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 December 31, 2015 and December 31, 2014
(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 is domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, Mexico 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 Transportes) on May 9, 2005 initially for a period of five years and was extended 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 (Bolsa Mexicana de Valores, or “BMV”), and on September 18, 2013 its shares started trading under the ticker symbol “VLRS” and “VOLAR”, respectively.
On November 16, 2015, certain shareholders of the Company completed a secondary follow-on equity offering on the NYSE.
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 February 19, 2016. Subsequent events have been considered through that date.
Relevant events
Operations in Central America
During the year ended December 31, 2015, the Company through its subsidiary Concesionaria, began operations in Central America (Guatemala and Costa Rica).
Secondary follow-on equity offering
On November 16, 2015 the Company completed a secondary follow-on equity offering, in which certain shareholders offered 99,000,000 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. No CPOs or ADSs were sold by the Company and the selling shareholders received all of the proceeds from this offering.
2. Basis of preparation
The unaudited interim condensed consolidated financial statements, which include the consolidated statements of financial position as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three months period, and for the year ended December 31, 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 and 2013, and for the three years 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 unaudited interim condensed consolidated financial statements comprise the financial statements of the Company and its subsidiaries. At December 31, 2015 and December 31, 2014, for accounting purposes the companies included in the unaudited interim condensed consolidated financial statements are as follows:
| Name | Principal Activities | Country | % Equity interest |
| 2015 | 2014 |
| Concesionaria | Air transportation services for passengers, cargo and mail throughout Mexico and abroad | Mexico | 100% | 100% |
| Vuela Aviación, S.A. (“Vuela Aviación”)* | Air transportation services for passengers, cargo and mail in Costa Rica and abroad | Costa Rica | 100% | - |
| Vuela, S.A. (“Vuela”)* | Air transportation services for passengers, cargo and mail in Guatemala and abroad | Guatemala | 100% | - |
| Comercializadora Volaris, S.A. de C.V. | Merchandising of services | Mexico | 100% | 100% |
| Servicios Earhart, S.A. | Recruitment and payroll | Guatemala | 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% |
Servicios Operativos Terrestres Volaris, S.A. de C.V (“Servicios Operativos”) | Recruitment and payroll | Mexico | 100% | - |
| Deutsche Bank México, S.A., Trust 1710 | Pre-delivery payments financing | Mexico | 100% | 100% |
| Deutsche Bank México, S.A., Trust 1711 | Pre-delivery payments financing | Mexico | 100% | 100% |
Irrevocable Administrative Trust number F/307750 “Administrative Trust” | Share administration trust | Mexico | 100% | 100% |
Irrevocable Administrative and Safeguard Trust, denominated F/1405 “DAIIMX/VOLARIS” | Share administration trust | Mexico | 100% | 100% |
Irrevocable Administrative Trust number F/745291 | Share administration trust | Mexico | 100% | 100% |
*The Company has not started operations in Central America.
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.
The nature and the impact of each new standard and amendment are described below:
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 1 July 2014. This amendment is not relevant to the Company, since the Company does not have a benefit plan with contributions from employees or third parties.
Annual Improvements 2010-2012 Cycle
With the exception of the improvement relating to IFRS 2 Share-based Payment applied to share-based payment transactions with a grant date on or after 1 July 2014, all other improvements are effective for accounting periods beginning on or after 1 July 2014. These improvements are not expected to have a material impact on the Company. 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. The clarifications are consistent with how the Company has identified any performance and service conditions which are vesting conditions in previous periods. Thus, these amendments did not impact the Company's financial statements or accounting policies.
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 segments 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 is not relevant to the Company, since the Company has not applied the aggregation criteria in IFRS 8.12 and does not reconcile segment assets to total assets.
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 does not have any impact in the Company´s financial statements, since the Company does not revalue its assets in accordance with IAS 16 and IAS 38.
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 is not relevant for the Company as it does not receive any management services from other entities.
Annual Improvements 2011-2013 Cycle
These improvements are effective from 1 July 2014 and the Company has applied these amendments for the first time in these consolidated financial statements. They include:
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 IAS 39. The Company 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 to 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.
