CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES
(d.b.a. VOLARIS)
Notes to the Unaudited Interim Condensed Consolidated Financial Statements
At September 30, 2015 and December 31, 2014
(In thousands of Mexican pesos and thousands of U.S. dollars,
except when indicated otherwise)
1. Corporate information
Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Controladora”) was incorporated in Mexico in accordance with Mexican Corporate laws on October 27, 2005.
Controladora is domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, Mexico D.F.
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 Transportes, or “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 a low-cost airline on March 13, 2006. The Company operates under the trade name of “Volaris”. 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.
On September 23, 2013, the Company completed its dual listing Initial Public Offering (“IPO”) on the New York Stock Exchange (“NYSE”) and on the Mexican Stock Exchange (“BMV”), and on September 18, 2013 it started trading under the ticker symbol “VLRS” and “VOLAR”, respectively.
The accompanying unaudited interim condensed consolidated financial statements and notes were authorized for their issuance by the Company’s Chief Executive Officer Enrique Beltranena and Chief Financial Officer Fernando Suárez on October 16, 2015. Those unaudited interim condensed consolidated financial statements and notes were then approved by the Company’s Board of Directors on October 16, 2015. Subsequent events have been considered through that date.
2. Basis of preparation
The unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 have been prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial Reporting and using the same accounting policies applied in preparing the annual financial statements, except as explained below.
The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company’s annual consolidated financial statements as of December 31, 2014, 2013 and 2012, and for the three year period ended December 31, 2014 as included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 (the “2014 Form 20-F”).
Basis of consolidation
The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiaries. At September 30, 2015 and December 31, 2014, for accounting purposes the companies included in the consolidated financial statements are as follows:
| | | | % Equity interest |
| Name | Principal Activities | Country | September 30, 2015 | December 31, 2014 |
| Concesionaria | Air transportation services for passengers, cargo and mail throughout Mexico and abroad | Mexico | 100.00% | 100.00% |
| Vuela Aviación, S.A. | Air transportation services for passengers, cargo and mail in Costa Rica and abroad | Costa Rica | 100.00% | - |
| Vuela, S.A. | Air transportation services for passengers, cargo and mail in Guatemala and abroad | Guatemala | 100.00% | - |
| Comercializadora Volaris, S.A. de C.V. | Merchandising of services | Mexico | 100.00% | 100.00% |
Servicios Corporativos Volaris, S.A. de C.V. (“Servicios Corporativos”) | Recruitment and payroll | Mexico | 100.00% | 100.00% |
Servicios Administrativos Volaris, S.A. de C.V. (“Servicios Administrativos”) | Recruitment and Payroll | Mexico | 100.00% | 100.00% |
| Servicios Operativos Terrestres Volaris, S.A. de C.V. | Recruitment and Payroll | Mexico | 100.00% | - |
| 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% |
Irrevocable Administrative Trust number F/307750 “Administrative Trust” | Share administration trust | Mexico | 100.00% | 100.00% |
Irrevocable Administrative and Safeguard Trust, denominated F/1405 “DAIIMX/VOLARIS” | Share administration trust | Mexico | 100.00% | 100.00% |
Irrevocable Administrative Trust number F/745291 | Share administration trust | Mexico | 100.00% | 100.00% |
The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Company’s annual consolidated financial statements for the year ended December 31, 2014, except for the adoption of new standards and interpretations effective as of January 1, 2015. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
New standards
The following new International Financial Reporting Standards (“IFRS”) and amendments apply for the first time in 2015; however, they do not have a material impact on the unaudited interim condensed consolidated financial statements of the Company.
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions
IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognize such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after July 1, 2014.
This amendment has no impact in the Company, since the Company has no defined benefit plans with contributions from employees or third parties.
Annual Improvements 2010-2012 Cycle
These improvements are effective from annual periods beginning on or after July 1, 2014 and the Company has applied these amendments for the first time in these unaudited interim condensed consolidated financial statements. They include:
IFRS 2 Share-based Payment
This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:
| § | A performance condition must contain a service condition |
| § | A performance target must be met while the counterparty is rendering service |
| § | A performance target may relate to the operations or activities of an entity, or to those of another entity in the same group |
| § | A performance condition may be a market or non-market condition |
| § | If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the service condition is not satisfied |
This improvement has no impact on the Company, since the share based payments of the Company only include an implicit service condition and already consider that if an employee no longer renders service during the vesting period (due to an employee’s decision), the service condition is not met .
IFRS 8 Operating Segments
The amendments are applied retrospectively and clarify that:
| § | An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’. |
| § | The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. |
This amendment has no impact on the Company, since it is managed as a single business unit that provides air transportation services and has not aggregated operating segments.
IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
The amendment is applied retrospectively and clarifies in IAS 16 and IAS 38 that the asset may be revalued by reference to observable data by either adjusting the gross carrying amount of the asset to market value or by determining the market value of the carrying value and adjusting the gross carrying amount proportionately so that the resulting carrying amount equals the market value. In addition, the accumulated depreciation or amortization is the difference between the gross and carrying amounts of the asset.
This amendment has no impact on the Company, since it does not use the revaluation model included in IAS 16.
