Controladora Vuela Co Avcn SA CV
Annual Report 2018

Plain-text annual report

We Fly Differently 2018 Annual Report Add new profile Check-in here Flight Status C O N T E N T S 2 CONTENTSVolaris | 2018 Annual ReportC O N V E R S A T I O N W I T H O U R C E O Dear shareholders, Since Volaris was founded in 2005‐2006 in Mexico, we decided to go behind the airline market and change the way to fly. Flying different means offering what customers really value and need. This strategy has generated an additional value for our Company, and I am very proud to share with you our outstanding 2018 results. We decided to give the pas- sengers what they needed and nothing else. All additional ser- vices had to be sold separately, because fares had to compete with buses and some services were not valuable for them. ¡Low fares! The solution was to design fares that were so low that would mobilize them and get them out of town… in a plane of course. Flying differently means offering what customers really value and need. More than 12 years later, Volaris has 187 routes to 69 destinations plus the 50 Frontier codeshare destinations and we have trans- ported over 100 million passengers. Last year alone, we trans- ported 18 million passengers, a 12% increase; but 10% of our customers claim they are first time travelers. Our bus switching campaign still has a huge impact, to the extent that today, still 27% of our routes do not have direct air competition. Currently, we are the largest ultra-low-cost carrier in Latin America and the largest domestic passenger operator in the Mexican market. We 3 have an Airbus A320 family fleet of 77 aircraft, with an average of 185 seats, which today is the youngest fleet in Mexico and prob- ably one of the youngest in the continent: 4.6 years old. This year, our revenues amounted to Ps. 27.3 billion, and we got into the three lowest unit cost operators ranking in the world at 4.3 US dollar cents per ASM‐ex fuel. ASMs grew 2.3 times from 2012 to 2018 at a 15% CAGR, passengers grew up 2.5 times in the same period, at a 16% CAGR per year and revenues at 1.5 times or 16% CAGR. Volaris | 2018 Annual ReportOAG recognized Volaris as one of the top five most punctual ULCC airlines worldwide. When in 2009 we decided to un- bundle prices and start selling ancillaries, we created a revo- lution, not because passengers opposed it, but because of the way we launched it. We called it “You decide” and emphasized the fact that we were more transparent with our passengers than traditional carriers, since we allowed customers to decide where to spend their money. Today, 32% of our revenues are driven by ancillaries. They grow at a pace of 36% CAGR and we are now charging almost US $30.00 per passenger. User experience and dynamic pricing im- provements are two main forces for growth. In the development of ancillaries, we maintain a customer‐centric approach that has clearly paid off. Air trips per capita went up from 0.25 in 2007 to 0.36 in 2018, growing the domestic market from 24 million passengers per year to 44 million passengers per year. 48% of the market growth in Mexico is attributed to Volaris. Traffic volume in the domestic market continues to rise, in line with an emerging market econ- omy, in which the middle class evolves and requires more seats and air travel options. This trend explains part of Volaris’ traffic behavior; we believe that domestic demand of Visiting Friends and Families traffic is growing at a higher pace. An ideal fit for the ultra‐low‐cost model in this economy and population. Costs continue to be a challenge. In 2018, we had fuel costs go up dramatically. Our all in all costs are so low that the fuel line represents 37% of our revenues. The new aircraft and engine technology are key to managing fuel costs. We were the first NEO operator in North America and by now we have substituted 20% of our actual fleet to NEO’s. By 2022, 56% of the fleet will be substituted with engines that burn less fuel, plus have shar- 4 Volaris | 2018 Annual ReportFurthermore, we are able to maintain our growth in an attractive emerging air travel market in Mexico and Central America; we can continue our geographic diversification through international growth and codeshares. Our new codeshare arrangement with Frontier, an ultra‐low‐cost carrier, shows great promise. We are continuing to expand our frequency in very elastic markets; we do have a great upside in ancillary revenues; we have a flexible fleet plan and high utilization; we manage ourselves in a very rational capacity deployment and we still think we can improve Volaris to the lowest cost operator in the world. Volaris has built a strong and diverse network with minimal concentration and overlap with other carriers. Our diversified network will continue to allow us to work around the infrastructural gaps to grow consistently in signif- icant untapped opportunities throughout the Americas. My sincerest gratitude for your continued confidence and support. klets to further reduce fuel and CO2 emissions. On the whole, an 18% lower fuel burn in favor of our low-cost strategy. Our on‐time performance has been recognized several times. We operate at 82% on time performance: arrival +15 minutes. OAG recognized Volaris as one of the top five most punctual ULCC airlines worldwide. Schedule completion is at 99.3% and we operate on average 13.4 hours a day, giving the fleet one of the highest utilization rates in the market. Volaris market share is now 28% in the domestic market. We use market share to measure market penetration of the new model, since we drive our decision model based on costs and profitability. Volaris stimulation in the markets is typically better than the market growth, resulting from a model that continuous- ly measures elasticity of demand. On the second semester of 2017, we started another certifi- cate of operations in Costa Rica. Central America is again an overpriced market that, as 12 years ago in Mexico, is strangu- lating volume growth. Today a very small portion of our ASMs are operated in that area. At the end of 2018, about 3.5% of our capacity is flying within Central America and from there to three destinations in the United States. Labor wise Volaris, cannot achieve these great accomplishments without our people, our Ambassadors. Our Volaris family is com- prised of over 4,600 direct employees with an industry labor union, 60 full time equivalents per aircraft. These Ambassadors generate four times more indirect employment. So concisely, Volaris gener- ates more than 25 thousand jobs in our territories. We have great opportunities going forward. We were strong sup- porters of the new United States‐Mexico open skies agreement, and we know that, despite the ups and downs of the air service market between the United States and Mexico, the agreement provides a strong foundation for growth and the expansion of the relationship between our two countries. 5 * All reported figures as of December 31st, 2018. Enrique J. Beltranena P R E S I D E N T A N D C H I E F E X E C U T I V E D I R E C T O R Volaris | 2018 Annual ReportO U T S T A N D I N G F I G U R E S 1stULT RA - LOW COST CARR IER I N CENT RA L AMERICA 77AIRC RAFT 20% ARE A320 NE O AIRBUS 4,600AM BAS SA DORS IN ME XICO AND CENTRA L AME RICA 187 R OUT ES & DEST INATIONS69 32% O F O U R T O T A L O P E R A T I N G R E V E N U E S CAME FROM OUR A N C I L L A R I E S L I N E 18.4 MILLION PA SS ENGE RS 12 % IN CREA SE VS 2 017 CASM EX-FUEL IN DECREASED US DOLLAR CENTS 9.3% 6 CODESH AR E W IT H FRON TIE R BEGAN O PERAT IO NS . s p 27,305 M I L L I O N + 10.2% VS 2017 TOTAL OP ERATI N G REVENUES . s p 8,817 M I L L I O N We are the largest domestic carrier in Mexico due to our outstanding strategy to fly differently and provide the best travel experiences! +26 .0 % V S 20 17 N ON -T I C KET REVEN U ES Volaris | 2018 Annual ReportW E F LY D I F F E R E N T LY Your Boarding Pass Seq 81 Boarding Pass 1/2 Jimena Cortés Jasso THU, MAR 28, 2019 MEXL Mexico City 8:59 AM AS Las Vegas 12:08 PM Boarding time 8:14 AM Flight Y4 966 Terminal Terminal 1 Arrive on time! i 1 Check-in wherever you want! t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 7 Hey Mario! I’ve just bought our tickets :D 17:00 pm Cool! Let’s meet up at least 3 hous earlier to get our check-in done… D: 17:01 pm No, not at all! We can check-in from the new app now! 17:02 pm Through its strong and diversified network, Volaris serves 40 cities in Mexico and 29 in the United States and Central America. Controladora Vuela Compañía de Aviación, S.A.B. de C.V., “Volaris” (NYSE: VLRS and BMV: VOLAR), is an ultra-low-cost carrier, with point-to-point operations, serving Mexico, the Unit- ed States and Central America. Volaris offers low base fares to build its market, providing quality service and extensive custom- er choice. Volaris targets passengers who are visiting friends and relatives, cost-conscious business people and leisure trav- elers in Mexico and select destinations in the United States and Central America. M I S S I O N With the best people and low costs, we enable more people to travel… well! V I S I O N Transcend by creating and living the best travel experiences. 8 Volaris | 2018 Annual ReportStrong ultra-low- cost model with a commitment to low operating costs and a diversified network with a point-to-point structure. B U S I N E S S M O D E L In 2018, we implemented a cost reduction strategy that yielded very successful results. Consequently, we further reduced our base fares and stimulated demand, focusing on satisfying our customers’ expectations and needs. We innovated to offer lower fares, point-to-point flights, the most modern fleet, an efficient way to purchase tickets and a customer discount club. t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 9 OAG ranked us in the top five most punctual airlines in Latin America and among the five most punctual low-cost airlines worldwide. Capacity increase More ancillaries (“You decide”) RESILIENT ULCC BUSINESS M ODEL DRIVING HIGH, PROF ITABLE GROWTH Cost reduction “Clean” low base fares More customers R O U T E N E T W O R K 10 187 routes NE W ROUTES 35 & 4 NEW STATIONS PUER T O E SC ON DI D O; WASHI NG T ON D.C. ; A LB UQ U ER QU E , NE W ME XIC O & CHARL O TT E , N OR T H C ARO LI N A DES T I N AT I ON S 69 4 0 DOMESTIC & 2 9 INTERNATIONAL Volaris | 2018 Annual Report2 0 1 8 D I F F E R E N T I A T I O N S T A R A T E G Y t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 11 Discover new offers instantly! Ana, let’s go to Cancun next summer! 