ) | — | (91,761 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) | — | — | — | — | — | 605,184 | (1,107 | ) | (90,654 | ) | — | 513,423 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Balance as of December 31, 2014 | 2,973,559 | (114,789 | ) | 1 | 38,250 | 1,786,790 | (55,783 | ) | (1,482 | ) | (156,766 | ) | — | 4,469,780 | ||||||||||||||||||||||||||
Exercise of stock options (Note 17) | — | 23,461 | — | — | — | — | — | — | — | 23,461 | ||||||||||||||||||||||||||||||
Long-term incentive plan cost (Note 17) | — | — | — | — | 4,250 | — | — | — | — | 4,250 | ||||||||||||||||||||||||||||||
Net income for the period | — | — | — | — | — | 2,463,870 | — | — | — | 2,463,870 | ||||||||||||||||||||||||||||||
Other comprehensive loss items | — | — | — | — | — | — | (822 | ) | (135,708 | ) | — | (136,530 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) | — | — | — | — | — | 2,463,870 | (822 | ) | (135,708 | ) | — | 2,327,340 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Balance as of December 31, 2015 | 2,973,559 | (91,328 | ) | 1 | 38,250 | 1,791,040 | 2,408,087 | (2,304 | ) | (292,474 | ) | — | 6,824,831 | |||||||||||||||||||||||||||
Treasury shares | — | (17,025 | ) | — | — | 17,025 | — | — | — | — | — | |||||||||||||||||||||||||||||
Exercise of stock options (Note 17) | — | 17,536 | — | — | — | — | — | — | — | 17,536 | ||||||||||||||||||||||||||||||
Forfeited shares from incentive plan | — | 963 | — | — | (963 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Long-term incentive plan cost (Note 17) | — | 6,489 | — | — | (6,489 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income for the period | — | — | — | — | — | 3,519,489 | — | — | — | 3,519,489 | ||||||||||||||||||||||||||||||
Other comprehensive (loss) income items | — | — | — | — | — | — | (310 | ) | 437,286 | (4,756 | ) | 432,220 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) | — | — | — | — | — | 3,519,489 | (310 | ) | 437,286 | (4,756 | ) | 3,951,709 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Balance as of December 31, 2016 | Ps. | 2,973,559 | Ps. | (83,365 | ) | Ps. | 1 | Ps. | 38,250 | Ps. | 1,800,613 | Ps. | 5,927,576 | Ps. | (2,614 | ) | Ps. | 144,812 | Ps. | (4,756 | ) | Ps. | 10,794,076 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| US$ | 143,900 | US$ | (4,034 | ) | US$ | — | US$ | 1,851 | US$ | 87,138 | US$ | 286,855 | US$ | (127 | ) | US$ | 7,008 | US$ | (230 | ) | US$ | 522,361 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Capital stock | Treasury shares | Contributions for future capital increases | Legal reserve | Additional paid-in capital | Accumulated losses | Employee benefits | Cash flow hedges | Total | Non-controlling interest | Total equity | ||||||||||||||||||||||||||||||||||
Balance as of January 1, 2011 | Ps. | 1,966,313 | Ps. | — | Ps. | 1 | Ps. | — | Ps. | — | Ps. | ( 813,094 | ) | Ps. | (3,898 | ) | Ps. | ( 59,411 | ) | Ps. | 1,089,911 | Ps. | 136,096 | Ps. | 1,226,007 | |||||||||||||||||||
Legal reserve | — | — | — | 38,250 | — | (38,250 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Net loss for the period | — | — | — | — | — | (293,540 | ) | — | — | (293,540 | ) | (21,950 | ) | (315,490 | ) | |||||||||||||||||||||||||||||
Other comprehensive loss items | — | — | — | — | — | — | (4,085 | ) | (41,726 | ) | (45,811 | ) | (4,967 | ) | (50,778 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | (293,540 | ) | (4,085 | ) | (41,726 | ) | (339,351 | ) | (26,917 | ) | (366,268 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Balance as of December 31, 2011 | 1,966,313 | — | 1 | 38,250 | — | (1,144,884 | ) | (7,983 | ) | (101,137 | ) | 750,560 | 109,179 | 859,739 | ||||||||||||||||||||||||||||||
Capital stock increase | 498,632 | — | — | — | — | — | — | — | 498,632 | — | 498,632 | |||||||||||||||||||||||||||||||||
Unpaid treasury shares | — | (133,723 | ) | — | — | — | — | — | — | (133,723 | ) | — | (133,723 | ) | ||||||||||||||||||||||||||||||
Unpaid capital and treasury shares (Note 18c) | (88,847 | ) | — | — | — | — | — | — | — | (88,847 | ) | — | (88,847 | ) | ||||||||||||||||||||||||||||||
Acquisition of non-controlling interest (Note 18c) | — | — | — | — | (190,850 | ) | — | — | — | (190,850 | ) | (84,690 | ) | (275,540 | ) | |||||||||||||||||||||||||||||
Net income for the period | — | — | — | — | — | 215,239 | — | — | 215,239 | (11,922 | ) | 203,317 | ||||||||||||||||||||||||||||||||
Other comprehensive (loss) income items | — | — | — | — | — | — | (342 | ) | 1,552 | 1,210 | 9,879 | 11,089 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 215,239 | (342 | ) | 1,552 | 216,449 | (2,043 | ) | 214,406 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Balance as of December 31, 2012 | 2,376,098 | (133,723 | ) | 1 | 38,250 | (190,850 | ) | (929,645 | ) | (8,325 | ) | (99,585 | ) | 1,052,221 | 22,446 | 1,074,667 | ||||||||||||||||||||||||||||
Net proceeds from initial public offering (Note 18b) | 508,614 | — | — | — | 2,044,313 | — | — | — | 2,552,927 | — | 2,552,927 | |||||||||||||||||||||||||||||||||
Capital stock increase | 88,847 | — | — | — | — | — | — | — | 88,847 | — | 88,847 | |||||||||||||||||||||||||||||||||
Acquisition of non-controlling interest (Note 1a) | — | — | — | — | (69,787 | ) | — | — | — | (69,787 | ) | (19,060 | ) | (88,847 | ) | |||||||||||||||||||||||||||||
Exercise of stock options (Note 17) | — | 25,993 | — | — | — | — | — | — | 25,993 | — | 25,993 | |||||||||||||||||||||||||||||||||
Management incentive plan cost (Note 17) | — | — | — | — | 2,068 | — | — | — | 2,068 | — | 2,068 | |||||||||||||||||||||||||||||||||
Net income for the period | — | — | — | — | — | 268,678 | — | — | 268,678 | (3,386 | ) | 265,292 | ||||||||||||||||||||||||||||||||
Other comprehensive income items | — �� | — | — | — | — | — | 7,950 | 33,473 | 41,423 | — | 41,423 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | 268,678 | 7,950 | 33,473 | 310,101 | (3,386 | ) | 306,715 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Balance as of December 31, 2013 | Ps. | 2,973,559 | Ps. | (107,730 | ) | Ps. | 1 | Ps. | 38,250 | Ps. | 1,785,744 | Ps. | (660,967 | ) | Ps. | (375 | ) | Ps. | (66,112 | ) | Ps. | 3,962,370 | Ps. | — | Ps. | 3,962,370 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Balance as of December 31,2013 | US$ | 227,397 | US$ | (8,238 | ) | US$ | — | US$ | 2,925 | US$ | 136,561 | US$ | (50,546 | ) | US$ | (29 | ) | US$ | (5,055 | ) | US$ | 303,015 | US$ | — | US$ | 303,015 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| * | Convenience translation to U.S. dollars (Ps.20.6640) – Note 1z. |
The accompanying notes are an integral part of these consolidated financial statements.
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Consolidated Statements of Cash Flows
(In thousands of Mexican pesos)
| Thousands of U.S. dollars 2013 | For the years ended December 31, | Thousands of U.S. dollars* | For the years ended December 31, | |||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2016 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||
Operating activities | ||||||||||||||||||||||||||||||||
Income (loss) before income tax | US$ | 21,629 | Ps. | 282,842 | Ps. | 206,798 | Ps. | (315,014 | ) | |||||||||||||||||||||||
Non-cash adjustment to reconcile profit before tax to net cash flows from operating activities: | ||||||||||||||||||||||||||||||||
Income before income tax | US$ | 240,838 | Ps. | 4,976,671 | Ps. | 3,502,218 | Ps. | 643,904 | ||||||||||||||||||||||||
Non-cash adjustment to reconcile income before tax to net cash flows from operating activities: | ||||||||||||||||||||||||||||||||
Depreciation and amortization (Notes 12 and 13) | 23,059 | 301,531 | 211,002 | 102,977 | 25,965 | 536,543 | 456,717 | 342,515 | ||||||||||||||||||||||||
Provision for doubtful accounts (Note 8) | 651 | 8,515 | 3,442 | 10,901 | 443 | 9,164 | 8,825 | 9,964 | ||||||||||||||||||||||||
Finance income | (1,895 | ) | (24,774 | ) | (13,611 | ) | (5,539 | ) | ||||||||||||||||||||||||
Finance cost | 9,615 | 125,737 | 89,731 | 57,718 | ||||||||||||||||||||||||||||
Foreign exchange | (4,332 | ) | (56,652 | ) | (70,292 | ) | 176,587 | |||||||||||||||||||||||||
Financial instruments | 2,300 | 30,075 | 16,590 | 27,717 | ||||||||||||||||||||||||||||
Net gain on disposal of intangible, rotable spare parts, furniture and equipment and gain of sale and leaseback of aircraft (Note 20) | (7,262 | ) | (94,968 | ) | (46,683 | ) | (71,754 | ) | ||||||||||||||||||||||||
Finance income (Note 21) | (4,965 | ) | (102,591 | ) | (47,034 | ) | (23,464 | ) | ||||||||||||||||||||||||
Finance cost (Note 21) | 1,699 | 35,116 | 21,703 | 32,335 | ||||||||||||||||||||||||||||
Net foreign exchange differences | (51,023 | ) | (1,054,333 | ) | (483,329 | ) | (294,966 | ) | ||||||||||||||||||||||||
Financial instruments (Notes 4 and 22) | 17,128 | 353,943 | 287,550 | 125,339 | ||||||||||||||||||||||||||||
Net gain on disposal of rotable spare parts, furniture and equipment and gain on sale of aircraft (Note 20) | (23,401 | ) | (483,565 | ) | (180,433 | ) | (13,908 | ) | ||||||||||||||||||||||||
Employee benefits (Note 16) | 117 | 1,527 | 1,208 | 1,109 | 151 | 3,122 | 2,549 | 1,764 | ||||||||||||||||||||||||
Aircraft and engine lease extension benefit and other benefits by services agreement (Note 1j and 15b) | (3,470 | ) | (45,376 | ) | (26,738 | ) | (10,428 | ) | ||||||||||||||||||||||||
Management incentive plan (Note 17) | 158 | 2,068 | — | — | ||||||||||||||||||||||||||||
Aircraft and engine lease extension benefit and other benefits from service agreements | (3,977 | ) | (82,178 | ) | (62,122 | ) | (40,234 | ) | ||||||||||||||||||||||||
Management incentive and long-term incentive plans (Note 17) | 234 | 4,826 | 4,250 | 1,046 | ||||||||||||||||||||||||||||
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Cash flows from operating activities before changes in working capital | 40,570 | 530,525 | 371,447 | (25,726 | ) | 203,092 | 4,196,718 | 3,510,894 | 784,295 | |||||||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||||||||||
Related parties | 181 | 2,371 | 755 | (4,944 | ) | 2,454 | 50,706 | 13,749 | (1,584 | ) | ||||||||||||||||||||||
Other accounts receivable | (3,144 | ) | (41,113 | ) | (80,609 | ) | (28,922 | ) | (7,616 | ) | (157,370 | ) | (52,157 | ) | 41,570 | |||||||||||||||||
Recoverable taxes | (13,885 | ) | (181,562 | ) | (70,919 | ) | (17,072 | ) | ||||||||||||||||||||||||
Recoverable and prepaid taxes | (17,489 | ) | (361,377 | ) | 63,499 | 97,276 | ||||||||||||||||||||||||||
Inventories | (1,276 | ) | (16,685 | ) | (17,140 | ) | (35,225 | ) | (3,911 | ) | (80,811 | ) | (23,400 | ) | (25,838 | ) | ||||||||||||||||
Prepaid expenses | (6,577 | ) | (86,007 | ) | (80,767 | ) | (59,245 | ) | (49,702 | ) | (1,027,040 | ) | (353,451 | ) | 55,234 | |||||||||||||||||
Other assets | 370 | 4,832 | (2,543 | ) | (47,174 | ) | 946 | 19,540 | 28,758 | 2,928 | ||||||||||||||||||||||
Guarantee deposits | (47,388 | ) | (619,663 | ) | (311,255 | ) | (800,588 | ) | (94,723 | ) | (1,957,350 | ) | (1,164,911 | ) | (694,566 | ) | ||||||||||||||||
Suppliers | 1,010 | 13,210 | (15,119 | ) | 88,127 | 6,589 | 136,178 | 300,447 | (16,717 | ) | ||||||||||||||||||||||
Accrued liabilities | 17,296 | 226,171 | 146,375 | 209,671 | 24,177 | 499,584 | 272,555 | 134,915 | ||||||||||||||||||||||||
Taxes payable | 3,420 | 44,722 | 124,595 | 173,577 | ||||||||||||||||||||||||||||
Other taxes and fees payable | 25,335 | 523,524 | 433,863 | 73,185 | ||||||||||||||||||||||||||||
Unearned transportation revenue | 10,308 | 134,799 | 433,280 | 320,578 | 9,500 | 196,313 | 536,319 | 27,466 | ||||||||||||||||||||||||
Financial instruments | (2,492 | ) | (32,585 | ) | (16,719 | ) | (24,777 | ) | (21,821 | ) | (450,902 | ) | (637,879 | ) | (164,877 | ) | ||||||||||||||||
Other liabilities | 3,811 | 49,837 | 13,797 | 98,952 | 12,603 | 260,437 | 127,170 | 8,144 | ||||||||||||||||||||||||
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| 2,204 | 28,852 | 495,178 | (152,768 | ) | 89,434 | 1,848,150 | 3,055,456 | 321,431 | ||||||||||||||||||||||||
Interest received | 1,895 | 24,774 | 8,084 | 5,539 | 4,965 | 102,591 | 47,034 | 23,490 | ||||||||||||||||||||||||
Income tax paid | (1,137 | ) | (14,869 | ) | (5,814 | ) | (476 | ) | (47,039 | ) | (972,009 | ) | (32,877 | ) | (11,138 | ) | ||||||||||||||||
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Net cash flows provided by (used in) operating activities | 2,962 | 38,757 | 497,448 | (147,705 | ) | |||||||||||||||||||||||||||
Net cash flows provided by operating activities | 47,360 | 978,732 | 3,069,613 | 333,783 | ||||||||||||||||||||||||||||
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Investing activities | ||||||||||||||||||||||||||||||||
Acquisitions of rotable spare parts, furniture and equipment (Note 12) | (85,607 | ) | (1,119,442 | ) | (830,305 | ) | (1,193,844 | ) | (106,402 | ) | (2,198,697 | ) | (1,403,863 | ) | (1,574,137 | ) | ||||||||||||||||
Acquisitions of intangible assets (Note 13) | (3,178 | ) | (41,558 | ) | (25,900 | ) | (21,055 | ) | (2,942 | ) | (60,792 | ) | (52,228 | ) | (28,457 | ) | ||||||||||||||||
Pre-delivery payments reimbursements (Note 12) | 83,870 | 1,733,093 | 669,718 | 395,639 | ||||||||||||||||||||||||||||
Proceeds from disposals of rotable spare parts, furniture and equipment (Note 12) | 64,931 | 849,074 | 1,043,366 | 586,869 | 24,121 | 498,438 | 185,096 | 21,987 | ||||||||||||||||||||||||
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Net cash flows provided by (used in) investing activities | (23,854 | ) | (311,926 | ) | 187,161 | (628,030 | ) | |||||||||||||||||||||||||
Net cash flows used in investing activities | (1,353 | ) | (27,958 | ) | (601,277 | ) | (1,184,968 | ) | ||||||||||||||||||||||||
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Financing activities | ||||||||||||||||||||||||||||||||
Net proceeds from initial public offering (Note 18) | 197,160 | 2,578,161 | — | — | ||||||||||||||||||||||||||||
Transaction costs on issue of shares | (2,933 | ) | (38,352 | ) | — | — | ||||||||||||||||||||||||||
Proceeds from exercised treasury shares (Note 17) | 1,989 | 25,993 | — | — | ||||||||||||||||||||||||||||
Proceeds from exercised stock options (Note 17) | 977 | 20,186 | 23,461 | — | ||||||||||||||||||||||||||||
Treasury shares purchase | (824 | ) | (17,025 | ) | — | (7,059 | ) | |||||||||||||||||||||||||
Interest paid | (5,007 | ) | (65,468 | ) | (127,375 | ) | (55,224 | ) | (1,902 | ) | (39,350 | ) | (41,538 | ) | (23,151 | ) | ||||||||||||||||
Debt prepayment premium (Note 5) | (4,987 | ) | (65,206 | ) | — | — | ||||||||||||||||||||||||||
Other finance interest paid | (6,670 | ) | (137,830 | ) | (40,113 | ) | (11,216 | ) | ||||||||||||||||||||||||
Payments of financial debt | (77,905 | ) | (1,018,722 | ) | (694,292 | ) | (261,387 | ) | (74,112 | ) | (1,531,460 | ) | (801,335 | ) | (399,815 | ) | ||||||||||||||||
Proceeds from financial debt | 33,962 | 444,098 | 549,769 | 878,984 | 83,055 | 1,716,244 | 924,611 | 965,945 | ||||||||||||||||||||||||
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Net cash flows (used in) provided by financing activities | 142,279 | 1,860,504 | (271,898 | ) | 562,373 | |||||||||||||||||||||||||||
Net cash flows provided by financing activities | 524 | 10,765 | 65,086 | 524,704 | ||||||||||||||||||||||||||||
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Increase (decrease) in cash and cash equivalents | 121,387 | 1,587,335 | 412,711 | (213,362 | ) | 46,531 | 961,539 | 2,533,422 | (326,481 | ) | ||||||||||||||||||||||
Net foreign exchange differences on the cash balance | 3,164 | 41,362 | (31,703 | ) | (22,483 | ) | ||||||||||||||||||||||||||
Net foreign exchange differences on cash balance | 46,090 | 952,399 | 359,034 | 140,565 | ||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of year | 62,867 | 822,076 | 441,068 | 676,913 | 249,580 | 5,157,313 | 2,264,857 | 2,450,773 | ||||||||||||||||||||||||
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Cash and cash equivalents at end of year | US$ | 187,418 | Ps. | 2,450,773 | Ps. | 822,076 | Ps. | 441,068 | US$ | 342,201 | Ps. | 7,071,251 | Ps. | 5,157,313 | Ps. | 2,264,857 | ||||||||||||||||
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Non cash investing and financing transactions: | ||||||||||||||||||||||||||||||||
Corporate restructure | US$ | — | Ps. | — | Ps. | 276,062 | Ps. | — | ||||||||||||||||||||||||
Acquisition of non-controlling interest with parent shares | 5,337 | 69,787 | — | — | ||||||||||||||||||||||||||||
| * | Convenience translation to U.S. dollars (Ps.20.6640) – Note 1z. |
The accompanying notes are an integral part of these consolidated financial statements.
CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND
SUBSIDIARIES
(d.b.a. VOLARIS)
Notes to Consolidated Financial Statements
For the years ended December 31, 2013, 20122016, 2015 and 20112014
(In thousands of Mexican pesos and thousands of U.S. dollars,
except when indicated otherwise)
| 1. | Description of the business and summary of significant accounting policies |
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Controladora” or the “Company”) was incorporated in Mexico in accordance with Mexican Corporate laws on October 27, 2005.
Controladora and its subsidiaries (the “Company”) areis domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, Mexico D.F.City.
The Company, through its subsidiary Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V. (“Concesionaria”), has a concession to provide air transportation services for passengers, cargo and mail throughout Mexico and abroad.
Concesionaria’s concession was granted by the Mexican federal government through the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportesor “SCT”) on May 9, 2005 initially for a period of five years and was extended by the SCT on February 17, 2010 for an additional period of ten years.
Concesionaria made its first commercial flight as alow-cost airline on March 13, 2006. The Company operates under the trade name of “Volaris”.
The Company’s consolidated financial statements and notes were authorized for issuance by the Company’s Chief Executive Officer Enrique Beltranena and Chief Financial Officer Fernando Suarez on February 24, 2014. Those consolidated financial statements and notes were then approved by the Company’s Board of Directors and by the Shareholders on April 24, 2014. The accompanying consolidated financial statements were approved for issuance in the Company’s annual report on Form 20-F by the Company’s Chief Executive Officer and Chief Financial Officer on April 24, 2014, and subsequent events have been considered through that date (Note 25).
On June 11, 2013, Controladora Vuela Compañía de Aviación, S.A.P.I. de C.V. changed its corporate name to Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
Initial public offering (“IPO”)
On September 23, 2013, the Company completed its dual listing IPOInitial Public Offering (“IPO”) on the New York Stock Exchange (“NYSE”) and on the Mexican Stock Exchange (Bolsa Mexicana de Valores, or “BMV”), and on September 18, 2013 itits shares started trading under the ticker symbol “VLRS” and “VOLAR”, respectivelyrespectively.
On November 16, 2015, certain shareholders of the Company completed a secondaryfollow-on equity offering on the NYSE (Note 18b)18a).
On November 10, 2016, the Company, through its subsidiary Vuela Aviación, S.A. (“Volaris Costa Rica”), obtained from the Costa Rican civil aviation authorities an air operator certificate to provide air transportation services for passengers, cargo and mail, in scheduled andnon-scheduled flights for an initial period of five years.
The accompanying consolidated financial statements and notes were authorized for issuance by the Company’s Chief Executive Officer, Enrique Beltranena, and Chief Financial Officer, Fernando Suárez, on March 9, 2017. Those consolidated financial statements and notes were approved by the Company´s Board of Directors and by the Shareholders on April 19, 2017. The accompanying consolidated financial statements were approved for issuance in the Company´s annual report on Form20-F by the Company´s Chief Executive Officer and Chief Financial Officer on April 26, and subsequent events were considered through that date (Note 25).
| a) | Relevant events |
Operations in Central America
On December 1, 2016, the Company’s subsidiary Vuela Aviación, started operations in Costa Rica.
Secondaryfollow-on equity offering
On November 16, 2015, the Company completed a secondaryfollow-on equity offering, in which certain shareholders sold 108,900,000 of the Company’s Ordinary Participation Certificates (Certificados de Participación Ordinarios or “CPOs”), in the form of American Depositary Shares or “ADSs”, in the United States and other countries outside Mexico. No CPOs or ADSs were sold by the Company and the selling shareholders received all of the proceeds from this offering.
Acquisition of additional interest in Concesionaria
On December 21, 2012, the shareholders of the Company through unanimous resolutions, approved the issuance of an aggregate of 16,719,261 Series A shares (the “Company Swap Shares”) to be held in the treasury until the Swap was exercised at a total price of Ps.88,847.
Although the creation of the Swap and the issuance of the Company Swap Shares were approved on December 21, 2012, the Trust implementing the transaction was created on February 22, 2013, and the Company became a party to such trust (Irrevocable Administrative and Safeguarding Trust denominated “DAIIMX/VOLARIS,VOLARIS”, identified administratively under number F/1405, hereinafter the “Trust”) on April 10, 2013.
On April 19, 2013, the option of Fideicomiso Irrevocable de Emisión de Certificados Bursátiles F/262374 (“FICAP”), to receive payment in kind with shares from Concesionaria was exercised and it was equity-settled on April 22, 2013.
The Company doesdid not legally own all of the shares of Concesionaria as they arewere owned by the Trust, however, the Company iswas the beneficiary of those shares pursuant to the guidelines of IFRS 10, beginning April 22, 2013; for accounting purposes the Company hashad control over the shares of Concesionaria in accordance with the Trust agreement.
Pursuant to IFRS 10,Consolidated Financial Statements, the foregoing represented for accounting purposes a 2.04% increase in the Company’s direct control of the outstanding shares of Concesionaria, thus increasing it to 99.99% with a corresponding decrease in thenon-controlling interest.
In April 2013, the Company recognized the capital increase of Ps.88,847, and the difference between the consideration paid and the carrying value of thenon-controlling interest acquired, as additionalpaid-in capital, for an amount of Ps.69,787.
On September 30, 2016, the trust fully transferred the mentioned shares to Controladora; therefore, the trust extinguished its legal obligations and it is no longer consolidated by the Company. This does not have any accounting effect into the consolidated financial statements. The Company legally owns all the shares of Concesionaria as of December 31, 2016.
| b) | Basis of preparation |
Statement of compliance
These consolidated financial statements comprise the financial statements of the Company and its subsidiaries at December 31, 20132016 and 20122015 and for each of the three years in the period ended December 31, 2013,2016, and were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by theInternational Accounting Standards Board(“IFRS”IASB”),.
Items included in the financial statements of each of the Company´s entities are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The presentation and functional currency of the Company´s consolidated financial statements is the Mexican pesospeso, which is used also for compliance with its legal and tax obligations. All values in the consolidated financial statements are rounded to the nearest thousand (Ps.000), except when otherwise indicated.
The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements. The consolidated financial statements provide comparative information in respect of the previous period. Certain comparative amounts in the consolidated statement of financial position have been reclassified orre-represented, as a result of a change in the functional and reporting currency.classification of prepaid income tax during the current year (see Note 1x).
Basis of measurement and presentation
The accompanying consolidated financial statements have been prepared under the historical-cost convention, except for derivative financial instruments that are measured at fair value. The carrying value of recognized financial assets and liabilities that are designated and accounted for as cash flow hedges are recognized as an adjustment of changesinvestments in fair values attributable to the risks that are being hedged.
Non-controlling interests represent the portion of profits or losses and net assets representing ownership interests in subsidiaries not held by the Company. Non-controlling interests are presented separately in the consolidated statements of comprehensive income and in equity in the consolidated statement of financial position separately from the Company’s own equity.
Acquisitions of non-controlling interest are recognized as equity transactions (transactions with owners in their capacity as owners). The carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and themarketable securities measured at fair value of the consideration paid are recognized directly in equitythrough profit and attributed to the owners of the parent (Note 1a)loss (“FVTPL”).
The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.
| c) | Basis of consolidation |
The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiaries. At December 31, 20132016 and 2012,2015, for accounting purposes the companies included in the Groupconsolidated financial statements are as follows:
Name | Principal Activities | Country | % Equity interest | |||||||||||
| 2013 | 2012 | |||||||||||||
Concesionaria | Air transportation services for passengers, cargo and mail throughout Mexico and abroad | Mexico | 100.00 | % | 97.95 | % | ||||||||
Comercializadora Volaris, S.A. de C.V. | Ground transportation services in Mexico | Mexico | 100.00 | % | 98.00 | % | ||||||||
Servicios Corporativos Volaris, S.A. de C.V. | Payroll | Mexico | 100.00 | % | 98.00 | % | ||||||||
Servicios Administrativos Volaris, S.A. de C.V | Payroll | Mexico | 100.00 | % | 98.00 | % | ||||||||
Deutsche Bank México, S.A., Trust 1462 | Predelivery payments financing (Note 5) | Mexico | 100.00 | % | 100.00 | % | ||||||||
Deutsche Bank México, S.A., Trust 1484 | Predelivery payments financing (Note 5) | Mexico | 100.00 | % | 100.00 | % | ||||||||
Deutsche Bank México, S.A., Trust 1498 | Predelivery payments financing (Note 5) | Mexico | 100.00 | % | 100.00 | % | ||||||||
Irrevocable Administrative Trust number F/307750 | Administration trust | Mexico | 100.00 | % | 100.00 | % | ||||||||
Irrevocable Administrative and Safeguard Trust, denominated F/1405 “DAIIMX/VOLARIS” | Share administration trust | Mexico | 100.00 | % | — | |||||||||
Name | Principal Activities | Country | % Equity interest | |||||||||
| 2016 | 2015 | |||||||||||
Concesionaria | Air transportation services for passengers, cargo and mail throughout Mexico and abroad | Mexico | 100 | % | 100 | % | ||||||
Volaris Costa Rica | Air transportation services for passengers, cargo and mail in Costa Rica and abroad | Costa Rica | 100 | % | 100 | % | ||||||
Vuela, S.A. (“Vuela”)* | Air transportation services for passengers, cargo and mail in Guatemala and abroad | Guatemala | 100 | % | 100 | % | ||||||
Comercializadora Volaris, S.A. de C.V. | Merchandising of services | Mexico | 100 | % | 100 | % | ||||||
Servicios Earhart, S.A. | Recruitment and payroll | Guatemala | 100 | % | 100 | % | ||||||
Servicios Corporativos Volaris, S.A. de C.V. (“Servicios Corporativos”) | Recruitment and payroll | Mexico | 100 | % | 100 | % | ||||||
Servicios Administrativos Volaris, S.A. de C.V (“Servicios Administrativos”) | Recruitment and payroll | Mexico | 100 | % | 100 | % | ||||||
Operaciones Volaris, S.A. de C.V (“Servicios Operativos”)(1) | Recruitment and payroll | Mexico | 100 | % | 100 | % | ||||||
Deutsche Bank México, S.A., Trust 1710 | Pre-delivery payments financing (Note 5) | Mexico | 100 | % | 100 | % | ||||||
Deutsche Bank México, S.A., Trust 1711 | Pre-delivery payments financing (Note 5) | Mexico | 100 | % | 100 | % | ||||||
Irrevocable Administrative Trust number F/307750 “Administrative Trust” | Share administration trust (Note 17) | Mexico | 100 | % | 100 | % | ||||||
Irrevocable Administrative and Safeguard Trust, denominated F/1405 “DAIIMX/VOLARIS”(2) | Share administration trust (Note 18) | Mexico | — | 100 | % | |||||||
Irrevocable Administrative Trust number F/745291 | Share administration trust (Note 17) | Mexico | 100 | % | 100 | % | ||||||
| * | The Company has not started operations in Guatemala. |
| (1) | With effect from August 3, 2016, the name of the Company was changed from Servicios Operativos Terrestres Volaris, S.A. de C.V. to Operaciones Volaris, S.A. de C.V. |
| (2) | On September 30, 2016, the trust fully transferred the Company Swap Shares to Controladora; therefore, the trust extinguished its legal obligations and is no longer consolidated by the Company. The Company legally owns all of the shares of Concesionaria as of December 31, 2016. |
The financial statements of the subsidiaries are prepared for the same reporting period as the parent Company, using consistent accounting policies.
Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if, and only if, the Company has:
| (i) | Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee). |
| (ii) | Exposure, or rights, to variable returns from its involvement with the investee. |
| (iii) | The ability to use its power over the investee to affect its returns. |
When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
| (i) | The contractual arrangement with the other vote holders of the investee. |
| (ii) | Rights arising from other contractual arrangements. |
| (iii) | The Company’s voting rights and potential voting rights. |
The Companyre-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive incomeconsolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Company and to the non-controlling interest even if this results in the non-controlling interests having a deficit balance.
All intercompany balances, transactions, unrealized gains and losses resulting from intercompany transactions are eliminated in full.
On consolidation, the assets and liabilities of foreign operations are translated into Mexican pesos at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in profit or loss.
| d) | Revenue recognition |
Passenger revenues:
Revenues from the air transportation of passengers and commissions from ground transportation services are recognized at the earlier of when the service is provided or when thenon-refundable ticket expires at the date of the scheduled travel.
Ticket sales for future flights are initially recognized as liabilities under the caption unearned transportation revenue and, once the transportation service is provided by the Company or when thenon-refundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as passenger ticket revenues and the unearned transportation revenue is reduced by the same amount. All of the Company’s tickets arenon-refundable and are subject to change upon a payment of a fee. Additionally, the Company does not operate a frequent flier program.
Non-ticket revenue includes: revenues:
The most significantnon-ticket revenues include revenues generated from: (i) air travel-related services (ii) revenues fromnon-air travel-related services and (iii) cargo services. Air travel-related services include but are not limited to fees charged to passengers for excess baggage, travel assistance, advancebookings through the call center or third-party agencies, advanced seat selection, carriage of sports equipment check-in, commission from sales of insurance,itinerary changes, charters and airport passenger facility charges for no show tickets and other services by third parties. All such revenuesno-show tickets. They are collected from passengers and recognized as non-ticket revenue when the related service has beenis provided by the Company.
Revenues fromnon-air travel-related services include commissions charged to third parties for the sale of hotel rooms, trip insurance and rental cars. They are recognized as revenue at the time the service is provided. Additionally, services not directly related to air transportation include Volaris’ sale of VClub membership and the sale of advertising spaces to third parties. VClub membership fees are recognized as revenues over the term of the membership. Revenue from the sale of advertising spaces is recognized over the period in which the space is typicallyprovided.
Revenues from cargo services are recognized when the flight date.cargo transportation is provided (upon delivery of the cargo to destination).
The breakdown of ournon-ticket revenues for the years ended December 31, 2016, 2015 and 2014 is as follows:
| For the years ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
Air travel-related services | Ps. | 5,055,836 | Ps. | 3,418,654 | Ps. | 2,234,175 | ||||||
Non-air travel-related services | 494,864 | 441,393 | 274,404 | |||||||||
Cargo | 171,621 | 189,292 | 224,836 | |||||||||
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Totalnon-ticket revenues | Ps. | 5,722,321 | Ps. | 4,049,339 | Ps. | 2,733,415 | ||||||
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| e) | Cash and cash equivalents |
Cash and cash equivalents are represented by bank deposits and highly liquid investments with maturities of 90 days or less at the original purchase date.
For the purpose of the consolidated statements of cash flows, cash and cash equivalentequivalents consist of cash and short-term depositsinvestments as defined above, net of outstanding bank overdrafts. As of December 31, 2013 and 2012, the Company did not have any outstanding bank overdrafts.above.
| f) | Financial |
A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.
Initial recognition and measurementAdoption of IFRS 9 (2013)
Financial assets are classified as (i) financial assets at fair value through profit or loss, (ii) loans and receivables, (iii) held-to-maturity investments, (iv) available-for-sale financial assets, or as (v) derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition.
At December 31, 2013 and 2012,On October 1, 2014 the Company does not have held-to-maturity investments or available-for-sale financial assets.
All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributableelected to the acquisition of the financial asset.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification as described below:
Financial assets at fair value through profit or loss.
Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss.
Loans and receivables
Loans and receivables and other accounts receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the Effective Interest Rate (“EIR”) method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the consolidated statements of operations. The losses arising from impairment are recognized in the consolidated statements of operations in finance costs for loans and in other operating expenses for receivables.
This category generally applies to trade and other receivables (Note 8).
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred since the initial recognition of the asset (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.
For the years ended December 31, 2013, 2012 and 2011, the Company did not record any losses for impairment of financial assets.
Initial recognition and measurement
Financial liabilities are classified as (i) financial liabilities at fair value through profit or loss, (ii) loans and borrowings, or as (iii) derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.
The Company’s financial liabilities include accounts payable to suppliers, unearned transportation revenue, other accounts payable, loans and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IAS 39.
Gains or losses on financial liabilities held for trading are recognized in the income statement. Financial liabilities as at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. During the years ended December 31, 2013, 2012 and 2011 the Company has not designated any financial liability as at fair value through profit or loss.
Loans and borrowings
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statements of operations.
This category generally applies to interest-bearing loans and borrowings (Note 5).
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of operations.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is:
Other accounts receivables are due primarily from major credit card processors associated with the sales of tickets and are stated at cost less allowances made for doubtful accounts, which approximates fair value given their short-term nature.
An allowance for doubtful receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable through risk analysis and taking into account the historical analysis of the recovery of arrears.
Inventories consist primarily of flight equipment expendable parts, materials and supplies, and are initially recorded at acquisition cost. Inventories are carried at the lower of cost and their net realization value. The cost is determined on the basis of the weighted average cost method and expensed when used in operations.
Cost related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over the period in which it will generate benefits not exceeding five years on a straight-line basis. The Company annually reviews the estimated useful lives and salvage values of intangible assets and any changes are accounted for prospectively.
The Company records impairment charges on intangible assets used in operations when events and circumstances indicate that the assets or related cash generating unit may be impaired or when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) its value in use.
The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
For the years ended December 31, 2013, 2012 and 2011, there were no indicators of impairment and therefore no impairment charges were recorded in respect of the Company’s value of intangible assets.
Guarantee deposits consist primarily of aircraft maintenance deposits paid to lessors, deposits for rent of flight equipment and other guarantee deposits. Aircraft and engine deposits are held by lessors in U.S. dollars and are presented as current assets and non-current assets, based on the recovery dates of each deposit established in the related agreements (Note 11).
Aircraft maintenance deposits paid to lessors
The Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as collateral in advance of the Company’s performance of major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs related to the specific maintenance event.
Substantially all of these maintenance deposits are calculated based on a utilization measure of the leased aircrafts and engines, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft and engine until the completion of the maintenance of the aircraft and engine.
Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position. The portion of prepaid maintenance deposits that is deemed unlikely to be recovered, primarily relating to the rate differential between the maintenance deposits payments and the expected cost for the next related maintenance event that the deposits serve to collateralize, is recognized as supplemental rent. Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent starting from the period the determination is made.
For the years ended December 31, 2013, 2012 and 2011, the Company expensed as supplemental rent Ps.38,426, Ps.27,216 and Ps.36,750, respectively.
Any usage-based maintenance deposits to be paid, related with a major maintenance event that is not expected to be performed, are nonrefundable to the Company and are not substantively related to the maintenance of the leased asset, are accounted for as contingent rent in the consolidated statements of operations. The Company records lease payment as contingent rent when it becomes probable and reasonably estimable that the maintenance deposits payments will not be refunded.
For the years ended December 31, 2013, 2012 and 2011, the Company expensed as contingent rent Ps.102,740, Ps.99,390 and Ps.94,645, respectively.
The Company makes certain assumptions at the inception of the lease and at each consolidated statement of financial position date to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft and engine is estimated to be utilized before it is returned to the lessor.
In the event that lease extensions are negotiated, any extension benefit is recognized as a liability. The aggregate benefit of extension is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
During the year ended December 31, 2011, the Company extended the lease terms of six aircraft lease agreements, which made available to the Company maintenance deposits that were recognized in prior periods in the consolidated statements of operations as supplemental rent of Ps.163,024. The maintenance event for which
the maintenance deposits were previously expensed was scheduled to occur after the original lease term and as such the supplemental rental payments were expensed as they were not substantially and contractually related to maintenance. However when the leases were amended the maintenance deposits amounts became probable of recovery due to the longer lease term and as such they are being recognized as an asset.
Additionally, during the year ended December 31, 2013, the Company extended the lease term of two spare engine agreements, which made available to the Company maintenance deposits that were recognized in prior periods in the consolidated statements of operations as supplemental rent of Ps.22,911. The effect of these lease extensions were recognized as a guarantee deposit and a deferred liability in the consolidated statements of financial position at the time of lease extension.
Because the lease extension benefits are considered lease incentives, the benefits are deferred in the caption other liabilities and are being amortized on a straight-line basis over the remaining revised lease terms. For the years ended December 31, 2013, 2012 and 2011, the Company amortized Ps.25,627, Ps.23,254 and Ps.10,428, respectively, of this amount which was recognized as a reduction of rent expenses in the consolidated statements of operations.
The Company is required to conduct diverse levels of aircraft maintenance. Maintenance requirements depend on the type of aircraft, age and the route network over which it operates.
Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks.
Aircraft maintenance and repair consists of routine and non-routine works, divided into three general categories: (i) routine maintenance, (ii) major maintenance and (iii) component service.
(i) Routine maintenance requirements consists in scheduled maintenance checks on the Company’s aircraft, including pre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled tasks performed as required. This type of maintenance events are currently serviced by the Company mechanics and are primarily completed at the main airports that the Company currently serves. All other maintenance activities are sub-contracted to qualified maintenance business partner, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and typically are required approximately every 22 months. All routine maintenance costs are expensed as incurred.
(ii) Major maintenance consist of a series of more complex tasks that can take up to eight weeks to accomplish and typically are required approximately every five to six years.
Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized (improvements to leased assets) and amortized over the shorter period of the next major maintenance event or the remaining contractual lease term. The next major maintenance event is estimated based on assumptions including estimated usage. TheUnited States Federal Aviation Administration (“FAA”) in the United States and theMexican Civil Aeronautic Authority (Dirección General de Aeronáutica Civilor “DGAC”) in Mexico mandate maintenance intervals and average removal times as suggested by the manufacturer.
These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a heavy maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated life would decrease before the next maintenance event, resulting in additional expense over a shorter period.
During the years ended December 31, 2013 and 2012, the Company capitalized major maintenance events as part of leasehold improvements to flight equipment for an amount of Ps.309,382 and Ps.129,876, respectively.
For the years ended December 31, 2013, 2012 and 2011, the amortization of major maintenance leasehold improvement costs was Ps.210,495, Ps.126,302 and Ps.37,530, respectively. The amortization of deferred maintenance costs is recorded as part of depreciation and amortization in the consolidated statements of operations.
(iii) The Company has an engine flight hour agreement that guarantees a cost per overhaul, provides miscellaneous engine coverage, caps the cost of foreign objects damage events, ensures there is protection from annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscellaneous engine coverage is recorded as incurred in the consolidated statements of operations.
The Company has a power-by-hour agreement for component services, which guarantees the availability of aircraft parts for the Company’s fleet when they are required. It also provides aircraft parts that are included in the redelivery conditions of the contract (hard time) without constituting an additional cost at the time of redelivery. The monthly maintenance cost associated to this agreement is recognized as incurred in the consolidated statements of operations.
Rotable spare parts, furniture and equipment, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method.
Pre-delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of the aircraft.
The borrowing costs related to the acquisition or construction of qualifying asset is capitalized as part of the cost of that asset.
During the years ended December 31, 2013, 2012 and 2011 the Company capitalized borrowing costs which amounted to Ps.25,197, Ps.64,452 and Ps.28,102, respectively. The rate used to determine the amount of borrowing cost was 1%.
Depreciation rates are as follows:
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The Company reviews annually the useful lives and salvage values of these assets and any changes are accounted for prospectively.
The Company records impairment charges on rotable spare parts, furniture and equipment used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or related cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value in use.
The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
For the years ended December 31, 2013, 2012 and 2011, there were no indicators of impairment and therefore no impairment charges were recorded in respect of the Company’s rotable spare parts, furniture and equipment.
The Mexican peso is the functional currency of the Company and its subsidiaries.
Transactions in foreign currencies are translated into the Company’s functional currency at the exchange rate at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are subsequently translated at the exchange rate at the consolidated statement of financial position date. Any differences resulting from the currency translation are recognized in the consolidated statements of operations.
Non-monetary items that are measured in terms of historical cost in a foreign currency are not subject to remeasurement after the dates of the initial transactions.
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
For the operating leases, the Company is contractually obligated to return the leased aircraft in a specific return condition. The Company accrues for restitution costs related to aircrafts held under operating leases throughout the term of the lease, based upon the estimated cost of satisfying the return condition criteria for each aircraft.
The Company records aircraft lease return liabilities reserve that is calculated based on the best estimate of the return obligation costs under each aircraft lease agreement. These return obligations are related to the costs to be incurred in the reconfiguration of aircraft (interior and exterior), painting, carpeting and other costs, which are estimated based on current cost adjusted for inflation.
The Company recognizes a reserve for the costs of paid absences, such as vacation time, based on the accrual method.
Obligations relating to seniority premiums other than those arising from restructurings, are recognized based upon actuarial calculations and are determined using the projected unit credit method.
The latest actuarial computation was prepared as of December 31, 2013.
Remeasurement gains and losses are recognized in full in the period in which they occur in other comprehensive income. Such remeasurement gains and losses are not reclassified to profit or loss in subsequent periods.
The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate based on government bonds (Certificados de la Tesorería de la Federación “CETES” in Mexico), less the fair value of plan assets out of which the obligations are to be settled.
The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain performance targets. These incentives are payable shortly after the end of each quarter and are accounted for as a short-term benefit under IAS 19R,Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment.
During the years ended December 31, 2013, 2012 and 2011 the Company expensed Ps.29,978 and Ps.34,336 and Ps.30,793, respectively, as quarterly incentive bonuses, recorded in the caption salaries and benefits.
The Company has an employee long-term retention plan, the purpose of which is to retain high performing employees within the organization by paying incentives depending on the Company’s performance. Incentives under this plan are payable in three equal annual installments, following the provisions for other long-term benefits under IAS 19R.
During the years ended December 31, 2013, 2012 and 2011 the Company expensed Ps.6,327 and Ps.6,453 and Ps.7,407, respectively, as bonuses as part of the caption salaries and benefits.
Certain key employees of the Company receive additional benefits through a share purchase agreement, which has been classified as an equity-settled share-based payment. The equity-settled compensation cost is recognized in consolidated statements of operations under the caption of salaries and benefits, over the vesting period (Note 17).
Employee profit sharing is computed at the rate of 10% of the individual company’s taxable income, except for depreciation of historical rather than restated values, foreign exchange gains and losses, which are not included until the asset is disposed of or the liability is due, and other effects of inflation are also excluded. The cost of employee profit sharing earned for the current-year is presented as an expense in the consolidated statements of operations (Note 16).
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.
Property and equipment lease agreements are recognized as finance leases if the risks and benefits incidental to ownership of the leased assets have been transferred to the Company when (i) the ownership of the leased asset is transferred to the Company upon termination of the lease; (ii) the agreement includes an option to purchase the asset at a reduced price; (iii) the term of the lease is for the major part of the economic life of the leased asset; (iv) the present value of minimum lease payments is basically the same as the fair value of the leased asset, net of any future benefit or scrap value; or (v) the leased asset is of a specialized nature for the Company.
When the risks and benefits incidental to the ownership of the leased asset remain mostly with the lessor, they are classified as operating leases and rental payments are charged to results of operations on a straight-line over the term of the lease.
The Company’s lease contracts for aircraft, engine and components parts are classified as operating leases.
Sale and leaseback
The Company enters into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to the Company. Leases under sale and leaseback agreements meet the conditions for treatment as operating leases.
Profit or loss related to a sale transaction followed by an operating lease, is accounted for as follows:
(i) Profit or loss is recognized immediately when it is clear that the transaction is established at fair value.
(ii) If the sale price is below fair value, any profit or loss is recognized immediately. However, if the loss is compensated for by future lease payments at below market price, such loss is recognized as an asset in the consolidated statements of financial position, and amortized to the consolidated statements of operations in proportion to the lease payments over the contractual lease term.
(iii) If the sale price is above fair value, the excess of the price above the fair value is deferred and amortized to the consolidated statements of operations over the asset’s expected lease term, including probable renewals, with the amortization recorded as a reduction of rent expense.
The Company is also required to collect certain taxes and fees from customers on behalf of government agencies and airports and remit these to the applicable governmental entity or airport on a periodic basis. These taxes and fees include federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure fees. These charges are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. The Company records a liability upon collection from the customer and discharges the liability when payments are remitted to the applicable governmental entity or airport.
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.
Current income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences.
Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any available tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and available tax losses can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.
Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction in OCI.
The Company mitigates certain financial risks, such as volatility in the price of fuel, adverse changes in interest rates and exchange rate fluctuations, through a risk management program that includes the use of derivative financial instruments.
In accordance with IAS 39, derivative financial instruments are recognized on the consolidated statement of financial position at fair value. The effective portion of a cash flow hedge’s gain or loss is recognized in accumulated other comprehensive income (loss) in equity, while the ineffective portion is recognized in current year earnings. During the years ended December 31, 2013 and 2012, there was no ineffectiveness with respect to derivative financial instruments.
The realized gain or loss on valuation of derivative financial instruments that qualify for hedge accounting is recorded in the same consolidated statement of operations caption as the realized gain or loss as on the hedged item.
Derivative financial instruments that are not designated as a hedge or are not effective hedges, are recognized at fair value with changes in fair value recorded in current year earnings.
Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in pledge, is presented as part of non-current assets under the caption guarantee deposits, and the amount of the collateral is reviewed and adjusted on a daily basis based on the fair value of the derivative position (Note 11).
IFRS 7 requires a three-level hierarchy for fair value measurement disclosures and requires entities to provide additional disclosures about the relative reliability of fair value measurements (Notes 4 and 5).
The Company’s equity instruments that are reacquired (treasury shares), are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation. Any difference between the carrying amount and the consideration received, if reissued, is recognized in additional paid in capital.
Share-based payment options exercised during the reporting period are settled with treasury shares (Note 17).
The Company is managed as a single business unit that provides air transportation and related services. The Company has two geographic areas identified as domestic (Mexico) and international (United States of America), and all its assets and liabilities are located in Mexico (Note 24).
Certain captions shown in the 2012 financial statements as originally issued have been reclassified for uniformity of presentation with the 2013 financial statements. The effects of this reclassification were recognized retrospectively in the statement of financial position as of December 31, 2012, in conformity with IAS 8,Accounting Policies, Changes in Accounting Estimates and Errors.
| As reported originally 2012 | As reclassified 2012* | |||||||
Financial position: | ||||||||
Short-term liabilities | ||||||||
Accrued liabilities | Ps. | 765,792 | Ps. | 805,791 | ||||
Other liabilities | 48,879 | 8,880 | ||||||
Long-term liabilities | ||||||||
Accrued liabilities | — | 139,774 | ||||||
Other liabilities | 146,929 | 7,155 | ||||||
Cash flow: | ||||||||
Accrued liabilities | Ps. | 121,487 | Ps. | 146,375 | ||||
Other liabilities | 38,685 | 13,797 | ||||||
New and amended standards and interpretations
In 2013, the Company applied, for the first time, certain standards and amendments, of which only the amendments of IAS 1,Presentation of Financial Statementsrequired retrospective application of previous financial statements. The other standards include IFRS 10,Consolidated Financial Statements, IFRS 11,Joint Arrangements andIFRS 13,Fair Value Measurement for which, with respect to the Company, no retrospective changes were needed to prior period financial statements. In addition, the application of IFRS 12,Disclosure of Interests in Other Entities resulted in additional disclosures in the consolidated financial statements (Note 1).
IFRS 10Consolidated Financial Statements
IFRS 10 replaces the portion of IAS 27,Consolidated and Separate Financial Statements and SIC-12,Consolidation Special Purpose Entities.
IFRS 10 establishes a single control model that applies to all entities including special purpose entities
The changes introduced by IFRS 10 requires management to exercise significant judgment to determine which entities are controlled and, therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. As a result of IFRS 10, the Company changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees.
In accordance with the transitional provisions of IFRS 10, the Company reassessed the control conclusion for its investees as at January 1, 2012 and concluded that the adoption of the standard had no impact on the Company’s financial position or performance.
IFRS 11Joint Arrangements
IFRS 11 classifies joint arrangements as either joint operations (combining the existing concepts of jointly controlled assets and jointly controlled operations) or joint ventures (equivalent to the existing concept of a jointly controlled entity). Joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. IFRS 11 requires the use of the equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method.
As a result of IFRS 11, the Company has changed its accounting policy for determining whether it has joint arrangements and consequently how to account for its interest in the arrangement.
The Company does not have joint arrangements, accordingly it has concluded that the adoption of this standard has no impact on the Company’s consolidated financial statements.
IFRS 12Disclosure of Interests in Other Entities
IFRS 12 sets out the requirements for disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries. For example, where a subsidiary is controlled with less than a majority of voting rights.
The standard requires that for each subsidiary that has non-controlling interests that are material to the Company, disclose summarized financial information about the assets, liabilities, profit or loss and cash flows of the subsidiary. As of December 31, 2013, the Company does not have non-controlling interests, and for 2012 and 2011 the non-controlling interests in the Company’s subsidiaries are not material.
The Company does not have any unconsolidated structured entities or joint arrangements. IFRS 12 disclosures of the Company’s holdings in other entities are provided in Notes 1c.
IFRS 13Fair Value Measurement
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Company re-assessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk for fair value measurement of liabilities. IFRS 13 also requires additional disclosures.
The adoption of IFRS 13 did not have a material impact on the fair value measurements of the Company. Additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in Note 4.
Amendments to IFRS 7 Financial Instruments: Disclosures
The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement.
The Company evaluated the amendments to IFRS 7 and concluded that they do not represent an impact on disclosures of financial instruments, as no enforceable master netting agreements do exist for its financial instruments.
IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1
The amendments to IAS 1 introduce a grouping of items presented in OCI. Items that will be reclassified (“recycled”) to profit or loss at a future point in time (e.g., net loss or gain on cash flow hedges) have to be presented separately from items that will not be reclassified (e.g., remeasurement gain or loss on employee benefits). The amendments affected the presentation of the consolidated statements of comprehensive income with the additional grouping in OCI, and have no impact on the Company’s financial position or performance.
IAS 1 Clarification of the requirement for comparative information (Amendment)
These amendments clarify the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period.
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements are disclosed below. The Company intends toearly adopt these standards, if applicable, when they become effective.
IFRS 9 (2013)Financial Instruments
IFRS 9, as issued, reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies, which comprises aspects related to classification and measurement of financial assets and financial liabilities, as defined in IAS 39. The standard was initially effective for annual periods beginning on or after January 1, 2013, but Amendments to IFRS 9 Mandatory Effective Datewell as hedge accounting treatment. This early adoption of IFRS 9 (2013) did not require retrospective adjustments to the Company. Additional disclosures are presented in Note 3.
Under IFRS 9 (2013), the FVTPL category used under IAS 39 remains permissible, although new categories of financial assets are introduced. These new categories are based on the characteristics of the instruments and Transition Disclosures, issuedthe business model under which these are held, to either be measured at fair value or at amortized cost.
For financial liabilities, categories provided under IAS 39 are kept. As a result, there was no difference in valuation and recognition of the financial assets under IFRS 9 (2013), since those financial assets categorized under IAS 39 as FVTPL remain in that same category under IFRS 9 (2013). In the case of trade receivables, these were not affected in terms of valuation model by this version of IFRS 9 (2013), since they are carried at amortized cost and continued to be accounted for as such.
Also, the hedge accounting section of IFRS 9 (2013) requires for options that qualify and are formally designated as hedging instruments, the intrinsic value of the option to be defined as the hedging instrument, thus allowing for the exclusion of changes in fair value attributable to extrinsic value (time value and volatility), to be accounted, under the transaction-related method, separately as a cost of hedging that needs to be initially recognized in OCI and accumulated in a separate component of equity, since the hedged item is a portion of the forecasted jet fuel consumption. The extrinsic value is recognized in the consolidated statement of operations when the hedged item is recognized in income.
IFRS 9 requires the Company to record expected credit losses on all trade receivables, either on a 12 month or lifetime basis. The Company recorded lifetime expected losses on all trade receivables.
| i) | Financial assets |
Classification of financial assets
The Company determines the classification and measurement of financial assets, in accordance with the new categories introduced by IFRS 9 (2013), which are based on both: the characteristics of the contractual cash flows of these assets and the business model objective for holding them.
Financial assets include those carried at FVTPL, whose objective to hold them is for trading purposes (short-term investments), or at amortized cost, for accounts receivables held to collect the contractual cash flows, which are characterized by solely payments of principal and interest (“SPPI”). Derivative financial instruments are also considered financial assets when these represent contractual rights to receive cash or another financial asset.
Initial recognition
All the Company’s financial assets are initially recognized at fair value, including derivative financial instruments.
Subsequent measurement
The subsequent measurement of financial assets depends on their initial classification, as is described below:
| 1. | Financial assets at FVTPL which include financial assets held for trading. |
| 2. | Financial assets at amortized cost, whose characteristics meet the SPPI criterion and were originated to be held to collect principal and interest in accordance with the Company’s business model. |
| 3. | Derivative financial instruments are designated for hedging purposes under the cash flow hedge (“CFH”) accounting model and are measured at fair value. |
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
| a) | The rights to receive cash flows from the asset have expired; |
| b) | The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Company has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset; or |
| c) | When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. |
| ii) | Impairment of financial assets |
The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. Receivables are evaluated by the Company based on parameters such as interest rates, specific country risk factors, individual creditworthiness of the customer, the risk characteristic of the financial project and indications that the debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Further disclosures related to impairment of financial assets are also provided in Note 2vi) and Note 8.
For trade receivables, the Company assesses whether objective evidence of impairment exists individually for receivables that are individually significant. If there is objective evidence that an impairment loss is expected, the amount of the loss is measured as the present value of estimated future cash flows (future expected credit losses that have not yet been incurred).
Based on this evaluation, allowances are taken into account for the expected losses of these receivables.
For the years ended December 2011, moved31, 2016, 2015 and 2014, the mandatory effectiveCompany recorded an impairment on accounts receivable of Ps.9,164, Ps.8,825 and Ps.9,964, respectively (Note 8).
| iii) | Financial liabilities |
Classification of financial liabilities
Financial liabilities under IFRS 9 (2013) are classified at amortized cost or at FVTPL.
Derivative financial instruments are also considered financial liabilities when these represent contractual obligations to deliver cash or another financial asset.
Initial recognition
The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value.
The Company’s financial liabilities include accounts payable to suppliers, unearned transportation revenue, other accounts payable, financial debt and financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification as described below:
Financial liabilities at amortized cost
Accounts payable are subsequently measured at amortized cost and do not bear interest or result in gains and losses due to their short-term nature.
After initial recognition at fair value (consideration received), interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into account any discount or premium on issuance and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statements of operations. This amortized cost category generally applies to interest-bearing loans and borrowings (Note 5).
Financial liabilities at FVTPL
FVTPL include financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities under the fair value option are classified as held for trading, if they are acquired for the purpose of selling them in the near future. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IFRS 9 (2013). During the years ended December 31, 2016, 2015 and 2014 the Company has not designated any financial liability as at FVTPL.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of operations.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is:
| (i) | A currently enforceable legal right to offset the recognized amounts, and |
| (ii) | An intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. |
| g) | Other accounts receivable |
Other accounts receivables are due primarily from major credit card processors associated with the sales of tickets and are stated at cost less allowances made for doubtful accounts, which approximates fair value given their short-term nature.
| h) | Inventories |
Inventories consist primarily of flight equipment expendable parts, materials and supplies, and are initially recorded at acquisition cost. Inventories are carried at the lower of cost and their net realization value. The cost is determined on the basis of the method of specific identification, and expensed when used in operations.
| i) | Intangible assets |
Cost related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over the period in which it will generate benefits not exceeding five years on a straight-line basis. The Company annually reviews the estimated useful lives and salvage values of intangible assets and any changes are accounted for prospectively.
The Company records impairment charges on intangible assets used in operations when events and circumstances indicate that the assets or related cash generating unit may be impaired and the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) its value in use.
The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
For the years ended December 31, 2016, 2015 and 2014, there were no indicators of impairment and therefore no impairment charges were recorded in respect of the Company’s value of intangible assets.
| j) | Guarantee deposits |
Guarantee deposits consist primarily of aircraft maintenance deposits paid to lessors, deposits for rent of flight equipment and other guarantee deposits. Aircraft and engine deposits are held by lessors in U.S. dollars and are presented as current assets andnon-current assets, based on the recovery dates of each deposit established in the related agreements (Note 11).
Aircraft maintenance deposits paid to lessors
Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as collateral in advance of the Company’s performance of major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs related to the specific maintenance event.
Substantially all of these maintenance deposits are calculated based on a utilization measure of the leased aircrafts and engines, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft and engines until the completion of the maintenance of the aircraft and engines.
Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position. The portion of prepaid maintenance deposits that is deemed unlikely to be recovered, primarily relating to the rate differential between the maintenance deposits and the expected cost for the next related maintenance event that the deposits serve to collateralize, is recognized as supplemental rent in the consolidated statements of operations. Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent in the consolidated statements of operations starting from the period the determination is made.
For the years ended December 31, 2016, 2015 and 2014, the Company expensed as supplemental rent Ps.143,923, Ps.73,258 and Ps.42,961, respectively.
Any usage-based maintenance deposits to be paid to the lessor, related with a major maintenance event that (i) is not expected to be performed before the expiration of the lease agreement, (ii) is nonrefundable to the Company and (iii) is not substantively related to the maintenance of the leased asset, is accounted for as contingent rent in the consolidated statements of operations. The Company records lease payment as contingent rent when it becomes probable and reasonably estimable that the maintenance deposits payments will not be refunded.