IAS 24 Related Party Disclosures
The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services.
This amendment has no impact on the Company, since it does not receive any management services from other entities.
Annual Improvements 2011-2013 Cycle
IFRS 13 Fair Value Measurement
The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IFRS 9 (2013).
This scope has no impact on the Company, since it does not apply the portfolio exception in IFRS 13.
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. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue.
The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date.
Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests
The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.
The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted.
These amendments are not expected to have a material impact on the Company.
Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization
The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets.
The amendments are effective prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted.
These amendments are not expected to have any impact on the Company given that the Company has not used a revenue-based method to depreciate its non-current assets.
3. Significant accounting judgments, estimates and assumptions
The preparation of these unaudited interim condensed consolidated financial statements in accordance with IAS 34 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 unaudited interim condensed consolidated financial statements.
4. Convenience translation
U.S. dollar amounts at September 30, 2015 shown in the unaudited interim condensed consolidated financial statements have been included solely for the convenience of the reader and are translated from Mexican pesos at September 30, 2015, divided by an exchange rate of Ps.17.0073 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 September 30, 2015. 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.
5. Seasonality of operations
The results of operations for any interim period are not necessarily indicative of those for the entire year because the business is subject to seasonal fluctuations. The Company 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. The Company and subsidiaries generally experience their lowest levels of passenger traffic in February, September and October, given their proportion of fixed costs, seasonality can affect their profitability from quarter to quarter. This information is provided to allow for a better understanding of the results, however management has concluded that this does not constitute “highly seasonal” as considered by IAS 34.
6. Risk management
Financial risk management
The Company’s activities are exposed to different financial risks derived from exogenous variables which are not under its control but whose effects might be potentially adverse such as: (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 and working capital requirements. The Company uses derivative financial instruments to hedge part of these risks. The Company does not engage 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 and off-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 also erode the value of recognized financial assets and liabilities, as well some other off-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 team, which identifies and measures financial risk exposures, as well as design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the Corporate Governance level for approval.
a) Jet fuel price risk
Since the contractual agreements with jet fuel suppliers include reference to jet fuel index, the Company is exposed to fuel price risk and its fuel price risk on its forecasted consumption volumes. The Company’s jet fuel risk management policy aims to provide the Company with protection against increases in fuel prices. In 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 three months ended September 30, 2015 and 2014 represented 31% and 40%, of the Company’s operating expenses, respectively.
Aircraft jet fuel consumed in the nine months ended September 30, 2015 and 2014 represented 31% and 40%, of the Company’s operating expenses, respectively.
During the three months ended September 30, 2014, the Company entered into US Gulf Coast Jet Fuel 54 Asian swap contracts to hedge approximately 21% of its fuel consumption, and were accounted for as cash flow hedges (“CFH”) that gave rise to a loss of Ps.4,245. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within other comprehensive income while the effects to transforming into a fixed jet fuel prices by these hedges are presented as part of fuel as part of operating expenses when recognized in the unaudited interim condensed consolidated statements of operations. All of the Company’s position in US Gulf Coast Jet Fuel 54 Asian swaps matured on June 30, 2015 (Note 7).
During the six months period ended June 30, 2015 and for the nine months ended September 30, 2014, the Company entered into US Gulf Coast Jet Fuel 54 Asian swap contracts to hedge approximately 11% and 17% of its fuel consumption, respectively, and were accounted for as cash flow hedges (“CFH”) that gave rise to a loss of Ps.128,330 and a gain of Ps.426, 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 to transforming into a fixed jet fuel prices by these hedges are presented as part of fuel operating expenses when recognized in the unaudited interim condensed consolidated statements of operations (Note 7).
As of December 31, 2014, the fair value of the outstanding US Gulf Coast Jet Fuel 54 swaps designated to hedge a percentage of the Company’s projected consumption, was Ps.169,622, and are presented as derivative financial instruments as current financial liabilities. As of September 30, 2015, the Company did not record fair value since all of the Company's position in US Gulf Coast Jet Fuel 54 Asian swaps matured on June 30, 2015.
During the nine months ended September 30, 2015, and for the last quarter of 2014, the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge a portion of the 2015 and 2016 projected consumption (as described in the tables below). Since the Company elected to early adopt IFRS 9 (2013) in 2014, this standard requires the separation of the changes in fair value of these options attributable to the intrinsic value, from those changes due to extrinsic value, where the latter are considered as a cost of hedging associated to a transaction-related hedged item (a hedge of a portion of the future monthly purchases of fuel). Accordingly, the Company reclassifies these amounts recognized within a separate component of other comprehensive income to profit or loss as a reclassification adjustment in the same period in which the expected jet fuel consumed volume affected the jet fuel operating cost in the consolidated statements of operations. 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 September 30, 2015 and December 31, 2014, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was Ps.104,881 and Ps.68,133, respectively, which was presented as part of the financial assets in the unaudited interim condensed consolidated statement of financial position (Note 7).
As of September 30, 2015 and December 31, 2014, the amount of cost of hedging derived from the extrinsic value changes of these options recognized in other comprehensive income, totalized Ps.253,261 and Ps.26,934, respectively, and will be recycled to fuel operating cost throughout 2015 and until 2016, as these options expire on a monthly basis (Note 7).