IFRS 16 Leases
In January 2016, the International Accounting Standards Board (IASB) issued IFRS 16 – Leases, which will be effective starting on January 1, 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). A company can choose to apply IFRS 16 before effective date but only if it also applies IFRS 15 Revenue from Contracts with Customers. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17. Leases are “capitalized” by recognizing the present value of the lease payments and showing them either as lease assets (right-of-use assets) or together with property, plant and equipment, and also recognizing a financial liability representing its obligation to make future lease payments. The most significant effect of the new requirements in IFRS 16 will be an increase in lease assets and financial liabilities. IFRS 16 does not require a company to recognize assets and liabilities for (a) short-term leases (i.e. leases of 12 months or less), and (b) leases of low-value assets. For companies with material off balance leases, IFRS 16 changes the nature of expenses related to those leases. IFRS 16 replaces the typical straight-line operating lease expense for those leases applying IAS 17 with a depreciation charge for lease assets (included within operating costs) and an interest expense on lease liabilities (included within finance costs). This change aligns the lease expense treatment for all leases. Although the depreciation charge is typically even, the interest expense reduces over the life of the lease as lease payments are made. This results in a reducing total expense as an individual lease matures.
The Company is currently evaluating the impact of IFRS 16 on its consolidated financial statements and plans to adopt the new standard on the required effective date.
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 December 31, 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 December 31, 2015, divided by an exchange rate of Ps.17.2065 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, 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 December 31, 2015 and 2014 represented 27% and 36%, of the Company’s operating expenses, respectively.
Aircraft jet fuel consumed in the year ended December 31, 2015 and 2014 represented 30% and 39%, of the Company’s operating expenses, respectively.
During the three months ended December 31, 2014, the Company entered into US Gulf Coast Jet Fuel 54 Asian swap contracts to hedge approximately 25% of its fuel consumption, and were accounted for as cash flow hedges (“CFH”) that gave rise to a loss of Ps.86,155. 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.
During the years ended December 31, 2015 and 2014, the Company entered into US Gulf Coast Jet Fuel 54 Asian swap contracts to hedge approximately 5% and 20% 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 Ps.85,729, respectively. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocated within other comprehensive income ("OCI") 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 swaps matured on June 30, 2015 .
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 is presented as derivative financial instruments as current financial liabilities. 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 three months period ended December 31, 2015 the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 34,652 thousand gallons, which represent a portion of the 2017 projected consumption. During the year ended December 31, 2015, the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 162,189 thousand gallons (54,148 thousand gallons in 2014), respectively, which represent a portion of the 2016 and 2017 projected consumption.
The Company decided to early adopted 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.
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 options contracted by the Company represents a non-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 a non-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 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.
As of December 31, 2015 and 2014, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was a gain of Ps.78,725 and Ps.68,133, respectively, and is presented as part of the financial assets in the consolidated statement of financial position.
The amount of cost of hedging derived from the extrinsic value changes of these options as of December 31, 2015 recognized in OCI totals Ps.365,028 (Ps.26,934 in 2014), and will be recycled to the fuel cost throughout 2016 and until 2017, as these options expire on a monthly basis.
During the three months period ended December 31, 2015 and during the year December 31, 2015, the extrinsic value of these options recycled to the fuel cost was Ps.48,750 and Ps.112,675, respectively.