During the year ended December 31, 2016, the Company added 17 new aircraft to its fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so the Company does not record guarantee deposits regarding these aircraft. However, some of these agreements provide the obligation to make a maintenance adjustment payment to the lessors at the end of the contract period. This adjustment covers maintenance events that are not expected to be made before the termination of the contract. The Company recognizes this cost as a contingent rent during the lease term of the related aircraft, in the consolidated statement of operations. During the year ended December 31, 2016 the Company returned four aircraft to the lessors.
For the years ended December 31, 2016, 2015 and 2014, the Company expensed as contingent rent Ps.201,434, Ps.290,857 and Ps.110,736, respectively.
The Company makes certain assumptions at the inception of the lease and at each consolidated statement of financial position date to January 1, 2015.determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft and engines is estimated to be utilized before it is returned to the lessor.
In the event that lease extensions are negotiated, any extension benefit is recognized as a deferred lease incentive. The aggregate benefit of extension is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
During the years ended December 31, 2016 and 2015, the Company extended the lease term of two and three aircraft agreements, respectively. These extensions made available to the Company maintenance deposits that were recognized in prior periods in the consolidated statements of operations as contingent rent of Ps.92,528 and Ps.92,599 during 2016 and 2015, respectively. The maintenance event for which the maintenance deposits were previously expensed was scheduled to occur after the original lease term and as such the contingent rental payments were expensed. However, when the leases were amended the maintenance deposits amounts became probable of recovery due to the longer lease term and as such they are being recognized as an asset.
The effect of these lease extensions were recognized as a guarantee deposit and a deferred lease incentive in the consolidated statements of financial position at the time of lease extension.
Because the lease extension benefits are considered lease incentives, the benefits are deferred in the caption other liabilities and are being recognized on a straight-line basis over the remaining revised lease terms. For the years ended December 31, 2016, 2015 and 2014, the Company amortized Ps.74,748, Ps.45,313 and Ps.26,938, respectively, of lease incentives which was recognized as a reduction of rent expenses in the consolidated statements of operations.
| k) | Aircraft and engine maintenance |
The Company is required to conduct diverse levels of aircraft maintenance. Maintenance requirements depend on the type of aircraft, age and the route network over which it operates.
Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks.
Aircraft maintenance and repair consists of routine andnon-routine works, divided into three general categories: (i) routine maintenance, (ii) major maintenance and (iii) component service.
(i) Routine maintenance requirements consists of scheduled maintenance checks on the Company’s aircraft, includingpre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled tasks performed as required. This type of maintenance events is currently serviced by the Company mechanics and are primarily completed at the main airports that the Company currently serves. All other maintenance activities aresub-contracted to qualified maintenance business partner, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and typically are required approximately every 22 months. All routine maintenance costs are expensed as incurred.
(ii) Major maintenance consist of a series of more complex tasks that can take up to eight weeks to accomplish and typically are required approximately every five to six years.
Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized (leasehold improvements to flight equipment) and amortized over the shorter of the period to the next major maintenance event or the remaining contractual lease term. The next major maintenance event is estimated based on assumptions including estimated usage. The United States Federal Aviation Administration (“FAA”) and the Mexican Civil Aeronautic Authority(Dirección General de Aeronáutica Civil,or “DGAC”) mandate maintenance intervals and average removal times as suggested by the manufacturer.
These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a heavy maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated life would decrease before the next maintenance event, resulting in additional expense over a shorter period.
During the years ended December 31, 2016 and 2015, the Company capitalized major maintenance events as part of leasehold improvements to flight equipment for an amount of Ps.226,526 and Ps.295,807, respectively (Note 12).
For the years ended December 31, 2016, 2015 and 2014, the amortization of major maintenance leasehold improvement costs was Ps.404,659, Ps.352,932 and Ps.253,381, respectively (Note 12). The amortization of deferred maintenance costs is recorded as part of depreciation and amortization in the consolidated statements of operations.
(iii) The Company has yet to complete its evaluationapower-by-the hour agreement for component services, which guarantees the availability of aircraft parts for the Company’s fleet when they are required. It also provides aircraft parts that are included in the redelivery conditions of the impactcontract (hard time) without constituting an additional cost at the time of redelivery. The monthly maintenance cost associated with this first phaseagreement is recognized as incurred in the consolidated statements of operations.
The Company has an engine flight hour agreement that guarantees a cost per overhaul, provides miscellaneous engines coverage, caps the cost of foreign objects damage events, ensures there is protection from annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscellaneous engines coverage is recorded as incurred in the consolidated statements of operations.
| l) | Rotable spare parts, furniture and equipment, net |
Rotable spare parts, furniture and equipment, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method.
Aircraft spare engines have significant parts with different useful lives; therefore, they are accounted for as separate items (major components) of rotable spare parts (Note 12d).
Pre-delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of the aircraft.
The borrowing costs related to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset.
During the years ended December 31, 2016, 2015 and 2014, the Company capitalized borrowing costs which amounted to Ps.95,445, Ps.90,057 and Ps.42,572, respectively (Note 21). The rate used to determine the amount of borrowing cost was 2.88%, 2.80% and 2.82%, for the years ended December 31, 2016, 2015 and 2014, respectively.
Depreciation rates are as follows:
Annual depreciation rate | ||
Aircraft parts and rotable spare parts | 8.3-16.7% | |
Aircraft spare engines | 4.0-8.3% | |
Standardization | Remaining contractual lease term | |
Computer equipment | 25% | |
Communications equipment | 10% | |
Office furniture and equipment | 10% | |
Electric power equipment | 10% | |
Workshop machinery and equipment | 10% | |
Service carts on board | 20% | |
Leasehold improvements to flight equipment | The shorter of: (i) remaining contractual lease term, or (ii) the next major maintenance event |
The Company reviews annually the useful lives and salvage values of these assets and any changes are accounted for prospectively.
The Company records impairment charges on rotable spare parts, furniture and equipment used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or related cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell and (ii) its value in use.
The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
For the years ended December 31, 2016, 2015 and 2014, there were no indicators of impairment and therefore no impairment charges were recorded in respect of the Company’s rotable spare parts, furniture and equipment.
| m) | Foreign currency transactions and exchange differences |
The Company’s consolidated financial statements are presented in Mexican peso, which is the reporting and functional currency of the parent company. For each subsidiary, the Company determines the functional currency and items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”).
The financial statements of foreign subsidiaries prepared under IFRS and denominated in their respective local currencies, are translated into the functional currency as follows:
Transactions in foreign currencies are translated into the respective functional currencies at the exchange rates at the dates of the transactions.
All monetary assets and liabilities were translated at the exchange rate at the consolidated statement of financial position date.
Allnon-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.
Equity accounts are translated at the prevailing exchange rate at the time the capital contributions were made
and the profits were generated.
Revenues, costs and expenses are translated at the average exchange rate during the applicable period.
Any differences resulting from the currency translation are recognized in the consolidated statements of operations.
For the year ended December 31, 2016 the exchange rates of local currencies translated to functional currencies are as follows:
| Exchange rates of local currencies translated to functional currencies | ||||||||||||||||
Country | Local currency | Functional currency | Average exchange rate for | Exchange rate as of | ||||||||||||
| 2016 | 2016 | |||||||||||||||
Costa Rica | Colon | U.S. dollar | ¢. | 564.3332 | ¢. | 561.1000 | ||||||||||
Guatemala | Quetzal | U.S. dollar | Q. | 7.4931 | Q. | 7.5221 | ||||||||||
The financial statements of foreign subsidiaries prepared under IFRS and denominated in their respective functional currencies are translated into Mexican pesos as follows:
The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2016 and 2015 were Ps.20.6640 and Ps.17.2065, respectively, per U.S. dollar.
Foreign currency differences arising on translation into functional currency are recognized in the consolidated statement of operations. Furthermore, foreign currency differences arising on translation into presentation currency are allocated in OCI. Exchange differences on translation of foreign entities for the year ended December 31, 2016 were Ps.4,756. For the year ended December 31, 2015 exchange differences on translation of foreign entities were immaterial.
| n) | Liabilities and provisions |
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a currentpre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
For the operating leases, the Company is contractually obligated to return the leased aircraft in a specific condition. The Company accrues for restitution costs related to aircraft held under operating leases throughout the term of the lease, based upon the estimated cost of satisfying the return condition criteria for each aircraft. These return obligations are related to the costs to be incurred in the reconfiguration of aircraft (interior and exterior), painting, carpeting and other costs, which are estimated based on current cost adjusted for inflation. The return obligation is estimated at the inception of each leasing arrangement and recognized over the term of the lease (Note 15c).
The Company records aircraft lease return obligation reserves based on the best estimate of the return obligation costs under each aircraft lease agreement.
The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in no case are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of supplemental rent and the provision is included as part of other liabilities, through the remaining lease term. The Company estimates the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2016 and 2015, the Company expensed as supplemental rent Ps.933,730 and Ps.91,698, respectively. For the year ended December 31, 2014, the Company did not record any return costs as supplemental rent.
| o) | Employee benefits |
| i) | Personnel vacations |
The Company and its subsidiaries in Mexico and Central America recognize a reserve for the costs of paid absences, such as vacation time, based on the accrual method.
| ii) | Termination benefits |
The Company recognizes a liability and expense for termination benefits at the earlier of the following dates:
a) When it can no longer withdraw the offer of those benefits; and
b) When it recognizes costs for a restructuring that is within the scope of IAS 37,Provisions, Contingent Liabilities and Contingent Assets, and involves the payment of termination benefits.
The Company is demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and is without realistic possibility of withdrawal.
For the years ended December 31, 2016, 2015 and 2014, no termination benefits provision has been recognized.
| iii) | Seniority premiums |
In accordance with Mexican Labor Law, the Company provides seniority premium benefits to the employees which rendered services to its Mexican subsidiaries under certain circumstances. These benefits consist of aone-time payment equivalent to 12 days’ wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit.
Obligations relating to seniority premiums other than those arising from restructurings, are recognized based upon actuarial calculations and are determined using the projected unit credit method.
The latest actuarial computation was prepared as of December 31, 2016.
Remeasurement gains and losses are recognized in full in the period in which they occur in OCI. Such remeasurement gains and losses are not reclassified to profit or loss in subsequent periods.
The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate based on government bonds (Certificados de la Tesorería de la Federación, or “CETES” in Mexico), less the fair value of plan assets out of which the obligations are to be settled.
For entities in Costa Rica and Guatemala; there is no obligation to pay seniority premium benefits.
| iv) | Incentives |
The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain performance targets. These incentives are payable shortly after the end of each quarter and are accounted for as a short-term benefit under IAS 19,Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment.
During the years ended December 31, 2016, 2015 and 2014 the Company expensed Ps.40,829, Ps.50,558 and Ps.18,424, respectively, as quarterly incentive bonuses, recorded under the caption salaries and benefits.
During the year ended December 31, 2015, the Company adopted a new short-term benefit plan for certain key personnel whereby cash bonuses are awarded when certain Company’s performance targets are met. These incentives are payable shortly after the end of each year and also are accounted for as a short-term benefit under IAS 19,Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment. During the year ended December 31, 2016 and 2015, the Company recorded an expense and provision for an amount of Ps.53,738 and Ps.70,690, respectively, recorded under the caption salaries and benefits.
| v) | Long-term retention plan (“LTRP”) |
During 2010, the Company adopted an employee LTRP, the purpose of which is to retain high performing employees within the organization by paying incentives contingent on meeting certain Company’s performance targets. Incentives under this plan were payable in three equal annual installments, following the provisions for other long-term benefits under IAS 19.
During 2014, this plan was restructured and it was renamed Long-term incentive plan (“LTIP”). This new plan consists of a share purchase plan (equity-settled) and a share appreciation rights “SARs” plan (cash settled).
| vi) | Share-based payments |
| a) | LTIP |
In April and October 2016, extensions to the LTIP (equity and cash settled) were approved at the Annual Ordinary Shareholder’s Meeting. These extensions were approved on the same terms as the original LTIP plan.
- Share purchase plan (equity-settled)
Certain key employees of the Company receive additional benefits through a share purchase plan denominated in Restricted Stock Units (“RSUs”), which has been classified as an equity-settled share-based payment. The cost of the equity-settled share purchase plan is measured at the grant date, taking into account the terms and conditions on which the share options were granted. The equity-settled compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).
During the years ended December 31, 2016, 2015 and 2014, the Company expensed Ps.7,816, Ps.6,018 and Ps.1,058, respectively, related to RSUs. The expenses were recorded under the caption salaries and benefits.
- SARs plan (cash settled)
The Company granted SARs to key employees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share price of the Company between the grant date and the time of exercise. The liability for the SARs is measured, initially and at the end of each reporting period until settled, at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).
During the years ended December 31, 2016, 2015 and 2014, the Company expensed Ps.31,743, Ps.44,699, Ps.1,652, respectively, related to the SARs included in the LTIP. These expenses were recorded under the caption salaries and benefits.
| b) | Management incentive plan (“MIP”) |
- MIP I
Certain key employees of the Company receive additional benefits through a share purchase plan, which has been classified as an equity-settled share-based payment. The equity-settled compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).
During the years ended December 31, 2015 and 2014, the Company expensed Ps.327 each year as cost of the MIP, related to the vested shares, the expenses were recorded in the consolidated statement of operations under the caption salaries and benefits.
- MIP II
On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees, this plan was named MIP II. In accordance with this plan, the Company granted SARs to key employees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share price of the Company between the grant date and the time of exercise. The liability for the SARs is measured initially and at the end of each reporting period until settled at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).
During the year ended December 31, 2016, the Company expensed Ps.54,357, related to MIP II.
| vii) | Employee profit sharing |
For the years ended December 2016, 2015 and 2014, the Mexican Income Tax Law (“MITL”), establishes that the base for computing current year employee profit sharing shall be the taxpayer’s taxable income of the year for income tax purposes, including certain adjustments established in the Income Tax Law, at the rate of 10%. The cost of employee profit sharing earned for the current-year is presented as an expense in the consolidated statements of operations. Subsidiaries in Central America do not have such profit sharing benefit, as it is not required by local regulation.
| p) | Leases |
The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.
Property and equipment lease agreements are recognized as finance leases if the risks and benefits incidental to ownership of the leased assets have been transferred to the Company when (i) the ownership of the leased asset is transferred to the Company upon termination of the lease; (ii) the agreement includes an option to purchase the asset at a reduced price; (iii) the term of the lease is for the major part of the economic life of the leased asset; (iv) the present value of minimum lease payments is at least substantially all of the fair value of the leased asset; or (v) the leased asset is of a specialized nature for the Company.
When the risks and benefits incidental to the ownership of the leased asset remain mostly with the lessor, they are classified as operating leases and rental payments are charged to results of operations on a straight-line over the term of the lease.
The Company’s lease contracts for aircraft, engines and components parts are classified as operating leases.
Sale and leaseback
The Company enters into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to the Company. Leases under sale and leaseback agreements meet the conditions for treatment as operating leases.
Profit or loss related to a sale transaction followed by an operating lease, is accounted for as follows:
| (i) | Profit or loss is recognized immediately when it is clear that the transaction is established at fair value. |
| (ii) | If the sale price is at or below fair value, any profit or loss is recognized immediately. However, if the loss is compensated for by future lease payments at below market price, such loss is recognized as an asset in the consolidated statements of financial position, and amortized to the consolidated statements of operations in proportion to the lease payments over the contractual lease term. |
| (iii) | If the sale price is above fair value, the excess of the price above the fair value is deferred and amortized to the consolidated statements of operations over the asset’s expected lease term, including probable renewals, with the amortization recorded as a reduction of rent expense. |
| q) | Taxes and fees payable |
The Company is required to collect certain taxes and fees from customers on behalf of government agencies and airports and to remit these to the applicable governmental entity or airport on a periodic basis. These taxes and fees include federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure fees. These charges are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. The Company records a liability upon collection from the customer and discharges the liability when payments are remitted to the applicable governmental entity or airport.
| r) | Income taxes |
Current income tax
Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.
Current income tax relating to items recognized directly in equity is recognized in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial positionreporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences, except, in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any available tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and available tax losses can be utilized, except, in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or performance.part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
IAS 32 Offsetting Financial AssetsDeferred tax assets and Financial Liabilities – Amendmentsliabilities are measured at the tax rates that are expected to IAS 32apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
These amendments clarifyDeferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the meaning of “currently hasunderlying transaction in OCI.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set-off”set off current tax assets against current tax liabilities and the criteriadeferred taxes relate to the same taxable entity and the same taxation authority.
The charge for non-simultaneousincome taxes incurred is computed based on tax laws approved in Mexico, Costa Rica and Guatemala at the date of the consolidated statement of financial position.
| s) | Derivative financial instruments and hedge accounting |
The Company mitigates certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctuations, through a risk management program that includes the use of derivative financial instruments.
In accordance with IFRS 9 (2013), derivative financial instruments are recognized in the consolidated statement of financial position at fair value. At inception of a hedge relationship, the Company formally
designates and documents the hedge relationship to which it wishes to apply hedge accounting; as well as, the risk management objective and strategy for undertaking the hedge. The documentation includes the hedging strategy and objective, identification of the hedging instrument, the hedged item or transaction, the nature of the risks being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk(s).
Only if such hedges are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge item(s) and are assessed on an ongoing basis to determine that they actually have been effective throughout the financial reporting periods for which they were designated, hedge accounting treatment can be used.
Under the CFH accounting model, the effective portion of the hedging instrument’s changes in fair value is recognized in OCI, while the ineffective portion is recognized in current year earnings. During the years ended December 31, 2016 and 2015, there was no ineffectiveness with respect to derivative financial instruments. The amounts recognized in OCI are transferred to earnings in the period in which the hedged transaction affects earnings.
The realized gain or loss of derivative financial instruments that qualify as CFH is recorded in the same caption of the hedged item in the consolidated statement of operations.
Accounting for the time value of options
The Company accounts for the time value of options in accordance with IFRS 9 (2013), which requires all derivative financial instruments to be initially recognized at fair value. Subsequent measurement for options purchased and designated as CFH requires that the option’s changes in fair value be segregated into its intrinsic value (which will be considered the hedging instrument’s effective portion in OCI) and its correspondent changes in extrinsic value (time value and volatility). The extrinsic value changes will be considered as a cost of hedging (recognized in OCI in a separate component of equity) and accounted for in income when the hedged items also is recognized in income.
Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in pledge, is presented as part ofnon-current assets under the caption guarantee deposits, and the amount of the collateral is reviewed and adjusted on a daily basis based on the fair value of the derivative position (Note 11).
| t) | Financial instruments – Disclosures |
IFRS 7 requires a three-level hierarchy for fair value measurement disclosures and requires entities to provide additional disclosures about the relative reliability of fair value measurements (Notes 4 and 5).
| u) | Treasury shares |
The Company’s equity instruments that are reacquired (treasury shares), are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of treasury shares. Any difference between the carrying amount and the consideration received, if reissued, is recognized in additional paid in capital.
Share-based payment options exercised during the reporting period are settled with treasury shares (Note 17).
| v) | Operating segments |
The Company is managed as a single business unit that provides air transportation and related services, accordingly it has only one operating segment.
The Company has two geographic areas identified as domestic (Mexico) and international (United States of America and Central America) (Note 24).
| w) | Current versusnon-current classification |
The Company presents assets and liabilities in the consolidated statement of financial position based oncurrent/non-current classification. An asset is current when it is: (i) expected to be realized or intended to be sold or consumed in normal operating cycle, (ii) expected to be realized within twelve months after the reporting period, or, (iii) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified asnon-current.
A liability is current when: (i) it is expected to be settled in normal operating cycle, (ii) it is due to be settled within twelve months after the reporting period, or, (iii) there is no unconditional right to defer the settlement mechanisms of clearing housesthe liability for at least twelve months after the reporting period. The Company classifies all other liabilities asnon-current. Deferred tax assets and liabilities are classified as noncurrent assets and liabilities.
| x) | Retrospective changes in classification |
During 2016, the Company modified the classification of prepaid income tax to qualifyreflect more appropriately and separately the assets for offsetting. Thesecurrent tax, as required by the IAS 1Presentation of Financial Statements. Comparative amounts in the consolidated statements of financial position were restated for consistency. The effects of this reclassification were recognized retrospectively in the consolidated statements of financial position as of December 31, 2015, in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. As a result, Ps.15,028 was reclassified from ‘recoverable taxes’ to ‘recoverable income tax’, Ps.29,461 was reclassified from ‘recoverable taxes’ to ‘income taxes payable’; and Ps.11,786 fromnon-current assets ‘guarantee deposits’ to current assets ‘guarantee deposits’ to reflect the appropriate presentation of short-term and long-term guarantee deposits, as follows:
| As previously reported 2015 | Reclassifications | As reclassified 2015 | ||||||||||
Financial position: | ||||||||||||
Current assets | ||||||||||||
Recoverable taxes | Ps. | 201,394 | Ps. | (44,489 | ) | Ps. | 156,905 | |||||
Recoverable income tax | — | 15,028 | 15,028 | |||||||||
Guarantee deposits | 861,236 | 11,786 | 873,022 | |||||||||
Non-current assets | ||||||||||||
Guarantee deposits | 4,704,389 | (11,786 | ) | 4,692,603 | ||||||||
Current liabilities | ||||||||||||
Income taxes payable | 337,997 | 29,461 | 308,536 | |||||||||
| y) | Impact of new International Financial Reporting Standards |
New and amended standards and interpretations already effective
The Company applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2014.2016. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
Although these new standards and amendments applied for the first time in 2016, they did not have a material impact on the annual consolidated financial statements of the Company. The nature and the impact of these changes to each new standard and amendment are described below:
Annual improvements 2012-2014 cycle
These improvements are effective for annual periods beginning on or after January 1, 2016. They include:
IAS 19 Employee Benefits
The amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. This amendment is applied prospectively. The adoption of this amendment to IAS 19 did not have any impact on the consolidated financial statements, since the discount rates of the Company’s obligations for seniority premiums in Mexico are already determined using government bonds (Certificados de la Tesorería de la Federación, or “CETES” in Mexico).
Amendments to IAS 1 Disclosure Initiative
The amendments to IAS 1Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify: (a) the materiality requirements in IAS 1; (b) that specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated; (c) that entities have flexibility as to the order in which they present the notes to financial statements; and (d) that the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statements of profit or loss and OCI.
The adoption of this amendment did not have any significant impact on the presentation and disclosures in these consolidated financial statements.
New and amended standards and interpretations not yet effective
Except for IFRS 9, the Company has not early adopted any of the following standards, interpretations or amendments that have been issued but is not yet effective.
IFRS 9 (2014) Financial Instruments
The Company has yetadopted IFRS 9 (2013) in connection with its 2014 consolidated financial statements. IFRS 9 (2014) requires entities to complete its evaluation ofapply an expected credit loss (ECL) model that replaces the impact of this standard on the Company’sIAS 39’s incurred loss model. The ECL model applies to debt instruments accounted for at amortized cost or at fair value through OCI, most loan commitments, financial positionguarantee contracts, contract assets under IFRS 15Revenue from Contracts with Customers and lease receivables under IAS 17Leases or performance.IFRS 16Leases.
IFRIC Interpretation,21 Levies (IFRIC 21)
IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached.
IFRIC 21IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2014. 2018.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers, which may require more judgement and estimates than with the revenue recognition process that are required under the existing IAS 18Revenue Recognition. Under IFRS 15, revenue is accounted for an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or providing services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue.
The new revenue standard will supersede all current revenue recognition requirements under IFRS. The standard permits two adoption methods: retrospectively to each reporting period presented (full retrospective method), or retrospectively with the cumulative effect recognized at the date of initial application (the cumulativecatch-up transition method). IFRS 15 is required to be adopted for annual periods beginning on or after January 1, 2018. Early adoption is permitted.
The Company has not early adopted this IFRIC.plans to adopt the new standard on the required effective date, and currently anticipates utilizing the full retrospective method, in order to provide for comparative results in all periods presented.
While the Company is still evaluating the impact of the new standard, it expects the new standard to impact the timing of recognition of certain air travel-related services and nonair-travel related services which under current accounting are recognized when the service is provided. Under the new standard, such services will likely be recognized when the air travel service is provided.
IFRS 15 provides presentation and disclosure requirements, which are more detailed than under current IFRS. The presentation requirements represent a significant change from current practice and increase the volume of disclosures required in the Company’s financial statements. Many of the disclosure requirements in IFRS 15 are completely new. In 2017, the Company will develop and start testing of appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information.
Furthermore, the Company will monitor and assess any further developments issued by the IASB and the transition resource group. The Company has yetcontinues to monitor and assess the potential impact of changes to IFRS 15 and related implementation guidance as they become available.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17Leases, IFRIC 4Determining Whether an Arrangement Contains a Lease,SIC-15Operating Leases-Incentives andSIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a singleon-balance sheet model similar to the accounting for finance leases under IAS 17.
The standard includes two recognition exemptions for lessees – leases of’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., theright-of-use asset).
Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on theright-of-use asset.
Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to theright-of-use asset.
IFRS 16 also requires lessees to make more extensive disclosures than under IAS 17.
IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.
The Company is in process to complete its evaluationan IFRS 16 assessment. The adoption of whether this interpretationstandard will have a materialsignificant impact on itsthe accounting for leased aircraft, engines and other lease agreements, requiring the presentation of those leases with durations of greater than twelve months on the consolidated statement of financial statements.position. The Company anticipates adopting the new standard using the full retrospective method, see Note 14 for more information on the Company’s lease agreements.
IAS 39 Amendments of Derivatives and Continuation of Hedge Accounting7 Disclosure Initiative – Amendments to IAS 397
TheseThe amendments to IAS 7Statement of Cash Flows were issued in January 2016 and are part of the IASB’s Disclosure Initiative and require an entity to provide reliefdisclosures that enable users of financial statements to evaluate changes in liabilities arising from discontinuing hedge accounting when novationfinancing activities, including both changes arising from cash flows andnon-cash changes. On initial application of a derivative designated as a hedging instrument meets certain criteria.the amendment, entities are not required to provide comparative information for preceding periods. These amendments are effective for annual periods beginning on or after January 1, 2014.2017, with early application permitted. Application of these amendments will result in additional disclosure provided by the Company.
The Company has yet to complete its evaluationIAS 12 Recognition of the impact of this standard on the Company’s financial position or performance.
IAS 36 Recoverable Amount DisclosuresDeferred Tax Assets for Non-Financial AssetsUnrealized Losses – Amendments to IAS 3612
The amendments to IAS 12Income taxes were issued in January 2016 and clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference.
Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.
Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact.
These amendments require disclosure of the recoverable amounts of the assets or CGUs for which an impairment loss has been recognized or reversed during the period. The amendments are effective retrospectively for annual periods beginning on or after January 1, 2014.2017, with early application permitted. If an entity applies the amendments for an earlier period, it must disclose that fact. These amendments are not expected to have any impact on the Company.
IFRS 2 Classification and Measurement of Share-based Payment Transactions — Amendments to IFRS 2
In June 2016, the IASB issued amendments to IFRS 2Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled, share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled.
On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company has not recognized or reversed any impairment loss on non-financial assets duringis assessing the periods presented in these financial statements.
The Company has yet to complete its evaluationpotential effect of the impact of this standardamendments on the Company’sits consolidated financial position or performance.statements.
| Convenience translation |
U.S. dollar amounts at December 31, 20132016 shown in the consolidated financial statements have been included solely for the convenience of the reader and are translated from Mexican pesos, using an exchange rate of Ps.13.0765Ps.20.6640 per U.S. dollar, as reported by the Mexican Central Bank(Banco de México) as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2013.2016. Such translation should not be construed as a representation that the peso amounts have been or could be converted into U.S. dollars at this or any other rate. The referred information in U.S. dollars is solely for information purposes and does not represent the amounts are in accordance with IFRS or the equivalent in U.S. dollars in which the transactions were conducted or in which the amounts presented in Mexican pesos can be translated or realized.
| 2. | Significant accounting judgments, estimates and assumptions |
The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Note 1 to the Company’s consolidated financial statements provides a detailed discussion of the significant accounting policies.
Certain of the Company’s accounting policies reflect significant judgments, assumptions or estimates about matters that are both inherently uncertain and material to the CompanyCompany’s financial position or results of operations.
Actual results could differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
| i) | Aircraft maintenance deposits paid to lessors |
The Company makes certain assumptions at the inception of a lease and at each reporting date to determine the recoverability of maintenance deposits. The key assumptions include the estimated time between the maintenance events, the costs of future maintenance, the date the aircraft is due to be returned to the lessor and the number of flight hours the aircraft is estimated to be flown before it is returned to the lessor (Note 11).
| ii) |
The Company measures the cost of its equity-settled transactions at fair value at the date the equity benefits are conditionally granted to employees.
The cost of equity-settled transactions is recognized in earnings, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled. For grants that vest on meeting performance conditions, compensation cost is recognized when it becomes probable that the performance condition will be met. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.
The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the share option, volatility and dividend yield, and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 17.(Note 17).
SARs plan (cash settled)
The cost of the SARs plan is measured initially at fair value at the grant date, further details of which are given in (Note 17). This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is remeasured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognized in salaries and benefits expense together with the grant date fair value. As with the equity settled awards described above, the valuation of cash settled award also requires using similar inputs, as appropriate.
| iii) | Deferred taxes |
Deferred tax assets are recognized for all available tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management’s judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning opportunities to advance taxable profit before expiration of available tax losses.
At December 31, 2013,2016, the Company’s tax loss carry-forwards amountamounts to Ps.2,071,195 (Ps.2,014,874Ps.111,083 (Ps.194,512 at December 31, 2012)2015). These losses relate to operations of the Company and of its subsidiaries on a stand-alone basis, which in conformity with current MexicanMITL and Costa Rican Income Tax Law (“CRITL”) may be carried forward against taxable income generated in the succeeding ten and three years, respectively, and may not be used to offset taxable income elsewhere in the Company’s consolidated group (Note 19).
During the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the Company used Ps.204,403, Ps.256,589Ps.195,116, Ps.1,618,850 and Ps.770,Ps.424,463, respectively, of the available tax loss carry-forwards (Note 19).
| iv) | Fair value of financial instruments |
Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.