During the three and nine months ended September 30, 2015, the US Gulf Coast Jet Fuel 54 Asian call options hedged gave rise to a loss of Ps.41,068 and Ps.63,925, respectively, which was recorded as part of the fuel operating cost (Note 7).
The following table includes the notional amounts and strike prices of the derivative financial instruments outstanding as of the end of the period:
| | Position as of September 30, 2015 |
| | Jet fuel Asian call option contracts maturities |
| | Oct – Dec 2015 | 2016 | Jan – June 2017 |
| Notional volume in gallons (thousands)* | 20,470 | 107,487 | 20,050 |
Strike price agreed rate per gallon (U.S. dollars)** | 2.0660 | 1.9666 | 1.8104 |
Approximate percentage of hedge (of expected consumption value) | 50% | 60% | 22% |
* US Gulf Coast Jet 54 as underlying asset
** Weighted average
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.
During the three and nine months ended September 30, 2015 and 2014, the Company did not enter into foreign exchange rate derivatives financial instruments.
The Company’s foreign exchange on and off-balance sheet exposure as of September 30, 2015 and December 31, 2014 is as set forth below:
| | | Thousands of U.S. dollars | |
| | | September 30, 2015 | | December 31, 2014 | |
| Assets: | | | | | |
| Cash and cash equivalents | | US$ | 204,034 | | US$ | 89,563 | |
| Other accounts receivable | | | 11,876 | | | 3,613 | |
| Aircraft maintenance deposits paid to lessors | | | 270,247 | | | 233,875 | |
| Deposits for rental of flight equipment | | | 42,001 | | | 37,796 | |
| Collateral of derivative financial instruments | | | - | | | 2,290 | |
| Derivative financial instruments | | | 6,167 | | | 4,630 | |
| Pre-delivery payments* | | | 101,460 | | | 105,056 | |
| Total assets | | | 635,785 | | | 476,823 | |
| | | | | | | | |
| Liabilities: | | | | | | | |
| Financial debt (Note 8) | | | 85,478 | | | 84,786 | |
| Foreign suppliers | | | 32,053 | | | 30,179 | |
| Taxes and fees payable | | | 10,929 | | | 5,587 | |
| Derivative financial instruments | | | 4,184 | | | 17,264 | |
| Total liabilities | | | 132,644 | | | 137,816 | |
| Net foreign currency position | | US$ | 503,141 | | US$ | 339,007 | |
| * | These assets are included as part of rotable, spare parts, furniture and equipment, and therefore are not remeasured. |
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 the London 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” and the effective portion of fair value variations are recorded in OCI until the date the cash flow of the hedged lease payment is recognized in the consolidated statements of operations.
At September 30, 2015 and December 31, 2014 the Company had outstanding hedging contracts in the form of interest rate swaps with notional amount of US$70,000 (both at September 30, 2015 and December 31, 2014) and fair value of Ps.71,161 and Ps.83,496, respectively, recorded as liabilities (Note 7).
For the three months ended September 30, 2015 and 2014, the reported loss on the interest rate swap was Ps.12,166 and Ps.9,800, respectively, which was recognized as part of aircraft and engine rent expense in the unaudited interim condensed consolidated statements of operations (Note 7).
For the nine months ended September 30, 2015 and 2014, the reported loss on the interest rate swap was Ps.34,586 and Ps.29,283, respectively, which was recognized as part of aircraft and engine rent expense in the unaudited interim condensed consolidated statements of operations (Note 7).
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 obligations.
The Company attempts to manage its cash and cash equivalents and its financial assets, relating 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’s off-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.
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 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.