17:00 pm The flights are very expensive, I don’t think we can... :( 17:01 pm What are you talking about? I got a super promo at Volaris! :D 17:02 pm N E W D E S T I N A T I O N S F O R O U R C U S T O M E R S W I T H C O D E S H A R E We began our Codeshare operations with Frontier, the first agreement of its kind in ultra-low-cost carriers global- ly. Through it, our customers can visit new destinations in the United States beyond our current ones, and Frontier customers will gain first-time access to new cities in Mex- ico. During 2019, we plan to enhance our codeshare initia- tives, such as increase the number of connecting airports and explore cost synergies at certain United States and Mexican airports to increase our already strong connec- tivity potential. 50 new Frontier destinations in the United States 150 codeshare routes in 8 connecting points t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 12 IAV 4G 12:12 pm 100% Enrique Beltranena, President & CEO Online The launch of code-sharing sales marks an important milestone in the history of our operations. 12:00 pm Our customers and those of Frontier can purchase their tickets with the shared promise of maintaining the lowest rates, the best customer service and the highest standards of safety and quality. 12:01 pm We focus on fleet efficiency, which drives higher revenue and lower cost. W E A R E C O M M I T T E D T O H A V E T H E Y O U N G E S T F L E E T I N T H E C O U N T R Y ! In 2018 we operated with 77 aircraft with an average age of 4.6 years. We received six new A320Neo and four A321Neo. In line with our ultra-low-cost strategy, we have constantly increased our number of Airbus NEO, which operate with lower fuel burn and have competitive lease rate fac- tors. Additionally, these aircraft have eco-efficient engines and sharklets, which decrease CO2 emissions and fuel consump- tion, minimizing our environmental footprint. Currently, 20% of our fleet is comprised of these aircraft, we plan to increase it to 50% by 2022. A319 A320 A321 8 55 14 We are among the Top 10 Safest Low-Cost airlines awarded by Airline Ratings due to our successful completion of the International Air Transport Association Operational Safety Audit (IOSA) C O M M E R C I A L E F F O R T S A N D C O S T R E D U C T I O N S T R A T E G Y We strive to further reduce our cost structure to offset challenging conditions. Our strategy includes: We are among the top three lowest cost operators worldwide, our CASM ex-fuel decreased 7.8% to 85.9 cents. t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 13 2 0 1 8 R E S U LT S Search flights From Select your origin To Select your destination Departure date Select date Return date Select date One way Round trip x1 Adults x0 Minor x0 Infant Promo code Search Book your flight and your hotel with us! t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 14 Look! Volaris has also the best rates in hotels !! 17:02 pm Reaaaaally??! 17:01 pm Yes, you better book everything there! 17:02 pm Obviously! 17:03 pm A V A I L A B L E S E A T M I L E S (ASMs, millions) P A S S E N G E R S (Thousands) T O T A L A N C I L L I A R Y R E V E N U E P E R B O O K E D P A S S E N G E R (MXN) O P E R A T I N G C O S T P E R A V A I L A B L E S E A T M I L E (CASM*, USD cents) 2018 2017 2016 2015 2014 21,010 18,861 16,704 14,052 11,830 201 8 20 17 201 6 20 15 201 4 18 ,39 6 16,4 27 15,0 05 11,9 83 9,80 9 2018 2017 2016 2015 2014 4 79 4 26 3 79 3 38 2 79 2018 2017 2016 2015 2014 6.8 6.7 6.0 6.5 7.9 R E V E N U E P A S S E N G E R M I L E S (RPMs, millions) A I R C R A F T T O T A L O P E R A T I N G R E V E N U E P E R A V A I L A B L E S E A T M I L E (TRASM, MXN cents) 2018 2017 2016 2015 17,748 15,917 14,326 11,562 15 2014 9,723 201 8 201 7 201 6 201 5 201 4 77 71 69 56 50 2018 2017 2016 2015 2014 1 30 .0 1 31 .4 1 29 .4 1 40 .5 1 18 .7 *Peso amounts were converted to U.S. dollars at end of period exchange rate. Volaris | 2018 Annual ReportM A R K E T O U T L O O K t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 16 Get custom offers! I got the offer for La Paz that we wanted in Volaris 17:02 pm Yeah hahahaha, we’re going, right? 17:02 pm OMG, really?? 17:01 pm Sure!!!!! 17:03 pm josesalylimon 07h We implemented a very successful cost reduction strategy that allowed us to thrive, notwithstanding the challenges we faced. to In 2018 we implemented sound and increase innovative strategies cost-efficiency and stimulate demand. These proved successful to increase our profitability, notwithstanding the significant volatility of fuel prices and the uncertainty caused by the presi- dential elections. • During 2018, Mexico maintained resilient macroeconomic in- dicators and stable domestic consumer demand. The Mexi- can Consumer Confidence Balance Indicator (BCC) increased 12% year over year. • The Mexican DGAC reported overall passenger volume growth for Mexican carriers of 10.6% year over year; domestic overall passenger volume increased 10.6%, while international overall passenger volume increased 3.8%. • As of December 31, 2018, the Mexican peso appreciated 0.3% against the US dollar in nominal terms since December 31, 2017. • The average economic fuel cost per gallon increased 29.3% to Ps. 44.6 per gallon. 17 Send message Volaris | 2018 Annual Report2 0 1 8 F I N A N C I A L & O P E R A T I N G M E T R I C S S U M M A R Y t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 18 Search flights From Select your origin To Select your destination Departure date Select date Return date Select date One way Round trip x1 Adults x0 Minor x0 Infant Promo code Search Faster and easier bookings! I found a good flight to Oaxaca, wdyt? 17:02 pm Perfect, I’m booking it right now! 17:02 pm Let’s go!!!!! 17:01 pm Cool! 17:03 pm 2 0 1 8 F I N A N C I A L A N D O P E R A T I N G M E T R I C S S U M M A R Y anaeloisaga092 02h A U D I T E D * (In Mexican pesos, except otherwise indicated) Total operating revenues (millions) Total operating expenses (millions) EBIT (millions) EBIT margin Depreciation and amortization Aircraft and engine rent expense Net (loss) income (millions) Net (loss) income margin (Loss) earnings per share: Basic (pesos) Diluted (pesos) (Loss) earnings per ADS: Basic (pesos) Diluted (pesos) Weighted average shares outstanding: Basic Diluted 2 0 1 8 ( U S D ) * 2 0 1 8 2 0 1 7 ( A D J U S T E D ) V A R I A N C E ( % ) 1,387 1,432 (45) (3.2%) 25 321 (35) (2.5%) (0.03) (0.03) (0.34) (0.34) - - 27,305 28,186 (881) (3.2%) 501 6,315 (683) (2.5%) (0.67) (0.67) (6.74) (6.74) 24,788 24,827 (39) (0.2%) 549 6,073 (652) (2.6%) (0.64) (0.64) (6.44) (6.44) 1,011,876,677 1,011,876,677 1,011,876,677 1,011,876,677 10.2% 13.5% >100% (3.1) pp (8.8%) 4.0% 4.7% 0.1 pp 4.7% 4.7% 4.7% 4.7% 0.0% 0.0% 19 Send message Volaris | 2018 Annual ReportA U D I T E D * (In Mexican pesos, except otherwise indicated) Available seat miles (ASMs) (millions) (1) Domestic International Revenue passenger miles (RPMs) (millions) (1) Domestic International Load factor (2) Domestic International Total operating revenue per ASM (TRASM) (cents) (1) Total ancillary revenue per passenger (3) Total operating revenue per passenger Operating expenses per ASM (CASM) (cents) (1) Operating expenses per ASM (CASM) (US cents) (1) CASM ex fuel (cents) (1) CASM ex fuel (US cents) (1) Booked passengers (thousands)(1) Departures (1) Block hours (1) Fuel gallons consumed (millions) Average economic fuel cost per gallon Aircraft at end of period Average aircraft utilization (block hours) Average exchange rate End of period exchange rate 2 0 1 8 ( U S D ) * 2 0 1 8 2 0 1 7 ( A D J U S T E D ) V A R I A N C E ( % ) anaeloisaga092 02h e !! r e a ll y h n fi - - - - - - - - - 6.6 24.4 75.4 6.8 - 4.4 - - - - - 2.3 - - - - 21,010 14,519 6,491 17,748 12,655 5,093 84.5% 87.2% 78.5% 130.0 479 1,484 134.2 7.0 85.9 4.5 18,396 117,920 322,054 227.4 44.6 77 13.2 19.24 19.68 18,861 12,740 6,121 15,917 11,054 4,863 84.4% 86.8% 79.4% 131.4 426 1,509 131.6 7.0 93.2 4.9 16,427 108,060 293,642 210.5 34.5 71 12.6 18.93 19.74 11.4% 14.0% 6.0% 11.5% 14.5% 4.7% 0.1 pp 0.4 pp (0.9) pp (1.1%) 12.5% (1.6%) 1.9% 0.3% (7.8%) (9.3%) 12.0% 9.1% 9.7% 8.0% 29.3% 8.5% 4.8% 1.6% (0.3%) *Peso amounts were converted to U.S. dollars at end of period exchange rate for convenience purposes only. (1) Includes schedule + charter (2) Includes schedule (3) Includes “other passenger revenues” and “non-passenger revenues” 20 Send message Volaris | 2018 Annual Report C O R P O R A T E G O V E R N A N C E t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 21 Find your flight by region! I have two weeks of vacation... 17:02 pm I feel like going to Central America... 17:01 pm Ok, let me check flights in the new Volaris App 17:02 pm Great! 17:03 pm C O R P O R A T E G O V E R N A N C E B O A R D O F D I R E C T O R S M E M B E R S A L T E R N A T E M E M B E R S Alfonso González Migoya I N D E P E N D E N T D I R E C T O R A N D C H A I R M A N O F T H E B O A R D Harry F. Krensky P R O P R I E T A R Y Enrique Javier Beltranena Mejicano Rodrigo Salcedo Moore Roberto José Kriete Ávila Marco Baldocchi Kriete I N D E P E N D E N T William A. Franke Brian H. Franke William Dean Donovan Stan L. Pace John A. Slowik John R. Wilson Andrew Broderick José Luis Fernández Fernández José Carlos Silva Sánchez-Gavito Joaquín Alberto Palomo Déneke Ricardo Maldonado Yáñez Eugenio Macouzet de León Jaime Pous Fernández Secretary non-member Isela Cervantes Rodríguez Pro secretary non-member 22 We comply with the best international practices in the market, as well as with the Mexican Securities Market Law. Our Board of Directors is comprised by 12 proprietary directors and six alternates, seven are independent. Volaris | 2018 Annual Report A U D I T A N D C O R P O R A T E G O V E R N A N C E C O M M I T T E E E X E C U T I V E T E A M José Luis Fernández Fernández Enrique Javier Beltranena Mejicano C H A I R M A N P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R John A. Slowik Joaquín Alberto Palomo Déneke Sonia Jerez Burdeus V I C E P R E S I D E N T A N D C H I E F F I N A N C I A L O F F I C E R M E M B E R S Holger Blankenstein C O M P E N S A T I O N A N D N O M I N A T I O N S C O M M I T T E E Roberto José Kriete Ávila C H A I R M A N Brian H. Franke Harry F. Krensky Enrique Javier Beltranena Mejicano E X E C U T I V E V I C E P R E S I D E N T A I R L I N E C O M M E R C I A L A N D O P E R A T I O N S Jaime E. Pous Fernández S E N I O R V I C E P R E S I D E N T C H I E F L E G A L O F F I C E R A N D C O R P O R A T E A F F A I R S José Luis Suárez Durán S E N I O R V I C E P R E S I D E N T A N D C H I E F O P E R A T I N G O F F I C E R Carolyn Prowse V I C E P R E S I D E N T A N D C H I E F C O M M E R C I A L O F F I C E R 23 M E M B E R S *As of 2019 Volaris | 2018 Annual ReportR I S K M A N A G E M E N T Our foundation for business risk management is the interna- tional control framework “COSO Enterprise Risk Management” (ERM), which facilitates management through the development of a systematic program that allows timely risk identification, as well as development of mitigation plans and indicators for accu- rate monitoring. During 2018, we hedged 58% of our fuel consumption, approximately. Risk Fuel is our largest operating expense. Therefore, we mitigate existing risks regarding volatility in fuel prices and exchange rates fluctuation through our controlled risk management policy, which includes the use of derivative financial instruments. Mitigation The Hedge Transaction Committee and the Hedge Committee, com- prised of Volaris’ management and CEO and shareholders, respectively, assess market conditions, the necessary capital to support margin re- quirements and the hedges’ pricing in order to identify expedient aircraft fuel swap hedges for our Company. t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 24 S O C I A L R E S P O N S I B I L I T Y t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 25 Get offers by season! When do you have a vacation? 