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, 2015 |
| | Jet fuel Asian call option contracts maturities |
| Jet fuel risk | 1H16 | 2H16 | 2016 Total | 1H17 | 2H17 | 2017 Total |
| 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. dollars)** | US$1.9451 | US$1.9867 | US$1.9666 | US$1.7142 | US$1.5933 | US$1.6871 |
Approximate percentage of hedge (of expected consumption value) | 59% | 53% | 55% | 38% | 10% | 23% |
* US Gulf Coast Jet 54 as underlying asset
** Weighted average
| | | Position as of December 31, 2014 |
| | | Jet fuel Asian call option contracts maturities |
| Jet fuel risk | | 1Q15 | | | 2Q15 to 4Q15 | | | 2015 Total | | | 1Q16 | |
| Notional volume in gallons (thousands)* | | | 3,450 | | | | 48,800 | | | | 52,250 | | | | 1,898 | |
Strike price agreed rate per gallon (U.S. dollars)** | | US$ | 2.2050 | | | US$ | US2.1113 | | | US$ | 2.1174 | | | US$ | 1.9700 | |
Approximate percentage of hedge (of expected consumption value) | | | 10 | % | | | 40 | % | | | 33 | % | | | 5 | % |
* US Gulf Coast Jet 54 as underlying asset
** Weighted average
| | | Position as of December 31, 2014 |
| | | Jet fuel swap contracts maturities |
| Jet fuel risk | | 1Q15 | | | 2Q15 | | Total 2015 | |
| Notional volume in gallons (thousands)* | | | 6,504 | | | | 2,045 | | | | 8,549 | |
| Future agreed rate per gallon (U.S. dollars)** | | US$ | 2.7009 | | | US$ | US2.4623 | | | US$ | US2.6439 | |
| Total in thousands of Mexican pesos *** | | Ps. | 258,546 | | | Ps. | 74,111 | | | Ps. | 332,667 | |
Approximate percentage of hedge (of expected consumption value) | | | 19 | % | | | 5 | % | | | 12 | % |
* US Gulf Coast Jet 54 as underlying asset
** Weighted average
*** Exchange rate at December 31, 2014 was Ps.14.7180
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 31% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2015 (27% at December 31, 2014) and U.S. dollar denominated collections accounted for 36% and 31% of the Company’s total collections in 2015 and 2014, respectively. However, certain of its expenditures, particularly those related to aircraft leasing and acquisition, are U.S. dollar denominated also and although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican Pesos /U.S. dollars exchange rate. The Company’s foreign exchange on and off-balance sheet exposure as of December 31, 2015 and 2014 is as set forth below:
| | | Thousands of U.S. dollars | |
| | | 2015 | | | 2014 | |
| Assets: | | | | | | |
| Cash and cash equivalents | | US$ | 202,022 | | | US$ | 89,563 | |
| Other accounts receivable | | | 5,286 | | | | 3,613 | |
| Aircraft maintenance deposits paid to lessors | | | 286,012 | | | | 233,875 | |
| Pre-delivery payments* | | | 108,779 | | | | 105,056 | |
| Deposits for rental of flight equipment | | | 36,331 | | | | 37,796 | |
| Collateral of derivative financial instruments | | | - | | | | 2,290 | |
| Derivative financial instruments | | | 4,575 | | | | 4,630 | |
| Total assets | | | 643,005 | | | | 476,823 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Financial debt (Note 8) | | | 92,466 | | | | 84,786 | |
| Foreign suppliers | | | 40,673 | | | | 30,179 | |
| Taxes and fees payable | | | 7,705 | | | | 5,587 | |
| Derivative financial instruments | | | 3,242 | | | | 17,264 | |
| Total liabilities | | | 144,086 | | | | 137,816 | |
| Net foreign currency position | | US$ | 498,919 | | | US$ | 339,007 | |
| * | These assets are included as part of rotable, spare parts, furniture and equipment, and therefore are not remeasured. |
The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2015 and 2014 were Ps.17.2065 pesos and Ps.14.7180 pesos, respectively, per U.S. dollar.
| | | Thousands of U.S. dollars | |
| | | 2015 | | | 2014 | |
| Off-balance sheet transactions exposure: | | | | | | |
| Aircraft operating leases (Note 12) | | US$ | 1,216,799 | | | US$ | 1,131,064 | |
| Aircraft and engine commitments (Note 15) | | | 353,528 | | | | 406,347 | |
| Total foreign currency | | US$ | 1,570,327 | | | US$ | 1,537,411 | |
During the year ended on December 31, 2015 and 2014, the Company did not enter into foreign exchange rate derivatives financial 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 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 equity until the date the cash flow of the hedged lease payment is recognized in earnings.
At December 31, 2015 and 2014, the Company had outstanding hedging contracts in the form of interest rate swaps with notional amount of US$70,000 and fair value of Ps.55,774 and Ps.83,496, respectively, recorded in liabilities. For the years ended December 31, 2015 and 2014, the reported loss on the interest rate swaps was Ps.46,545 and Ps.39,610, respectively, which was recognized as part of rental expense in the unaudited interim condensed consolidated statements of operations. During the three months period ended December 31, 2015 and 2014, the reported loss on the interest rate swap was Ps.11,959 and Ps.10,327, respectively, which was recorded as part of rental expense in the consolidated statements of operations.