7. 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 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 a non-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:
| ● | Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities. |
| ● | Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. |
| ● | Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. |
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-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 | |
| | | At September 30, | | | At December 31, | | | At September 30, | | | At December 31, | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Assets | | | | | | | | | | | | |
| Derivative financial instruments | | Ps. | 104,881 | | | Ps. | 68,133 | | | Ps. | 104,881 | | | Ps. | 68,133 | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| Financial debt* | | | (1,446,989 | ) | | | (1,243,192 | ) | | | (1,453,605 | ) | | | (1,247,713 | ) |
| Derivative financial instruments | | | ( 71,161 | ) | | | ( 253,118 | ) | | | ( 71,161 | ) | | | ( 253,118 | ) |
| Net | | Ps. | (1,413,269 | ) | | Ps. | (1,428,177 | ) | | Ps. | (1,419,885 | ) | | Ps. | (1,432,698 | ) |
*Floating rate borrowing
The following table summarizes the fair value measurements at September 30, 2015:
| | | 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: | | | | | | | | | | | | |
| US Gulf Coast Jet fuel Asian call options contracts* | | Ps. | - | | | Ps. | 104,881 | | | Ps. | - | | | Ps. | 104,881 | |
Liabilities | | | | | | | | | | | | |
| Derivative financial instruments: | | | | | | | | | | | | |
| Interest rate swap contracts* | | | - | | | | ( 71,161 | ) | | | - | | | | ( 71,161 | ) |
Liabilities for which fair values are disclosed: | | | | | | | | | | | | | | | | |
| Interest-bearing loans and borrowings* | | | - | | | | ( 1,453,605 | ) | | | - | | | | (1,453,605 | ) |
| Net | | Ps. | - | | | Ps. | ( 1,419,885 | ) | | Ps. | - | | | Ps. | (1,419,885 | ) |
*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, 2014:
| | | 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: | | | | | | | | | | | | |
| US Gulf Coast Jet fuel Asian call options contracts* | | Ps. | - | | | Ps. | 68,133 | | | Ps. | - | | | Ps. | 68,133 | |
Liabilities | | | | | | | | | | | | |
| Derivative financial instruments: | | | | | | | | | | | | |
| US Gulf Coast Jet fuel Asian swap contracts* | | | - | | | | ( 169,622 | ) | | | - | | | | ( 169,622 | ) |
| Interest rate swap contracts** | | | - | | | | ( 83,496 | ) | | | - | | | | ( 83,496 | ) |
Liabilities for which fair values are disclosed: | | | | | | | | | | | | | | | | |
| Interest-bearing loans and borrowings** | | | - | | | | (1,247,713 | ) | | | - | | | | (1,247,713 | ) |
| Net | | Ps. | - | | | Ps. | (1,432,698 | ) | | Ps. | - | | | Ps. | (1,432,698 | ) |
* 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 (loss) gain from derivative financial instruments recognized in the unaudited interim condensed consolidated statements of operations for the nine months ended September 30, 2015 and 2014:
Consolidated statements of operations
| Instrument | Financial statements line | | For the nine months ended September 30, | |
| | | | 2015 | | | 2014 | |
| US Gulf Coast Jet fuel 54 Asian swap contracts | Fuel | | Ps. | (128,330 | ) | | Ps. | 426 | |
| US Gulf Coast Jet fuel Asian Call options contracts | Fuel | | | ( 63,925 | ) | | | - | |
| Interest rate swap contracts | Aircraft and engine rent expense | | | ( 34,586 | ) | | | ( 29,283 | ) |
| Total | | | Ps. | (226,841 | ) | | Ps. | ( 28,857 | ) |
The following table summarizes the (loss) gain from derivative financial instruments recognized in the unaudited interim condensed consolidated statements of operations for the three months ended September 30, 2015 and 2014:
Consolidated statements of operations
| Instrument | Financial statements line | | For the three months ended September 30, | |
| | | | 2015 | | | 2014 | |
| US Gulf Coast Jet fuel 54 Asian swap contracts | Fuel | | Ps. | - | | | Ps. | ( 4,245 | ) |
| US Gulf Coast Jet fuel Asian Call options contracts | Fuel | | | ( 41,068 | ) | | | - | |
| Interest rate swap contracts | Aircraft and engine rent expense | | | ( 12,166 | ) | | | ( 9,800 | ) |
| Total | | | Ps. | ( 53,234 | ) | | Ps. | ( 14,045 | ) |
The following table summarizes the net (loss) gain on cash flow hedges before taxes recognized in the unaudited interim condensed consolidated statements of comprehensive income as of September 30, 2015 and December 31, 2014:
Consolidated statements of other comprehensive income
| Instrument | Financial statements line | | September 30, 2015 | | | December 31, 2014 | |
| US Gulf Coast Jet 54 fuel swap contract | OCI | | Ps. | 116,502 | | | Ps. | ( 125,228 | ) |
| US Gulf Coast Jet fuel Asian call options | OCI | | | (253,261 | ) | | | ( 26,934 | ) |
| Interest rate swap contracts | OCI | | | 12,334 | | | | 22,656 | |
| Total | | | Ps. | ( 124,425 | ) | | Ps. | ( 129,506 | ) |
8. Financial assets and liabilities
At September 30, 2015 and December 31, 2014 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.
a) Financial assets
| | | September 30, 2015 | | | December 31, 2014 | |
Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI) | | | | | | |
| US Gulf Coast Jet fuel Asian call options | | Ps. | 104,881 | | | Ps. | 68,133 | |
| Total derivative financial instruments at fair value | | Ps. | 104,881 | | | Ps. | 68,133 | |
| | | | | | | |
Presented on the consolidated statements of financial position as follows: | | | | | | |
| Current | | Ps. | 39,509 | | | Ps. | 62,679 | |
| Non-current | | | 65,372 | | | | 5,454 | |
| Total | | Ps. | 104,881 | | | Ps. | 68,133 | |
b) Financial debt
| (i) | At September 30, 2015 and December 31, 2014, the Company’s short-term and long-term debt consists of the following: |
| | | | September 30, 2015 | | | December 31, 2014 | |
| 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 May 31, 2019, bearing annual interest rate at the three-month LIBOR plus an spread according to the contractual conditions of each disbursement in a range of 1.99 to 2.65 percentage points. | | Ps. | 1,446,989 | | | Ps. | 1,243,192 | |
| II. | Accrued interest | | | 6,754 | | | | 4,678 | |
| | | | | 1,453,743 | | | | 1,247,870 | |
| | Less: Short-term maturities | | | 1,145,097 | | | | 823,071 | |
| | Long-term | | Ps. | 308,646 | | | Ps. | 424,799 | |
(ii) The following table provides a summary of the Company’s contractual payments of financial debt and accrued interest at September 30, 2015:
| | | October – December 2015 | | | 2016 | | | 2017 | | | 2018 | | | Total | |
Finance debt denominated in foreign currency: | | | | | | | | | | | | | | | |
| Santander/Bancomext | | Ps. | 178,002 | | | Ps. | 1,157,583 | | | Ps. | 53,128 | | | Ps. | 65,030 | | | Ps. | 1,453,743 | |
| Total | | Ps. | 178,002 | | | Ps. | 1,157,583 | | | Ps. | 53,128 | | | Ps. | 65,030 | | | Ps. | 1,453,743 | |
This 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. |
| 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 September 30, 2015 and December 31, 2014, the Company was in compliance with the covenants under the above-mentioned loan agreements.