The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (Note 3)4).
| v) | Impairment of long-lived assets |
The Company assesses whether there are any indicators of impairment for long-lived assets annually and at other times when such indicators exist. Impairment exists when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and itsvalue-in-use. Thevalue-in-use calculation is based on a discounted cash flow model, using the Company’s projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.
| vi) | Allowance for doubtful accounts |
An allowance for doubtful accounts receivables is established when there is objective evidence thatin accordance with the Company will not be able to collect all amounts due according to the original terms of the receivables.information mentioned in Note 1f) ii).
| 3. | Financial instruments and risk management |
Concentration ofFinancial risk management
The Company’s activities are exposed to different financial risks:risks derived from exogenous variables which are not under their control but whose effects might be potentially adverse: (i) market risk, (ii) credit risk, and (iii) liquidity risk. The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on the net earnings.earnings and working capital requirements. The Company uses derivative financial instruments to hedge part of these risks. The Company does not engageenter into derivatives for trading or speculative purposes.
The sources of these financial risks exposures are included in both “on balance sheet” exposures, such as recognized financial assets and liabilities, as well as in“off-balance sheet” contractual agreements and on highly expected forecasted transactions. These on andoff-balance sheet exposures, depending on their profiles, do represent potential cash flow variability exposure, in terms of receiving less inflows or facing the need to meet outflows which are higher than expected, therefore increase the working capital requirements. Also, since adverse movements erode the value of recognized financial assets and liabilities, as well some otheroff-balance sheet financial exposures such as operating leases, there is a need for value preservation, by transforming the profiles of these fair value exposures.
The Company has a Finance and Risk Management unit, which identifies and measures financial risk exposures, in order to design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the corporate governance level for approval.
Market risk
| a) |
TheSince the contractual agreements with jet fuel suppliers include reference to jet fuel index, the Company is exposed to fuel price risk and itswhich might have an impact on the forecasted consumption volumes. The Company’s jet fuel price risk management policy aims to provide the Company with protection against sudden and significant increases in jet fuel prices. Pursuing this objective, the risk management policy allows the use of derivative financial instruments available on the over the counter (“OTC”) markets with approved counterparties and within approved limits. Aircraft jet fuel consumed in the years ended December 31, 2013, 20122016, 2015 and 20112014 represented 40%28%, 42%30% and 41%39%, of the Company’s operating expenses, respectively.
During the year ended December 31, 2016, the Company did not enter into US Gulf Coast Jet Fuel 54 swaps positions. During the years ended December 31, 2013, 20122015 and 2011,2014, the Company entered into fuelUS Gulf Coast Jet Fuel 54 swap contracts that are beingto hedge approximately 5% and 20% of its fuel consumption, respectively; they were accounted for as cash flow hedgesCFH that gave rise to a gainloss of Ps.6,694, Ps.19,984,Ps.128,330, and Ps.9,260,Ps.85,729, respectively. These instruments qualifywere formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within OCI while the effects of thetransforming into a fixed jet fuel prices by these hedges are presented as part of fuel costcosts when recognized in the consolidated statements of operations.
All of the Company’s position in US Gulf Coast Jet Fuel 54 swaps position matured on June 30, 2015, and therefore there is no balance outstanding as of December 31, 2015.
During the years ended December 31, 2016 and 2015, the Company held a notional amount of 189,036 thousand gallons and 162,189 thousand gallons, respectively, in US Gulf Coast Jet Fuel 54 Asian call options designated to hedge a portion of the projected consumption for the years to come.
The Company decided to early adopt IFRS 9 (2013), beginning on October 1, 2014, which allows the Company to separate the intrinsic value and time value of an option contract and to designate as the hedging instrument only the change in the intrinsic value of the option. Because the external value (time value) of the Asian call options are related to a transaction related hedged item, it is required to be segregated and accounted for as a cost of hedging in OCI and accrued as a separate component of stockholders’ equity until the related hedged item affects profit and loss.
The hedged item (jet fuel consumption) of the options held by the Company represents anon-financial asset (energy commodity), which is not in the Company’s inventory. Instead, it is directly consumed by the Company’s aircraft at different airport terminals. Therefore, although anon-financial asset is involved, its initial recognition does not generate a book adjustment in the Company’s inventories. Rather, it is initially accounted for in the Company’s OCI and a reclassification adjustment is made from OCI to profit and loss and recognized in the same period or periods during which the hedged item is expected to be allocated to profit and loss. Furthermore, the Company hedges its forecasted jet fuel consumption month after month, which is congruent with the maturity date of the monthly serial Asian call options. The adoption of IFRS 9 (2013) does not impact the interest rate swaps or jet fuel swaps as those instruments do not incorporate a portion of time value (attributable to external value), such as is the case with options.
As of December 31, 20132016 and 2012,2015, the fair value of these financial instrumentsthe outstanding US Gulf Coast Jet Fuel Asian call options was Ps.11,133Ps.867,809 and Ps.2,360,Ps.78,725, respectively, and is presented as part of current assets.the financial assets in the consolidated statement of financial position.
The amount of positive cost of hedging derived from the extrinsic value changes of these options as of December 31, 2016 recognized in other comprehensive income totals Ps.218,038 (the negative cost of hedging in 2015 totals Ps.365,028), and will be recycled to the fuel cost during 2017 and 2018, as these options expire on a monthly basis. During the years ended December 31, 2016 and 2015, the extrinsic value of these options recycled to the fuel cost was Ps.305,166 and Ps.112,675, respectively. During the year ended December 31, 2014, the Company did not recycle any extrinsic value of the options to the fuel cost.
The following table includes the notional amounts and strike prices of the derivative financial instruments outstanding as of the end of the year:
| Position as of December 31, 2013 Maturities | ||||||||||||
| 1Q14 | 2Q14 | Total | ||||||||||
Fuel risk | ||||||||||||
Notional volume in gallons (thousands)* | 4,016 | 1,456 | 5,472 | |||||||||
Future agreed rate per gallon (U.S. dollars)** | US$ | 2.8803 | US$ | 2.8541 | US$ | 2.8734 | ||||||
Total in thousands of Mexican pesos *** | Ps. | 151,260 | Ps. | 54,340 | Ps. | 205,605 | ||||||
Approximate percentage of hedge (of expected consumption value) | 11.9 | % | 4.0 | % | 7.8 | % | ||||||
| Position as of December 31, 2016 | ||||||||||||||||||||||||
| Jet fuel Asian call option contracts maturities | ||||||||||||||||||||||||
| 1 Half 2017 | 2 Half 2017 | 2017 Total | 1 Half 2018 | 3Q 2018 | 2018 Total | |||||||||||||||||||
Jet fuel risk | ||||||||||||||||||||||||
Notional volume in gallons (thousands)* | 55,436 | 63,362 | 118,798 | 62,492 | 7,746 | 70,238 | ||||||||||||||||||
Strike price agreed rate per gallon (U.S. | US$ | 1.6245 | US$ | 1.4182 | US$ | 1.5145 | US$ | 1.6508 | US$ | 1.5450 | US$ | 1.6392 | ||||||||||||
Approximate percentage of hedge (of expected consumption value) | 51 | % | 53 | % | 52 | % | 45 | % | 10 | % | 24 | % | ||||||||||||
| * | US Gulf Coast Jet 54 as underlying asset |
| ** | Weighted average |
| Position as of December 31, 2015 | ||||||||||||||||||||||||
| Jet fuel Asian call option contracts maturities | ||||||||||||||||||||||||
| 1 Half 2016 | 2 Half 2016 | 2016 Total | 1 Half 2017 | 2 Half 2017 | 2017 Total | |||||||||||||||||||
Jet fuel risk | ||||||||||||||||||||||||
Notional volume in gallons (thousands)* | 51,840 | 55,647 | 107,487 | 42,450 | 12,252 | 54,702 | ||||||||||||||||||
Strike price agreed rate per gallon (U.S. | US$ | 1.9451 | US$ | 1.9867 | US$ | 1.9666 | US$ | 1.7142 | US$ | 1.5933 | US$ | 1.6871 | ||||||||||||
Approximate percentage of hedge (of expected consumption value) | 59 | % | 53 | % | 55 | % | 38 | % | 10 | % | 23 | % | ||||||||||||
| * | US Gulf Coast Jet 54 as underlying asset |
| ** |
The following table illustrates the sensitivity of financial instruments to a reasonably possible change in fuel prices, with all other variables held constant, on the caption of accumulated other comprehensive income. The calculations were made considering a parallel movement of 5% in the forward curve of the US Gulf Coast Jet 54 as of December 31, 2013:
| Sensitivity of position as of December 31, 2013 effect on equity (thousands of U.S. dollars) | ||||
US Gulf Coast Jet Fuel 54 forward level | ||||
+5% | 820 | |||
-5% | -820 | |||
| b) | Foreign currency risk |
Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Company’s operating activities; when revenue or expense is denominated in a different currency from the Company’s functional currency (including the amounts payable arising from U.S. dollar denominated expenses and U.S. dollars linked expenses and payments). To mitigate this risk, the Company may use foreign exchange derivative financial instruments.
Most of the Company’s revenue is generated in Mexican pesos, although 26%33% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2013 (26%2016 (31% at December 31, 2012)2015) and U.S. dollar denominated collections accounted for 31%38% and 34%36% of the Company’s total collections in 20132016 and 2012,2015, respectively. However, certain of its expenditures, particularly those related to aircraft leasing and acquisition, are also U.S. dollar denominated. In addition, although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican peso /U.S. dollar exchange rate.
The Company’s foreign exchange on andoff-balance sheet exposure atas of December 31, 20132016 and 20122015 is as set forth below:
| Thousands of U.S. dollars | Thousands of U.S. dollars | |||||||||||||||
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | US$ | 152,459 | US$ | 46,965 | US$ | 297,565 | US$ | 202,022 | ||||||||
Other accounts receivable | 11,619 | 5,286 | ||||||||||||||
Aircraft maintenance deposits paid to lessors | 199,385 | 158,568 | 343,787 | 286,012 | ||||||||||||
Pre-delivery payments* | 67,237 | 69,940 | ||||||||||||||
Deposits for rental of flight equipment | 30,902 | 22,573 | 30,025 | 36,331 | ||||||||||||
Collateral of derivative financial instruments | 3,060 | 6,272 | ||||||||||||||
Derivative financial instruments | 851 | 181 | 41,996 | 4,575 | ||||||||||||
|
|
|
| |||||||||||||
Total assets | 453,894 | 304,499 | 724,992 | 534,226 | ||||||||||||
Liabilities: | ||||||||||||||||
Financial debt (Note 5) | 43,001 | 68,667 | 76,789 | 92,466 | ||||||||||||
Foreign suppliers | 33,968 | 27,425 | 56,109 | 40,673 | ||||||||||||
Taxes and fees payable | 6,874 | 7,705 | ||||||||||||||
Derivative financial instruments | 8,117 | 11,354 | 684 | 3,242 | ||||||||||||
|
| |||||||||||||||
Total liabilities | 85,086 | 107,446 | 140,456 | 144,086 | ||||||||||||
|
|
|
| |||||||||||||
Net foreign currency position | US$ | 368,808 | US$ | 197,053 | US$ | 584,536 | US$ | 390,140 | ||||||||
|
|
|
| |||||||||||||
At April 26, 2017, date of issuance of these financial statements, the exchange rate was 18.6521 per U.S. dollar.
| Thousands of U.S. dollars | ||||||||
| 2013 | 2012 | |||||||
Off-balance sheet transactions exposure: | ||||||||
Aircraft operating leases (Note 14) | US$ | 988,408 | US$ | 817,622 | ||||
Aircraft and engine commitments (Note 23) | 473,967 | 521,959 | ||||||
|
|
|
| |||||
Total foreign currency | US$ | 1,462,375 | US$ | 1,339,581 | ||||
|
|
|
| |||||
Off-balance sheet transactions exposure: Aircraft and engine operating lease payments (Note 14) Aircraft and engine commitments (Note 23) Total foreign currency Thousands of U.S. dollars 2016 2015 US$ 1,727,644 US$ 1,216,799 315,326 353,528 US$ 2,042,970 US$ 1,570,327
During the year ended on December 31, 20132016 and 2012,2015, the Company did not enter into foreign exchange rate derivatives financial instruments, however for the year ended December 31, 2011 the Company entered into exchange rate derivatives that resulted in a loss of Ps.1,069, which matured in January 2011.instruments.
| c) | Interest rate risk |
Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations and flight equipment operating lease agreements with floating interest rates.
The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such changes may have on operational lease payments indexed to theLondon Inter Bank Offered Rate (“LIBOR”). The Company uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these instruments as an accounting hedge. In general, when a derivative can be defined within the terms and cash flows of a leasing agreement, this may be designed as a “cash flow hedge”CFH and the effective portion of fair value variations are recorded in equity until the date the cash flow of the hedged lease payment becomes due.is recognized in the consolidated statements of operation.
At December 31, 20132016 and 2012,2015, the Company had outstanding hedging contracts in the form of interest rate swaps whosewith notional amount wasof US$70,000 and their fair value was Ps.106,151of Ps.14,144 and Ps.147,713,Ps.55,774, respectively, recorded in liabilities. For the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the reported loss on the instrumentsinterest rate swaps was Ps.36,769, Ps.36,574Ps.48,777, Ps.46,545 and Ps.35,908,Ps.39,610, respectively, which was recognized as part of rental expense in the consolidated statements of operations.
The following table illustrates the sensitivity of financial instruments on the Company’s accumulated other comprehensive income (due to changes in the fair value of forward contracts) to a reasonably possible change in LIBOR interest rates. The calculations are based on financial instruments held at each consolidated statement of financial position date and were made increasing (decreasing) 100 basis points to the LIBOR curve. All other variables were held constant.
| Position at December, 31, effect on equity ( U.S. dollars) | ||||
Increase (decrease) in curve | ||||
+100 basis points | US$ | |||
| ) | |||
Liquidity risk
| d) | Liquidity risk |
Liquidity risk represents the risk that the Company has insufficient funds to meet its obligations.
Because of the cyclical nature of the business, the operations, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, the Company requires liquid funds to meet its payment obligations.
The Company attempts to manage its cash and cash equivalents and its financial assets, matchingrelating the term of investments with those of its obligations. Its policy is that the average term of its investments may not exceed the average term of its obligations. This cash and cash equivalents position is invested in highly-liquid short-term instruments through financial entities.
The Company has future obligations related to maturities of bank borrowings and derivative contracts. The Company’soff-balance sheet exposure represents the future obligations related to operating lease contracts and aircraft purchase contracts. The Company concluded that it has a low concentration of risk since it has access to alternate sources of funding.
The table below presents the Company’s contractual principal payments required on its financial liabilities and the derivative financial instruments fair value:
| December 31, 2013 | December 31, 2016 | |||||||||||||||||||||||
| Within one year | One to five years | Total | Within one year | One to five years | Total | |||||||||||||||||||
Interest-bearing borrowings: | ||||||||||||||||||||||||
Pre-delivery payments facilities | Ps. | 266,121 | Ps. | 293,824 | Ps. | 559,945 | ||||||||||||||||||
Pre-delivery payments facilities (Note 5) | Ps. | 328,845 | Ps. | 943,046 | Ps. | 1,271,891 | ||||||||||||||||||
Short-term working capital facilities (Note 5) | 716,290 | — | 716,290 | |||||||||||||||||||||
Derivative financial instruments: | ||||||||||||||||||||||||
Fuel swaps contracts | (11,133 | ) | — | (11,133 | ) | |||||||||||||||||||
Interest rate swaps contracts | 31,845 | 74,306 | 106,151 | 14,144 | — | 14,144 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | Ps. | 286,833 | Ps. | 368,130 | Ps. | 654,963 | Ps. | 1,059,279 | Ps. | 943,046 | Ps. | 2,002,325 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Within one year | One to five years | Total | ||||||||||||||||||||||
Interest-bearing borrowings: | ||||||||||||||||||||||||
Pre-delivery payments facilities (Note 5) | Ps. | 1,363,861 | Ps. | 219,817 | Ps. | 1,583,678 | ||||||||||||||||||
Derivative financial instruments: | ||||||||||||||||||||||||
Interest rate swaps contracts | 44,301 | 11,473 | 55,774 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Total | Ps. | 1,408,162 | Ps. | 231,290 | Ps. | 1,639,452 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
| December 31, 2012 | ||||||||||||
| Within one year | One to five years | Total | ||||||||||
Interest-bearing borrowings: | ||||||||||||
Pre-delivery payments facilities | Ps. | 517,320 | Ps. | 242,053 | Ps. | 759,373 | ||||||
Working capital | 390,487 | 390,487 | ||||||||||
Derivative financial instruments: | ||||||||||||
Fuel swaps contracts | (2,360 | ) | — | (2,360 | ) | |||||||
Interest rate swaps contracts | 37,011 | 110,702 | 147,713 | |||||||||
|
|
|
|
|
| |||||||
Total | Ps. | 551,971 | Ps. | 743,242 | Ps. | 1,295,213 | ||||||
|
|
|
|
|
| |||||||
Credit risk
| e) | Credit risk |
Credit risk is the risk that any counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.instruments including derivatives.
Financial instruments that expose the Company to credit risk involve mainly cash equivalents and accounts receivable. Credit risk on cash equivalents relate to amounts invested with major financial institutions.
Credit risk on accounts receivable relates primarily to amounts receivable from the major international credit card companies.
The Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, which have a large portion of their sales settled in credit cards.
The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
Some of the outstanding derivative financial instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not expect any of its counterparties to fail to meet their obligations. The amount of such credit exposure is generally the unrealized gain, if any, in such contracts. To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty and monitors the market position with each counterparty. The Company does not purchase or hold derivative financial instruments for trading purposes.
At December 31, 2016, the Company concluded that its credit risk related to its outstanding derivative financial instruments is low, since it has no significant concentration with any single counterparty and it only enters into derivative financial instruments with banks with high credit-rating assigned by international credit-rating agencies.Capital management
| f) | Capital management |
Management believes that the resources available to the Company are sufficient for its present requirements and will be sufficient to meet its anticipated requirements for capital expenditures and other cash requirements for the 20142017 fiscal year.
The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios to support its business and maximize the shareholder’s value.
No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 20132016 and 2012.
2015. The Company is not subject to any externally imposed capital requirement, other than the legal reserve (Note 18).
| 4. | Fair value measurements |
The only financial assets and liabilities recognized at fair value on a recurring basis are the derivative financial instruments.
Fair value is the price that would be received from sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
| (i) | In the principal market for the asset or liability, or |
| (ii) | In the absence of a principal market, in the most advantageous market for the asset or liability. |
The principal or the most advantageous market must be accessible to by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of anon-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between Levelslevels in the hierarchy byre-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
Set out below, is a comparison by class of the carrying amounts and fair values of the Company’s financial instruments, other than those for which carrying amounts are reasonable approximations of fair values:
| Carrying amount | Fair value | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
Assets | ||||||||||||||||
Derivative financial instruments | Ps. | 11,133 | Ps. | 2,360 | Ps. | 11,133 | Ps. | 2,360 | ||||||||
Liabilities | ||||||||||||||||
Financial debt* | (559,945 | ) | (1,149,860 | ) | (562,739 | ) | (1,220,559 | ) | ||||||||
Derivative financial instruments | (106,151 | ) | (147,713 | ) | (106,151 | ) | (147,713 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | Ps. | (654,963 | ) | Ps. | (1,295,213) | Ps. | (657,757 | ) | Ps. | (1,365,912) | ||||||
|
|
|
|
|
|
|
| |||||||||
| Carrying amount | Fair value | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
Assets | ||||||||||||||||
Derivative financial instruments | Ps. | 867,809 | Ps. | 78,725 | Ps. | 867,809 | Ps. | 78,725 | ||||||||
Liabilities | ||||||||||||||||
Financial debt | (1,988,181 | ) | (1,583,678 | ) | (1,331,931 | ) | (1,587,889 | ) | ||||||||
Derivative financial instruments | (14,144 | ) | (55,774 | ) | (14,144 | ) | (55,774 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | Ps. | (1,134,516 | ) | Ps. | (1,560,727 | ) | Ps. | (478,266 | ) | Ps. | (1,564,938 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
The following table summarizes the fair value measurements at December 31, 2013:2016:
| Fair value measurement | Fair value measurement | |||||||||||||||||||||||||||||||
| Quoted prices in active markets Level 1 | Significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Total | Quoted prices in active markets Level 1 | Significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Total | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Derivatives financial instruments | ||||||||||||||||||||||||||||||||
Fuel swap contracts* | Ps. | — | Ps. | 11,133 | Ps. | — | Ps. | 11,133 | ||||||||||||||||||||||||
Derivatives financial instruments: | ||||||||||||||||||||||||||||||||
Jet fuel Asian call options contracts* | Ps. | — | Ps. | 867,809 | Ps. | — | Ps. | 867,809 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Derivatives financial instruments | ||||||||||||||||||||||||||||||||
Derivatives financial instruments: | ||||||||||||||||||||||||||||||||
Interest rate swap contracts** | — | (106,151 | ) | — | (106,151 | ) | — | (14,144 | ) | — | (14,144 | ) | ||||||||||||||||||||
Liabilities for which fair values are disclosed | ||||||||||||||||||||||||||||||||
Liabilities for which fair values are disclosed: | ||||||||||||||||||||||||||||||||
Interest-bearing loans and borrowings** | — | (562,739 | ) | — | (562,739 | ) | — | (1,331,931 | ) | — | (1,331,931 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net | Ps. | — | Ps. | (657,757 | ) | Ps. | — | Ps. | (657,757 | ) | Ps. | — | Ps. | (478,266 | ) | Ps. | — | Ps. | (478,266 | ) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
| * | Jet fuel forwards levels and LIBOR curve. |
| ** | LIBOR curve. |
There were no transfers between level 1 and level 2 during the period.
The following table summarizes the fair value measurements at December 31, 2015:
| Fair value measurement | ||||||||||||||||
| Quoted prices in active markets Level 1 | Significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Derivatives financial instruments: | ||||||||||||||||
Jet fuel Asian call options contracts* | Ps. | — | Ps. | 78,725 | Ps. | — | Ps. | 78,725 | ||||||||
Liabilities | ||||||||||||||||
Derivatives financial instruments: | ||||||||||||||||
Interest rate swap contracts** | — | (55,774 | ) | — | (55,774 | ) | ||||||||||
Liabilities for which fair values are disclosed: | ||||||||||||||||
Interest-bearing loans and borrowings** | — | (1,587,889 | ) | — | (1,587,889 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net | Ps. | — | Ps. | (1,564,938 | ) | Ps. | — | Ps. | (1,564,938 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
| * | Jet fuel forwards levels and LIBOR curve. |
| ** | LIBOR curve. |
There were no transfers between level 1 and level 2 during dethe period.
The following table summarizes the fair value measurements at(loss) gain from derivatives financial instruments recognized in the consolidated statements of operations for the years ended December 31, 2012:2016, 2015 and 2014:
Consolidated statements of operations
| Fair value measurement | ||||||||||||||||
| Quoted prices in active markets Level 1 | Significant observable inputs Level 2 | Significant unobservable inputs Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Derivative financial instruments | ||||||||||||||||
Fuel swap contracts* | Ps. | — | Ps. | 2,360 | Ps. | — | Ps. | 2,360 | ||||||||
Liabilities | ||||||||||||||||
Derivatives financial instruments | ||||||||||||||||
Interest rate swap** | — | 147,713 | — | 147,713 | ||||||||||||
Liabilities for which fair values are disclosed | ||||||||||||||||
Interest-bearing loans and borrowings** | — | 1,220,559 | — | 1,220,559 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net | Ps. | — | Ps. | (1,365,912 | ) | Ps. | — | Ps. | (1,365,912 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Instrument | Financial statements line | 2016 | 2015 | 2014 | ||||||||||
Jet fuel swap contracts | Fuel | Ps. | — | Ps. | (128,330 | ) | Ps. | (85,729 | ) | |||||
Jet fuel Asian call options contracts | Fuel | (305,166 | ) | (112,675 | ) | — | ||||||||
Interest rate swap contracts | Aircraft and engine rent expenses | (48,777 | ) | (46,545 | ) | (39,610 | ) | |||||||
|
|
|
|
|
| |||||||||
Total | Ps. | (353,943 | ) | Ps. | (287,550 | ) | Ps. | (125,339 | ) | |||||
|
|
|
|
|
| |||||||||
There were no transfers between level 1The following table summarizes the net (loss) gain on CFH before taxes recognized in the consolidated statements of comprehensive income for the years ended December 31, 2016, 2015 and level 2 during de period.2014:
Consolidated statements of other comprehensive income (loss)
Instrument | Financial statements line | 2016 | 2015 | 2014 | ||||||||||||
Jet fuel swap contracts | OCI | Ps. | — | Ps. | — | Ps. | (125,228 | ) | ||||||||
Jet fuel Asian call options contracts | OCI | 583,065 | (221,592 | ) | (26,934 | ) | ||||||||||
Interest rate swap contracts | OCI | 41,629 | 27,723 | 22,656 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total | Ps. | 624,694 | Ps. | (193,869 | ) | Ps. | (129,506 | ) | ||||||||
|
|
|
|
|
| |||||||||||
| 5. | Financial assets and liabilities |
At December 31, 20132016 and 2012,2015, the Company’s financial assets are represented by cash and cash equivalents, trade and other accounts receivable, accounts receivable with carrying amounts that approximate their fair value.
Financial assets
| a) | Financial assets |
| 2013 | 2012 | |||||||
Derivative financial instruments at fair value through OCI | ||||||||
Fuel swap contracts | Ps. | 11,133 | Ps. | 2,360 | ||||
|
|
|
| |||||
Total derivative financial instruments at fair value | Ps. | 11,133 | Ps. | 2,360 | ||||
|
|
|
| |||||
Total financial assets | Ps. | 11,133 | Ps. | 2,360 | ||||
|
|
|
| |||||
Total current | Ps. | 11,133 | Ps. | 2,360 | ||||
|
|
|
| |||||
| 2016 | 2015 | |||||||
Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI) | ||||||||
Jet fuel Asian call options | Ps. | 867,809 | Ps. | 78,725 | ||||
|
|
|
| |||||
Total financial assets | Ps. | 867,809 | Ps. | 78,725 | ||||
|
|
|
| |||||
Presented on the consolidated statements of financial position as follows: | ||||||||
Current | Ps. | 543,528 | Ps. | 10,123 | ||||
|
|
|
| |||||
Non-current | Ps. | 324,281 | Ps. | 68,602 | ||||
|
|
|
| |||||
Financial assets at fair value through OCI reflect the change in fair value of fuel swap contracts, designated as cash flow hedges.
| b) | Financial debt |
| (i) | At December 31, 2016 and 2015, the Company’s short-term and long-term debt consists of the following: |
| 2016 | 2015 | |||||||||
I. | Revolving line of credit with Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander (“Santander”) and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”), in U.S. dollars, to financepre-delivery payments, maturing on May 31, 2021, bearing annual interest rate at the three-month LIBOR plus a spread according to the contractual conditions of each disbursement in a range of 1.99 to 2.25 points. | Ps. | 1,271,891 | Ps. | 1,583,678 | |||||
II. | In December 2016, the Company entered into a short-term working capital facility with Banco Nacional de México, S.A. (“Citibanamex”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus 0.80 points. | 406,330 | — | |||||||
III. | In December 2016, the Company entered into a U.S. dollar denominated short-term working capital facility with Bank of America México S.A. Institución de Banca Múltiple (“Bank of America”) for the amount of U.S.$15,000, bearing annual interest rate at theone-month LIBOR plus 1.60 points. | 309,960 | — | |||||||
IV. | Accrued interest | 6,102 | 7,341 | |||||||
|
|
|
| |||||||
| 1,994,283 | 1,591,019 | |||||||||
Less: Short-term maturities | 1,051,237 | 1,371,202 | ||||||||
|
|
|
| |||||||
Long-term | Ps. | 943,046 | Ps. | 219,817 | ||||||
|
|
|
| |||||||
TIIE: Mexican interbank rate
Financial debt
At December 31, 2013 and 2012, the Company’s short-term and long-term debt consists of the following:
| 2013 | 2012 | |||||||
I. Revolving line of credit with Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander (“Santander”) and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”), in U.S. dollars, to finance pre-delivery payments, maturing on November 1, 2016, bearing annual interest rate at the three-month LIBOR rate plus 2.65 percentage points. | Ps. | 559,945 | Ps. | 759,373 | ||||
II. Loan agreement with Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa (“Inbursa”), in Mexican pesos, for working capital. Such loan matures on May 12, 2015 and 2016 (50% of the outstanding balance at each date, respectively) and bears interest at the Mexican interbank rate of equilibrium (“TIIE”), plus 10.0 percentage points, which increased by 2.5 percentage points from May 14, 2012. | — | 257,081 | ||||||
III. Loan agreement with International Finance Corporation (“IFC”), tranche C, in U.S. dollars, for working capital, maturing on June 15, 2014, bearing annual interests at the six-month LIBOR plus 6 percentage points. | — | 130,101 | ||||||
IV. Loan agreement with related party Pasprot, S.A. de C.V. (“Pasprot”), in Mexican pesos, for working capital. Such loan matures on May 12, 2015 and 2016 (50% of the outstanding balance at each date, respectively) and bears interest at TIIE, plus 10.0 percentage points, which increased by 2.5 percentage points from May 14, 2012. | — | 3,305 | ||||||
V. Accrued interest | 2,347 | 10,063 | ||||||
|
|
|
| |||||
| 562,292 | 1,159,923 | |||||||
Less: Short-term maturities | 268,468 | 527,383 | ||||||
|
|
|
| |||||
Long-term total | Ps. | 293,824 | Ps. | 632,540 | ||||
|
|
|
| |||||
In September 2013, the Inbursa and Pasprot loans were prepaid in a total amount of Ps.260,386. The Company paid a 25% debt prepayment premium of Ps.65,156 according to the prepayment conditions established in the respective loan agreements. The debt prepayment premium was recorded as finance cost in the consolidated statement of operations.
In September 2013, the IFC loan agreement, tranche C was prepaid in a total amount of US$10,000 (Ps.130,119) with an unwinding cost premium of Ps.50 due to the fact that the payment was not made on an interest payment date. The total amount of the unwinding cost premium was recorded as finance cost in the consolidated statement of operations.