The following table illustrates the sensitivity of financial instruments on the Company’s accumulated other comprehensive income (due to changes in the fair value of forward contracts) to a reasonably possible change in LIBOR interest rates. The calculations are based on financial instruments held at each consolidated statement of financial position date and were made increasing (decreasing) 100 basis points to the LIBOR curve. All other variables were held constant.
| | | Position at December, 31, 2015 | |
| Increase (decrease) in curve | | effect on equity (thousands of U.S. dollars) | |
| +100 basis points | | US$ | 713.13 | |
| - 100 basis points | | | (731.67 | ) |
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.
The table below presents the Company’s contractual principal payments required on its financial liabilities and the derivative financial instruments fair value:
| | | December 31, 2015 | |
| | | Within one year | | | One to five years | | | Total | |
| Interest-bearing borrowings: | | | | | | | | | |
| Pre-delivery payments facilities (Note 8) | | 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, 2014 | |
| | | Within one year | | | One to five years | | | Total | |
| Interest-bearing borrowings: | | | | | | | | | |
| Pre-delivery payments facilities | | Ps. | 818,393 | | | Ps. | 424,799 | | | Ps. | 1,243,192 | |
| | | | | | | | | | |
| Derivative financial instruments: | | | | | | | | | |
| Jet fuel swaps contracts | | | 169,622 | | | | - | | | | 169,622 | |
| Interest rate swaps contracts | | | 41,028 | | | | 42,468 | | | | 83,496 | |
| Total | | Ps. | 1,029,043 | | | Ps. | 467,267 | | | Ps. | 1,496,310 | |
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.
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, 2015, 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.
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 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Assets | | | | | | | | | | | | |
| Derivative financial instruments | | Ps. | 78,725 | | | Ps. | 68,133 | | | Ps. | 78,725 | | | Ps. | 68,133 | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| Financial debt* | | | (1,583,678 | ) | | | (1,243,192 | ) | | | (1,587,889 | ) | | | (1,247,713 | ) |
| Derivative financial instruments | | | (55,774 | ) | | | (253,118 | ) | | | (55,774 | ) | | | (253,118 | ) |
| Total | | Ps. | (1,560,727 | ) | | Ps. | (1,428,177 | ) | | Ps. | (1,564,938 | ) | | Ps. | (1,432,698 | ) |
*Floating rate borrowing
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 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 | | | | | | | | | | | | |
| Derivatives financial instruments: | | | | | | | | | | | | |
| Jet fuel Asian call options contracts* | | Ps. | - | | | Ps. | 68,133 | | | Ps. | - | | | Ps. | 68,133 | |
Liabilities | | | | | | | | | | | | |
| Derivatives financial instruments: | | | | | | | | | | | | |
| Jet fuel 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 from derivatives financial instruments recognized in the unaudited interim condensed consolidated statements of operations for the three months period ended December 31, 2015 and 2014:
Consolidated statements of operations
| Instrument | Financial statements line | | 2015 | | | 2014 | |
| Jet fuel swap contracts | Fuel | | Ps. | - | | | Ps. | (86,155 | ) |
| Jet fuel Asian call options contracts | Fuel | | | (48,750 | ) | | | - | |
| Interest rate swap contracts | Aircraft and engine rent expenses | | | (11,959 | ) | | | (10,327 | ) |
| Total | | | Ps. | (60,709 | ) | | Ps. | (96,482 | ) |
The following table summarizes the loss from derivatives financial instruments recognized in the unaudited interim condensed consolidated statements of operations for the years ended December 31, 2015 and 2014:
Consolidated statements of operations
| Instrument | Financial statements line | | 2015 | | | 2014 | |
| Jet fuel swap contracts | Fuel | | Ps. | Ps. (128,330 | ) | | Ps. | (85,729 | ) |
| Jet fuel Asian call options contracts | Fuel | | | (112,675 | ) | | | - | |
| Interest rate swap contracts | Aircraft and engine rent expenses | | | (46,545 | ) | | | (39,610 | ) |
| Total | | | Ps. | (287,550 | ) | | Ps. | (125,339 | ) |
The following table summarizes the net (loss) gain on CFH before taxes recognized in the consolidated statements of comprehensive income as of December 31, 2015 and 2014:
Consolidated statements of other comprehensive income
| Instrument | Financial statements line | | 2015 | | | 2014 | |