For purposes of financing the pre-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 make pre-delivery payments to the Mexican trusts, and the Company guaranteed the obligations of the Mexican trusts under the financing agreements.
c) Financial liabilities
| | | At September 30, 2015 | | | At December 31, 2014 | |
Derivative financial instruments designed as CFH (effective portion recognized within OCI): | | | | | | |
Interest rate swap contracts | | Ps. | 71,161 | | | Ps. | 83,496 | |
| US Gulf Coast Jet Fuel Asian swap contracts | | | - | | | | 169,622 | |
| Total financial liabilities | | Ps. | 71,161 | | | Ps. | 253,118 | |
| | | | | | | | | |
| Total current liability | | Ps. | 47,710 | | | Ps. | 210,650 | |
| Total non-current liability | | Ps. | 23,451 | | | Ps. | 42,468 | |
9. Related parties
a) An analysis of balances due from/to related parties at September 30, 2015 and December 31, 2014 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 | | At September 30, 2015 | | | At December 31, 2014 | | Terms |
| Due to: | | | | | | | | | |
| Aeromantenimiento, S.A. | Aircraft and engine maintenance | El Salvador | | Ps. | 2,109 | | | Ps. | 559 | | 30 days |
| Human Capital International HCI, S.A. de C.V. | Professional fees | Mexico | | | - | | | | 8 | | 30 days |
| One Link, S.A. de C.V. | Other fees | El Salvador | | | 14,367 | | | | - | | 30 days |
| | | | | Ps. | 16,476 | | | Ps. | 567 | | |
For the nine months ended September 30, 2015 and 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 nine months ended September 30, 2015 and 2014, the Company had the following transactions with related parties:
| | Country of origin | | During the nine months ended September 30, | |
| | | | 2015 | | | 2014 | |
| Revenues: | | | | | | | |
Other commissions | Mexico | | Ps. | - | | | Ps. | 3,663 | |
| | | | Ps. | - | | | Ps. | 3,663 | |
| Expenses: | | | | | | | | |
| Maintenance | El Salvador | | Ps. | 76,956 | | | Ps. | 139,130 | |
| Supporting fees | El Salvador | | | 32,905 | | | | - | |
| Other fees | Mexico | | | 618 | | | | 789 | |
| | | | Ps. | 110,479 | | | Ps. | 139,919 | |
During the three months ended September 30, 2015 and 2014, the Company had the following transactions with related parties:
Related party transactions | Country of origin | | During the three month s ended September 30, | |
| | | | 2015 | | | 2014 | |
Expenses: | | | | | | | |
| Maintenance | El Salvador | | Ps. | 16,501 | | | Ps. | 34,670 | |
| Supporting fees | El Salvador | | | 26,205 | | | | - | |
| Other fees | Mexico | | | 222 | | | | 278 | |
| | | | Ps. | 42,928 | | | Ps. | 34,948 | |
c) Servprot
Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena Mejicano, the Company´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. During the nine months ended September 30, 2015 and 2014, the Company expensed Ps.562 and Ps.675, respectively, for this concept.
During the three months ended September 30, 2015 and 2014, the Company expensed Ps.183 and Ps.225, respectively, for this concept.
d) Directors and officers
During the nine months ended September 30, 2015 and 2014, all of the Company’s senior managers received an aggregate compensation of short and long-term benefits of Ps.72,457 and Ps.40,706, respectively. Additionally, the cost of the long-term incentive plan and management incentive plan for the nine months ended September 30, 2015 and 2014 was Ps.25,293 and Ps.245, respectively.
During the three months ended September 30, 2015 and 2014 the cost of the long-term incentive plan and management incentive plan was Ps.8,431 and Ps.182, respectively.
During the second quarter 2015, the Company adopted a new short-term benefit plan for certain personnel whereby cash bonuses are awarded meeting certain Company’s performance target. These incentives are payable shortly after the end of each year 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 three and nine months ended September 30, 2015 the Company recorded a provision by an amount of Ps.19,896 and Ps.35,007, respectively.
During the nine months ended September 30, 2015 and 2014, the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.1,939 and Ps.4,445, respectively, and the rest of the directors received a compensation of Ps.2,761 and Ps.3,584, respectively.
During the three months ended September 30, 2015 and 2014, the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.631 and Ps.1,710, respectively, and the rest of the directors received a compensation of Ps.986 and Ps.1,504, respectively.