17:02 pm Hmm ... until autumn ): 17:01 pm Ummm ... in Volaris there is a flight to New York on that season 17:02 pm Say no more! New York it is!!! 17:03 pm MEMBERS OF TH E SUSTA INA BILI T Y I NDEX OF THE M EXICA N ST O CK EXCHA NGE IN 2018 SOC IALLY RESPONSIBLE COM PANY (ESR) DISTINCTION FOR THE CONSECUTIVE YEAR 9th TOP MEMBER I N THE IMPLEMENTATION OF THE CODE (ECPAT) FOR THE 6 th CONSECUTIVE YEAR As a Socially Responsible Company, we are committed to safeguard the environment, our customers and Ambassadors. Our initiatives and operations are aimed to create economic, social and environmental value in the communities where we operate. . s p 3,305,928 IN VESTED ON SOCIAL ACTIONS DURIN G 2018 26 *For more information, please visit our Social Responsibility Report at: http://ir.volaris.com/English/home/default.aspx CE R TI F ICATION IN ENVI RONMENTAL & QUALITY MANAGEMENT SYSTEMS ISO 1 400 1:2 01 5 & IS O 9 00 1:2 01 6 31,589 CER TI FIED CARBON CRED ITS PROCURED SINCE 2015 T RANS POR T OF 256 ORGANS & TISSUES WITH CENTARA SINCE 2009 COLLECT I ON OF s p 4,750,032 THROUGH OUR #ForACleanSky CAMPAI GN SI NCE 201 1 CONTRIB UTION TO THE UN’S SUSTAINABLE DEVELOPMENT THROUGH OUR SOCI AL AND GOALS ENVI RONMENTAL ACTIONS 5,126 VOLUNTEERING HOURS WITH 1,822 VOLUNTEERS PAR TICIPATING IN IN 104 A CTIVITIES Volaris | 2018 Annual ReportO P E R A T I N G & F I N A N C I A L R E V I E W A N D P R O S P E C T S Flight Status Flight number Route and date Flight number April 09,2019 Search Check the status of any of your flights! t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 27 Hey sweetie! do you know at what time your sister’s flight departs? 17:01 pm No, but I can check it in the Volaris app! 17:02 pm Wow!! I’ll download it at once Thanks honey! 17:03 pm A . O P E R A T I N G R E S U L T S You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report. The following dis- cussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.” D E S C R I P T I O N O F O U R P R I N C I P A L L I N E I T E M S Operating Revenues As of January 1, 2018, we adopted IFRS 15 “Revenue from Contracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. Un- der the new standard, certain ancillary services are recognized when we satisfy our performance obligations, which is typically when the air transportation service is rendered (at the time of the flight). In addition, these ancillary services do not constitute sep- arate performance obligations or represent administrative tasks that do not represent a different promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation. Therefore, the classification of certain ancillary fees in our state- ment of operations, such as advanced seat selection, fees charged for excess baggage, itinerary changes and other air travel-related services, changed with adoption of IFRS 15, since they are part of the single performance obligation of provid- 28 ing passenger transportation. We have recasted our financial statements as of January 1, 2016 and 2017 for comparability purposes. See note 1x of our Audited Consolidated Financial Statements. our capacity that is actually used by paying customers, is cal- culated by dividing RPMs by ASMs. The average ticket revenue per booked passenger represents the total passenger revenue divided by booked passengers. P A S S E N G E R R E V E N U E S Our passenger revenue includes income generated from: (i) fare revenue and (ii) other passenger revenue. We derive our operating revenues primarily from transporting passengers on our aircraft. Approximately 68% of our total oper- ating revenues were derived from passenger fares in 2018. Pas- senger revenues are based upon our capacity, load factor and the average ticket revenue per booked passenger. Our capacity is measured in terms of ASMs, which represents the number of seats we make available on our aircraft multiplied by the number of miles the seats are flown. Load factor, or the percentage of Other passenger revenues include but are not limited to fees charged for excess baggage, bookings through our call cen- ter or third-party agencies, advanced seat selection, itinerary changes, V-Club memberships and charters. They are recog- nized as revenue when the obligation of passenger transporta- tion service is provided by us or when the non-refundable ticket expires at the date of the scheduled travel. Approximately 29% of our total operating revenues were derived from other passen- ger revenues in 2018. Volaris | 2018 Annual Report N O N - P A S S E N G E R R E V E N U E S Our non-passenger revenues include income generated from (i) other non-passenger revenues and (ii) cargo services. In 2018, we derived approximately Ps.924.8 million, or 3.4% of our total operating revenues from non-passenger revenues. Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and adver- tising spaces to third parties. They are recognized as revenue at the time the service is provided. Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the des- tination). The following table shows each of the line items in our consol- idated statements of operations for the periods indicated as a percentage of our total operating revenues for that period: Revenues from our international operations represented 33.1%, 30.3% and 32.3% of our total revenues in 2016, 2017 and 2018, respectively, and revenues from our domestic operations repre- sented 66.9%, 69.7% and 67.7% of our total revenues in 2016, 2017 and 2018, respectively. (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. 29 Operating revenues: Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Cargo Other non-passenger revenues Total operating revenues Other operating income Fuel Aircraft and engine rent expense Landing, take-off and navigation expenses Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Other operating expenses Depreciation and amortization Total operating expenses, net Operating income (loss) Finance income Finance cost Exchange gain (loss), net Income (loss) before income tax Income tax (expense) benefit Net income (loss) For the Years ended December 31, 2016 2017 2018 Adjusted(1) 76% 20% 1% 3% 72% 23% 1% 4% 68% 29% 1% 3% 100% 100% 100% (2)% 25% 24% 14% 10% 6% 6% 4% 2% 89% 11% 1% 0% 9% 21% (6)% 15% 0% 29% 25% 16% 11% 7% 6% 4% 2% 100% 0% 0% 0% (3)% (3)% 1% (2)% (2)% 37% 23% 17% 11% 5% 6% 4% 2% 103% (3)% 0% 0% 0% (3)% 1% (2)% Volaris | 2018 Annual ReportRevenue Recognition G E N E R A L As of January 1, 2018, we adopted IFRS 15 “Revenue from Contracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. Un- der the new standard, certain ancillary services are recognized when we satisfy our performance obligations, which is typically when the air transportation service is rendered (at the time of the flight). In addition, these ancillary services do not constitute sep- arate performance obligations or represent administrative tasks that do not represent a different promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation. Therefore, the classification of certain ancillary fees in our state- ment of operations, such as advanced seat selection, fees charged for excess baggage, itinerary changes and other air travel-related services, changed with adoption of IFRS 15, since they are part of the single performance obligation of providing passenger transportation. We have recasted our financial state- ments as of January 1, 2016 and 2017 for comparability pur- poses. See notes 1d and 1x to our Audited Consolidated Finan- cial Statements for more details. P A S S E N G E R R E V E N U E S Revenues from the air transportation of passengers are recog- nized at the earlier of when the service is provided or when the non-refundable ticket expires at the date of the scheduled travel. 30 Ticket sales for future flights are initially recognized as contract li- abilities under the caption unearned transportation revenue and, once we provide the transportation service or when the non-re- fundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as fare revenue and the unearned transportation revenue is reduced by the same amount. All of our tickets are non-refundable and are subject to change upon a payment of a fee. Additionally, the Company does not operate a frequent flier program. Passenger revenues includes income generated from: (i) fare revenues and (ii) other passenger revenues. Other passenger services include but are not limited to fees charged for excess baggage, bookings through the call center or third-party agen- cies, advanced seat selection, itinerary changes, V-Club mem- berships and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by the Company or when the non-refundable ticket expires at the date of the scheduled travel. N O N - P A S S E N G E R R E V E N U E S Non-passenger revenues include revenues generated from: (i) other non-passenger revenues and (ii) cargo services. Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and adver- tising spaces to third parties. They are recognized as revenue at the time the service is provided. We concluded that the timing of satisfaction of revenue from advertising spaces is to be recognized over time because the customer simultaneously receives and consumes the benefits we provide. Additionally, we recognize as revenue the air transportation facil- ity charges for non-show passengers, when the non- refundable ticket expires at the date of the scheduled travel. We also evaluated principal versus agent considerations as they relate to certain non-air travel services arrangements with third party providers. No changes were identified under this analysis as we are the agent for those services provided by third parties. We are also required to collect certain taxes and fees from cus- tomers on behalf of government agencies and airports and re- mit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include value added tax, federal transportation taxes, federal security charges, air- port passenger facility charges, and foreign arrival and depar- ture taxes. These items are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. We record a liability upon collection from the customer and discharge the liability when payments are remitted to the applicable governmental entity or airport. Volaris | 2018 Annual ReportOperating Expenses, net Our operating expenses consist of the following line items. Other Operating Income. Other operating income primarily in- cludes the gains from sale and lease back operations of our aircraft and engines. Fuel. Fuel expense is our single largest operating expense. It includes the cost of fuel, related taxes, fueling into-plane fees and transportation fees. It also includes realized gains and loss- es that arise from any fuel price derivative activity qualifying for hedge accounting. Aircraft and Engine Rent Expense. Aircraft rent expense con- sists of monthly lease rents for our 77 aircraft and 10 spare en- gines, as of December 31, 2018, under the terms of the relat- ed operating leases and is recognized on a straight line basis. Aircraft rent expense also includes gains and losses related to our interest rate swap contracts and foreign currency forward contracts that qualify for hedge accounting. Additionally, if we determine that we will probably not recover partially or completely the maintenance deposits we pay to the lessor as maintenance deposits, we record these amounts in the results of operations as additional aircraft rent (supplemental rent) from the time we make the determination over the remain- ing term of the lease. Aircraft and engine rent expense also in- cludes the estimated return costs of our fleet, which in no case are related to scheduled major maintenance. The return costs are recognized on a straight-line basis as a component of sup- plemental rent. Whether an Arrangement Contains a Lease,” SIC-15 “Operat- ing Leases-Incentives” and SIC-27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease.” IFRS 16 sets out the principles for the recognition, measurement, presenta- tion and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. Under IFRS 16, at the commencement date of a lease, a lessee will recognize a li- ability to make lease payments (i.e., the lease liability) and an as- set representing the right to use the underlying asset during the lease term (i.e., the right-of- use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the oc- currence of certain events (e.g., a change in the lease term or a change in future lease payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. In addition, for leas- es denominated in a foreign currency other than our functional currency (which is the Mexican Peso) the lease liability will be remeasured at each reporting date, using the foreign exchange of the period. We adopted IFRS 16 on the mandatory date, Jan- uary 1, 2019, through the full retrospective method recognizing the effect on our statement of financial position as of January 1, 2017. This led to approximately Ps.23.7 billion of right- of-use assets and Ps.32.6 billion as lease liabilities as of January 1, 2017. See note 1x to our Audited Consolidated Financial State- ments for more details. With respect to this line item, IFRS 16 was issued in Janu- ary 2016 and replaces IAS 17 “Leases,” IFRIC 4 “Determining IFRS 16 also requires lessees to make more extensive disclo- sures than under IAS 17. We applied the standard to contracts 31 that were previously identified as leases applying IAS 17 and IFRIC 4. See Note 14 of our Audited Consolidated Financial Statements for more information on our lease agreements under these standards. Salaries and Benefits. Salaries and benefits expense includes the salaries, hourly wages, employee health insurance coverage and variable compensation that are provided to employees for their services, as well as the related expenses associated with employee benefit plans and employer payroll taxes. Landing, Take-off and Navigation Expenses. Landing, take-off and navigation expenses include airport fees, handling charges, and other rents, which are fixed and variable facilities’ expenses, such as the fees charged by airports for the use or lease of air- port facilities, as well as costs associated with ground handling services that we outsource at certain airports. This expense also includes route charges, which are the costs of using a country’s or territory’s airspace and are levied depending on the distance flown over such airspace. Sales, Marketing and Distribution Expenses. Sales, market- ing and distribution expenses consist of advertising and pro- motional expenses directly related to our services, including the cost of web support, our outsourced call center, travel agent commissions, and credit card discount fees that are associated with the sale of tickets and other products and services. Maintenance Expenses. Maintenance expenses include all parts, materials, repairs and fees for repairs performed by third- party vendors directly required to maintain our fleet. It excludes the direct labor cost of our own mechanics, which is included under salaries and benefits and includes only routine and ordi- Volaris | 2018 Annual Reportnary maintenance expenses. Major maintenance expenses are capitalized and subsequently amortized as described in “—De- preciation and Amortization—“ below. Other Operating Expenses. Other operating expenses include (i) administrative support such as travel expenses, stationery, administrative training, monthly rent paid for our headquarters’ facility, professional fees and all other administrative and oper- ational overhead expenses; (ii) costs for technological support, communication systems, cell phones, and internal and opera- tional telephone lines; (iii) premiums and all expenses related to the aviation insurance policy (hull and liability); (iv) outsourced ground services and the cost of snacks and beverages that we serve on board to our passengers; and (v) rent expense associ- ated with the lease of our maintenance warehouse and hangar. Depreciation and Amortization. Depreciation and amortiza- tion expense includes the depreciation of all rotable spare parts, furniture and equipment we own and leasehold improvements to flight equipment. It also includes the amortization of major maintenance expenses we defer under the deferral method of accounting for major maintenance events associated with the aging of our fleet and recognize over the shorter period of the next major maintenance event or the remaining lease term. For the years ended December 31, 2016 2017 2018 2018 (In Ps. cents) (In U.S.$ cents)(1) Other operating income Fuel Aircraft and engine rent expense Landing, take-off and navigation expenses Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Other operating expenses Depreciation and amortization (3.0) 34.4 33.5 19.6 14.5 8.5 8.0 5.7 3.2 (0.5) 38.5 32.2 21.2 15.0 9.0 7.6 5.7 2.9 (3.0) 48.2 30.1 21.8 14.9 7.1 7.2 5.4 2.4 Total operating expenses, net 124.4 131.6 134.2 (0.2) 2.5 1.5 1.1 0.8 0.4 0.4 0.3 0.1 6.8 (1) Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.19.6829 per U.S. $1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2018. Such conversions should not be construed as a representation that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all. Trends and Uncertainties Affecting Our Business We believe our operating and business performance is driven by various factors that affect airlines and their markets, trends affecting the broader travel industry, and trends affecting the specific markets and customer base that we target. The following key factors may affect our future per- formance. A common measure of per unit costs in the airline industry is cost per available seat mile (CASM). The following table shows the breakdown of CASM for the periods indicated: Economic Conditions in Mexico. Mexico’s GDP is expected to grow by 2.4% per year for the next ten years according to the Mexican Central Bank, which is 0.5% above the expected annual growth for the United States during the same period as reported by the U.S. Federal Reserve. 32 Volaris | 2018 Annual ReportRegarding population dynamics as of 2015, according to the INEGI intercensal survey, around 36% of the Mexican popula- tion was under 20 years of age, which benefits us by providing a strong base of potential customer growth. Inflation in Mexico during 2018 was 4.83% according to the INEGI. As of Decem- ber 31, 2018, international reserves were at U.S. $174.6 billion. Competition. The airline industry is highly competitive. The prin- cipal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities and related services, number of routes served from a city, cus- tomer service, safety record and reputation, code-sharing rela- tionships and frequent flier programs and redemption opportu- nities. Our current and potential competitors include traditional network airlines, low-cost carriers, regional airlines and new en- trant airlines. We typically compete in markets served by lega- cy carriers and other low-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital and may serve more routes than we do. Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost- conscious business people. These low base fares are facilitated by our low CASM, which at Ps.134.2 cents (U.S. $6.8 cents) we believe was the lowest CASM in Latin America in 2018, compared to Avianca at U.S. $14.25 cents, Azul at U.S. $12.95 cents, Copa at U.S. $9.8 cents, Gol at U.S. $9.0 cents, Grupo Aeroméxico at U.S. $11.1 cents and LATAM at U.S. $10.9 cents. We also have lower costs than our publicly traded target market competitors in the United States, including Alaska Air at U.S. $11.66 cents, American at U.S. $14.85 cents, Delta at U.S. $14.88 cents, Jet Blue at U.S. $12.85 cents, Southwest Airlines at U.S. $11.74 cents and United at U.S. $13.81 cents. 