| Jet fuel swap contract | OCI | | Ps. | - | | | Ps. | (125,228 | ) |
| Jet fuel Asian call options | OCI | | | (221,592 | ) | | | (26,934 | ) |
| Interest rate swap contracts | OCI | | | 27,723 | | | | 22,656 | |
| Total | | | Ps. | (193,869 | ) | | Ps. | (129,506 | ) |
8. Financial assets and liabilities
At December 31, 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
| | | 2015 | | | 2014 | |
Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI) | | | | | | |
| Jet fuel Asian call options | | Ps. | 78,725 | | | Ps. | 68,133 | |
| Total financial assets | | Ps. | 78,725 | | | Ps. | 68,133 | |
| | | | | | | | | |
Presented on the unaudited interim condensed consolidated statements of financial position as follows: | | | | | | | | |
| Current | | Ps. | 10,123 | | | Ps. | 62,679 | |
| Non-current | | Ps. | 68,602 | | | Ps. | 5,454 | |
b) Financial debt
| (i) | At December 31, 2015 and 2014, the Company’s short-term and long-term debt consists of the following: |
| | | | 2015 | | | 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. | 1,583,678 | | | Ps. | 1,243,192 | |
| II. | Accrued interest | | | 7,341 | | | | 4,678 | |
| | | | | 1,591,019 | | | | 1,247,870 | |
| Less: Short-term maturities | | | 1,371,202 | | | | 823,071 | |
| Long-term | | Ps. | 219,817 | | | Ps. | 424,799 | |
(ii) The following table provides a summary of the Company’s contractual payments of financial debt and accrued interest at December 31, 2015:
| | 2016 | | | 2017 | | | 2018 | | | Total | |
| Finance debt denominated in foreign currency: | | | | | | | | | | | |
| Santander/Bancomext | | Ps. | 1,363,861 | | | Ps. | 154,025 | | | Ps. | 65,792 | | | Ps. | 1,583,678 | |
| Total | | Ps. | 1,363,861 | | | Ps. | 154,025 | | | Ps. | 65,792 | | | Ps. | 1,583,678 | |
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 December 31, 2015 and 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) Other financial liabilities
| | | 2015 | | | 2014 | |
Derivative financial instruments designed as CFH (effective portion recognized within OCI): | | | | | | |
| Interest rate swap contracts | | Ps. | 55,774 | | | Ps. | 83,496 | |
| Jet Fuel Asian swap contracts | | | - | | | | 169,622 | |
| Total financial liabilities | | Ps. | 55,774 | | | Ps. | 253,118 | |
Presented on the consolidated statements of financial position as follows: | | | | | | | | |
| Current | | Ps. | 44,301 | | | Ps. | 210,650 | |
| Non-current | | Ps. | 11,473 | | | Ps. | 42,468 | |
9. Related parties
a) An analysis of balances due from/to related parties at December 31, 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 | | 2015 | | | 2014 | | Terms |
| Due to: | | | | | | | | | |
| One Link, S.A. de C.V. | Call center fees | El Salvador | | Ps. | 9,863 | | | Ps. | - | | 30 days |
| Aeromantenimiento, S.A. | Aircraft and engine maintenance | El Salvador | | | 4,453 | | | | 559 | | 30 days |
| Human Capital International HCI, S.A. de C.V. | Professional fees | Mexico | | | - | | | | 8 | | 30 days |
| | | | | Ps. | 14,316 | | | Ps. | 567 | | |
For the years ended December 31, 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 three months period ended December 31, 2015 and 2014, the Company had the following transactions with related parties:
| Related party transactions | Country of origin | | 2015 | | | 2014 | |
| Revenues: | | | | | | | |
| Other commissions | Mexico | | Ps. | - | | | Ps. | - | |
| Other | Mexico | | | - | | | | - | |
| | | | | | | | | | |
| Expenses: | | | | | | | | | |
| Maintenance | El Salvador | | | 36,606 | | | | 24,235 | |
| Fees | Mexico/El Salvador | | | 24,286 | | | | 249 | |
| Other | Mexico/El Salvador | | | 595 | | | | 211 | |
During the years ended December 31, 2015 and 2014, the Company had the following transactions with related parties:
| Related party transactions | Country of origin | | 2015 | | | 2014 | |
| Revenues: | | | | | | | |
| Other commissions | Mexico | | Ps. | - | | | Ps. | 3,663 | |
| Other | Mexico | | | - | | | | - | |
| | | | | | | | | | |
| Expenses: | | | | | | | | | |
| Maintenance | El Salvador | | | 111,641 | | | | 162,687 | |
| Fees | Mexico/El Salvador | | | 57,809 | | | | 1,038 | |
| Other | Mexico/El Salvador | | | 2,516 | | | | 617 | |
c) Servprot
Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, the Company´s Chief Executive Officer, and Rodolfo Montemayor, 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 years ended December 31, 2015 and 2014 the Company expensed Ps.768 and Ps.900, respectively for this concept.