10. Rotable spare parts, furniture and equipment, net
a) Acquisitions and disposals
During the nine months ended September 30, 2015 and 2014, the Company acquired rotable spare parts, furniture and equipment by an amount of Ps.884,267 and Ps.1,083,728, respectively.
Rotable spare parts, furniture and equipment by an amount of Ps.538,723 were disposed during the nine months ended September 30, 2015. This amount included reimbursements of pre-delivery payments for aircraft acquisition of Ps.532,883.
Rotable spare parts, furniture and equipment by an amount of Ps.269,788 were disposed during the nine months ended September 30, 2014. During this period, the Company recorded reimbursements of pre-delivery payments for aircraft acquisition of Ps.268,278.
b) Depreciation expense
Depreciation expense for the nine months ended September 30, 2015 and 2014 was Ps.325,147 and Ps.186,291, respectively. Depreciation charges for the year are recognized as a component of operating expenses in the unaudited interim condensed consolidated statements of operations.
Depreciation expense for the three months ended September 30, 2015 and 2014 was Ps.112,204 and Ps.81,604, respectively. Depreciation charges for the year are recognized as a component of operating expenses in the unaudited interim condensed consolidated statements of operations.
11. Intangible assets, net
a) Acquisitions
During the nine months ended September 30, 2015 and 2014, the Company acquired intangible assets related to computer software by an amount of Ps.28,180 and Ps.5,864, respectively.
b) Amortization expense
Software amortization expense for the nine months ended September 30, 2015 and 2014 was Ps.23,594 and Ps.18,616, respectively. These amounts were recognized in depreciation and amortization in the unaudited interim consolidated statements of operations.
Software amortization expense for the three months ended September 30, 2015 and 2014 was Ps.8,484 and Ps.4,970, respectively. These amounts were recognized in depreciation and amortization in the unaudited interim consolidated statements of operations.
12. Operating leases
The most significant operating leases are as follows:
Aircraft and engine rent. At September 30, 2015, the Company leases 55 aircraft (50 as of December 31, 2014) and six spare engines under operating leases that have maximum terms through 2026. Rents are guaranteed by deposits in cash or letters of credit. The 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 lessors. |
| (v) | Comply with the technical conditions relative to the return of aircraft. |
As of September 30, 2015, December 31, 2014, the Company was in compliance with the covenants under the above mentioned aircraft lease agreements.
Composition of the fleet, operating leases*:
Aircraft Type | Model | At September 30, 2015 | At December 31, 2014 |
| A319 | 132 | 6 | 6 |
| A319 | 133 | 12 | 12 |
| A320 | 233 | 30 | 28 |
| A320 | 232 | 5 | 4 |
| A321 | 200 | 2 | - |
| | | 55 | 50 |
* 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 nine months ended September 30, 2015, the Company incorporated six aircraft to its fleet (four of them based on the terms of the amended Airbus purchase agreement and two from a lessors aircraft order book), and returned one aircraft to the lessors. These new aircraft agreements were accounted for as operating leases.
In August 2015, the Company entered into two new A321CEO aircraft lease agreements. These aircraft will be incorporated into the Company’s fleet in June and September 2016. Also, during August 2015, the Company extended the lease term of three A319s.
In April 2015, the Company entered into three new A321CEO aircraft lease agreements, all from a lessor aircraft order book. The three A321CEO will be incorporated into the Company´s fleet during May, October and November 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 and amended Airbus purchase agreement and five from a lessors aircraft order book), and returned two aircraft to the lessors. These new aircraft agreements were accounted for as operating leases.
On November 26, 2014, the Company entered into two new aircraft lease agreement (A321CEO), both from the lessor aircraft order book. The A321CEO were incorporated to the Company’s fleet during April and May 2015.
During October 2014, the Company entered into 14 new aircraft lease agreement (all A320CEO). These aircraft are from the amendment Airbus purchase order. On November 2014 the Company received one of these aircraft, which was accounted for as operating lease. During first nine months as of 2015 other four aircraft were received, which also were accounted for as operating leases. The remaining 9 aircraft will be incorporated into the Company’s fleet during the rest of 2015 and 2016.
On February 13, 2014, the Company entered into 16 new aircraft lease agreements (ten A320NEO and six A321NEO), all from a lessor aircraft order book. The A320NEO will be incorporated into the Company’s fleet during 2016, 2017 and 2018, and the A321NEO will be incorporated into the Company’s fleet during 2017 and 2018.
As of September 30, 2015, the aircraft incorporated to the Company´s fleet through lessors aircraft order books have not been subject to sale and leaseback transactions.
Provided below is an analysis of future minimum aircraft rent payments in U.S. dollars and its equivalent to Mexican pesos:
| | | Operating leases | |
| | | in U.S. dollars | | | in Mexican pesos (1) | |
| October- December 2015 | | US$ | 50,405 | | | Ps. | 857,246 | |
| 2016 | | | 189,475 | | | | 3,222,455 | |
| 2017 | | | 163,694 | | | | 2,783,991 | |
| 2018 | | | 145,743 | | | | 2,478,689 | |
| 2019 | | | 133,666 | | | | 2,273,297 | |
| 2020 and thereafter | | | 529,764 | | | | 9,009,860 | |
| Total | | US$ | 1,212,747 | | | Ps. | 20,625,538 | |
(1) Using the exchange rate as of September 30, 2015 of Ps. 17.0073
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 September 30, 2015.