(ii) The following table provides a summary of the Company’s scheduled principal payments of short and long-termfinancial debt obligations and accrued interest at December 31, 2013:2016:
| 2014 | 2015 | 2016 | Total | |||||||||||||
Finance debt denominated in foreign currency: | ||||||||||||||||
Santander/Bancomext | Ps. | 268,468 | Ps. | 142,641 | Ps. | 151,183 | Ps. | 562,292 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | Ps. | 268,468 | Ps. | 142,641 | Ps. | 151,183 | Ps. | 562,292 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| 2017 | 2018 | 2019 | 2020 | Total | ||||||||||||||||
Finance debt denominated in foreign currency: | ||||||||||||||||||||
Santander/Bancomext | Ps. | 333,702 | Ps. | 653,336 | Ps. | 131,686 | Ps. | 158,024 | Ps. | 1,276,748 | ||||||||||
Citibanamex | 407,514 | — | — | — | 407,514 | |||||||||||||||
Bank of America | 310,021 | — | — | — | 310,021 | |||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Total | Ps. | 1,051,237 | Ps. | 653,336 | Ps. | 131,686 | Ps. | 158,024 | Ps. | 1,994,283 | ||||||||||
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| |||||||||||
During(iii) Since 2011, the Company entered into 100% has financed thepre-delivery payments financings with JSA, Santander and Bancomext for ten A320 aircrafts type to be delivered in 2012, 2013 and 2014, respectively. On the same date, the Company entered intoacquisition of its aircraft through a 67% pre-delivery paymentsrevolving financing with GECAS for four A320 aircraft type, which were delivered in 2012. A Mexican trust structure was created whereby (i) the Company assigned its rights and obligations, including its obligation to make pre-delivery payments, under its purchase agreement with Airbus to the Mexican trusts, (ii) the Company guaranteed the obligations of the Mexican trusts under the financing agreements, (iii) the Company transferred its purchase rights to JSA, and GECAS prior to the delivery date of the aircraft pursuant to the terms of the purchase agreement with Airbus, and (iv) the Company entered into lease agreements with JSA and GECAS for these seven aircraft out of the fourteen previously mentioned (sale and leaseback transaction).
The pre-delivery payments financing with JSA and GECAS were paid by the Company duringfacility. During the year ended December 31, 2012. Therefore,2016, the Company did not have any financial debt with JSA and GECAS as of December 31, 2013 and 2012.pre-delivery payments for eight A320 Classic Engine Option (“CEO”) aircraft were financed through this revolving financing facility.
As of December 2012, the Company had a 100% pre-delivery payments financing with Santander and Bancomext for seven A320 aircraft to be delivered in 2013 and 2014. On August 1, 2013, the Company signed an amendment to the loan agreement to finance thepre-delivery payments of 8eight additional A320CEO that were delivered in 2015 and 2016.
On February 28, 2014 and November 27, 2014, the Company signed amendments to the loan agreement to financepre-delivery payments of two and four additional A320CEO, respectively, one was delivered in 2014 and five in 2016.
On August 25, 2015, the Company signed an amendment to the loan agreement to financepre-delivery payments of eight additional A320 New Engine Option (“NEO”) aircraft to be delivered in 2015between 2017 and 2016. This2018.
Additionally, on November 30, 2016, the Company signed an amendment to the loan agreement to financepre-delivery payments oftwenty-two additional A320NEO to be delivered between 2019 and 2020. In accordance with this amendment, the revolving line of credit with Santander and Bancomext to financepre-delivery payments will expire on May 31, 2021.
The “Santander/Bancomext” loan agreement provides for certain covenants, including limits to the ability to, among others:
| i) | Incur debt above a specified debt basket unless certain financial ratios are met. |
| ii) | Create liens. |
| iii) | Merge with or acquire any other entity without the previous authorization of the Banks. |
| iv) | Dispose of certain assets. |
| v) | Declare and pay dividends, or make any distribution on the Company’s share capital unless certain financial ratios are met. |
At December 31, 20132016 and 2012,2015, the Company was in compliance with the covenants under the above-mentioned loan agreements.agreement.
For purposes of financing thepre-delivery payments, Mexican trust structures were created whereby, the Company assigned its rights and obligations under the Airbus Purchase Agreement with Airbus S.A.S. (“Airbus”), including its obligation to makepre-delivery payments to the Mexican trusts, and the Company guaranteed the obligations of the Mexican trusts under the financing agreement (Deutsche Bank Mexico, S.A. Trust 1710 and 1711).
(iv) At December 31, 2013,2016, the Company had available credit lines totaling Ps.1,159,103,Ps.6,936,237, of which Ps.934,956Ps.5,048,477 were related to financial debt and Ps.224,147Ps.1,887,760 were related to letters of credit (Ps.402,016(Ps.3,703,052 were undisbursed)undrawn).
Other At December 31, 2015, the Company had available credit lines totaling Ps.3,033,184, of which Ps.1,810,446 were related to financial liabilitiesdebt and Ps.1,222,738 were related to letters of credit (Ps.680,413 were undrawn).
| 2013 | 2012 | |||||||
Derivative financial instruments at fair value through OCI: | ||||||||
Interest rate swaps contracts | Ps. | 106,151 | Ps. | 147,713 | ||||
|
|
|
| |||||
Total financial liabilities | Ps. | 106,151 | Ps. | 147,713 | ||||
|
|
|
| |||||
Total current | Ps. | 31,845 | Ps. | 37,011 | ||||
|
|
|
| |||||
Total no current | Ps. | 74,306 | Ps. | 110,702 | ||||
|
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|
| |||||
| c) | Other financial liabilities |
Financial liabilities at fair value through OCI reflect the change in fair value of interest rate swap contracts, designated as cash flow hedges.
| 2016 | 2015 | |||||||
Derivative financial instruments designated as CFH (effective portion recognized within OCI): | ||||||||
Interest rate swap contracts | Ps. | 14,144 | Ps. | 55,774 | ||||
|
|
|
| |||||
Total financial liabilities | Ps. | 14,144 | Ps. | 55,774 | ||||
|
|
|
| |||||
Presented on the consolidated statements of financial position as follows: | ||||||||
Current | Ps. | 14,144 | Ps. | 44,301 | ||||
|
|
|
| |||||
Non-current | Ps. | — | Ps. | 11,473 | ||||
|
|
|
| |||||
| 6. | Cash and cash equivalents |
An analysis of this caption is as follows:
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
Short-term investments | Ps. | 4,433,559 | Ps. | 2,350,998 | ||||||||||||
Cash in banks | 2,632,878 | 2,796,437 | ||||||||||||||
Cash on hand | Ps. | 3,840 | Ps. | 3,101 | 4,814 | 9,878 | ||||||||||
Cash in banks | 2,007,566 | 42,559 | ||||||||||||||
Short-term investments | 439,367 | 776,416 | ||||||||||||||
|
|
|
| |||||||||||||
Total cash and cash equivalents | Ps. | 2,450,773 | Ps. | 822,076 | Ps. | 7,071,251 | Ps. | 5,157,313 | ||||||||
|
|
|
| |||||||||||||
| 7. | Related parties |
a) An analysis of balances due from/to related parties at December 31, 20132016 and 20122015 is provided below. All companies are considered affiliates, since the Company’s primary shareholders or directors are also direct or indirect shareholders of the related parties:
Type of transactions | Country of origin | 2013 | 2012 | Terms | ||||||||||
Due from: | ||||||||||||||
ARSA Asesoría Integral Profesional, S.A. de C.V. | Insurance passenger commissions | Mexico | Ps. | 885 | Ps. | 2,169 | 30 days | |||||||
Marketing Modelo, S.A. de C.V. | Advertising | Mexico | — | 1,450 | 30 days | |||||||||
|
|
|
| |||||||||||
| Ps. | 885 | Ps. | 3,619 | |||||||||||
|
|
|
| |||||||||||
Due to: | ||||||||||||||
Aeromantenimiento, S.A. | Aircraft and engine maintenance | El Salvador | Ps. | 2,796 | Ps. | 3,389 | 30 days | |||||||
TACA International Airlines, S.A. | Maintenance/pilot training | El Salvador | — | 3 | 30 days | |||||||||
Human Capital International HCI, S.A. de C.V. | Professional fees | Mexico | 240 | 7 | 30 days | |||||||||
|
|
|
| |||||||||||
| Ps. | 3,036 | Ps. | 3,399 | |||||||||||
|
|
|
| |||||||||||
Type of transaction | Country of origin | 2016 | 2015 | Terms | ||||||||||||||
Due to: | ||||||||||||||||||
One Link, S.A. de C.V. (“One Link”) | Call center fees | El Salvador | Ps. | 33,775 | Ps. | 9,863 | 30 days | |||||||||||
Aeromantenimiento, S.A. (“Aeroman”) | Aircraft and engine maintenance | El Salvador | 30,627 | 4,453 | 30 days | |||||||||||||
SearchForce, Inc. (“SearchForce”) | Internet services | Mexico | 620 | — | 30 days | |||||||||||||
|
|
|
| |||||||||||||||
| Ps. | 65,022 | Ps. | 14,316 | |||||||||||||||
|
|
|
| |||||||||||||||
For the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the Company did not recognize any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
b) During the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the Company had the following transactions with related parties:
Related party transactions | Country of origin | 2013 | 2012 | 2011 | Country of origin | 2016 | 2015 | 2014 | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||
Other commissions | Mexico | Ps. | 42,206 | Ps. 44,205 | Ps. | 23,486 | Mexico | Ps. | — | Ps. | — | Ps. | 3,663 | |||||||||||||||||
Advertising | Mexico | — | 2,500 | 2,500 | ||||||||||||||||||||||||||
Other | Mexico | 5 | — | 1,866 | ||||||||||||||||||||||||||
Transporting services commissions | Mexico | — | — | 354 | ||||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||
Maintenance | El Salvador | Ps. | 124,281 | Ps. | 135,640 | Ps. | 72,983 | El Salvador | 304,399 | 111,641 | 162,687 | |||||||||||||||||||
Fees | Mexico/El Salvador/USA | — | — | — | Mexico/El Salvador | 173,197 | 57,809 | 1,038 | ||||||||||||||||||||||
Pilot training | El Salvador | — | — | 979 | ||||||||||||||||||||||||||
Other | Mexico/El Salvador | 1,845 | 857 | 1,628 | Mexico/El Salvador | 8,105 | 2,516 | 617 | ||||||||||||||||||||||
c) Servprot
Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, Mejicano, the Company´sCompany’s Chief Executive Officer, and Rodolfo Montemayor, Garza, a member of the board of directors, are shareholders of such company. Servprot provides security services for Mr. Beltranena and his family, as well as for Mr. Montemayor. At December 31, 2013, the Company accrued an expense of Ps.0.1 million.
d) During the years ended December 31, 2013, 20122016, 2015 and 2011,2014 the Company expensed Ps.1,733, Ps.768 and Ps.900, respectively for this concept.
d) Aeroman
Aeroman is a related party because Roberto José Kriete Ávila, a member of the Company’s board of directors, and members of his immediate family are shareholders of Aeroman. We entered into an aircraft repair and maintenance service agreement with Aeroman on March 6, 2007. This agreement provides that we have to use Aeroman, exclusively for aircraft repair and maintenance services, subject to availability. Under this agreement, Aeroman provides inspection, maintenance, repair and overhaul services for aircraft. The Company makes payments under this agreement depending on the services performed. This agreement is for a 10 year term. As of December 31, 2016, 2015 and 2014, the balances due under our agreement with Aeroman were Ps.30,627, Ps.4,453 and Ps.559, respectively. The Company incurred expenses in aircraft and engine maintenance and technical support under this agreement of Ps.308,731, Ps.114,157 and Ps.163,263 for the years ended December 31, 2016, 2015 and 2014, respectively.
e) Human Capital International
The Company entered into a professional services agreement with Human Capital International HCI, S.A. de C.V., or Human Capital International, on February 25, 2015, for the selection and hiring of executives. Rodolfo Montemayor Garza, a member of the Company’s board of directors, is a founder and chairman of the board of directors of Human Capital International. As of December 31, 2016 and 2015, the Company recognized an expense under this agreement of Ps.3,127 and Ps.152, respectively.
f) One Link
One Link is a related party because Marcho Baldochi, an alternate member of the board, is a director of the Company. As of December 31, 2016 and 2015, the balance due under this agreement was Ps.33,775 and Ps.9,863, respectively and the Company recognized an expense under this agreement of Ps.168,337 and Ps.56,889 for the years ended December 31, 2016 and 2015, respectively.
g) SearchForce
SearchForce is a related party because William Dean Donovan, an alternate member of the board, is a director of the Company. As of December 31, 2016, the balance due under this agreement was Ps.620 and the Company recognized an expense under this agreement of Ps.3,446 for the year ended December 31, 2016.
h) Directors and officers
During the years ended December 31, 2016, 2015 and 2014, all of the Company’s senior managers received an aggregate compensation of short and long-term benefits of Ps.65,452, Ps.63,003Ps.160,762, Ps.120,440 and Ps.61,735,Ps.64,387, respectively. Additionally,
For the years ended December 31, 2016, 2015 and 2014 the cost of the Management Incentive Planshare-based payments transactions (MIP and LTIP) were Ps.7,816, Ps.6,345 and Ps.1,385, respectively. Cash-settled payments transactions SARs were Ps.86,100, Ps.44,699 and Ps.1,652, respectively (Note 17).
During 2015, the Company adopted a new short-term benefit plan for certain personnel whereby cash bonuses are awarded for meeting certain Company’s performance target. During the yearyears ended December 31, 2013 was Ps.2,068 (Note 17).2016 and 2015, the Company recorded a provision in an amount of Ps.53,738 and Ps.70,690, respectively.
During the year ended December 31, 2013,2016, 2015 and 2014, the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.4,996,Ps.7,751, Ps.5,480 and Ps.6,524, respectively, and the rest of the directors received a compensation of Ps.775.
During the year ended December 31, 2012, the chairmanPs.7,308, Ps.4,183 and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.5,775, and the rest of the directors received no compensation.
During years ended December 31, 2011 and 2010, the Company did not have an independent chairman or independent members as part of its Board of Directors.Ps.4,669, respectively.
| 8. | Other accounts receivable, net |
An analysis of other accounts receivable at December 31, 20132016 and 2012,2015, is detailed below:
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
Short-term: | ||||||||||||||||
Credit cards | Ps. | 126,307 | Ps. | 91,411 | Ps. | 253,374 | Ps. | 153,989 | ||||||||
Insurance recovering | 55,815 | 13,124 | ||||||||||||||
Cargo clients | 57,938 | 66,863 | 29,901 | 28,687 | ||||||||||||
Travel agencies | 45,683 | 35,331 | ||||||||||||||
Credit notes from suppliers (Note 12) | 9,956 | 21,151 | ||||||||||||||
Other accounts receivable | 26,236 | 17,710 | ||||||||||||||
Other points of sales | 22,077 | 19,057 | 23,867 | 19,086 | ||||||||||||
Depositary services benefit | 7,323 | — | ||||||||||||||
Travel agencies and insurance commissions | 20,477 | 24,687 | ||||||||||||||
Marketing services receivable | 11,070 | 2,241 | ||||||||||||||
Airport services | 9,479 | 10,435 | ||||||||||||||
Affinity credit card | 8,950 | 11,720 | ||||||||||||||
Employees | 5,663 | 4,211 | 7,551 | 5,955 | ||||||||||||
Other accounts receivable | 24,623 | 21,029 | ||||||||||||||
Provision for doubtful accounts | (29,775 | ) | (21,722 | ) | ||||||||||||
|
| |||||||||||||||
| 446,720 | 287,634 | |||||||||||||||
Allowance for doubtful accounts | (19,317 | ) | (24,612 | ) | ||||||||||||
|
|
|
| |||||||||||||
| Ps. | 269,795 | Ps. | 237,331 | Ps. | 427,403 | Ps. | 263,022 | |||||||||
|
|
|
| |||||||||||||
Accounts receivable have the following maturity:aging:
| 2013 Impaired | 2013 Not impaired | Total 2013 | 2012 Impaired | 2012 Not impaired | Total 2012 | |||||||||||||||||||
Days | ||||||||||||||||||||||||
00-30 | Ps. | 12,497 | Ps. | 233,807 | Ps. | 246,304 | Ps. | 12,203 | Ps. | 211,716 | Ps. | 223,919 | ||||||||||||
31–60 | — | 25,316 | 25,316 | 17,791 | 17,791 | |||||||||||||||||||
61–90 | — | 10,672 | 10,672 | 5,022 | 5,022 | |||||||||||||||||||
91–120 | 17,278 | 17,278 | 9,519 | 2,802 | 12,321 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Ps. | 29,775 | Ps. | 269,795 | Ps. | 299,570 | Ps. | 21,722 | Ps. | 237,331 | Ps. | 259,053 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Days 0–30 31–60 61–90 91–120 2016
Impaired 2016
Not impaired Total
2016 2015
Impaired 2015
Not impaired Total
2015 Ps. 15,723 Ps. 398,721 Ps. 414,444 Ps. 5,339 Ps.251,183 Ps. 256,522 — 11,231 11,231 — 8,376 8,376 — 14,492 14,492 — 3,463 3,463 3,594 2,959 6,553 19,273 — 19,273 Ps. 19,317 Ps. 427,403 Ps. 446,720 Ps. 24,612 Ps.263,022 Ps. 287,634
The movement in the allowance for doubtful accounts from January 1, 20122014 to December 31, 20132016 is as follows:
Balance as of January 1, | Ps. | ( | ) | |
Write-offs | ||||
Increase in allowance | ( | ) | ||
|
| |||
Balance as of December 31, | ( | ) | ||
Write-offs | ||||
Increase in allowance | ( | ) | ||
|
| |||
Balance as of December 31, | ( | ) | ||
Write-offs | ||||
Increase in allowance | ( | ) | ||
|
| |||
Balance as of December 31, | Ps. | ) | ||
|
|
| 9. | Inventories |
An analysis of inventories at December 31, 20132016 and 20122015 is as follows:
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
Spare parts and accessories of flight equipment | Ps. | 105,642 | Ps. | 91,403 | Ps. | 235,330 | Ps. | 157,304 | ||||||||
Meals, beverages and utensils | 8,193 | 5,747 | ||||||||||||||
Miscellaneous supplies | 8,554 | 5,769 | ||||||||||||||
|
|
|
| |||||||||||||
| Ps. | 113,835 | Ps. | 97,150 | Ps. | 243,884 | Ps. | 163,073 | |||||||||
|
|
|
| |||||||||||||
The inventory items are consumed during or used mainly in delivery of in flight-servicesin-flight services and for maintenance services by the Company and are valued at the lower of cost or replacement value.
During the years ended as of December 31, 2013, 20122016, 2015 and 2011,2014, the amount of consumption of inventories, recorded as an operating expense as part of maintenance expense was Ps.139,519, Ps.114,521Ps.186,719, Ps.143,992 and Ps.116,657,Ps.108,580, respectively.
| 10. | Prepaid expenses and other current assets |
An analysis of prepaid expenses and other current assets at December 31, 20132016 and 20122015 is as follows:
| 2013 | 2012 | |||||||
Short-term: | ||||||||
Prepaid major maintenance | Ps. | 165,581 | Ps. | 128,201 | ||||
Prepaid aircraft rent | 67,884 | 64,733 | ||||||
Sales commission to travel agencies for unused tickets | 43,589 | 25,006 | ||||||
Prepaid insurance | 24,878 | 26,615 | ||||||
Advances to suppliers | 10,985 | 6,086 | ||||||
Prepaid expenses for constructions of aircraft and engine | 7,007 | 7,747 | ||||||
Loss on sale and leaseback transactions to be amortized (Note 14) | 3,047 | 3,047 | ||||||
Transaction costs on the issuance of equity | — | 6,398 | ||||||
Others | — | 41 | ||||||
|
|
|
| |||||
| Ps. | 322,971 | Ps. | 267,874 | |||||
|
|
|
| |||||
| 2016 | 2015 | |||||||
Advances to suppliers | Ps. | 705,105 | Ps. | 113,082 | ||||
Prepaid aircraft rent | 668,306 | 320,358 | ||||||
Sales commission to travel agencies | 73,413 | 65,092 | ||||||
Prepaid insurance | 47,663 | 40,195 | ||||||
Other prepaid expenses | 33,555 | 14,961 | ||||||
Advances for constructions of aircraft and engines | 31,437 | 28,541 | ||||||
Loss on sale and leaseback transactions to be amortized (Note 14) | 3,047 | 3,047 | ||||||
|
|
|
| |||||
| Ps. | 1,562,526 | Ps. | 585,276 | |||||
|
|
|
| |||||
| 11. | Guarantee deposits |
An analysis of this caption at December 31, 20132016 and 20122015 is as follows:
| 2013 | 2012 | 2016 | 2015 | |||||||||||||
Current asset: | ||||||||||||||||
Aircraft maintenance deposits paid to lessors (Note 1j) | Ps. | 459,531 | Ps. | 202,478 | Ps. | 1,145,913 | Ps. | 852,530 | ||||||||
Deposits for rental of flight equipment | 14,155 | 11,786 | ||||||||||||||
Other guarantee deposits | 39,558 | 35,764 | 7,141 | 8,706 | ||||||||||||
|
|
|
| |||||||||||||
| Ps. | 499,089 | Ps. | 238,242 | 1,167,209 | 873,022 | |||||||||||
|
| |||||||||||||||
Non-current asset: | ||||||||||||||||
Aircraft maintenance deposits paid to lessors (Note 1j) | Ps. | 2,147,720 | Ps. | 1,860,507 | 5,951,831 | 4,068,732 | ||||||||||
Deposits for rental of flight equipment | 404,096 | 293,660 | 589,804 | 613,346 | ||||||||||||
Collateral of derivative financial instruments (Note 1s) | 40,017 | 81,597 | ||||||||||||||
Other guarantee deposits | 11,648 | 8,901 | 18,243 | 10,525 | ||||||||||||
|
|
|
| |||||||||||||
| 2,603,481 | 2,244,665 | 6,559,878 | 4,692,603 | |||||||||||||
|
|
|
| |||||||||||||
| Ps. | 3,102,570 | Ps. | 2,482,907 | Ps. | 7,727,087 | Ps. | 5,565,625 | |||||||||
|
|
|
| |||||||||||||
| 12. | Rotable spare parts, furniture and equipment, net |
a) The detail and movement of the different categories of rotable spare parts, furniture and equipment are shown below:
| Gross value | Accumulated depreciation | Net carrying value | ||||||||||||||||||||||
| At December 31, 2016 | At December 31, 2015 | At December 31, 2016 | At December 31, 2015 | At December 31, 2016 | At December 31, 2015 | |||||||||||||||||||
Leasehold improvements to flight equipment | Ps. | 1,709,868 | Ps. | 1,483,344 | Ps. | (1,386,844 | ) | Ps. | (982,187 | ) | Ps. | 323,024 | Ps. | 501,157 | ||||||||||
Pre-delivery payments | 1,206,330 | 1,583,835 | — | — | 1,206,330 | 1,583,835 | ||||||||||||||||||
Aircraft parts and rotable spare parts | 393,522 | 285,323 | (137,712 | ) | (105,376 | ) | 255,810 | 179,947 | ||||||||||||||||
Aircraft spare engines | 323,025 | — | (1,337 | ) | — | 321,688 | — | |||||||||||||||||
Construction and improvements in process | 255,374 | 140,926 | — | — | 255,374 | 140,926 | ||||||||||||||||||
Standardization | 176,975 | 155,021 | (94,864 | ) | (71,135 | ) | 82,111 | 83,886 | ||||||||||||||||
Constructions and improvements | 120,886 | 86,067 | (85,873 | ) | (67,865 | ) | 35,013 | 18,202 | ||||||||||||||||
Computer equipment | 24,172 | 27,075 | (16,972 | ) | (22,880 | ) | 7,200 | 4,195 | ||||||||||||||||
Workshop tools | 20,500 | 16,259 | (15,915 | ) | (11,444 | ) | 4,585 | 4,815 | ||||||||||||||||
Electric power equipment | 14,818 | 19,457 | (7,890 | ) | (10,424 | ) | 6,928 | 9,033 | ||||||||||||||||
Communications equipment | 9,261 | 8,641 | (5,706 | ) | (4,877 | ) | 3,555 | 3,764 | ||||||||||||||||
Workshop machinery and equipment | 7,240 | 7,108 | (3,622 | ) | (2,929 | ) | 3,618 | 4,179 | ||||||||||||||||
Motorized transport equipment platform | 5,703 | 5,576 | (4,346 | ) | (4,250 | ) | 1,357 | 1,326 | ||||||||||||||||
Service carts on board | 5,403 | 5,367 | (4,645 | ) | (3,914 | ) | 758 | 1,453 | ||||||||||||||||
Office furniture and equipment | 36,310 | 28,101 | (18,653 | ) | (15,169 | ) | 17,657 | 12,932 | ||||||||||||||||
Total | Ps. | 4,309,387 | Ps. | 3,852,100 | Ps. | (1,784,379 | ) | Ps. | (1,302,450 | ) | Ps. | 2,525,008 | Ps. | 2,549,650 | ||||||||||
| Gross value | Accumulated depreciation | Net carrying value | ||||||||||||||||||||||
| At December 31, 2013 | At December 31, 2012 | At December 31, 2013 | At December 31, 2012 | At December 31, 2013 | At December 31, 2012 | |||||||||||||||||||
Aircraft parts and rotable spare parts | Ps. | 181,676 | Ps. | 161,630 | Ps. | (69,436 | ) | Ps. | (53,069 | ) | Ps. | 112,240 | Ps. | 108,561 | ||||||||||
Constructions and improvements | 69,056 | 47,973 | (40,810 | ) | (27,616 | ) | 28,246 | 20,357 | ||||||||||||||||
Standardization | 71,371 | 33,682 | (31,259 | ) | (23,370 | ) | 40,112 | 10,312 | ||||||||||||||||
Computer equipment | 22,323 | 20,794 | (17,439 | ) | (14,710 | ) | 4,884 | 6,084 | ||||||||||||||||
Office furniture and equipment | 27,014 | 24,372 | (8,398 | ) | (4,883 | ) | 18,616 | 19,489 | ||||||||||||||||
Electric power equipment | 15,491 | 12,789 | (6,281 | ) | (4,448 | ) | 9,210 | 8,341 | ||||||||||||||||
Motorized transport equipment platform | 4,597 | 4,969 | (4,267 | ) | (4,429 | ) | 330 | 540 | ||||||||||||||||
Communications equipment | 7,545 | 6,621 | (3,200 | ) | (2,473 | ) | 4,345 | 4,148 | ||||||||||||||||
Workshop machinery and equipment | 6,776 | 3,302 | (1,526 | ) | (991 | ) | 5,250 | 2,311 | ||||||||||||||||
Service carts on board | 4,505 | 3,629 | (1,810 | ) | — | 2,695 | 3,629 | |||||||||||||||||
Reserve for obsolescence | — | (619 | ) | — | — | — | (619 | ) | ||||||||||||||||
Pre-delivery payments | 879,001 | 861,052 | — | — | 879,001 | 861,052 | ||||||||||||||||||
Workshop tools | 10,395 | 10,395 | (8,796 | ) | — | 1,599 | 10,395 | |||||||||||||||||
Construction and improvements in process | 8,828 | 13,639 | — | — | 8,828 | 13,639 | ||||||||||||||||||
Leasehold improvements to flight equipment | 601,845 | 292,463 | (375,878 | ) | (165,383 | ) | 225,967 | 127,080 | ||||||||||||||||
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Total | Ps. | 1,910,423 | Ps. | 1,496,691 | Ps. | (569,100 | ) | Ps. | (301,372 | ) | Ps. | 1,341,323 | Ps. | 1,195,319 | ||||||||||
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| Aircraft parts and rotable spare parts | Constructions and improvements | Standardization | Computer equipment | Office furniture and equipment | Electric power equipment | Workshop tools | Construction and improvements in process | Motorized transport equipment platform | Communications equipment | Workshop machinery and equipment | Service carts on board | Reserve for obsolescence | Pre- delivery payments | Improvements to leased assets | Total | Aircraft parts and rotable spare parts | Aircraft spare engines | Constructions and improvements | Standardization | Computer equipment | Office furniture and equipment | Electric power equipment | Workshop Tools | Motorized transport equipment platform | Communications equipment | Workshop machinery and equipment | Service carts on board | Pre- delivery payments | Construction and improvements in process | Leasehold improvements to flight equipment | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net book amount as of December 31, 2011 | Ps. | 200,164 | Ps. | 37,721 | Ps. | 2,764 | Ps. | 3,532 | Ps. | 11,517 | Ps. | 7,012 | Ps. | 10,395 | Ps. | 11,492 | Ps. | 601 | Ps. | 3,643 | Ps. | 1,107 | Ps. | 1,783 | Ps. | (294 | ) | Ps. | 1,102,355 | Ps. | 123,506 | Ps. | 1,517,298 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net book amount as of December 31, 2014 | Ps. | 151,943 | Ps. | —. | Ps. | 24,104 | Ps. | 47,622 | Ps. | 3,873 | Ps. | 15,742 | Ps. | 7,347 | Ps. | 2,072 | Ps. | 239 | Ps. | 4,073 | Ps. | 4,578 | Ps. | 2,669 | Ps. | 1,396,008 | Ps. | 4,760 | Ps. | 558,282 | Ps. | 2,223,312 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Additions | 45,578 | 4,834 | 10,660 | 5,192 | 10,641 | 7,117 | 13,607 | 363 | 1,078 | 1,454 | 1,846 | (325 | ) | 633,226 | * | 129,876 | 865,147 | 53,723 | — | — | 57,838 | 173 | 12 | 3,966 | 4,374 | 1,382 | 366 | 332 | — | 835,496 | 154,727 | 295,807 | 1,408,196 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (106,535 | ) | (10,041 | ) | — | (10 | ) | (3,864 | ) | (4,727 | ) | — | (214 | ) | (73 | ) | — | — | — | — | (874,529 | ) | — | (999,993 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals and transfers | (787 | ) | — | — | — | (1 | ) | (682 | ) | — | — | (10 | ) | (13 | ) | — | — | (669,718 | ) | (7,257 | ) | — | (678,468 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowing costs, net* | — | — | — | — | — | — | — | — | — | — | — | — | 22,049 | — | — | 22,049 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other movements | — | 7,045 | — | — | 4,177 | — | — | (11,246 | ) | — | 24 | — | — | — | — | — | — | — | — | 6,586 | — | 2,878 | 1,567 | — | — | — | 273 | — | — | — | (11,304 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | (30,646 | ) | (19,202 | ) | (3,112 | ) | (2,630 | ) | (2,982 | ) | (1,061 | ) | — | — | (351 | ) | (597 | ) | (250 | ) | — | — | — | (126,302 | ) | (187,133 | ) | (24,932 | ) | — | (12,488 | ) | (21,574 | ) | (2,728 | ) | (3,707 | ) | (2,280 | ) | (1,631 | ) | (285 | ) | (935 | ) | (731 | ) | (1,216 | ) | — | — | (352,932 | ) | (425,439 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2012 | 108,561 | 20,357 | 10,312 | 6,084 | 19,489 | 8,341 | 10,395 | 13,639 | 540 | 4,148 | 2,311 | 3,629 | (619 | ) | 861,052 | 127,080 | 1,195,319 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2015 | 179,947 | — | 18,202 | 83,886 | 4,195 | 12,932 | 9,033 | 4,815 | 1,326 | 3,764 | 4,179 | 1,453 | 1,583,835 | 140,926 | 501,157 | 2,549,650 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cost | 285,323 | — | 86,067 | 155,021 | 27,075 | 28,101 | 19,457 | 16,259 | 5,576 | 8,641 | 7,108 | 5,367 | 1,583,835 | 140,926 | 1,483,344 | 3,852,100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated depreciation | (105,376 | ) | — | (67,865 | ) | (71,135 | ) | (22,880 | ) | (15,169 | ) | (10,424 | ) | (11,444 | ) | (4,250 | ) | (4,877 | ) | (2,929 | ) | (3,914 | ) | — | — | (982,187 | ) | (1,302,450 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net book amount as of December 31, 2015 | Ps. | 179,947 | Ps. | — —. |
| Ps. | 18,202 | Ps. | 83,886 | Ps. | 4,195 | Ps. | 12,932 | Ps. | 9,033 | Ps. | 4,815 | Ps. | 1,326 | Ps. | 3,764 | Ps. | 4,179 | Ps. | 1,453 | Ps. | 1,583,835 | Ps. | 140,926 | Ps. | 501,157 | Ps. | 2,549,650 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Additions | 110,592 | 323,025 | 2,218 | 21,953 | 740 | 517 | 1,467 | 4,217 | 505 | 129 | 131 | 36 | 1,345,081 | 161,560 | 226,526 | 2,198,697 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals and transfers | (1,299 | ) | — | — | — | — | (110 | ) | (1,626 | ) | — | (49 | ) | — | — | — | (1,733,093 | ) | (2,132 | ) | — | (1,738,309 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowing costs, net* | — | — | — | — | — | — | — | — | — | — | — | — | 10,507 | — | — | 10,507 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other movements | — | — | 32,441 | — | 4,814 | 7,877 | — | 25 | 46 | 493 | — | — | — | (44,980 | ) | — | 716 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | (33,430 | ) | (1,337 | ) | (17,848 | ) | (23,728 | ) | (2,549 | ) | (3,559 | ) | (1,946 | ) | (4,472 | ) | (471 | ) | (831 | ) | (692 | ) | (731 | ) | — | — | (404,659 | ) | (496,253 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2016 | 255,810 | 321,688 | 35,013 | 82,111 | 7,200 | 17,657 | 6,928 | 4,585 | 1,357 | 3,555 | 3,618 | 758 | 1,206,330 | 255,374 | 323,024 | 2,525,008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cost | 161,630 | 47,973 | 33,682 | 20,794 | 24,372 | 12,789 | 10,395 | 13,639 | 4,969 | 6,621 | 3,302 | 3,629 | (619 | ) | 861,052 | 292,463 | 1,496,691 | 393,522 | 323,025 | 120,886 | 176,975 | 24,172 | 36,310 | 14,818 | 20,500 | 5,703 | 9,261 | 7,240 | 5,403 | 1,206,330 | 255,374 | 1,709,868 | 4,309,387 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated depreciation | (53,069 | ) | (27,616 | ) | (23,370 | ) | (14,710 | ) | (4,883 | ) | (4,448 | ) | — | — | (4,429 | ) | (2,473 | ) | (991 | ) | — | — | — | (165,383 | ) | (301,372 | ) | (137,712 | ) | (1,337 | ) | (85,873 | ) | (94,864 | ) | (16,972 | ) | (18,653 | ) | (7,890 | ) | (15,915 | ) | (4,346 | ) | (5,706 | ) | (3,622 | ) | (4,645 | ) | — | — | (1,386,844 | ) | (1,784,379 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net book amount as of December 31, 2012 | 108,561 | 20,357 | 10,312 | 6,084 | 19,489 | 8,341 | 10,395 | 13,639 | 540 | 4,148 | 2,311 | 3,629 | (619 | ) | 861,052 | 127,080 | 1,195,319 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net book amount as of December 31, 2016 | Ps. | 255,810 | Ps. | 321,688 | Ps. | 35,013 | Ps. | 82,111 | Ps. | 7,200 | Ps. | 17,657 | Ps. | 6,928 | Ps. | 4,585 | Ps. | 1,357 | Ps. | 3,555 | Ps. | 3,618 | Ps. | 758 | Ps. | 1,206,330 | Ps. | 255,374 | Ps. | 323,024 | Ps. | 2,525,008 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Additions | 25,267 | 7,425 | 37,688 | 176 | 982 | 2,703 | — | 18,575 | — | 169 | 2,651 | 876 | — | 735,036 | * | 309,382 | 1,140,930 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals and transfers | (3,344 | ) | — | — | — | (44 | ) | — | — | (5,086 | ) | (13 | ) | — | — | — | — | (717,087 | ) | — | (725,574 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other movements | — | 13,657 | — | 1,353 | 1,711 | — | (419 | ) | (18,300 | ) | — | 755 | 824 | (200 | ) | 619 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | (18,244 | ) | (13,193 | ) | (7,888 | ) | (2,729 | ) | (3,522 | ) | (1,834 | ) | (8,377 | ) | — | (197 | ) | (727 | ) | (536 | ) | (1,610 | ) | — | — | (210,495 | ) | (269,352 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2013 | 112,240 | 28,246 | 40,112 | 4,884 | 18,616 | 9,210 | 1,599 | 8,828 | 330 | 4,345 | 5,250 | 2,695 | — | 879,001 | 225,967 | 1,341,323 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cost | 181,676 | 69,056 | 71,371 | 22,323 | 27,014 | 15,491 | 10,395 | 8,828 | 4,597 | 7,545 | 6,776 | 4,505 | — | 879,001 | 601,845 | 1,910,423 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated depreciation | (69,436 | ) | (40,810 | ) | (31,259 | ) | (17,439 | ) | (8,398 | ) | (6,281 | ) | (8,796 | ) | — | (4,267 | ) | (3,200 | ) | (1,526 | ) | (1,810 | ) | — | — | (375,878 | ) | (569,100 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net book amount as of December 31, 2013 | Ps. | 112,240 | Ps. | 28,246 | Ps. | 40,112 | Ps. | 4,884 | Ps. | 18,616 | Ps. | 9,210 | Ps. | 1,599 | Ps. | 8,828 | Ps. | 330 | Ps. | 4,345 | Ps. | 5,250 | Ps. | 2,695 | — | Ps. | 879,001 | Ps. | 225,967 | Ps. | 1,341,323 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| * | During the years ended December 31, |
b)a) Depreciation expense for the years ended December 31, 2013, 20122016, 2015 and 2011,2014, was Ps.269,352, Ps.187,133Ps.496,253, Ps.425,439 and Ps.82,919,Ps.318,103, respectively. Depreciation charges for the year are recognized as a component of operating expenses in the consolidated statements of operations.