During the three months ended December 31, 2015 and 2014, the Company expensed Ps.206 and Ps.225, respectively, for this concept.
d) Directors and officers
During the years ended December 31, 2015 and 2014, all of the Company’s senior managers received an aggregate compensation of short and long-term benefits of Ps.120,440 and Ps.64,387, respectively.
Additionally, for the year ended December 31, 2015 the cost of the share-based payments transactions (long-term incentive plan and management incentive plan) and the cash-settled payments transactions (share appreciation rights) was Ps.6,344 and Ps.46,183, respectively.
For the year ended December 31, 2014, the cost of the share-based payments transactions (long-term incentive plan and management incentive plan) and the cash-settled payments transactions (share appreciation rights) was Ps.1,385 and Ps.1,652, respectively.
During 2015, the Company adopted a new short-term benefit plan for certain personnel whereby cash bonuses are awarded meeting certain Company’s performance target. During the year ended December 31, 2015, the Company recorded a provision by an amount of Ps.70,690.
During the year ended December 31, 2015 and 2014 the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.5,480 and Ps.6,524, respectively, and the rest of the directors received a compensation of Ps.4,183 and Ps.4,669, respectively.
10. Rotable spare parts, furniture and equipment, net
Acquisitions and disposals
During the years ended December 31, 2015 and 2014, the Company acquired rotable spare parts, furniture and equipment by an amount of Ps.1,403,863 and Ps.1,574,137, respectively.
Rotable spare parts, furniture and equipment by an amount of Ps.678,468 were disposed during the year ended December 31, 2015. This amount included reimbursements of pre-delivery payments for aircraft acquisition of Ps.669,718.
Rotable spare parts, furniture and equipment by an amount of Ps.400,744 were disposed during the year ended December 31, 2014. During this period, the Company recorded reimbursements of pre-delivery payments for aircraft acquisition of Ps.395,639.
b) Depreciation expense
Depreciation expense for the years ended December 31, 2015 and 2014 was Ps.425,439 and Ps.318,103, 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 period ended December 31, 2015 and 2014 was Ps.100,292 and Ps.131,812, 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 years ended December 31, 2015 and 2014, the Company acquired intangible assets by an amount of Ps.52,228 and Ps.28,457, respectively.
b) Amortization expense
Software amortization expense for the years ended December 31, 2015 and 2014 was Ps.31,278 and Ps.24,412, 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 December 31, 2015 and 2014 was Ps.7,684 and Ps.5,796 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 December 31, 2015, the Company leases 56 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 December 31, 2015 and 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 December 31, 2015 | At December 31, 2014 |
| A319 | 132 | 6 | 6 |
| A319 | 133 | 12 | 12 |
| A320 | 233 | 32 | 28 |
| A320 | 232 | 4 | 4 |
| A321 | 200 | 2 | - |
| | | 56 | 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 year ended December 31, 2015, the Company incorporated seven aircraft to its fleet (five of them based on the terms of the Airbus purchase agreement and two from a lessor´s aircraft order book), and returned one aircraft to a lessor. These new aircraft lease agreements were accounted for as operating leases. Additionally, during 2015 the Company extended the lease term of three A-319 aircraft. All aircraft incorporated through the lessor´s aircraft order book are not subject to sale and leaseback transactions.