During the nine months ended September 30, 2015 and 2014, the Company entered into sale and leaseback transactions, resulting in a gain of Ps.131,761 and Ps.2,649, respectively, that were recorded under the caption other operating income in the unaudited interim condensed consolidated statement of operations.
During the three months ended September 30, 2015, the Company entered into sale and leaseback transactions, resulting in a gain of Ps.79,405, which was recorded under the caption other income in the unaudited interim condensed consolidated statement of operations. During the three months ended September 30, 2014, the Company did not enter into sale and leaseback transactions.
During the year ended December 31, 2011, the Company entered into sale and leaseback transactions, which resulted in a loss of Ps.30,706. This loss was deferred and is being amortized over the contractual lease term. As of September 30, 2015 and December 31, 2014 the current portion of the loss on sale amounts to Ps.3,047 and Ps.3,047, respectively, which are recorded in the caption of prepaid expenses and other current assets, and the non-current portion amounts to Ps.18,269 and Ps.20,554, respectively, which are recorded in the caption of other assets in the unaudited consolidated statements of financial position.
During the nine months ended September 30, 2015 and 2014, the Company amortized a loss of Ps.2,285 and Ps.2,285, respectively, as additional aircraft rent expense.
During the three months ended September 30, 2015 and 2014, the Company amortized a loss of Ps.762 and Ps.762, respectively, as additional aircraft rent expense.
13. Equity
a) As of September 30, 2015 and December 31, 2014, 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 | | | | | | |
| Series A shares | | | 3,224 | | | | 877,852,982 | | | | 877,856,206 | |
| Series B shares | | | 20,956 | | | | 133,999,515 | | | | 134,020,471 | |
| | | | 24,180 | | | | 1,011,852,497 | | | | 1,011,876,677 | |
| Treasury shares | | | - | | | | ( 20,866,797 | ) | | | ( 20,866,797 | ) |
| | | | 24,180 | | | | 990,985,700 | | | | 991,009,880 | |
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’s Series A common stock and Series B common stock are entitled to dividends when, and if, declared by a shareholder resolution. The Company’s revolving line of credit with Santander and Bancomext limits the Company’s ability to declare and pay dividends in the event that the Company fails to comply with the payment terms thereunder.
During the nine months ended September 30, 2015, the Company did not declare any dividends.
b) Earnings per share
Basic earnings per share (“EPS”) amounts are calculated by dividing the income for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.
Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.
The following tables show the calculations of the basic and diluted earnings per share for the nine months and for the three months ended September 30, 2015 and 2014:
| | | For the nine months ended September 30, | |
| | | 2015 | | | 2014 | |
| Net income (loss) for the period | | Ps. | 1,809,885 | | | Ps. | (97,693 | ) |
Weighted average number of shares outstanding (in thousands): | | | | | | |
| Basic | | | 1,011,877 | | | | 1,011,877 | |
| Diluted | | | 1,011,877 | | | | 1,011,877 | |
| EPS: | | | | | | | | |
| Basic | | | 1.789 | | | | ( 0.097 | ) |
| Diluted | | | 1.789 | | | | ( 0.097 | ) |
| | | For the three months ended September 30, | |
| | | 2015 | | | 2014 | |
| Net income (loss) for the period | | Ps. | 1,152,014 | | | Ps. | 347,267 | |
Weighted average number of shares outstanding (in thousands): | | | | | | |
| Basic | | | 1,011,877 | | | | 1,011,877 | |
| Diluted | | | 1,011,877 | | | | 1,011,877 | |
| EPS: | | | | | | | | |
| Basic | | | 1.138 | | | | 0.343 | |
| Diluted | | | 1.138 | | | | 0.343 | |
14. Income tax
The Company calculates the period income tax expense using the tax rate that would be applicable to the expected total annual earnings. The major components of income tax expense in the unaudited interim condensed statement of operations are:
Consolidated statement of operations
| | | For the nine months ended | | For the three months ended | |
| | | September 30, | | September 30, | |
| | | 2015 | | 2014 | | 2015 | | 2014 | |
| | | | | | | | | | | | | | |
| Current tax expense | | Ps. | (916,280 | ) | Ps. | (2,260 | ) | Ps. | (346,426 | ) | Ps. | - | |
| Deferred income tax benefit | | | 140,618 | | | 20,737 | | | (147,640 | ) | | (126,829 | ) |
| Total income tax (expense) benefit on profits | | Ps. | (775,662 | ) | Ps. | 18,477 | | Ps. | (494,066 | ) | Ps. | (126,829 | ) |
The Company’s effective tax rate during the nine month periods ended September 30, 2015 and 2014 was 30% and 16%, respectively.
The Company’s effective tax rate during the three month periods ended September 30, 2015 and 2014 was 30% and 27%, respectively.