c) Onb) In October 2005 and December 2006, the Company entered into purchase agreements with Airbus and International Aero Engines AG (“IAE”) for the purchase of aircraft and engine,engines, respectively. Under such agreements and prior to the delivery of each aircraft and engine, the Company agreed to makepre-delivery payments, which were calculated based on the reference price of each aircraft and engine, and following a formula established for such purpose in the agreements. The Company took the delivery of the aircraft in accordance with a schedule, based on which at December 31, 2011 a total of 16 aircraft and five engines were delivered.
Additionally, based on the original Airbus purchase agreement, the Company had an option to buy 20 additional aircraft under the same commercial terms. On June 22, 2007, the Company converted 14 aircraft (out of the 20 aforementioned additional aircraft) to binding orders. On January 4, 2011, the Company amended the schedule of these 14 additional aircraft to be delivered as follows: seven in 2012, five in 2013 and two in 2014. On the same date, the Company modified these 14 new orders from A319 aircraft type to A320 aircraft type.
In 2011, the Company amended the agreement with Airbus for the purchase of 44 A320 family aircraft to be delivered from 2015 to 2020. The new order includes 14 Classic Engine Option (“CEO”) aircraftA320CEO and 30 New Engine Option (“NEO”) aircraft. A320NEO.
In October 2013, the Company agreed with Airbus to advance one aircraft, which was delivered during 2014.
In May 2015, the Company amended the agreement with Airbus to advance two aircraft, which were delivered during 2016.
During the years ended December 31, 20132016 and 2012,2015, the amounts paid for aircraft and spare enginepre-delivery payments were of Ps.735,036Ps.1,345,081 (US$56.8882.7 million), and Ps.633,226Ps.835,496 (US$44.2552.8 million), respectively.
On August 16, 2013, the Company entered into certain agreements with IAE and United Technologies Corporation Pratt & Whitney Division (“P&W”), which included the purchase of the engineengines for 14 A320 CEOA320CEO and 30 A320 NEOA320NEO respectively, to be delivered between 2014 and 2020. The CompanyThis agreement also entered into agreements that provide major maintenance services related to these engines, andincludes the purchase of sevenone spare engine for the A320CEO fleet (which was received during the fourth quarter of 2016) and six spare engines, one of them for the A320 CEOA320NEO fleet and the remaining six, for the A320 NEO fleet.
to be received from 2017 to 2020. In November 2013,2015, the Company amended the agreement with the engine supplier to provide major maintenance services for the engines of sixteen aircrafts (10 A320NEO and 6 A321NEO). This agreement also includes the purchase of three spare engines, two of them for the A320NEO fleet, and one for the A321NEO fleet.
The current purchase agreement with Airbus requires the Company to advance oneaccept delivery of 30 Airbus A320 family aircraft during four years (from January 2017 to December 2020). The agreement provides for the 14 CEO aircraft due for deliveryaddition of 30 A320NEO to its fleet as follows: two in 2016, to November 2014.2017, six in 2018, 10 in 2019, and 12 in 2020.
d)c) On August 27, 2012, the Company entered into a total support agreement with Lufthansa Technik AG (“LHT”) for a six year term, which includes:term. This agreement includes a total component support agreement(power-by-the hour) and guarantees the availability of aircraft components for the Company’s fleet when they are required. The cost of the total component support agreement is recognized as maintenance expenses in the consolidated statement of operations.
As of June 30, 2013, the Company decided not to sell the remaining components that had not been delivered at such date. LHT agreed with the decision; therefore, the amount of Ps.5,601 was reclassified as part of rotable spare parts, furniture and equipment, after adjustment for depreciation.
As part of the total support agreement with LHT, the Company received credit notes of Ps.46,461 (US$3.5 million), which are being amortized on a straight line basis, prospectively during the term of the agreement. As of December 31, 20132016, 2015 and 2012,2014, the Company amortized a corresponding benefit from these credit notes of Ps.9,292, Ps.9,292 and Ps.3,485,Ps.9,292, respectively, which is recognized as an offset to maintenance expenses in the consolidated statements of operations.
As of December 31, 2014 the Company applied Ps.21,151 to outstanding LHT. As of December 31, 2013, and 2012 the Company applied Ps.11,195 and Ps.25,310 to outstanding LHT invoices and also recorded an account receivable of Ps.9,956 and Ps.21,151 for the unused portion of the credit notes. This account receivable will be applied against future invoices payable to LHT undernotes, which was used during the total support agreement (Note 8).year ended December 31, 2014.
Commitments to acquisitions of property plant and equipment are disclosed in Note 23.
d) On October 12, 2016 and December 12, 2016, the Company acquired two aircraft spare engines, which were accounted for at cost for a total amount of Ps.323,025. The assets contain two major components which are assumed to have different useful lives, the limited life parts (LLPs) have an estimated useful life of 12 years, and the rest of the aircraft engine has an estimated useful life of 25 years. The Company had identified the major components as separate parts at their respective cost. These major components of the spare engines are presented as part of the spare aircraft engines and depreciated over their useful life.
| 13. | Intangible assets, net |
The composition and movement of intangible assets is as follows:
Amortization rate | Gross value | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||
| 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||
Software | 20 | % | Ps. | 182,268 | Ps. | 121,594 | Ps. | (102,986) | Ps. | (61,359) | Ps. | 79,282 | Ps. | 60,235 | ||||||||||||||
| Amortization | Gross value | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||
| Rate | At December 31, | |||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||
Software | Useful life | Ps. | 313,028 | Ps. | 253,325 | Ps. | (198,987 | ) | Ps. | (158,676 | ) | Ps. | 114,041 | Ps. | 94,649 | |||||||||||
Balance as of January 1, | Ps. | |||||||||||||||
Additions | ||||||||||||||||
Disposals | — | |||||||||||||||
Amortization | ( | ) | ||||||||||||||
|
| |||||||||||||||
Balance as of December 31, | Ps. | |||||||||||||||
Additions | ||||||||||||||||
Disposals | (1,277 | ) | ||||||||||||||
Amortization | ( | ) | ||||||||||||||
Exchange differences | 167 | |||||||||||||||
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Balance as of December 31, | ||||||||||||||||
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Software amortization expense for the years ended December 31, 2013, 20122016, 2015 and 20112014 was Ps.32,179, Ps.23,869Ps.40,290, Ps.31,278 and Ps.20,058,Ps.24,412, respectively. These amounts were recognized in other operating expensesdepreciation and amortization in the consolidated statements of operations.
| 14. | Operating leases |
The most significant operating leases are as follows:
a) Aircraft and engine rent. TheAt December 31, 2016, the Company leases 44 aircraftsleased 69 aircraft (56 as of December 31, 2015) and six11 spare engines under operating leases (six as of December 31, 2015) that have maximum terms through 2025.2030. Rents are guaranteed by deposits in cash or letters of credit. The aircraft lease agreements contain certain covenants to which the Company is bound. The most significant covenants include the following:
| (i) | Maintain the records, licenses and authorizations required by the competent aviation authorities and make the corresponding payments. |
| (ii) | Provide maintenance services to the equipment based on the approved maintenance program. |
| (iii) | Maintain insurance policies on the equipment for the amounts and risks stipulated in each agreement. |
| (iv) | Periodic submission of financial and operating information to the |
| (v) | Comply with the technical conditions relative to the return of aircraft. |
As of December 31, 20132016 and 2012,2015, the Company was in compliance with the covenants under the above mentioned aircraft lease agreements.
Composition of the fleet and spare engines, operating leases:leases*:
Aircraft Type | Model | At December 31, 2013 | At December 31, 2012 | At December 31, 2011 | Model | At December 31, 2016 | At December 31, 2015 | At December 31, 2014 | ||||||||||||||
A319 | 132 | 7 | 11 | 11 | 132 | 6 | 6 | 6 | ||||||||||||||
A319 | 133 | 13 | 13 | 13 | 133 | 9 | 12 | 12 | ||||||||||||||
A320 | 233 | 20 | 13 | 6 | 233 | 39 | 32 | 28 | ||||||||||||||
A320 | 232 | 4 | 4 | 4 | 232 | 4 | 4 | 4 | ||||||||||||||
A320NEO | 271N | 1 | — | — | ||||||||||||||||||
A321 | 231 | 10 | 2 | — | ||||||||||||||||||
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| 44 | 41 | 34 | 69 | 56 | 50 | |||||||||||||||||
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Engine Type | Model | At December 31, 2016 | At December 31, 2015 | At December 31, 2014 | ||||||||||||
V2500 | V2527M-A5 | 3 | 3 | 3 | ||||||||||||
V2500 | V2527E-A5 | 4 | 3 | 3 | ||||||||||||
V2500 | V2527-A5 | 4 | — | — | ||||||||||||
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| 11 | 6 | 6 | ||||||||||||||
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| * | Certain of the Company’s aircraft and engine lease agreements include an option to extend the lease term period. Terms and conditions are subject to market conditions at the time of renewal. |
During the year ended December 31, 20132016, the Company incorporated 17 aircraft to its fleet (eight of them based on the terms of the Airbus purchase agreement and 9 from a lessor’s aircraft order book). These new aircraft lease agreements were accounted for as operating leases. Also, the Company returned four aircraft to their respective lessors. All the aircraft incorporated through the lessor´s aircraft order book were not subject to sale and leaseback transactions.
Additionally, during 2016 the Company extended the lease term of two aircraft and entered into certain agreements with different lessors to lease five aircraft spare engines which were received during the same period. Such leases were accounted as operating leases and were not subject to sale and leaseback transactions.
On September 19, 2016, the Company received its first A320NEO.
During the year ended December 31, 2015, the Company incorporated seven aircraft to its fleet (five of them based on the terms of the original Airbus Purchase Agreement)purchase agreement and two from a lessor’s aircraft order book), and returned fourone aircraft to the lessors.a lessor. These new aircraft lease agreements were accounted for as operating leases.
On June 5, 2013, Additionally, during August 2015 the Company entered into four newextended the lease term of three A319CEO, one effective from 2015 and the other two effective from 2016.
During the year ended December 31, 2014, the Company incorporated eight aircraft to its fleet (three of them based on the terms of the original Airbus purchase agreement and five from a lessor’s aircraft order book), and returned two aircraft to different lessors. Additionally, during October 2014, the Company extended the lease term of one A320CEO.
As of December 31, 2016 and 2015, all of the Company’s aircraft and spare engines lease agreements (A320 aircraft), which are accounted as operating leases; two of them were incorporated into the Company’s fleet during the fourth quarter of 2013, and the two remaining aircraft will be incorporated during the first half of 2014.
On August 12, 2013, the Company entered into two new aircraft lease agreements (A320 aircraft), which are accounted as operating leases; these two aircraft will be incorporated into the Company’s fleet during 2014.
On November 7, 2013, the Company entered into one new spare engine lease agreement, which is accounted for as an operating lease; with the addition of this engine the quantity of spare engine increased to six.leases.
Provided below is an analysis of future minimum aircraft and engine rent payments in U.S. dollars and its equivalent toin Mexican pesos:
| Operating leases in U.S. dollars | Operating leases of Mexican pesos | |||||||
2014 | US$ | 155,521 | Ps. | 2,033,678 | ||||
2015 | 143,884 | 1,881,496 | ||||||
2016 | 131,406 | 1,718,330 | ||||||
2017 | 105,095 | 1,374,276 | ||||||
2018 | 87,813 | 1,148,282 | ||||||
2019 and thereafter | 364,689 | 4,768,856 | ||||||
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Total | US$ | 988,408 | Ps. | 12,924,918 | ||||
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| |||||
| Aircraft operating leases | Engine operating leases | |||||||||||||||
| in U.S. dollars | in Mexican pesos(1) | in U.S. dollars | in Mexican pesos(1) | |||||||||||||
2017 | US$ | 227,087 | Ps. | 4,692,519 | US$ | 5,004 | Ps. | 103,404 | ||||||||
2018 | 229,726 | 4,747,061 | 2,958 | 61,133 | ||||||||||||
2019 | 214,679 | 4,436,136 | 2,560 | �� | 52,894 | |||||||||||
2020 | 210,652 | 4,352,922 | 1,878 | 38,807 | ||||||||||||
2021 and thereafter | 829,009 | 17,130,633 | 4,091 | 84,536 | ||||||||||||
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Total | US$ | 1,711,153 | Ps. | 35,359,271 | US$ | 16,491 | Ps. | 340,774 | ||||||||
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| (1) | Using the exchange rate as of December 31, 2016 of Ps.20.6640. |
Such amounts are determined based on the stipulated rent contained within the agreements without considering renewals and on the prevailing exchange rate and interest rates at December 31, 2013.2016.
b) Rental of land and buildings. The Company has entered into land and property lease agreements with third parties for the premises where it provides its services and where its offices are located. These leases are recognized as operating leases.
Provided below is an analysis of future minimum rental andof land and building payments in U.S. dollarsMexican pesos and its equivalent to Mexican pesos:U.S. dollars:
| Operating leases in U.S. dollars | Operating leases of Mexican pesos | |||||||
2014 | US$ | 3,699 | Ps. | 48,374 | ||||
2015 | 1,420 | 18,568 | ||||||
2016 | 866 | 11,325 | ||||||
2017 | 790 | 10,334 | ||||||
2018 | 816 | 10,668 | ||||||
2019 and thereafter | 6,828 | 89,280 | ||||||
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Total | US$ | 14,419 | Ps. | 188,549 | ||||
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| Operating leases in U.S. dollars | Operating leases in Mexican pesos | |||||||
2017 | US$ | 6,498 | Ps. | 134,284 | ||||
2018 | 795 | 16,419 | ||||||
2019 | 399 | 8,235 | ||||||
2020 | 328 | 6,784 | ||||||
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Total | US$ | 8,020 | Ps. | 165,722 | ||||
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c) Rental expense charged to results of operations is as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Aircraft and engine (Note 1p) | Ps. | 2,187,339 | Ps. | 1,885,696 | Ps. | 1,508,135 | Ps. | 5,590,058 | Ps. | 3,525,336 | Ps. | 2,534,522 | ||||||||||||
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Real estate: | ||||||||||||||||||||||||
Airports facilities | 41,643 | 49,277 | 38,161 | 40,591 | 39,993 | 36,113 | ||||||||||||||||||
Offices, maintenance warehouse and hangar (Note 20) | 22,431 | 20,227 | 14,346 | 33,517 | 25,889 | 20,055 | ||||||||||||||||||
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Total rental expenses on real estate | 64,074 | 69,504 | 52,507 | 74,108 | 65,882 | 56,168 | ||||||||||||||||||
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Total cost of operating leases | Ps. | 2,251,413 | Ps. | 1,955,200 | Ps. | 1,560,642 | Ps. | 5,664,166 | Ps. | 3,591,218 | Ps. | 2,590,690 | ||||||||||||
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During the years ended December 31, 2013, 20122016, 2015 and 2011,2014 the Company soldentered into aircraft and engine to third parties, giving rise tospare engines sale and leaseback transactions, resulting in a gain of Ps.106,607, Ps.61,269Ps.484,827, Ps.181,736 and Ps.72,820,Ps.14,192, respectively, that was recorded under the caption other income in the consolidated statement of operations (Notes 12 and(Note 20).
During the year ended December 31, 2011, the Company entered into aircraft and spare engines sale and leaseback transactions, which resulted in a loss of Ps.30,706. This loss was deferred on the consolidated statements of financial position and is being amortized over the contractual lease term. As of December 31, 20132016 and 2012,2015, the current portion of the loss on sale amounts to Ps.3,047 and Ps.3,047, respectively, which areis recorded in the caption of prepaid expenses and other current assets (Note 10), and thenon-current portion amounts to Ps.23,601Ps.14,460 and Ps.26,648,Ps.17,507, respectively, which areis recorded in the caption of other assets.assets in the consolidated statements of financial position.
For the years ended December 31, 2013, 20122016, 2015 and 2011,2014, the Company amortized a loss of Ps.3,047, Ps.3,047 and Ps.1,011,Ps.3,047, respectively, as additional aircraft rental expense.
| 15. | Accrued liabilities |
a) An analysis of accrued liabilities at December 31, 20132016 and 20122015 is as follows:
| 2013 | 2012 | |||||||
Fuel and traffic expenses | Ps. | 563,156 | Ps. | 488,829 | ||||
Information and communication expenses | 93,080 | 39,578 | ||||||
Maintenance reserves | 85,535 | 73,856 | ||||||
Salaries and benefits | 74,518 | 64,197 | ||||||
Sale, marketing and distribution expenses | 66,247 | 41,711 | ||||||
Maintenance and aircraft parts expenses | 38,693 | 18,718 | ||||||
Administrative expenses | 30,992 | 18,988 | ||||||
Membership services | 28,567 | 14,684 | ||||||
Aircraft and engine lease extension benefit (Note 1j) | 27,095 | 23,253 | ||||||
Supplier services agreement | 9,292 | 9,292 | ||||||
Depositary services benefit | 2,068 | — | ||||||
Others | 13,439 | 12,685 | ||||||
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| Ps. | 1,032,682 | Ps. | 805,791 | |||||
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| 2016 | 2015 | |||||||
Fuel and traffic accrued expenses | Ps. | 922,607 | Ps. | 532,112 | ||||
Maintenance deposits | 179,288 | 139,214 | ||||||
Salaries and benefits | 170,994 | 158,854 | ||||||
Maintenance and aircraft parts accrued expenses | 130,897 | 61,861 | ||||||
Sales, marketing and distribution accrued expenses | 102,880 | 123,745 | ||||||
Aircraft and engine lease extension benefit (Note 1j) | 85,124 | 55,115 | ||||||
Accrued administrative expenses | 80,981 | 41,212 | ||||||
Information and communication accrued expenses | 32,950 | 46,383 | ||||||
Deferred revenue from VClub membership | 32,771 | 44,948 | ||||||
Supplier services agreement | 6,333 | 9,292 | ||||||
Depositary services benefit | 2,068 | 2,068 | ||||||
Advances from travel agencies | 1,536 | 86,927 | ||||||
Incentives from suppliers | — | 47,788 | ||||||
Others | 37,010 | 30,056 | ||||||
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| Ps. | 1,785,439 | Ps. | 1,379,575 | |||||
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b) Accrued liabilities long-term:
| 2013 | 2012 | |||||||
Aircraft and engine lease extension benefit (Note 1j) | Ps. | 99,531 | Ps. | 106,089 | ||||
Supplier services agreement | 24,394 | 33,685 | ||||||
Depositary services benefit | 7,682 | — | ||||||
Others | 5,977 | — | ||||||
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| Ps. | 137,584 | Ps. | 139,774 | |||||
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Aircraft and engine lease extension benefit (Note 1j) Supplier services agreement Depositary services benefit Others 2016 2015 Ps. 127,831 Ps. 139,213 4,350 5,806 1,473 3,547 36,154 8,765 Ps. 169,808 Ps. 157,331
c) An analysis of other liabilities is as follows:
| Balance as of January 1, 2013 | Increase for the year | Payments | Balance as of December 31, 2013 | Balance as of January 1, 2016 | Increase for the year | Payments | Unwinding discount* | Balance as of December 31, 2016 | ||||||||||||||||||||||||||||
Employee profit sharing | Ps. | 7,230 | Ps. | 79,182 | Ps. | 78,478 | Ps. | 7,934 | ||||||||||||||||||||||||||||
Aircraft lease return liabilities | 8,805 | 8,058 | 3,918 | 12,945 | ||||||||||||||||||||||||||||||||
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Aircraft lease return obligation | Ps. | 149,326 | Ps. | 1,038,764 | Ps. | 765,023 | Ps. | 13,007 | Ps. | 410,060 | ||||||||||||||||||||||||||
Employee profit sharing (Note 16) | 10,173 | 9,967 | 9,445 | — | 10,695 | |||||||||||||||||||||||||||||||
| Ps. | 16,035 | Ps. | 87,240 | Ps. | 82,396 | Ps. | 20,879 |
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| Ps. | 159,499 | Ps. | 1,048,731 | Ps. | 774,468 | Ps. | 13,007 | Ps. | 420,755 | |||||||||||||||||||||||
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Short-term maturities | Ps. | 9,498 | Ps. | 284,200 | ||||||||||||||||||||||||||||||||
Long-term | Ps. | 11,381 | Ps. | 136,555 | ||||||||||||||||||||||||||||||||
| Balance as of January 1, 2012 | Increase for the year | Payments | Balance as of December 31, 2012 | |||||||||||||
Employee profit sharing | Ps. | 8,143 | Ps. | 6,770 | Ps. | 7,683 | Ps. | 7,230 | ||||||||
Aircraft lease return liabilities | 6,337 | 2,468 | — | 8,805 | ||||||||||||
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| Ps. | 14,480 | Ps. | 9,238 | Ps. | 7,683 | Ps. | 16,035 | |||||||||
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Short-term maturities | Ps. | 8,880 | ||||||||||||||
Long-term | Ps. | 7,155 | ||||||||||||||
| * | Discount rate adjustment |
| Balance as of January 1, 2015 | Increase for the year | Payments | Unwinding discount* | Balance as of December 31, 2015 | ||||||||||||||||
Aircraft lease return obligation | Ps. | 23,358 | Ps. | 129,995 | Ps. | 1,067 | Ps. | 2,960 | Ps. | 149,326 | ||||||||||
Employee profit sharing (Note 16) | 6,533 | 9,938 | 6,298 | — | 10,173 | |||||||||||||||
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| Ps. | 29,891 | Ps. | 139,933 | Ps. | 7,365 | Ps. | 2,960 | Ps. | 159,499 | |||||||||||
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Short-term maturities | Ps. | 110,368 | ||||||||||||||||||
Long-term | Ps. | 49,131 | ||||||||||||||||||
| * | Discount rate adjustment |
During the years ended December 31, 2016, 2015 and 2014 no cancellations, or write-offs related to these liabilities were recorded.