In November 2015, the Company entered into three new A321CEO aircraft lease agreements. These aircraft will be incorporated into the Company’s fleet in September and December 2016.
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. Additionally, during August 2015, the Company extended the lease term of three A319 aircraft.
In April 2015, the Company entered into three new A321CEO aircraft lease agreements. 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 Airbus purchase agreement and five from a lessor´s aircraft order book), and returned two aircraft to different lessors. These new aircraft agreements were accounted for as operating leases. Additionally, during October 2014, the Company extended the lease term of one A320CEO aircraft.
On November 26, 2014, the Company entered into two new aircraft lease agreement (A321CEO), both from the lessor aircraft order book. These aircraft were incorporated into 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 amended purchased order with Airbus. On November 2014 the Company received one of these aircrafts, which was accounted for as operating lease. During 2015, the Company received five of these aircrafts, which were accounted for as operating leases. The remaining eight aircrafts will be incorporated into the Company’s fleet during 2016.
On April 8, 2014 the Company entered into one new aircraft lease agreement (A320CEO aircraft) from a lessor aircraft order book. This aircraft was incorporated into the Company’s fleet during 2014, and was accounted for as operating lease.
On February 13, 2014, the Company entered into 16 new aircraft lease agreements
(10 A320NEO and 6 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. All aircraft incorporated through the lessor aircraft order book are not subject to sale and leaseback transactions.
At December 31, 2015 and 2014, all of the Company’s aircraft and spare engines lease agreements were accounted for as operating leases.
As of December 31, 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 | |
| 2016 | | US$ | 194,615 | | | Ps. | 3,348,639 | |
| 2017 | | | 171,360 | | | | 2,948,516 | |
| 2018 | | | 153,380 | | | | 2,639,129 | |
| 2019 | | | 141,303 | | | | 2,431,332 | |
| 2020 | | | 139,058 | | | | 2,392,704 | |
| 2021 and thereafter | | | 417,083 | | | | 7,176,532 | |
| Total | | US$ | 1,216,799 | | | Ps. | 20,936,852 | |
During the three months period ended December 31, 2015 and 2014, the Company entered into sale and leaseback transactions, resulting in a gain of Ps.49,974 and Ps.11,543, respectively, that were recorded under the caption other income in the consolidated statement of operations.
During the years ended December 31, 2015 and 2014, the Company entered into sale and leaseback transactions, resulting in a gain of Ps.181,736 and Ps.14,192, respectively, that were recorded under the caption other income in the consolidated statement of operations.
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 on the consolidated statements of financial position and is being amortized over the contractual lease term. As of December 31, 2015 and 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.17,507 and Ps.20,554, respectively, which are recorded in the caption of other assets.
For the three months period ended December 31, 2015 and 2014, the Company amortized a loss of Ps.762, and Ps.762, respectively, as additional aircraft rental expense.
For the years ended December 31, 2015 and 2014, the Company amortized a loss of Ps.3,047, and Ps.3,047, respectively, as additional aircraft rental expense.
13. Equity
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 | |
| | | | 24,180 | | | | 1,011,852,497 | | | | 1,011,876,677 | |
| Treasury shares | | | | | | | (16,474,857 | ) | | | (16,474,857 | ) |
| | | | 24,180 | | | | 995,377,640 | | | | 995,401,820 | |
As of 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 | | | Total shares | |
| 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 years ended December 31, 2015 and 2014, the Company did not declare any dividends.