15. Components of other comprehensive income (loss)
| | | For the nine months ended September 30, | |
| | | 2015 | | | 2014 | |
| Derivative financial instruments: | | | | | | |
Gain (loss) of the not-yet matured fuel swap contracts during period* | | Ps. | 116,502 | | | Ps. | ( 48,995 | ) |
Extrinsic value changes on jet fuel Asian call options | | | (253,261 | ) | | | - | |
Gain of the not-yet matured interest rate swap contracts | | | 12,334 | | | | 23,739 | |
| Net loss on cash flow hedges recorded in OCI | | Ps. | ( 124,425 | ) | | Ps. | ( 25,256 | ) |
* All of the Company’s position in US Gulf Coast Jet Fuel 54 swaps matured on June 30, 2015.
| | | For the three months ended September 30, | |
| | | 2015 | | | 2014 | |
| Derivative financial instruments: | | | | | | |
Gain of the not-yet matured fuel swap contracts during period | | Ps. | - | | | Ps. | ( 47,383 | ) |
Extrinsic value changes on jet fuel Asian call options | | | ( 246,892 | ) | | | - | |
Gain of the not-yet matured interest rate swap contracts | | | 2,082 | | | | 10,171 | |
| Net loss on cash flow hedges recorded in OCI | | Ps. | (244,810 | ) | | Ps. | ( 37,212 | ) |
16. Commitments and contingencies
Aircraft related commitments and financing arrangements
Committed expenditures for aircraft purchase and related flight equipment related to the Airbus purchase contract, including estimated amounts for contractual prices escalations and pre-delivery payments, will be as follows:
| | | Commitment expenditures in U.S. dollars | | | Commitment expenditures equivalent in Mexican pesos (1) | |
| October – December 2015 | | US$ | 17,028 | | | Ps. | 289,600 | |
| 2016 | | | 34,122 | | | | 580,323 | |
| 2017 | | | 82,275 | | | | 1,399,276 | |
| 2018 | | | 119,883 | | | | 2,038,886 | |
| 2019 | | | 91,556 | | | | 1,557,120 | |
| 2020 | | | 25,692 | | | | 436,952 | |
| | | US$ | 370,556 | | | Ps. | 6,302,157 | |
(1) Using the exchange rate as of September 30, 2015 of Ps. 17.0073
All aircraft acquired by the Company through the Airbus Purchase Agreement at September 30, 2015 and December 31, 2014 have been subject to sale and leaseback transactions.
Litigation
| a) | The Company and its CEO, CFO, certain of its current directors and certain of its former directors, are 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 American Depositary Receipt (“ADSs”) in and/or traceable to the Company’s September 2013 initial public offering. The complaint, which also names as defendants the underwriters of the IPO, generally alleges that the registration statement and prospectus for the ADSs contained misstatements and omissions with respect to the recognition of non-ticket revenue in violation of the federal securities laws, and seeks unspecified damages and rescission. Pavers and Road Builders Pension Fund was appointed as lead plaintiff for the action. The Company believes that the outcome of the proceedings to which it is currently a party will not, individually or in the aggregate, have a material adverse effect on the condensed unaudited interim consolidated financial statements. |
| 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. |
17. Operating segments
The Company is managed as a single business unit that provides air transportation services. The Company has two geographic segments identified below:
| | | During the nine months ended September 30, | |
| | | 2015 | | | 2014 | |
| Operating revenues: | | | | | | |
| Domestic (Mexico) | | Ps. | 9,112,552 | | | Ps. | 7,416,098 | |
| International (USA and Central America) | | | 3,974,675 | | | | 2,662,398 | |
| Total operating revenues | | Ps. | 13,087,227 | | | Ps. | 10,078,496 | |
| | | During the three months ended September 30, | |
| | | 2015 | | | 2014 | |
| Operating revenues: | | | | | | |
| Domestic (Mexico) | | Ps. | 3,591,352 | | | Ps. | 2,924,698 | |
| International (USA and Central America) | | | 1,628,378 | | | | 1,070,046 | |
| Total operating revenues | | Ps. | 5,219,730 | | | Ps. | 3,994,744 | |
The breakdown of the Company´s non-ticket revenues for the nine and three months ended September 30, 2015 and 2014 is as follows:
| | | During the nine months ended September 30, | |
| | | 2015 | | | 2014 | |
| Non-ticket revenues | | | | | | |
| Air travel related services | | Ps. | 2,403,728 | | | Ps. | 1,552,485 | |
| Non-air -travel related services | | | 342,963 | | | | 188,931 | |
| Cargo | | | 139,970 | | | | 173,863 | |
| Total non-ticket revenues | | Ps. | 2,886,661 | | | Ps. | 1,915,279 | |
| | | During the three months ended September 30, | |
| | | 2015 | | | 2014 | |
| Non-ticket revenues | | | | | | |
| Air travel related services | | Ps. | 916,793 | | | Ps. | 612,906 | |
| Non-air -travel related services | | | 100,464 | | | | 76,132 | |
| Cargo | | | 46,161 | | | | 52,944 | |
| Total non-ticket revenues | | Ps. | 1,063,418 | | | Ps. | 741,982 | |
18. Subsequent events
Subsequent to September 30, 2015 and though October 16, there were not significant events that should be disclosed.
*Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
*Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
*Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