| 16. | Employee benefits |
The components of net period cost recognized in the consolidated statement of operations and the obligations for seniority premium for the years ended December 31, 2013, 20122016, 2015 and 2011,2014, are as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Analysis of net period cost: | ||||||||||||||||||||||||
Current service cost | Ps. | 1,251 | Ps. | 1,006 | Ps. | 960 | Ps. | 2,421 | Ps. | 2,012 | Ps. | 1,384 | ||||||||||||
Interest cost on benefit obligation | 276 | 202 | 149 | 701 | 537 | 380 | ||||||||||||||||||
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Net period cost | Ps. | 1,527 | Ps. | 1,208 | Ps. | 1,109 | Ps. | 3,122 | Ps. | 2,549 | Ps. | 1,764 | ||||||||||||
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Net defined benefit obligation | Ps. | 5,260 | Ps. | 4,111 | Ps. | 2,813 | ||||||||||||||||||
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Changes in the defined benefit obligation are as follows:
| 2013 | 2012 | 2011 | ||||||||||
Defined benefit obligation at January 1, | Ps. | 4,111 | Ps. | 2,813 | Ps. | 2,087 | ||||||
Net period cost charged to profit or loss: | ||||||||||||
Current service cost | 1,251 | 1,006 | 960 | |||||||||
Interest cost on benefit obligation | 276 | 202 | 149 | |||||||||
Remeasurement gains (losses) in other comprehensive income: | ||||||||||||
Actuarial changes arising from changes in financial assumptions | 332 | 436 | (139 | ) | ||||||||
Payments made | (710 | ) | (346 | ) | (244 | ) | ||||||
|
|
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| |||||||
Defined benefit obligation at December 31, | Ps. | 5,260 | Ps. | 4,111 | Ps. | 2,813 | ||||||
|
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Defined benefit obligation at January 1, Net period cost charged to profit or loss: Current service cost Interest cost on benefit obligation Remeasurement losses in other comprehensive income (loss): Actuarial changes arising from changes in assumptions Payments made Defined benefit obligation at December 31, 2016 2015 2014 Ps. 10,056 Ps. 7,737 Ps. 5,260 2,421 2,012 1,384 701 537 380 442 1,174 1,581 (182 ) (1,404 ) (868 ) Ps. 13,438 Ps. 10,056 Ps. 7,737
The significant assumptions used in the computation of the actuarial present value of the current defined benefit obligation, the accumulated current benefit obligation, the projected benefit obligation and the net cost of the planseniority premium obligations are as follows:shown below:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||
Financial: | ||||||||||||||||||
Annual discount rate | 7.50% | 7.00% | 7.50% | |||||||||||||||
Discount rate | 7.78% | 7.29% | 7.15% | |||||||||||||||
Expected rate of salary increases | 5.50% | 5.50% | 5.50% | 5.50% | 5.50% | 5.50% | ||||||||||||
Annual increase in minimum salary | 4.00% | 4.00% | 4.00% | 4.00% | 4.00% | 4.00% | ||||||||||||
Biometric: | ||||||||||||||||||
Mortality (1) | EMSA 97 | EMSA 82-89 | EMSA 82-89 | EMSSA 09 | EMSSA 09 | EMSSA 97 | ||||||||||||
Disability (2) | IMSS-97 | IMSS-97 | IMSS-97 | IMSS-97 | IMSS-97 | IMSS-97 | ||||||||||||
| (1) |
| (2) |
Accruals for short-term employee benefits at December 31, 20132016 and 2012,2015, respectively, are as follows:
| 2013 | 2012 | |||||||
Employee profit-sharing | Ps. | 7,934 | Ps. | 7,230 | ||||
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| 2016 | 2015 | |||||||
Employee profit-sharing (Note 15c) | Ps. | 10,695 | Ps. | 10,173 | ||||
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The key management personnel of the Company include the members of the Board of Directors (Note 7).
| 17. |
| a) | LTRP |
On November 6, 2014, the shareholders of the Company and the shareholders of its subsidiary Servicios Corporativos, approved an amendment to the current LTRP for the benefit of certain key employees; based on the recommendations of the Board of Directors of the Company at its meetings held on July 24 and August 29, 2014. For such purposes on November 10, 2014 an irrevocable Administrative Trust was created by Servicios Corporativos and the key employees. The new plan was restructured and named LTIP, which consists of a share purchase plan (equity-settled transaction) and SARs plan (cash settled).
| b) | LTIP |
- Share purchase plan (equity-settled)
Under the share purchase plan (equity- settled), in November 2014 certain key employees of the Company were granted with a special bonus by an amount of Ps.10,831, to be used to purchase Company’s shares. The plan consisted in:
| (i) | Servicios Corporativos granted a bonus to each key executive; |
| (ii) | The bonus amount by Ps.7,059, net of withheld taxes, was transferred on November 11, 2014, as per the written instructions of each key employees, to the Administrative Trust for the acquisition of Series A shares of the Company through an intermediary authorized by the BMV based on the Administration Trust’s Technical Committee instructions; |
| (iii) | Subject to specified terms and conditions set forth in the Administrative Trust, the acquired shares were in escrow under the Administrative Trust for its administration until the vesting period date for each key executive, date as of which the key executive can fully dispose of the shares and instruct as desired. |
| (iv) | The share purchase plan provides that if the terms and conditions are not met by the vesting period date, then the shares would be sold in the BMV, and Servicios Corporativos would be entitled to receive the proceeds of the sale of shares. |
| (v) | The key employees’ account balance will be tracked by the Administrative Trust. The Administrative Trust’s objectives are to acquire Series A shares on behalf of the key employees and to manage the shares granted to such key executive based on instructions set forth by the Technical Committee. |
As the Administrative Trust is controlled and therefore consolidated by Controladora, shares purchased in the market and held within the Administrative Trust are presented for accounting purposes as treasury stock in the consolidated statement of changes in equity.
In April and October 2016, extensions to the LTIP were approved by the Company’s shareholder’s and Company´s Board of Directors, respectively. The total cost of the extensions approved was Ps.14,532 (Ps.9,466 net of withheld taxes) and Ps.11,599 (Ps.7,559 net of withheld taxes), respectively. Under these extensions, certain key employees of the Company were granted a special bonus, that was transferred to the Administrative Trust for the acquisition of Series A shares of the Company.
As of December 31, 2016 and 2015, the number of shares into the Administrative Trust associated with the Company’s share purchase payment plans is as follows:
| Number of Series A shares | ||||
Outstanding as of December 31, 2014 | 594,081 | |||
Purchased during the year | 22,920 | |||
Granted during the year | — | |||
Exercised during the year | — | |||
Outstanding as of December 31, 2015 | 617,001 | |||
Purchased during the year | 513,002 | * | ||
Granted during the year | — | |||
Exercised during the year | (425,536 | ) | ||
Forfeited during the year | (86,419 | ) | ||
Outstanding as of December 31, 2016 | 618,048 | * | ||
| * | These shares are presented as treasury shares in the consolidated statement of financial position as of December 31, 2016 and 2015. |
The vesting period of the shares granted under the Company’s share purchase plans is as follows:
| Number of Series A shares | Vesting period | |||
| 345,270 | November 2016 - 2017 | |||
| 171,010 | November 2017 - 2018 | |||
| 101,768 | November 2018 - 2019 | |||
| 618,048 | ||||
In accordance with IFRS 2, the share purchase plans are classified as equity-settled transactions on the grant date. Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to key employees. The total cost of the plans is recognized in the consolidated statement of operations under the caption of salaries and benefits from the time it becomes probable the related performance condition will be met over the vesting period. This valuation is the result of multiplying the total number of Series A shares deposited in the Administrative Trust and the price per share, plus the balance in cash deposited in the Administrative Trust.
For the years ended December 31, 2016, 2015 and 2014, the compensation expense recorded in the consolidated statement of operations amounted to Ps.7,816, Ps.6,018 and Ps.1,058, respectively.
All shares held in the Administrative Trust are considered outstanding for both basic and diluted earnings per share purposes, since the shares are entitled to dividend if and when declared by the Company.
During the years ended December 31, 2016 and 2015, some key employees left the Company; therefore, the vesting conditions were not fulfilled. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2015, 86,419 shares were forfeited.
- SARs (cash settled)
On November 6, 2014, the Company granted 4,315,264 SARs to key employees that entitle them to a cash payment and vest as long as the employee continues to be employed by the Company at the end of each anniversary, during a 3 year period. The total amount of the appreciation rights granted under this plan at the grant date was Ps.10,831 at such date.
Under the LTIP extensions, the number of SARs granted to certain key executives of the Company were 2,044,604 and 1,793,459, which amounts to Ps.14,532 and Ps.11,599, for the years ended December 31, 2016 and 2015, respectively. The SARs vest as long as the employee continues to be employed by the Company at the end of each anniversary, during a 3 year period.
Fair value of the SARs is measured at each reporting date. The carrying amount of the liability relating to the SARs as of December 31, 2016 and 2015 was Ps.15,744 and Ps.14,511, respectively. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits over the service period. During the years ended December 31, 2016, 2015 and 2014, the Company recorded Ps.31,743, Ps.44,699 and Ps.1,652, respectively, in the consolidated statement of operations.
The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, taking into account the terms and conditions on which the SARs were granted (vesting schedule in tables below).
| Number of SARs | Exercisable date | |||
| 2,301,000 | November 2016 – 2017 | |||
| 1,055,996 | November 2017 – 2018 | |||
| 482,475 | November 2018 – 2019 | |||
| 3,839,471 | ||||
During the year ended December 31, 2016, the Company made a cash payment to key employees related to the SARs plan in the amount of Ps.31,261. This amount was determined based on the increase in the share price of the Company between the grant date and the exercisable date (November 2016).
During the year ended December 31, 2015, the Company made a cash payment to key employees related to the SARs plan in the amount of Ps.31,090. This amount was determined based on the increase in the share price of the Company between the grant date and the exercisable date (November 2015).
| c) | MIP |
- MIP I
In April 2012, the Board of Directors authorized a management incentive planMIP for the benefit of certain key employees, subject to shareholders’ approval. On December 21, 2012, the shareholders approved the management incentive planMIP consisting of: (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of the Company´sCompany’s fully diluted capital stock; (ii) a grant of options to acquire shares of the Company or Ordinary Participation Certificates (“CPOs”)CPOs having shares as underlying securities for which, as long as certain conditions occur, the employees will have the right to request the delivery of those shares (iii) the creation of a trust (“Management Trust”)an Administrative Trust to deposit such shares in escrow until they are delivered to the officers or returned to the Company in the case that certain conditions do not occur; and (iv) the execution of share sale agreements setting forth the terms and conditions upon which the officers may exercise its shares at Ps.5.31 (five Mexican pesos 31/100) per share.
On December 24, 2012, the ManagementAdministrative Trust was created and the share sale agreements were executed. On December 27, 2012, the trust borrowed Ps.133,723 from the Company and immediately after; the trust paid the Company the same amount borrowed as purchase price for the shares. The share sale agreements provide that the officers may pay for the shares at the same price upon the occurrence of either an initial public offering of the Company’s capital stock or a change of control and as long as they remain employees until the options are exercised, with a maximum term of ten years. Upon payment of the shares by the officers to the Management Trust, it has to pay such amount back to the Company as repayment of the loan, for which the Company charges no interest.
The management incentive planMIP has been classified as “equity-settled”,equity-settled, by which, the grant date, fair value is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. The total cost of the management incentive planMIP determined by the Company was Ps.2,722 to be recognized from the time it becomes probable the performance condition will be met over the vesting period.
During the yearyears ended December 31, 2013,2015 and 2014, the Company recorded Ps.2,068Ps.327 and Ps.327, respectively, as cost of the management incentive planMIP related to the vested shares, in the consolidated statements of operations.
This cost was determined by using the improved Binomial valuation model from Hull and White, on the date in which the plan had already been approved by the shareholders and a shared understanding of the terms and conditions of the plan was reached with the employees (December 24, 2012, defined as the grant date), with the following assumptions:
| 2012 | ||||
Dividend yield (%) | 0.00 | % | ||
Volatility (%) | 37.00 | % | ||
Risk–free interest rate (%) | 5.96 | % | ||
Expected life of share options (years) | 8.8 | |||
Exercise share price (in Mexican pesos Ps.) | 5.31 | |||
Exercise multiple | 1.1 | |||
Fair value of the stock at grant date | 1.73 | |||
The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome.
Under the methodology followed by the Company, at the grant date and December 31, 2012, the granted shares had no positive intrinsic value.
On September 18, 2013 (IPO date), the key employees participating in the management incentive planMIP exercised 4,891,410 Series A and Series B shares. As a result, the key employees paid Ps.25,993 to the Management Trust corresponding to the exercised shares. Thereafter, the Company received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
In 2016, the key employees exercised 3,299,999 Series A shares. In 2015, as part of the secondaryfollow-on equity offering, the key employees exercised 4,414,860 Series A shares. As a result, the key employees paid Ps.17,536 and Ps.23,461, for the years ended December 31, 2016 and 2015, respectively, to the Management Trust corresponding to the exercised shares. Thereafter, the Company received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.
Movements in sharesshare options
The following table illustrates the number of shares options and fixed exercise prices during the year:
| Number of shares options | Exercise price in Mexican pesos | Total in thousands of Mexican pesos | ||||||||||
Outstanding as of December 31, 2012 | 25,164,126 | * | Ps. | 5.31 | Ps. | 133,723 | ||||||
Granted during the year | — | — | — | |||||||||
Forfeited during the year | — | — | — | |||||||||
Exercised during the year | (4,891,410 | ) | 5.31 | (25,993 | ) | |||||||
|
|
|
|
|
| |||||||
Outstanding as of December 31, 2013 | 20,272,716 | Ps. | 5.31 | Ps. | 107,730 | |||||||
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|
| |||||||
| Number of share options | Exercise price in Mexican pesos | Total in thousands of Mexican pesos | ||||||||||
Outstanding as of December 31, 2014 | 20,272,716 | 5.31 | 107,730 | |||||||||
Granted during the year | — | — | — | |||||||||
Forfeited during the year | — | — | — | |||||||||
Exercised during the year | (4,414,860 | ) | 5.31 | (23,461 | ) | |||||||
|
|
|
|
|
| |||||||
Outstanding as of December 31, 2015 | 15,857,856 | Ps. | 5.31 | Ps. | 84,269 | |||||||
Granted during the year | — | — | — | |||||||||
Forfeited during the year | — | — | — | |||||||||
Exercised during the year | (3,299,999 | ) | 5.31 | (17,536 | ) | |||||||
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|
|
|
|
| |||||||
Outstanding as of December 31, 2016 | 12,557,857 | Ps. | 5.31 | Ps. | 66,733 | |||||||
|
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|
|
|
| |||||||
At December 31, 20132016 and December 31, 2012, the2015, 12,557,857 and 15,857,856 share options pending to exercise were considered as treasury shares. Asshares, respectively.
- MIP II
On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees. Such extension was modified as of November 6, 2016. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five year extension to the period in which the employees can exercise MIP II once the SARs are vested was approved.
Fair value of the SARs is measured at each reporting period using a Black-Scholes option pricing model, taking into consideration the terms and conditions granted to the employees. The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.
The carrying amount of the liability relating to the SARs as of December 31, 2013,2016 was Ps.54,357. The compensation cost is recognized in the total numberconsolidated statement of vestedoperations under the caption of salaries and unvested shares amounted to 14,228,364 and 6,044,352, respectively.benefits over the service period. During the year ended December 31, 2016, the Company recorded Ps.54,357 in the consolidated statement of operations. The vesting schedule is summarized in the table below.
| Number of SARs | Exercisable date | |||
| 2,030,540 | November 2017 | |||
| 2,030,540 | November 2018 | |||
| 2,030,540 | November 2019 | |||
| 3,384,240 | November 2020 | |||
| 4,061,100 | November 2021 | |||
| 13,536,960 | ||||
d) The expense recognized for the Company’s retention plans during the year is shown in the following table:
| 2016 | 2015 | 2014 | ||||||||||
Expense arising from cash-settled share-based payments transactions | Ps. | 86,100 | Ps. | 44,699 | Ps. | 1,652 | ||||||
Expense arising from equity-settled share-based payments transactions | 7,816 | 6,345 | 1,385 | |||||||||
|
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|
|
|
| |||||||
Total expense arising from share-based payments transactions | Ps. | 93,916 | Ps. | 51,044 | Ps. | 3,037 | ||||||
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| 18. | Equity |
On June 5, 2013 the Company’s shareholders adopted certain unanimous resolutions (the “June 5 Resolutions”), pursuant to which they approved, among others: (i) a stock splitAs of 1 to 403 and share conversion
to Series A and B shares, (ii) a capital increase which is conditioned to an effective IPO, (iii) the change of the Company’s bylaws, including the name of the Company and (iv) the 2012 and 2011 consolidated financial statements.
On June 11, 2013 the Company’s shareholders adopted new unanimous resolutions. In the new resolutions the Company’s shareholders revoked the June 5, 2013 Resolutions and approved, among others: (i) a stock split of 1 to 403 and share conversion to Series A and B shares, (ii) a capital increase which is conditioned to an effective IPO, (iii) the change of the Company’s bylaws, including the name of the Company and (iv) the 2012 and 2011 consolidated financial statements.
Considering the stock split (which consisted of a 1 to 403 split of the Company’s total number of shares),December 31, 2016, the total number of authorized shares as of December 31, 2012, was 838,799,767 (727,595,544 in 2011), represented by common registered shares, issued and with no par value, fully subscribed.
As a result of the share conversion, as of December 31, 2013, the Company now has only two classes of outstanding shares, Series A shares reserved for Mexican holders and Series B shares for non-Mexican holders.
On September 23, 2013, the Company completed its dual listing IPO on the New York Stock Exchange (NYSE) and on the Bolsa Mexicana de Valores (BMV) or Mexican Stock Exchange. The Company raised Ps.2,684,280 (approximately US$207.7 million) of gross proceeds from the global offering of 173,076,910 Series A shares, consisting of (i) an offering of Series A Shares in Mexico and (ii) concurrent international offering of Ordinary Participation Certificates or “CPOs”, in the form of American Depositary Shares “ADS” in the United States at a public offering price of Ps.15.51 per share (US$1.20 dollars) or US$12.00 per ADS. The Series A shares were listed on the BMV, under the trading symbol “VOLAR.”, and the ADSs, were listed on the NYSE under the trading symbol “VLRS.” The Series A shares and ADSs began trading on September 18, 2013.
In connection with the IPO, the Company incurred in equity transaction costs in the amount of Ps.140,920. In accordance with IAS 32, the transaction costs of the equity transaction of Ps.131,496 were accounted for as a deduction of equity, since they were considered as incremental costs directly attributable to the equity transaction that would otherwise have been avoided. The Company recorded the transaction costs in connection with the existing shares in the consolidated statement of operations in the amount of Ps.9,424.
The number of newly issued shares and gross proceeds obtained from the global offering is detailed as follows:
| Global Offering (Shares) | ||||||||||||||||
| Mexico | International | Total newly- issued shares | Total proceeds obtained | |||||||||||||
Primary tranche-Series A Shares | 40,884,960 | 132,191,950 | 173,076,910 | Ps. | 2,684,280 | |||||||||||
The Company retained Ps.2,087,649 of the proceeds, after using Ps.390,505 to amortize the financial debt with Inbursa, Pasprot and IFC, Ps.65,206 for the debt prepayment premium, and unwinding cost premium related to debt prepayment, as well as Ps.140,920 for equity transaction costs.
Upon completion of the IPO, the total number of authorized shares as of December 31, 2013, was 1,011,876,677; represented by common registered shares, issued and with no par value, fully subscribed and paid, comprised as follows:
| Shares | ||||||||||||
| Fixed Class I | Variable Class II | Total shares | ||||||||||
Series A Shares | 3,224 | 877,852,982 | 877,856,206 | |||||||||
Series B Shares | 20,956 | 133,999,515 | 134,020,471 | |||||||||
|
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|
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| |||||||
| 24,180 | 1,011,852,497 | 1,011,876,677 | ||||||||||
Treasury shares (Note 17) | (20,272,716 | ) | (20,272,716 | ) | ||||||||
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| |||||||
| 24,180 | 991,579,781 | 991,603,961 | ||||||||||
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| Shares | ||||||||||||
| Fixed Class I | Variable Class II | Total shares | ||||||||||
Series A shares | 3,224 | 877,852,982 | 877,856,206 | |||||||||
Series B shares | 20,956 | 133,999,515 | 134,020,471 | |||||||||
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| |||||||
| 24,180 | 1,011,852,497 | 1,011,876,677 | ||||||||||
Treasury shares (Note 17) | — | (13,175,905 | ) | (13,175,905 | ) | |||||||
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| 24,180 | 998,676,592 | 998,700,772 | ||||||||||
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As of December 31, 2015, the total number of authorized shares was 1,011,876,677; represented by common registered shares, issued and with no par value, fully subscribed and paid, comprised as follows:
| Shares | ||||||||||||
| Fixed Class I | Variable Class II | Total shares | ||||||||||
Series A shares | 3,224 | 877,852,982 | 877,856,206 | |||||||||
Series B shares | 20,956 | 133,999,515 | 134,020,471 | |||||||||
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| 24,180 | 1,011,852,497 | 1,011,876,677 | ||||||||||
Treasury shares (Note 17) | — | (16,474,857 | ) | (16,474,857 | ) | |||||||
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| 24,180 | 995,377,640 | 995,401,820 | ||||||||||
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All shares representing the Company’s capital stock, either Series A shares or Series B shares, grant the holders the same economic rights and there are no preferences and/or restrictions attaching to any class of shares on the distribution of dividends and the repayment of capital. Holders of the Company´sCompany’s Series A common stock and Series B common stock are entitled to dividends when, and if, declared by a shareholder resolution, subject to the rights of the holders of all series of stock outstanding having priority rights to dividends.shareholders’ resolution. The Company’s revolving line of credit with Banco Santander México and Bancomext limitlimits the Company´sCompany’s ability to declare and pay dividends in the event that the Company fails to comply with the payment terms thereunder.
During the yearyears ended December 31, 20132016, 2015 and 20122014, the Company did not declare any dividends.
Through unanimous resolutions dated November 27, 2012, December 21, 2012 and December 26, 2012, the Company’s shareholders approved a corporate restructuring with the sole purpose of acquiring the shares held by other shareholders of Concesionaria in exchange for the capital stock of the Company. As a consequence, the Company increased its direct and indirect holding of the outstanding shares of Concesionaria by acquiring on November 27, 2012, an additional 5.28% interest in the voting shares of Concesionaria and on December 21, 2012, an additional 3.24% interest in the voting shares of Concesionaria, increasing its ownership interest after both acquisitions to 97.95% as of December 31, 2012.
In December 2012, the Company recognized the difference between the consideration paid and the carrying value of the non-controlling interest acquired, as additional paid-in capital for an amount of Ps.190,850.
Through unanimous resolutions dated November 27, 2012 and December 21, 2012, the Company´s shareholders approved a corporate restructuring with the sole purpose of acquiring the shares held by other shareholders of Concesionaria in exchange for the capital stock of the Company, through the capitalization of promissory notes by Ps.136,298 and Ps.139,764, respectively.
Additionally, on December 21, 2012 the shareholders of Company through unanimous resolution, approved:
(a) The creation of certain unpaid Stock Swap Option (the “Swap”) regarding 16,173,599 shares representing 2.05% of the common equity of Concesionaria (“Concesionaria Swap Shares”) owned by HSBC México, S.A., FICAP, granting FICAP the option to sell to Controladora any or all of Concesionaria Swap Shares in consideration for either
(i) a payment in kind with shares from Company’s capital stock, taking into account 1.03374 shares of Company per each share of Concesionaria, or (ii) a cash settlement amount, at a total price of Ps.88,847; and
(b) The issuance of an aggregate of 16,719,261 Series A shares (the “Company Swap Shares”) to be held in the treasury until the Swap is exercised at a total price of Ps.88,847.
Although the creation of the Swap and the issuance of the Company Swap Shares were approved on December 21, 2012, the trust implementing the transaction was not created until February 22, 2013 and the Company did not become a party to such trust until April 10, 2013. Therefore, no obligation of the Company existed until April 10, 2013. The option of FICAP to receive payment in kind was subsequently exercised on April 19, 2013 and equity-settled on April 22, 2013.
On November 27, 2012 and December 21, 2012, some16, 2015, the Company completed a secondaryfollow-on equity offering, in which certain shareholders sold 108,900,000 of the non-controlling interestCompany’s CPOs, in the form of Concesionaria reimbursed their shares withAmerican Depositary Shares, or ADSs. No CPOs or ADSs were sold by the corresponding capital reduction in ConcesionariaCompany and somethe selling shareholders received all of the non-controlling interest sold their shares to Controladora, forproceeds from this offering. The Company recorded the sole purposerelated transaction costs in the consolidated statement of participatingoperations in Controladora’s capital stock and in exchange they received a promissory note for anthe amount of Ps.276,062. These promissory notes were recognized as capital contributions upon the issuance of new shares of Controladora for the same value.
At December 31, 2012 and 2011, Controladora’s capital stock, which is represented by common registered shares, issued and with no par value, fully subscribed and paid, was comprised as follows:
| Shares | ||||||||||||
| Fixed Class I | Variable Class II | At December 31, 2012 | ||||||||||
Fixed capital: | Ps. | 65 | ||||||||||
Series A | 3,224 | 181,973,441 | ||||||||||
Series B1 | 7,254 | 45,961,344 | ||||||||||
Series B2 | 6,851 | 44,850,273 | ||||||||||
Series B3 | 6,851 | 43,187,898 | ||||||||||
Series B4 | — | 4,194,021 | ||||||||||
Series N | — | 518,608,610 | ||||||||||
Variable capital | 2,464,880 | |||||||||||
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| 24,180 | 838,775,587 | Ps. | 2,464,945 | |||||||||
Treasury shares: | ||||||||||||
Stock swap option unpaid (Series A) (Note 18 c) | — | (16,719,261 | ) | (88,847 | ) | |||||||
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| 24,180 | 822,056,326 | 2,376,098 | ||||||||||
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Management incentive plan (Series A and B) (Note 17) | — | (25,164,126 | ) | (133,723 | ) | |||||||
| Shares | ||||||||||||
| Fixed Class I | Variable Class II | At December 31, 2011 | ||||||||||
Fixed capital: | Ps. | 65 | ||||||||||
Series A | 7,254 | 216,465,405 | ||||||||||
Series B | 6,851 | 211,230,435 | ||||||||||
Series C | 6,851 | 203,402,160 | ||||||||||
Series D | 3,224 | 96,473,364 | ||||||||||
Variable capital | 1,966,248 | |||||||||||
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Total | 24,180 | 727,571,364 | Ps. | 1,966,313 | ||||||||
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(i) The Company’s fixed portion of capital stock is represented by common registered shares with no par value. Fixed minimum capital is Ps.65,346 (sixty-five thousand three hundred and forty-six Mexican pesos 00/100) and are represented by Class I shares.
(ii) There is no limit on the number of shares that represent the variable portion of capital, and variable portion of capital is represented by Class II shares.
(iii) Series A, B1, B2, B3 and B4 shares common registered shares with no par value, grant full voting rights. Series N shares common registered shares with no par value grant no voting rights. Additionally, in order for a general extraordinary shareholders meeting resolve and approve Important Matters, as defined in the Company’s bylaws, the affirmative vote of (a) at least 62% of the Series A shares, plus (b) the majority of either the Series B1, B2 or B3, as applicable, as long as each such series of shares maintain a participation of 12.50% in the Company’s capital stock, is needed. Series A may be subscribed and paid solely by Mexican investors, Series B1, B2, B3, B4 and N may be subscribed and paid foreign investors under the terms of the legislation applicable to foreign investment in Mexico. The board of directors shall be composed of a minimum of 9 and a maximum of 13 members, which will be appointed by the shareholders. Holders of Series A shares shall have the right to appoint the majority of its members and Series B1, B2, and B3 shall have the right to select a maximum of two board members. All shares representing the Company’s capital stock grants the holders the same economic rights and there are no preferences and/or restrictions attaching to that any class or series of shares on the distribution of dividends and the repayment of capital.Ps.22,955.
| Earnings per share |
Basic earnings per share (“EPS”) amounts are calculated by dividing the net income for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.
Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares, if any), by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares (to the extent that their effect is dilutive).
The following table shows the calculations of the basic and diluted earnings per share for the years ended December 31, 2013, 20122016, 2015 and 2011.2014.
| At December 31, | At December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Net profit (loss) for the period attributable to equity holders of the parent | Ps. | 268,678 | Ps. | 215,239 | Ps. | (293,540 | ) | |||||||||||||||||
Net income for the period | Ps. | 3,519,489 | Ps. | 2,463,870 | Ps. | 605,184 | ||||||||||||||||||
Weighted average number of shares outstanding (in thousands): | ||||||||||||||||||||||||
Basic | 865,579 | 732,441 | 727,596 | 1,011,877 | 1,011,877 | 1,011,877 | ||||||||||||||||||
Diluted | 865,579 | ** | 732,441 | * | 727,596 | * | 1,011,877 | 1,011,877 | 1,011,877 | |||||||||||||||
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Earnings (loss) per share: | ||||||||||||||||||||||||
EPS: | ||||||||||||||||||||||||
Basic | Ps. | 0.310 | Ps. | 0.294 | Ps. | (0.403 | ) | 3.478 | 2.435 | 0.598 | ||||||||||||||
Diluted | Ps. | 0.310 | Ps. | 0.294 | Ps. | (0.403 | ) | 3.478 | 2.435 | 0.598 | ||||||||||||||
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorization of these financial statements.
In conformity with the Mexican Corporations Act, the Company is required to allocate at least 5% of the net income of each year to increase the legal reserve. This practice must be continued until the legal reserve reaches 20% of capital stock.
At an ordinary general shareholders’ meeting held on April 7, 2011, the shareholders approved to allocate the legal reserve by an amount of Ps.38,250.
As of December 31, 2013,2016 and 2015, the Company’s legal reserve has not reached the 20% of its capital stock.
Any distribution of earnings in excess of the net tax profit account (“CUFIN”) balance will be subject to corporate income tax, payable by the Company, at the enacted income tax rate at that time.
| d) | Any distribution of earnings in excess of the net tax profit account (Cuenta de utilidad fiscal neta or “CUFIN”) balance will be subject to corporate income tax, payable by the Company, at the enacted income tax rate at that time. |
Shareholders may contribute certain amounts for future increases in capital stock, either in the fixed or variable capital. Said contributions will be kept in a special account until the shareholders meeting authorizes an increase in the capital stock of the Company, at which time each shareholder will have a preferential right to subscribe and pay the increase with the contributions previously made. As it is not strictly regulated in Mexican law, the shareholders meeting may agree to return the contributions to the shareholders or even set a term in which the increase in the capital stock has to be authorized. As of December 31, 2013 and 2012, there are not contributions for future increases in capital stock.
| e) | Shareholders may contribute certain amounts for future increases in capital stock, either in the fixed or variable capital. Said contributions will be kept in a special account until the shareholders meeting authorizes an increase in the capital stock of the Company, at which time each shareholder will have a preferential right to subscribe and pay the increase with thecontributions previously made. As it is not strictly regulated in Mexican law, the shareholders meeting may agree to return the contributions to the shareholders or even set a term in which the increase in the capital stock has to be authorized. |
| 19. | Income tax |
a) In accordance with Mexican tax law,the MITL, the Company isand its Mexican subsidiaries are subject to income tax and Flat Rate Business Tax (“FRBT”) andeach files its tax returns on an individual entity basis and the related tax results are combinedincluded in the accompanying consolidated financial statements. The income tax is computed taking into consideration the taxable and deductible effects of inflation, such as depreciation calculated on restated assets values. Taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the annual inflation adjustment.