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 years ended December 31, 2015 and 2014:
| | | At December 31, | |
| | | 2015 | | | 2014 | |
Net income for the period attributable to equity holders of the parent | | Ps. | 2,463,870 | | | Ps. | 605,184 | |
Weighted average number of shares outstanding (in thousands): | | | | | | |
| Basic | | | 1,011,877 | | | | 1,011,877 | |
| Diluted | | | 1,011,877 | | | | 1,011,877 | |
EPS: | | | | | | | | |
| Basic | | | 2.435 | | | | 0.598 | |
| Diluted | | | 2.435 | | | | 0.598 | |
| | | For the three months period ended December 31, | |
| | | 2015 | | | 2014 | |
Net income for the period attributable to equity holders of the parent | | Ps. | 653,985 | | | Ps. | 702,877 | |
Weighted average number of shares outstanding (in thousands): | | | | | | |
| Basic | | | 1,011,877 | | | | 1,011,877 | |
| Diluted | | | 1,011,877 | | | | 1,011,877 | |
EPS: | | | | | | | | |
| Basic | | | 0.646 | | | | 0.695 | |
| Diluted | | | 0.646 | | | | 0.695 | |
14. Income tax
The major components of income tax expense in the unaudited interim condensed statement of operations are:
Consolidated statement of operations
| | | For the years ended | | | For the three months period ended | |
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2015 | | 2014 | |
| | | | | | | | | | | | | |
| Current income tax expense | | Ps. | (337,997 | ) | | Ps. | (17,345 | ) | | Ps. | 578,283 | | | Ps. | (15,085 | ) |
| Deferred income tax expense | | | (700,351 | ) | | | (21,375 | ) | | | (840,969 | ) | | | (42,112 | ) |
| Total income tax expense | | Ps. | (1,038,348 | ) | | Ps. | (38,720 | ) | | Ps. | (262,686 | ) | | Ps. | (57,197 | ) |
The Company’s effective tax rate during the years ended December 31, 2015 and 2014 was 29.65% and 6.01%, respectively.
The Company’s effective tax rate during the three months period ended December 31, 2015 and 2014 was 28.66% and 7.53%, respectively.
15. Commitments and contingencies
Committed expenditures for aircraft purchase and related flight equipment related to the Airbus purchase agreement, including estimated amounts for contractual prices escalations and pre-delivery payments, will be as follows:
| | | Commitment expenditures in U.S. dollars | | | Commitment expenditures quivalent in Mexican pesos | |
| 2016 | | US$ | 34,122 | | | Ps. | 587,128 | |
| 2017 | | | 82,275 | | | | 1,415,664 | |
| 2018 | | | 119,883 | | | | 2,062,772 | |
| 2019 | | | 91,556 | | | | 1,575,352 | |
| 2020 | | | 25,692 | | | | 442,062 | |
| | | US$ | 353,528 | | | Ps. | 6,082,978 | |
All aircraft acquired by the Company through the Airbus purchase agreement at December 31, 2015 have been executed through to sale and leaseback transactions.
All aircraft acquired by the Company through the Airbus Purchase Agreement at December 31, 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 ADSs in and/or traceable to the September 2013 IPO. 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 we are currently a party will not, individually or in the aggregate, have a material adverse effect on the 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.
16. 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 years ended December 31, | |
| | | 2015 | | | 2014 | |
| Operating revenues: | | | | | | |
| Domestic (Mexico) | | Ps. | 12,579,806 | | | Ps. | 10,218,973 | |
| United States of America and Central America | | | 5,599,898 | | | | 3,817,769 | |
| Total operating revenues | | Ps. | 18,179,704 | | | Ps. | 14,036,742 | |
| | | During the three months period ended December 31, | |
| | | 2015 | | | 2014 | |
| Operating revenues: | | | | | | |
| Domestic (Mexico) | | Ps. | 3,467,254 | | | Ps. | 2,802,875 | |
| United States of America and Central America | | | 1,625,223 | | | | 1,155,371 | |
| Total operating revenues | | Ps. | 5,092,477 | | | Ps. | 3,958,246 | |
The breakdown of our non-ticket revenues for the years ended December 31, 2015 and 2014 is as follows:
| | | 2015 | | | 2014 | |
| Non-ticket revenues | | | | | | |
| Air travel-related services | | Ps. | 3,418,654 | | | Ps. | 2,234,175 | |
| Non-air travel-related services | | | 441,392 | | | | 274,404 | |
| Cargo | | | 189,293 | | | | 224,836 | |
| Total non-ticket revenues | | Ps. | 4,049,339 | | | Ps. | 2,733,415 | |
17. Subsequent events
Subsequent to December 31, 2015 and though February 19, there were not relevant events that should be disclosed.