33 Our principal competitors for the domestic market are Grupo Aeroméxico, Interjet and VivaAerobus, Interjet and VivaAerobus are low-cost carriers in Mexico. In 2018, the Mexican low-cost carriers (including us) combined had 67.3% of the domestic market based on passenger flight segments. We had 28.38% of the domestic market which placed us first, according to the DGAC. We also face domestic competition from ground transportation alternatives, primarily long-distance bus companies. There are limited passenger rail services in Mexico. There is a large bus industry in Mexico, with total passenger segments of approxi- mately 3.09 billion in 2018, of which approximately 83.4 million were executive and luxury passenger segments, according to the Mexican Authority of Ground Transportation (Dirección Gen- eral de Autotransporte Federal) and which could include both long- and short- distance travel. We set certain of our promo- tional fares at prices lower than bus fares for similar routes in order to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus. We believe a small shift of bus passengers to air travel would dra- matically increase the number of airline passengers and bring the air trips per capita figures in Mexico closer to those of other countries in the Americas. Our principal competitors for the international routes between Mexico and the United States are Grupo Aeroméxico, Alaska Air, Delta and United. We have grown rapidly in the internation- al market since we started international operations in 2009, reaching 26% market share on the routes that we operate and 19.64% market share considering all routes between Mexico and the United States in 2018, according to the DGAC. Seasonality and Volatility. Our results of operations for any in- terim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. We generally expect demand to be greater during the summer in the northern hemisphere, in December and around Easter, which can fall either in the first or second quarter, compared to the rest of the year. Our business is also volatile and highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, health out- breaks, weakening economic conditions, fare initiatives, fluctua- tions in fuel prices, labor actions, weather and other factors have resulted in significant fluctuations in our revenues and results of operations in the past.Particularly, in 2008, the demand for air transportation services was significantly adversely affected by both the severe economic recession and the record high fuel prices. We believe, however, that demand for business travel historically has been more sensitive to economic pressures than demand for low-price leisure and VFR travel, which are the pri- mary markets we serve. In addition, on January 20, 2017, Donald Trump became pres- ident of the United States. President Trump has already imple- mented immigration policies that have adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets, and there is a possibility that further immi- gration policy changes are to come. Volaris | 2018 Annual ReportPresident Trump’s immigration policies had a negative impact on our results of operations during 2018 and this negative im- pact can be expected to continue if the Trump administration continues to carry out such immigration policies. consumption. During the year ended December 31, 2017, we entered into US Gulf Coast fuel 54 Asian call options designated to hedge approximately 55% of our 2018 projected fuel con- sumption. exchange gain, net of Ps.2.2 billion. Whereas, as a result of the appreciation of the Peso against the U.S. dollar and our net U.S. dollar asset position, we recorded a foreign exchange loss, net of Ps.793.9 million in 2017 and Ps.72.5 million in 2018. Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours, accounting for 28%, 29% and 36% of our total operating expenses for 2016, 2017 and 2018, respectively. Fuel availability and pricing are also subject to re- fining capacity, periods of market surplus and shortage, and de- mand for heating oil, gasoline and other petroleum products, as well as economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining sources located in Mexico. During the years ended December 31, 2018, 2017, and 2016, we did not enter into US Gulf Coast Jet Fuel 54 swap contracts. These instruments were formally designated and qualified for hedge accounting and accordingly, the effective portion is al- located within other comprehensive income, while the effects of transforming into a fixed jet fuel prices by these hedges are presented as part of jet fuel costs when recognized in the con- solidated statements of operations. Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under swap agreements and the pricing of hedges and other derivative products in the market. Additionally, during the year ended December 31, 2018, we also entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options and US Gulf Coast Jet Fuel 54 Asian call options des- ignated to hedge approximately 18% of our 2019 projected fuel As of December 31, 2018, we purchased our domestic fuel un- der the ASA fuel service contract, and the international fuel under the WFS, BP Products North America, Chevron and Associated Energy Group fuel service contracts. The cost and future avail- ability of fuel cannot be predicted with any degree of certainty. Foreign Exchange Gains and Losses. While most of our reve- nue is generated in Mexican pesos, 32% of our revenues came from our operations in the United States and Central America during the year ended December 31, 2018 (compared to 30% during the year ended December 31, 2017) and U.S. dollar de- nominated collections accounted for 40% and 38% of our total collections in 2017 and 2018, respectively. In addition, the ma- jority of our operating costs are denominated in or indexed to U.S. dollars, constituting 71% and 73% of our total operating costs in 2017 and 2018. Our key U.S. dollar-denominated oper- ating costs include fuel, aircraft rentals and maintenance costs. We manage our foreign exchange risk exposure by a policy of matching, to the extent possible, receipts and local payments in each individual currency. Most of the surplus funds are convert- ed into U.S. dollars. However, we are exposed to fluctuations in exchange rates between the peso and the U.S. dollar. As of December 31, 2017, and 2018, our net monetary asset position denominated in U.S. dollars was U.S. $567.5 million and U.S. $428.6 million, respectively. As a result of the signif- icant depreciation of the peso against the U.S. dollar in 2016 and our net U.S. dollar asset position, we recorded a foreign Maintenance Expenses. We are required to conduct varying levels of aircraft and engine maintenance which involve signifi- cantly different labor and materials inputs. Maintenance require- ments depend on the age and type of aircraft and the route net- work over which they operate. Fleet maintenance requirements may involve short cycle engineering checks, for example, com- ponent checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks. Aircraft mainte- nance and repair costs for routine and non-routine maintenance are divided into three general categories: 1. Routine maintenance requirements consist of daily and week- ly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, diagnostic and routine repairs and any necessary unscheduled tasks per- formed. These types of line maintenance are currently ser- viced by our mechanics and are primarily completed at the main airports that we currently serve. All other maintenance activities are sub-contracted to qual- ified maintenance, repair and overhaul organizations. Rou- tine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and are required ap- proximately every 22 months. All routine maintenance costs are expensed as incurred. 2. Major maintenance consists of a series of more complex tasks that can take from one to six weeks to accomplish and are generally required approximately every five to six years. 34 Volaris | 2018 Annual ReportMajor maintenance is accounted for under the deferral meth- od, whereby the cost of major maintenance and major over- haul and repair is capitalized as improvements to leased as- sets and amortized over the shorter period of the next major maintenance event or the remaining lease term. 3. Engine services are provided pursuant to an engine flight hour agreement that guarantees a cost per overhaul, pro- vides miscellaneous engine coverage, caps the cost of for- eign objects damage events, ensures protection from annual escalations and grants an annual credit for scrapped com- ponents. We also have a power-by-hour agreement for com- ponent services, which guarantees the availability of aircraft parts for our fleet when they are required and provides aircraft parts that are not included in the redelivery conditions of the contract without constituting an additional cost at the time of redelivery. The costs associated with the miscellaneous en- gine coverage and the component services agreements are recorded in the consolidated statements of operations. Due to the young age of our fleet (approximately 4.6 years on average as of December 31, 2018), maintenance expense in 2016, 2017 and 2018 remained relatively low. For the years end- ed December 31, 2016, 2017 and 2018 we capitalized major maintenance events as part of leasehold improvements to the flight equipment in the amount of Ps.226.5 million, Ps.529.3 million and Ps.676.5 million, respectively. For the years ended December 31, 2016, 2017 and 2018 the amortization of these deferred major maintenance expenses was Ps.404.7 million, Ps.382.7 million and Ps.313.5 million, respectively. The amorti- zation of deferred maintenance expenses is included in depre- ciation and amortization rather than total maintenance costs as 35 described in “—Critical Accounting Polices and Estimates.” In 2016, 2017 and 2018, total maintenance costs amounted to Ps.1.3 billion, Ps.1.4 billion and Ps.1.5 billion, respectively. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actu- al costs. Accordingly, we cannot reliably quantify future main- tenance expenses for any significant period of time. However, we estimate that based on our scheduled maintenance events, current maintenance expense and maintenance-related amor- tization expense will be approximately Ps.2 billion (U.S. $101.9 million) in 2019. Aircraft Maintenance Deposits Paid to Lessors. The terms of our aircraft lease agreements require us to pay maintenance deposits to lessors to be held as collateral for the performance of major maintenance activities, resulting in our recording sig- nificant prepaid deposits on our consolidated statements of fi- nancial position. As a result, the cash costs of scheduled major maintenance events are paid well in advance of the recognition of the maintenance event in our results of operations. Please see Item 5:—Critical Accounting Policies and Estimates.” Ramp-up Period for New Routes. During 2016 we opened 20 new routes, added 31 more in 2017 and 35 more in 2018. As we continue to grow, we would expect to continue to ex- perience a lag between when new routes are put into service and when they reach their full profit potential. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorgani- zations could adversely affect the industry.” Volaris | 2018 Annual ReportC R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M A T E S The following discussion and analysis of our consolidated financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of supplemental assets and liabili- ties at the date of our consolidated financial statements. Note 1 to our consolidated financial statements included herein provides a detailed discussion of our significant accounting policies. Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters that are both inherently uncertain and material to our financial condition or results of operations. Aircraft Maintenance Deposits Paid to Lessors. Our lease agreements provide that we pay maintenance deposits or sup- plement rent to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities.Maintenance deposits are held as collateral in cash. These lease agreements provide that maintenance deposits are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event or (ii) the qualifying costs related to the specific maintenance event. Substantially all of these maintenance deposits are calculated based on a utilization measure, such as flight hours or cycles, and areused solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft and engines. We paid Ps.2.2 billion, Ps.0.2 billion and Ps.0.5 billion in maintenance deposits, net of reimburse- ments, to our lessors for the years ended December 31, 2016, 2017 and 2018, respectively. At lease inception and at each consolidated statement of finan- cial position date, we assess whether the maintenance deposit payments required by the lease agreements are substantively and contractually related to the maintenance of the leased as- set.Maintenance deposit payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as guar- antee deposits in the accompanying consolidated statement of financial position. The portion of prepaid maintenance deposits that are deemed unlikely to be recovered, primarily relate to the rate differential between the maintenance deposits payments and the expected cost for the next related maintenance event that the deposits serve to collateralize is recognized as supplemental rent. Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent starting from the period the determination is made. When it is not probable that we will recover amounts currently on depos- it with a lessor, such amounts are expensed as supplemental rent. We expensed Ps.143.9 million in 2016, Ps.103.6 million in 2017 and Ps.87 million in 2018 of maintenance deposits as supplemental rent. As of December 31, 2016, 2017 and 2018 we had prepaid maintenance deposits of Ps.7.1 billion, Ps.6.9 billion and Ps.6.5 billion, respectively, recorded in our consolidated statements of financial position. We currently expect that these prepaid main- tenance deposits are likely to be recovered primarily because there is no rate differential between the maintenance deposit payments and the expected cost for the related next mainte- nance event that the deposits serve to collateralize. During the years ended December 31, 2016, 2017 and 2018 we extended the lease term of two aircraft agreements, three agreements and two aircraft agreements, respectively. Addition- ally, we extended the lease term of two spare engine agreements in 2018 and two spare engine agreements in 2017. These ex- tensions made available maintenance deposits that were rec- ognized in prior periods in the consolidated statements of op- erations as supplemental rent of Ps.92.5 million, Ps.65.7 million and Ps.0.0 during 2016, 2017 and 2018, respectively. Because the lease extension benefits are considered lease in- centives, the benefits are deferred in the caption other liabilities 36 Volaris | 2018 Annual Reportand are being amortized on a straight-line basis over the re- maining revised lease terms. For the years ended December 31, 2016, 2017 and 2018, we amortized Ps.74.7 million, Ps.88.2 million and Ps.84.6 million respectively, of this amount which was recognized as a reduction of rent expenses in the consoli- dated statements of operations. During the year ended December 31, 2018, we added six new net aircraft to our fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance depos- its to lessors in advance in order to ensure major maintenance activities, so we do not record guarantee deposits regarding these aircraft. However, some of these agreements provide the obligation to make a maintenance adjustment payment to the lessors at the end of the contract period. This adjustment covers maintenance events that are not expected to be made before the termination of the contract. We recognize this cost as sup- plemental rent during the lease term of the related aircraft, in the consolidated statements of operations. For the years ended December 31, 2016, 2017 and 2018, we expensed as supplemental rent Ps.201.4 million, Ps.162.1 mil- lion and Ps.212.6 million, respectively. Aircraft and Engine Maintenance. We account for major main- tenance under the deferral method. Under the deferral meth- od, the cost of major maintenance is capitalized (leasehold im- provements to flight equipment) and amortized as a component of depreciation and amortization expense until the next major maintenance event or during the remaining contractual lease term, whichever occurs first. The next major maintenance event is estimated based on assumptions including estimated usage maintenance intervals mandated by the FAA in the United States and the DGAC in Mexico and average removal times suggested by the manufacturer. These assumptions may change based on changes in the utilization of aircraft, changes in government reg- ulations and changes in suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by un- planned incidents that could damage an airframe, engine, or major component to a level that would require a major main- tenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated useful life would decrease before the next maintenance event, resulting in additional amortization expense over a shorter period. In 2016, 2017 and 2018, we capitalized costs of major mainte- nance events of Ps.226.5 million, Ps.529.3 million and Ps.676.5 million, respectively and we recognized amortization expenses of Ps.404.7 million, Ps.382.7 million and Ps.313.5 million, re- spectively. The amortization of deferred maintenance expens- es is included under the caption depreciation and amortization expense in our consolidated statements of operations. If the amortization of major maintenance expenditures were classified as maintenance expense, they would amount to Ps.1,748.8 mil- lion, Ps.1,815.9 million and Ps.1,831.1 million for the years end- ed December 31, 2016, 2017 and 2018, respectively. Fair Value. The fair value of our financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets. They are de- termined using valuation techniques such as the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasi- ble, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions regarding these factors could affect the reported fair value of financial instruments. Gains and Losses on Sale and Leaseback. We enter into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to us. Leases under sale and leaseback agreements meet the conditions for treatment as operating leas- es. If a sale and lease back transaction is at fair value and results in an operating lease, any profit or loss is recognized immediately. During the year ended December 31, 2016, 2017 and 2018 we sold and transferred aircraft and engines to third parties, giving rise to a gain of approximately Ps.484.8 million, Ps.65.9 million and Ps.609.1 million respectively, that was recorded as other operating income in the consolidated statements of operations. During the year ended December 31, 2011, we entered into air- craft and spare engine sale and leaseback transactions, which resulted in a loss of Ps.30.7 million. This loss was deferred on the consolidated statements of financial position and is being amortized over the contractual lease term. For the years ended December 31, 2016, 2017 and 2018, we amortized a loss of Ps.3.0 million, Ps.3.0 million and Ps.3.0 million, respectively, as additional aircraft rental expense. In August 2012, we entered into a total support agreement with Lufthansa Technik AG (LHT), as amended in December 2016, that expires December 31, 2022, which includes a total com- ponent support agreement (power-by-hour) and ensures the availability of aircraft components for our fleet when they are required. The cost of the total component support agreement is applied monthly to the results of operations. As part of this total support agreement, we received credit notes of Ps.46.5 million, which was deferred on the consolidated statements of financial position and is being amortized on a straight line basis, prospec- tively during the term of the agreement. During 2016, 2017 and 2018, we amortized a corresponding benefit from these credit notes of, Ps.9.3 million, Ps.6.6 million and Ps.0.0, respectively, which is recognized in the consolidat- ed statements of operations as a reduction of maintenance ex- penses. 37 Volaris | 2018 Annual ReportE Q U I T Y- S E T T L E D T R A N S A C T I O N S Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. Our Equity-settled Transactions include a share purchase plan and a management incentive plan. L O N G - T E R M I N C E N T I V E P L A N S Share Purchase Plan In November 2014, we established a share purchase plan pur- suant to which certain of our key executives were granted a spe- cial bonus equal to a fair value of Ps.10.8 million to be used to purchase our shares. On April 21, 2016, an amendment to this plan was approved at our annual ordinary shareholders’ meet- ing. The key components of the plan are as follows: 1. Servicios Corporativos granted a bonus to each key executive. 2. Pursuant to the instructions of such key executives, on No- vember 11, 2014, an amount equal to Ps.7.1 million (the fair value of the bonus net of withheld taxes) was transferred to an administrative trust for the acquisition of our Series A shares through an intermediary authorized by the Mexican stock market, based on the instructions of the administration trust’s technical committee. 3. Subject to the terms and conditions set forth in the adminis- trative trust agreement signed in connection thereto, the ac- quired shares are to be held in escrow in the administrative trust until the applicable vesting period date for each key ex- ecutive, which is the date as of which each such key execu- tive can fully dispose of the shares as desired. 38 4. If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale. 5. Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee. The total cost of this share purchase plan approved in Novem- ber 2014 is Ps.10.8 million. This valuation is the result of multi- plying the total number of our Series A shares deposited in the administrative trust and the price per share, plus the balance in cash deposited in the administrative trust. This amount is being expensed over the vesting period, which commenced on No- vember 11, 2014 and will end in November 2019. In November 2018, November 2017 and October 2016, exten- sions to this share purchase plan were approved by our board of directors. The total cost of the extensions approved was Ps.64.0 million (or Ps.41.6 million, net of withheld taxes), Ps.15.8 million (or Ps.10.1 million, net of withheld taxes) and Ps.14.5 million (or Ps.9.5 million, net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the ac- quisition of our Series A shares. During 2016, 2017 and 2018, we recognized Ps.7.8 million, Ps.13.5 million and Ps.20.0 million, respectively, as compensa- tion expense associated with the complete share purchase plan in our consolidated statements of operations. Movements during the year The following table illustrates the number of shares associated with our share purchase plan during the year: Outstanding as of December 31, 2017 Purchased during the year Granted during the year Exercised during the year Forfeited during the year Outstanding as of December 31, 2018 Number of Series A shares *820,088 3,208,115 — (353,457) (121,451) *3,553,295 *These shares were presented as treasury shares in the consolidated statements of financial position as of December 31, 2017 and 2018 and all are considered out- standing for basic and diluted earnings per share purposes because the holders are entitled to dividends if and when distributed. The vesting period of the shares granted under the Company’s share purchase plan is as follows: Number of Series A shares Vesting period 1,284,373 1,207,862 1,061,060 3,553,295 November 2018-2019 November 2019-2020 November 2020-2021 During the year ended December 31, 2018, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Cor- porativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2018, 121,451 shares were forfeited. Volaris | 2018 Annual ReportManagement Incentive Plan The management incentive plan has been classified as an equi- ty-settled transaction because as of the grant date the fair value of the transaction is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. The total cost of the management incentive plan is Ps.2.7 million. This amount is being expensed over the vesting period, which commenced retroactively upon consummation of our initial pub- lic offering and ended on December 31, 2015. During 2012, we did not recognize any compensation expense associated with the management incentive plan in our consolidated statements of operations. During 2013, 2014 and 2015, we recorded Ps.2.1 million Ps.0.3 million and Ps.0.3 million, respectively, as a cost of the management incentive plan related to the vested shares, as recorded in our consolidated statements of operations. The factors considered in the valuation model for the manage- ment incentive plan included a volatility assumption estimated from historical returns on common stock of comparable com- panies and other inputs obtained from independent and observ- able sources, such as Bloomberg. The share spot price fair value was determined using the market approach valuation methodol- ogy, with the following assumptions: Dividend yield (%) Volatility (%) Risk—free interest rate (%) Expected life of share options (years) Exercise share price (in Mexican pesos) Exercise multiple Fair value of the stock at grant date 39 2012 0.00 37.00 5.96 8.80 5.31 1.10 1.73 The dividend yield was set at zero because at the time the man- agement incentive plan was valued and as of the date of this annual report, we do not have any plans to pay a dividend. The volatility was determined based on average historical vola- tilities. Such volatilities were calculated according to a database including up to 18 months of historical stock price returns of U.S. and Latin American publicly traded airlines. The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome. The risk-free interest rate is the interbank interest rate in Mexico, continuously expressed, accordingly to the corresponding term. The expected life of the share options is an output of the valu- ation model, and represents the average time the option is ex- pected to remain viable, assuming the employee does not leave during the vesting period. The management incentive plan explicitly incorporates expec- tations of the employee’s early exercise behavior by assuming that early exercise happens when the stock price is a certain multiple, M, of the exercise price. The exercise multiple M, of 1.1x incorporates the assumption that the employee’s exercise of the options can occur when the share prices are 1.1 times the exercise price, i.e. 10% above the exercise price. On September 18, 2013, the key employees participating in the management incentive plan exercised 4,891,410 shares. As a result, the key employees paid Ps.25.9 million to the Manage- ment Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. On November 16, 2015, as part of the secondary follow-on eq- uity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps.23.5 million to the Manage- ment Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. During 2016, the key employees participating in the manage- ment incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps.17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exer- cised shares by the key employees as a repayment of the loan between the Company and the Management Trust. During 2017, the key employees participating in the manage- ment incentive plan exercised 120,000 Series A shares. The key employees paid Ps.0.6 million to the Management Trust corre- sponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan be- tween the Company and the Management Trust. During 2018, the key employees participating in the manage- ment incentive plan exercised 2,003,876 Series A shares. The key employees paid Ps.10.7 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exer- cised shares by the key employees as a repayment of the loan between the Company and the Management Trust. As of December 31, 2018 and 2017, the 10,433,981 and 12,437,857 share options pending to be exercised were con- sidered as treasury shares, respectively. Volaris | 2018 Annual ReportMovements during the year Management Incentive Plan II The following table illustrates the number of share options and fixed exercise prices during the year: Number Exercise price in Mexican pesos Total in thousands of Mexican pesos Outstanding as of December 31, 2012 25,164,126Ps. Granted during the year Forfeited during the year Exercised during the year — — (4,891,410) Outstanding as of December 31, 2013 20,272,716 Ps. Granted during the year Forfeited during the year Exercised during the year — — — Outstanding as of December 31, 2014 20,272,716 Ps. Granted during the year Forfeited during the year Exercised during the year — — (4,414,860) Outstanding as of December 31, 2015 15,857,856 Ps. Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2016 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2017 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2018 — — (3,299,999) 12,557,857 — — (120,000) 12,437,857 — — (2,003,876) 10,433,981 5.31 — — 5.31 5.31 — — — 5.31 — — 5.31 5.31 — — 5.31 Ps. 5.31 — — 5.31 Ps.133,723 — — (25,993) Ps. 107,730 — — — Ps. 107,730 — — (23,461) Ps. 84,269 — — (17,536) Ps. 66,733 — — (638) Ps. 5.31 Ps. 66,095 — — 5.31 Ps. 5.31 — — (10,654) Ps. 55,441 At December 31, 2012, 2013, 2014, 2015, 2016, 2017, and 2018, the shares held in trust to satisfy the management options were considered as treasury shares. At December 31, 2018, 2017 and 2016, 10,433,981, 12,437,857 and 12,557,857 share options pending to be exercised were considered as treasury shares, respectively. 40 On November 6, 2016, our board of directors approved an ex- tension of the management incentive plan to certain key employ- ees, known as MIP II. Under MIP II, 13,536,960 share appreci- ation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested was also approved. The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date. The carrying amount of the liability relating to these SARs as of December 31, 2018, 2017 and 2016 was Ps.32.8 million, Ps.37.8 million and Ps.54.4 million, respectively. The compen- sation cost is recognized in our consolidated statements of op- erations under the caption salaries and benefits over the service period. During the years ended December 31, 2018, 2017 and 2016 we recorded a cost (benefit) of Ps.(5.1) million, Ps.(16.5) million and Ps.54.4 million, respectively, associated with these SARs in our consolidated statements of operations. No SARs were exercised during 2018. Number of SARs (Grant date: November 6, 2016) Exercisable date 1,695,500 2,825,840 3,391,020 7,912,360* February 2019 February 2020 February 2021 Cash-settled Transactions. Cash-settled transactions include a share appreciation rights (“SARs”) plan. *Includes forfeited SAR’s of 1,563,520 for the year ended December 31, 2018. Volaris | 2018 Annual ReportL O N G - T E R M R E T E N T I O N P L A N During 2010, we adopted an employee long-term retention plan, the purpose of which is to retain high-performing employees within the organization by paying incentives depending on our performance. Incentives under this plan were payable in three annual installments, following the provisions for other long-term benefits under IAS 19. During the year ended December 31, 2013 and 2012 we expensed Ps.6.3 million and Ps.6.5 million respectively, as bonuses as part of the caption salaries and benefits. During 2014, this plan was structured as a long-term incentive plan, which consists of a share purchase plan (equi- ty-settled) and share appreciation rights plan (cash-settled). L O N G - T E R M I N C E N T I V E P L A N S Share Appreciation Rights On November 6, 2014 we granted 4,315,264 Series A SARs to key executives. The SARs vest during a three-year period as long as the employee completes the required service period, and entitle them to a cash payment. As of the grant date the amount of SARs granted under this plan totaled Ps.10.8 million. Under the share purchase program extensions described above, the number of SARs granted to certain of our key execu- tives totaled 2,044,604, 3,965,351 and 0.0, respectively, which amounts to a cost of Ps.14.5 million (or Ps.9.5 million, net of withheld taxes), Ps.15.8 million (or Ps.10.1 million, net of with- held taxes) and Ps.0.0 (or Ps.0.0, net of withheld taxes), for the years ended December 31, 2016, 2017 and 2018, respectively. The SARs vest during a three-year period as long as the em- ployee completes the required service period. The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing 41 model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date. The carrying amount of the liability relating to the SARs as of De- cember 31, 2016, 2017 and 2018 was Ps.15.7 million, Ps.0.7 million and Ps.0.5 million, respectively. The compensation cost is recognized in our consolidated statements of operations un- der the caption of salaries and benefits over the service period. During the years ended December 31, 2016, 2017 and 2018, we recorded an expense (benefit) of Ps.31.7 million, Ps.