Current-year FRBT is computed by applying the 17.5% in 2013, 2012 and 2011. Taxable income is determined on a cash flow basis net of authorized credits.
| (i) | Based on the approved law corporate income tax rate for 2016 and thereafter is 30%. |
For the year ended December 31, 2013 and 2012, FRBT shall be payable only to the extent it exceeds
| (ii) | As of 2014, the tax rules include limits in the deductions of the exempt compensation amount certain items, as follows: Wages and benefits paid to workers 47% of income paid to workers and in certain cases up to 53% (holiday bonus, savings fund, employee profit sharing, seniority premiums) will be deductible for employers. As a result, certain wage and salary provisions have difference between tax and book values atyear-end. |
| (iii) | The MITL sets forth new criteria and limits for applying some deductions, such as: the deduction of payments which, in turn, are exempt income for workers, contributions for creating or increasing provisions for pension funds, contributions to the Mexican Institute of Social Security payable by the worker that are paid by the employer, as well as the possiblenon-deduction of payments made to related parties in the event of failing to meet certain requirements. |
| (iv) | Starting 2014, taxable income for purposes of the employee profit sharing is the same used for the Corporate Income Tax except for certain items. |
| (v) | A new 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders from earnings as of January 1, 2014. |
The income tax rates for the same period. In other words, to determine FRBT payable, income tax paid2016 in a given period shall first be subtracted from the FRBT of the same periodGuatemala and the difference shall be the FRBT payable.
Should a negative FRBT base be determined because deductions exceed taxable income, there will be no payable FRBT. Deductions exceeding taxable incomeCosta Rica are multiplied by the FRBT rate resulting in a FRBT credit, which may be applied against income tax for the same year or, if applicable, against FRBT payable in the next ten years.25% and 30%, respectively.
b) On December 11, 2013, the 2014 tax reform was approved. The effects of the changes in the Mexican Tax Law have been observed for the computation of Company’s deferred taxes since these effects are not retroactive. Main changes to the Mexican Tax Law are as follows:
(i) Based on the approved law corporate income tax rate for 2014 and thereafter is 30%.
(ii) In addition to the above, as of 2014, the new tax rules include limits in the deductions of the exempt compensation amount certain items, as follows: Wages and benefits paid to workers 47% of income paid to workers and in certain cases up to 53% (Christmas bonus, savings fund, employee profit sharing, seniority premiums) will be deductible for employers. As a result, certain wage and salary provisions will have difference between tax and book values at year-end.
(iii) In order to carry out the simplicity and lower administrative costs related to taxes payments, the tax authority abrogated the FRBT. Therefore, FRBT is no longer applicable as of January 1, 2014.
(iv) Based on the approved law, starting in 2014 taxable income for purposes of the employee profit sharing will be the same used for the Corporate Income Tax except for certain items.
(v) A new 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders.
The definition of dividend for this purpose would include the following in addition to declared dividends:
c) For the years ended December 31, 20132016, 2015 and 2012,2014, the Company reported on a combinedconsolidated basis a tax profitincome of Ps.51,665Ps.2,702,355, Ps.2,751,813 and Ps.308,633,Ps.472,630, respectively, which was partially offset by tax losses from prior years. For the year ended December 31, 2011, the Company reported a tax loss on combined a basis of Ps.532,414.
In accordance with the Mexican Income Tax Law,MITL and CRITL, tax losses may be carried forward against taxable income generated in the succeeding ten years.and three years, respectively. Carryforward tax losses are restated based on inflation.
d)
c) An analysis of combinedconsolidated income tax on profits charged to results of operationsexpense for the years ended December 31, 2013, 20122016, 2015 and 20112014 is as follows:
Consolidated statements of operations
| 2013 | 2012 | 2011 | ||||||||||
Current year income tax (expense) | Ps. | (8,710 | ) | Ps. | (15,614 | ) | Ps. | (7,498 | ) | |||
Deferred income tax (expense) benefit | (8,840 | ) | 12,133 | 7,022 | ||||||||
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Total tax (expense) on profits | Ps. | (17,550 | ) | Ps. | (3,481 | ) | Ps. | (476 | ) | |||
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e)
| 2016 | 2015 | 2014 | ||||||||||
Current year income tax expense | Ps. | (706,244 | ) | Ps. | (337,997 | ) | Ps. | (17,345 | ) | |||
Deferred income tax expense | (750,938 | )* | (700,351 | ) | (21,375 | ) | ||||||
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Total income tax expense | Ps. | (1,457,182 | ) | Ps. | (1,038,348 | ) | Ps. | (38,720 | ) | |||
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| * | Includes translation effect by Ps.1,242 |
Consolidated statements of OCI
| 2016 | 2015 | 2014 | ||||||||||
Deferred tax related to items recognized in OCI during the year | ||||||||||||
Net (loss) gain on cash flow hedges | Ps. | (187,408 | ) | Ps. | 58,161 | Ps. | 38,852 | |||||
Remeasurement gain of employee benefits | 132 | 352 | 474 | |||||||||
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Deferred tax charged to OCI | Ps. | (187,276 | ) | Ps. | 58,513 | Ps. | 39,326 | |||||
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d) A reconciliation of the statutory corporate income tax rate to the Company’s effective tax rate for financial reporting purposes is as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||
Statutory income tax rate | 30.00% | 30.00% | 30.00% | 30.00 | % | 30.00 | % | 30.00 | % | |||||||||
Annual inflation adjustment | 0.45% | 7.04% | (4.33%) | |||||||||||||||
Nondeductible expenses | 3.85% | 2.03% | (3.42%) | 0.28 | % | 0.66 | % | 0.64 | % | |||||||||
Inflation of furniture and equipment | (0.37%) | (0.64%) | 1.40% | |||||||||||||||
Unrecorded deferred taxes on available tax losses carryforward | 14.00% | — | (66.38%) | |||||||||||||||
Unrecorded deferred taxes on tax losses | 0.09 | % | — | — | ||||||||||||||
Tax rate change | 0.04 | % | — | — | ||||||||||||||
Benefits recognized for tax losses | (39.21%) | (33.01%) | 0.00% | — | — | (22.92 | %) | |||||||||||
Inflation of tax losses | (6.34%) | (10.36%) | 7.82% | (0.01 | %) | (0.02 | %) | (3.39 | %) | |||||||||
Adjustment to beginning balance | 3.56% | 10.29% | 25.32% | |||||||||||||||
Other tax adjustments | 0.21% | (6.17%) | 9.28% | |||||||||||||||
Tax rate change | 0.05% | 2.50% | 0.16% | |||||||||||||||
Amendment tax return effects and other tax adjustments | (0.11 | %) | (0.42 | %) | 1.77 | % | ||||||||||||
Inflation on furniture, intangible and equipment | (0.38 | %) | (0.34 | %) | (0.20 | %) | ||||||||||||
Annual inflation adjustment | (0.63 | %) | (0.23 | %) | 0.11 | % | ||||||||||||
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| 6.20% | 1.68% | (0.15%) | 29.28 | % | 29.65 | % | 6.01 | % | ||||||||||
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Mexican income tax matters
For Mexican purposes, corporate income tax is computed on accrued basis. Corporate Income Tax LawMITL requires taxable profit to be determined by considering revenue net of tax deductions. Prior years’ tax losses can be utilized to offset current year taxable income. Income tax is determined by applying the 30% rate on the net amount after tax losses utilization.
For tax purposes, income is considered taxable at the earlier of: (i) the time by the revenue is collected, (ii) the service is provided or (iii) the time of the issuance of the invoice. Expenses are deductible for tax purposes generally on accrual basis, with some exceptions, once the requirements established in the tax law are fulfilled.
Central America (Guatemala and Costa Rica)
According to Guatemala Corporate Income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2016, the Company obtained a net operating loss which has not been recognized as a deferred tax asset. The Company recognized Ps.17,224 of recoverable deferred taxes due to the carryforward tax loss in Costa Rica.
f)e) An analysis of combinedconsolidated deferred taxes is as follows:
| 2013 | 2012 | 2016 | 2015 | |||||||||||||||||||||||||||||
| Consolidated statement of financial position | Consolidated statement of operations | Consolidated statement of financial position | Consolidated statement of operations | Consolidated statement of financial position | Consolidated statement of operations | Consolidated statement of financial position | Consolidated statement of operations | |||||||||||||||||||||||||
Deferred income tax assets: | ||||||||||||||||||||||||||||||||
Intangible | Ps. | 481,626 | Ps. | (16,637 | ) | Ps. | 498,263 | Ps. | 498,263 | |||||||||||||||||||||||
Provisions and other accruals | 343,294 | 56,727 | 286,567 | 56,324 | ||||||||||||||||||||||||||||
Extension lease agreement | 101,724 | 25,405 | 76,319 | 18,593 | ||||||||||||||||||||||||||||
Unearned transportation revenue | Ps. | 41,572 | Ps. | 3,812 | Ps. | 37,760 | Ps. | 12,998 | 65,755 | 7,039 | 58,716 | 16,089 | ||||||||||||||||||||
Allowance for doubtful accont | 8,965 | 2,326 | 6,639 | (1,073 | ) | |||||||||||||||||||||||||||
Provisions | 139,787 | 38,273 | 101,514 | (222 | ) | |||||||||||||||||||||||||||
Tax losses available for offsetting against future taxable income | 33,324 | (25,030 | ) | 58,354 | (459,718 | ) | ||||||||||||||||||||||||||
Allowance for doubtful accounts | 6,891 | (2,179 | ) | 9,070 | (124 | ) | ||||||||||||||||||||||||||
Employee benefits | 1,578 | 3,503 | 1,151 | (8,111 | ) | 4,031 | 886 | 3,013 | 343 | |||||||||||||||||||||||
Employee profit sharing | 1,748 | (421 | ) | 2,169 | 1,832 | 3,206 | 158 | 3,048 | 1,720 | |||||||||||||||||||||||
Financial instruments | 32,349 | 453 | 44,363 | (91 | ) | — | — | 126,240 | (163 | ) | ||||||||||||||||||||||
Extension lease agreement | 48,093 | (3,603 | ) | 51,696 | 51,696 | |||||||||||||||||||||||||||
Tax losses available for offsetting against future taxable income | 470,789 | 43,460 | 427,329 | (35,238 | ) | |||||||||||||||||||||||||||
Other accruals | 14,066 | 10,323 | 3,743 | (3,752 | ) | |||||||||||||||||||||||||||
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| 1,039,851 | 46,369 | 1,119,590 | 131,327 | |||||||||||||||||||||||||
| 758,947 | 98,126 | 676,364 | 18,039 |
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Deferred income tax liabilities: | ||||||||||||||||||||||||||||||||
Deductible supplemental rent | 1,339,610 | 363,783 | 975,827 | 716,968 | ||||||||||||||||||||||||||||
Prepaid expenses and other assets | 435,738 | 280,660 | 155,078 | 91,364 | ||||||||||||||||||||||||||||
Rotable spare parts, furniture and equipment, net | 368,027 | 103,926 | 264,101 | 34,558 | ||||||||||||||||||||||||||||
Inventories | 34,151 | 5,006 | 29,145 | 5,142 | 72,883 | 23,979 | 48,904 | 7,007 | ||||||||||||||||||||||||
Financial instruments | 2,618 | (18 | ) | 757 | 18 | 61,168 | — | — | — | |||||||||||||||||||||||
Rotable spare parts, furniture and equipment, net | 109,056 | 43,199 | 65,857 | 7,671 | ||||||||||||||||||||||||||||
Intangible | 11,917 | (3,329 | ) | 15,246 | 11,345 | |||||||||||||||||||||||||||
Prepaid expenses and other assets | 94,890 | 21,224 | 73,666 | 4,956 | ||||||||||||||||||||||||||||
Supplemental rent | 209,850 | 42,386 | 167,464 | (24,529 | ) | |||||||||||||||||||||||||||
Other prepayment | 13,470 | (1,502 | ) | 14,972 | 1,303 | 40,292 | 23,717 | 16,575 | 3,551 | |||||||||||||||||||||||
Intangible assets | — | — | — | (21,770 | ) | |||||||||||||||||||||||||||
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| 475,952 | 106,966 | 367,107 | 5,906 | 2,317,718 | 796,065 | 1,460,485 | 831,678 | |||||||||||||||||||||||||
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| Ps. | 282,995 | Ps. | (8,840 | ) | Ps. | 309,257 | Ps. | 12,133 | Ps. | (1,277,867 | ) | Ps. | (749,696 | ) | Ps. | (340,895 | ) | Ps. | (700,351 | ) | ||||||||||||
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| 2013 | 2012 | 2016 | 2015 | 2014 | ||||||||||||||||
Reflected in the consolidated statement of financial position as follows: | ||||||||||||||||||||
Deferred tax assets | Ps. | 304,525 | Ps. | 319,969 | Ps. | 559,083 | Ps. | 544,598 | Ps. | 327,785 | ||||||||||
Deferred tax liabilities | (21,530 | ) | (10,712 | ) | (1,836,950 | ) | (885,493 | ) | (26,842 | ) | ||||||||||
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Deferred tax asset, net | Ps. | 282,995 | Ps. | 309,257 | ||||||||||||||||
Deferred tax (liability) asset, net | Ps. | (1,277,867 | ) | Ps. | (340,895 | ) | Ps. | 300,943 | ||||||||||||
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A reconciliation of deferred tax assetliability, net is as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Opening balance as of January 1, | Ps. | 309,257 | Ps. | 302,125 | Ps. | 273,338 | Ps. | (340,895) | Ps. | 300,943 | Ps. | 282,995 | ||||||||||||
Tax income (expense) during the current year recorded in profit | (8,840 | ) | 12,133 | 7,022 | ||||||||||||||||||||
Tax income (expense) during the current year recorded in accumulated other comprehensive income | (17,422 | ) | (5,001 | ) | 21,765 | |||||||||||||||||||
Deferred income tax (expense) benefit during the current year recorded on profits | (749,696 | ) | (700,351 | ) | (21,375 | ) | ||||||||||||||||||
Tax income benefit (expense) during the current year recorded in accumulated other comprehensive income (loss) | (187,276 | ) | 58,513 | 39,323 | ||||||||||||||||||||
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Closing balance as of December 31, | Ps. | 282,995 | Ps. | 309,257 | Ps. | 302,125 | Ps. | (1,277,867 | ) | Ps.(340,895) | Ps. | 300,943 | ||||||||||||
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At December 31, 20132016 and 20122015, the table shown above includes deferred income tax asset recognized by Concesionaria (2014) and Controladora (2015) for tax losses carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.
g) According to IAS 12,Income Taxes, a deferred tax asset should be recognized for the carryforward of available tax losses to the extent that it is probable that future taxable income will be available against which the available tax losses can be utilized. In this regards the Company has recognized at December 31, 20132016, 2015 and 20122014 a deferred tax asset for tax losses of Ps.470,789Ps.33,324, Ps.58,354 and Ps.427,567,Ps.518,072, respectively.
During 2013,2014, the Company recognized a deferred tax asset for the carryforward of available tax losses of ConcesionariaControladora for an amount of Ps.369,631,Ps.491,916, based on the positive evidence of the Company to generate taxable temporary differences related to the same taxation authority which will result in taxable amounts against which the available tax losses can be utilized before they expire. Positive evidence includes the Company’s desire to expand its operations outside of Mexico, resulting in the need to find an organizational structure that is more efficient, in hopes of increasing the Company’s growing resulting in tax planning opportunities available to create taxable profit in the future.
An analysis of the available tax losses carry-forward of the Company at December 31, 20132016 is as follows:
Year of loss | Historical Loss | Restated tax loss | Utilized | Total remaining amount | Year of expiration | |||||||||||||||
2005 | Ps. | 115,170 | Ps. | 142,044 | Ps. | 142,044 | Ps. | — | 2015 | |||||||||||
2006 | 297,422 | 387,156 | 384,573 | 2,583 | 2016 | |||||||||||||||
2007 | 333,206 | 437,874 | 82,881 | 354,993 | 2017 | |||||||||||||||
2008 | 317,209 | 397,968 | 245 | 397,723 | 2018 | |||||||||||||||
2009 | 344,154 | 409,222 | 5,622 | 403,600 | 2019 | |||||||||||||||
2010 | 95,334 | 109,268 | 2,464 | 106,804 | 2020 | |||||||||||||||
2011 | 559,623 | 620,559 | 1,656 | 618,903 | 2021 | |||||||||||||||
2013 | 181,756 | 186,589 | — | 186,589 | 2023 | |||||||||||||||
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| Ps. | 2,243,874 | Ps. | 2,690,680 | Ps. | 619,485 | Ps. | 2,071,195 | |||||||||||||
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Year of loss | Historical Loss | Restated tax loss | Utilized | Total remaining amount | Year of expiration | |||||||||||||||
2013 | Ps. | 181,756 | Ps. | 198,228 | Ps. | 198,228 | Ps. | — | 2023 | |||||||||||
2014 | 17,341 | 18,290 | 18,290 | — | 2024 | |||||||||||||||
2016 | 52,221 | 53,669 | — | 53,669 | 2026 | |||||||||||||||
2016 | 57,414 | 57,414 | — | 57,414 | 2019 | |||||||||||||||
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| Ps. | 308,732 | Ps. | 327,601 | Ps. | 216,518 | Ps. | 111,083 | |||||||||||||
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A breakdown of available tax loss carry-forward of Controladora and its subsidiaries at December 31, 20132016 is as follows:
| Historical loss | Restated tax loss | Utilized | Total remaining amount | Historical Loss | Restated tax loss | Utilized | Total remaining amount | |||||||||||||||||||||||||
Concesionaria | Ps. | 1,687,494 | Ps. | 2,076,169 | Ps. | 578,869 | Ps. | 1,497,300 | ||||||||||||||||||||||||
Controladora | 535,251 | 591,753 | 29,486 | 562,267 | Ps. | 192,683 | Ps. | 209,867 | Ps. | 209,867 | Ps. | — | ||||||||||||||||||||
Comercializadora | 20,149 | 21,743 | 10,115 | 11,628 | 58,635 | 60,320 | 6,651 | 53,669 | ||||||||||||||||||||||||
Servicios Administrativos | 980 | 1,015 | 1,015 | — | ||||||||||||||||||||||||||||
Volaris Costa Rica | 57,414 | 57,414 | — | 57,414 | ||||||||||||||||||||||||||||
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| Ps. | 2,243,874 | Ps. | 2,690,680 | Ps. | 619,485 | Ps. | 2,071,195 | Ps. | 308,732 | Ps. | 327,601 | Ps. | 216,518 | Ps. | 111,083 | |||||||||||||||||
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Validación de tabla por parte de Volaris
h)f) At December 31, 2013,2016 the Company had the following tax balances:
Restated contributed capital account (“CUCA”) Ps.3,185,711
| 2016 | ||||
Restated contributed capital account (Cuenta de capital de aportación or “CUCA”) | Ps. | 3,500,091 | ||
CUFIN* | 2,390,955 | |||
Combined Net tax profit account (“CUFIN”) Ps.35,010
| * | The calculation comprises all the subsidiaries of the Company. |
| 20. | Other operating income and expenses |
An analysis of other operating income is as follows:
| 2013 | 2012 | 2011 | ||||||||||
Gain on sale and leaseback (Note 14) | Ps. | 106,607 | Ps. | 61,269 | Ps. | 72,820 | ||||||
Others | 4,670 | 7,531 | 1,011 | |||||||||
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| Ps. | 111,277 | Ps. | 68,800 | Ps. | 73,831 | |||||||
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Gain on sale and leaseback (Note 14c) Others 2016 2015 2014 Ps. 484,827 Ps. 181,736 Ps. 14,192 11,915 11,419 7,915 Ps. 496,742 Ps. 193,155 Ps. 22,107
An analysis of other operating expenses is as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Administrative and operational support expenses | Ps. | 147,746 | Ps. | 116,257 | Ps. | 144,035 | Ps. | 541,826 | Ps. | 383,805 | Ps. | 261,286 | ||||||||||||
Technology and communications | 96,924 | 72,962 | 56,493 | 266,898 | 173,078 | 110,245 | ||||||||||||||||||
Insurance | 59,313 | 66,903 | 50,861 | 56,414 | 54,609 | 55,248 | ||||||||||||||||||
Passenger services | 57,956 | 53,395 | 46,393 | 45,439 | 23,195 | 32,388 | ||||||||||||||||||
Rents of offices, maintenance warehouse and hangar (Note 14 c) | 22,431 | 20,227 | 14,346 | |||||||||||||||||||||
Penalty of anticipated IT contract cancellation | 21,821 | — | 34,245 | |||||||||||||||||||||
Rents of offices, maintenance warehouse and hangar (Note 14c) | 33,517 | 25,889 | 20,055 | |||||||||||||||||||||
Disposal of intangible, rotable spare parts, furniture and equipment | 11,805 | 14,586 | 1,066 | 436 | 632 | 284 | ||||||||||||||||||
Equity transaction costs (Note 18) | 9,424 | — | — | — | 22,955 | — | ||||||||||||||||||
Penalty of anticipated lease contract cancellation | 7,601 | — | — | |||||||||||||||||||||
Other IT expenses | 7,443 | — | — | — | — | 620 | ||||||||||||||||||
Others | 16,036 | 12,187 | 11,607 | 7,922 | 13,623 | 9,812 | ||||||||||||||||||
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| Ps. | 458,500 | Ps. | 356,517 | Ps. | 359,046 | Ps. | 952,452 | Ps. | 97,786 | Ps. | 489,938 | |||||||||||||
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| 21. | Finance income and cost |
An analysis of finance income is as follows:
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
Interest on cash and equivalents | Ps. | 23,044 | Ps. | 8,084 | Ps. | 5,539 | Ps. | 78,793 | Ps. | 47,029 | Ps. | 23,242 | ||||||||||||
Interest on recovery of guarantee deposits | 23,792 | — | — | |||||||||||||||||||||
Others | 1,730 | 5,527 | — | 6 | 5 | 222 | ||||||||||||||||||
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| Ps. | 24,774 | Ps. | 13,611 | Ps. | 5,539 | Ps. | 102,591 | Ps. | 47,034 | Ps. | 23,464 | |||||||||||||
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An analysis of finance cost is as follows:
| 2013 | 2012 | 2011 | ||||||||||
Interest on debts and borrowings | Ps. | 38,796 | Ps. | 53,999 | Ps. | 48,162 | ||||||
Debt prepayment premium (Note 5) | 65,206 | — | — | |||||||||
Other finance interest | — | 8,262 | — | |||||||||
Cost of letter credit notes | 17,164 | 13,868 | 7,720 | |||||||||
Debt financial costs | — | 10,059 | — | |||||||||
Others | 4,571 | 3,543 | 1,836 | |||||||||
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| Ps. | 125,737 | Ps. | 89,731 | Ps. | 57,718 | |||||||
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| 2016 | 2015 | 2014 | ||||||||||
Cost of letter credit notes | Ps. | 28,067 | Ps. | 18,279 | Ps. | 18,189 | ||||||
Bank fees and others | 5,804 | 3,424 | 2,930 | |||||||||
Interest on debts and borrowings* | 1,245 | — | — | |||||||||
Other finance costs | — | — | 11,216 | |||||||||
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| Ps. | 35,116 | Ps. | 21,703 | Ps. | 32,335 | |||||||
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| * | The borrowing costs related to the acquisition or construction of qualifying assets are capitalized as part of the cost of the asset. |
| 2016 | 2015 | 2014 | ||||||||||
Interest on debts and borrowings | Ps. | 96,690 | Ps. | 90,057 | Ps. | 42,572 | ||||||
Capitalized interest (Note 12) | (95,445 | ) | (90,057 | ) | (42,572 | ) | ||||||
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Net interest on debts and borrowing in the consolidated statements of operations | Ps. | 1,245 | Ps. | — | Ps. | — | ||||||
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| 22. | Components of other comprehensive income (loss) |
| 2013 | 2012 | 2011 | ||||||||||
Derivative financial instruments: | ||||||||||||
Gain of the not-yet matured interest rate swap contracts | Ps. | 41,561 | Ps. | 15,037 | Ps. | (3,438 | ) | |||||
Gain of the not-yet matured fuel swap contracts | 6,258 | 1,288 | (63,282 | ) | ||||||||
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| Ps. | 47,819 | Ps. | 16,325 | Ps. | (66,720 | ) | ||||||
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| 2016 | 2015 | 2014 | ||||||||||
Derivative financial instruments: | ||||||||||||
Reclassification during the year to profit or loss | Ps. | 353,943 | Ps. | 287,550 | Ps. | 125,339 | ||||||
Extrinsic value of changes on jet fuel Asian call options | 277,899 | (450,768 | ) | (26,934 | ) | |||||||
Loss of thenot-yet matured fuel swap contracts | — | (11,828 | ) | (210,957 | ) | |||||||
Loss of thenot-yet matured interest rate swap contracts | (7,148 | ) | (18,823 | ) | (16,954 | ) | ||||||
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| Ps. | 624,694 | Ps. | (193,869 | ) | Ps. | (129,506 | ) | |||||
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| 23. | Commitments and contingencies |
Aircraft related commitments and financing arrangements
Committed expenditures for aircraft purchase and related flight equipment related to the Airbus purchase agreement, including estimated amounts for contractual prices escalations andpre-delivery payments, will be as follows:
| Commitment expenditures in U.S. dollars | Commitment expenditures equivalent in Mexican pesos | |||||||
2014 | US$ | 59,480 | Ps. | 777,787 | ||||
2015 | 53,535 | 700,046 | ||||||
2016 | 41,547 | 543,293 | ||||||
2017 | 82,275 | 1,075,868 | ||||||
2018 | 119,883 | 1,567,654 | ||||||
2019 and thereafter | 117,247 | 1,533,183 | ||||||
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| US$ | 473,967 | Ps. | 6,197,831 | |||||
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| Commitment expenditures in U.S. dollars | Commitment expenditures equivalent in Mexican pesos(1) | |||||||
2017 | US$ | 78,195 | Ps. | 1,615,828 | ||||
2018 | 119,883 | 2,477,269 | ||||||
2019 | 91,556 | 1,891,906 | ||||||
2020 | 25,692 | 530,890 | ||||||
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| US$ | 315,326 | Ps. | 6,515,893 | |||||
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| (1) | Using the exchange rate as of December 31, 2016 of Ps.20.6640. |
All aircraft acquired by the Company through the Airbus purchase agreement at December 31, 2016 and 2015 have been executed through sale and leaseback transactions.
Litigation
a) The Company and its CEO, CFO, certain of its current directors and certain of its former directors, as well as certain underwriters were among the defendants in a putative class action commenced on February 24, 2015 in the United States District Court for the Southern District of New York brought on behalf of purchasers of ADSs in and/or traceable to the September 2013 IPO. The complaint, which also named as defendants the underwriters of the IPO, generally alleged that the registration statement and prospectus for the ADSs contained misstatements and omissions with respect to the recognition ofnon-ticket revenue in violation of the federal securities laws, and sought unspecified damages and rescission. The motion to dismiss requested by the Company and all defendants was granted with prejudice in their favor on July 6, 2016. The plaintiff has not appealed the judge’s decision and the time to appeal has expired. Accordingly, any right of the plaintiff to pursue the litigation has ended.
b) The Company is a party to legal proceedings and claims that arise during the ordinary course of business. The Company believes the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
| 24. | Operating segments |
The Company is managed as a single business unit that provides air transportation services. The Company has two geographic segments identified below:
| 2013 | 2012 | 2011 | ||||||||||
Revenues: | ||||||||||||
Domestic (Mexico) | Ps. | 9,619,983 | Ps. | 8,834,864 | Ps. | 6,781,571 | ||||||
United States of America | 3,382,488 | 2,851,551 | 2,097,045 | |||||||||
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Total revenues | Ps. | 13,002,471 | Ps. | 11,686,415 | Ps. | 8,878,616 | ||||||
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| 2016 | 2015 | 2014 | ||||||||||
Operating revenues: | ||||||||||||
Domestic (Mexico) | Ps. | 15,720,807 | Ps. | 12,579,806 | Ps. | 10,218,973 | ||||||
International: | ||||||||||||
United States of America and Central America | 7,791,644 | 5,599,898 | 3,817,769 | |||||||||
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Total operating revenues | Ps. | 23,512,451 | Ps. | 18,179,704 | Ps. | 14,036,742 | ||||||
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Revenues are allocated by geographic segments based upon the origin of each flight.
The Company does not have materialnon-current assets located in foreign countries.
| 25. | Subsequent events |
Subsequent to December 31, 20132016 and through April 24, 2014:26, 2017:
(i) The Company entered into a 16 new A320neo family aircraft lease agreement with a leading aircraft lessor (10 A320neo and six A321neo); these aircraft will enable Volaris to continue with its growth strategy with a young, efficient and uniform fleet, as well as secure early delivery slots of the next generation and fuel efficient Airbus A320 family new engine option. Volaris’ decision to add the A321neo into its fleet, is in line with its strategy of further reducing its operating costs and to maximize the use of airport slots in key markets. These 16 aircraft will be incorporated into the Company’s fleet between 2016 and 2018 and will be powered by Pratt & Whitney´s PW1100G engine.
(ii) The Company incorporated three new A320 aircraft to its fleet and returned one A320 aircraft to the lessor. The Company’s fleet reached 46 aircraft as of April 24, 2014.
(iii) On April 8, 2014 Concesionaria entered into a new A-320 aircraft lease agreement with Awas Aviation Trading Limited. This new aircraft will be incorporated into the Company’s fleet during 2014.
| a) | On February 22, 2017 the Company increased its short-term working capital facility with Citibanamex by an amount of Ps.207,100. |
| b) | On March 22, 2017 the Company repaid in full its short-term working capital facility with Bank of America in the amount of US$15,000 in accordance with the terms of the agreement. |
F-57F-75