(9.0) mil- lion and Ps.(0.2) million, respectively, in respect of these SARs in our consolidated statements of operations. Number of SARs 1,348,777 757,809 2,106,856* Exercisable date November 2019 November 2020 *Include forfeited SARs of 484,656, 145,760 and 0 for the years ended December 31, 2018, 2017 and 2016. Board of Directors Incentive Plan (BODIP): In April 2018, our shareholders at the annual shareholders meet- ing authorized a stock plan for the benefit of certain independent members of our board of directors (“BODIP”). The BODIP was implemented through the execution of: (i) a trust agreement num- ber CIB/3081 created by us, as trustee, and CIBanco, S.A., Insti- tucion de Banco Multiple, as trustor, on August 29, 2018; and (ii) a stock purchase agreement between each plan participant and the trustee, under which a plan participant has a period of four years to exercise his/her option to pay a fixed purchase price, with the title to the shares transfering to the plan participant upon payment of such purchase price by the plan participant. The number of shares held by the trustee as of December 31, 2018 was 1,103,638, of which 977,105 shares were priced at Ps.$16.12 and 126,533 shares were priced at Ps.$26.29. As of December 31, 2018, there were no exercises under the BODIP. Derivative Financial Instruments and Hedge Accounting. We mitigate certain financial risks, such as volatility in the price of aircraft fuel, adverse changes in interest rates and exchange rate fluctuations, through a controlled risk management policy that includes the use of derivative financial instruments. The de- rivative financial instruments are recognized in the consolidated statement of financial position at fair value. The effective portion of a cash flow hedge’s unrecognized gain or loss is recognized in “Accumulated other comprehensive income (loss) items,” while the ineffective portion is recognized in current year earnings. The realized gain or loss of derivative financial instruments that qualify as hedging is recorded in the same statements of operations as the realized gain or loss of the hedged item. Derivative financial instruments that are not designated as or not effective as a hedge are recognized at fair value with changes in fair value recorded in current year earnings. During 2018, all derivative financial in- struments held qualified for hedge accounting. Outstanding de- rivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in guarantee, which is presented as part of “Guarantee deposits,” is reviewed and adjusted on a daily basis, based on the fair value of the derivative position. As of December 31, 2018 we did not have any collateral recorded as a guarantee deposits. I. Aircraft Fuel Price Risk. We account for derivative fi- nancial instruments at fair value and recognize them in the consolidated statements of financial position as an asset or liability. The cost of aircraft fuel consumed in 2016, 2017 and 2018 represented 28%, 29% and 36% of our operating expenses, respectively. To manage aircraft fuel price risk, Volaris | 2018 Annual Reportwe periodically enter into derivatives financial instruments. During 2014 and 2015, we entered into aircraft fuel swap hedges (further described in the paragraph immediately be- low) that gave rise to a loss of Ps.85.7 million and Ps.128.3 million, respectively. Since these instruments qualify as ac- counting hedges, the cost and related gains or losses are considered a portion of the fuel cost in the consolidated statements of operations. As of December 31, 2014, the fair value of these fuel swap instruments was a net asset position of Ps.169.6 million. All of the Company’s US Gulf Coast Jet Fuel 54 swaps positions matured on June 30, 2015, and therefore there is no balance outstanding as of December 31, 2015. During the years ended December 31, 2018, 2017 and 2016, we did not enter into US Gulf Coast Jet Fuel 54 swap contracts. During the year ended December 31, 2015, we entered into US Gulf Coast Jet Fuel 54 swap contracts to hedge approximately 5% of our fuel consumption. These in- struments were formally designated and qualified for hedge accounting and accordingly, the effective portion is allocat- ed within other comprehensive income, while the effects of transforming into a fixed jet fuel prices by these hedges are presented as part of jet fuel costs when recognized in the consolidated statements of operations. Our fuel hedg- ing practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under swap agreements and the pricing of hedges and other de- rivative products in the market. Additionally, during the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost col- lar options and US Gulf Coast Jet Fuel 54 Asian call options designated to hedge approximately 18% of our 2019 fuel consumption. During the year ended December 31, 2017, we entered into US Gulf Coast fuel 54 Asian call options designated to hedge approximately 55% of our 2018 pro- jected fuel consumption. During the year ended December 31, 2014, we elected to adopt IFRS 9, which comprises aspects related to classifi- cations and measurement of financial assets and financial li- abilities, as well as hedge accounting treatment. Paragraph 6.2.4 (a) of IFRS 9 allows us to separate the intrinsic value and time value of an option contract and to designate as the hedging instrument only the change in the intrinsic val- ue of the option. As further required in paragraph 6.5.15 therein, because the external value (time value) of the Jet fuel 54 Asian call options are related to a “transaction re- lated hedged item,” it is required to be segregated and ac- counted for as a “cost of hedging” in other comprehensive income (“OCI”) and accrued as a separate component of stockholders’ equity until the related hedged item affects profit and loss. Since monthly forecasted jet fuel consumption is consid- ered the hedged item of the “related to a transaction” type, then the time value included as accrued changes on ex- ternal value in capital is considered as a “cost of hedging” under IFRS 9. The hedged item (jet fuel consumption) of the Jet fuel 54 Asian call options contracted by us represent a non-financial asset (energy commodity), which is not in our inventory. Instead, it is directly consumed by our aircraft at different airport terminals. Therefore, although a non-finan- cial asset is involved, its initial recognition does not generate a book adjustment in our inventories. Rather, it is initially ac- counted for in our other comprehensive income (OCI) and a reclassification adjustment is made from OCI toward the profit and loss and recognized in the same period or periods during which the hedged item is expected to be allocated to profit and loss (in accordance with IFRS 9.6.5.15, B6.5.29 (a), B6.5.34 (a) and B6.5.39). As of January 2015, we be- gan to reclassify these amounts (previously recognized as a component of equity) to our statement of operations in the same period in which our expected jet fuel volume con- sumed affects our jet fuel purchase line item therein. As of December 31, 2017 and 2018, the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian call options to- taled Ps.497.4 million and Ps.48.2 million, respectively, and as of December 31, 2018, the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options was a loss of Ps.(122.9) million, and these were present- ed as part of the financial assets and financial liabilities line items in our consolidated statements of financial position. The amount of positive cost of hedging derived from the ex- trinsic value changes of these options as of December 31, 2018 recognized in other comprehensive income totaled Ps.134.1 million (as compared to the positive cost of hedg- ing in 2017 which totaled Ps. 163.8 million), and will be re- cycled to our fuel cost during 2019, as these options expire on a monthly basis and as jet fuel is consumed. During the years ended December 31, 2016, 2017 and 2018, the net negative (positive) cost of these options recycled to our fuel cost totaled Ps.305.2 million, Ps.27.0 million and Ps.(402.5) million, respectively. II. Foreign Currency Risk. Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primari- ly to our operating activities (when revenue or expense is denominated in a different currency than pesos). Exchange exposure relates to amounts payable arising from U.S. dol- lar-denominated and U.S. dollar-linked expenses and pay- ments. To mitigate this risk, we may use foreign exchange derivative financial instruments. 42 Volaris | 2018 Annual ReportDuring the year ended December 31, 2018, the Compa- ny entered into foreign currency forward contracts in U.S. dollars to hedge approximately 20% of the aircraft rental expense for the second half of 2018. During the year end- ed December 31, 2017, the Company entered into foreign currency forward contracts in U.S. dollars to hedge approx- imately 9% of the aircraft rental expense for the second half of 2017. During the year ended on December 31, 2016 the Company did not enter into exchange rate derivatives financial instruments. All of the Company’s positions in foreign currency forward contracts matured throughout the second half of 2017 (Au- gust, September, November and December), therefore there was no outstanding balance as of December 31, 2018. Our foreign exchange exposure as of December 31, 2016, 2017 and 2018 was a net asset position of U.S. $584.5 million, U.S. $567.5 million and U.S. $428.6 million, re- spectively. III. Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Our exposure to the risk of chang- es in market interest rates relates primarily to our long-term debt and lease obligations with floating interest rates. As of December 31, 2017 and 2018, we did not have any interest rate swaps. As of December 31, 2016, we had outstanding hedging contracts in the form of interest rate swaps with fair value of Ps.14.1 million. These instruments are includ- ed as liabilities in our consolidated statements of financial position. In 2016, 2017 and 2018, the reported loss on the instruments was Ps.48.8 million, Ps.13.8 million and Ps.0.0, respectively, which was recognized as a portion of the rental expense in the consolidated statements of operations. 43 The table below presents the payments required by our fi- nancial liabilities: Year ended December 31, 2018 Within one Year One to five Years In five Years or more Total (In thousands of pesos) 734,635 461,260 122,948 2,310,939 — — — 3,045,574 — 461,260 — 122,948 Interest-bearing borrowings Pre-delivery payment facilities Short-term working capital facilities Derivative financial instruments Jet fuel Asian Zero-Cost collars op- tions contracts Total 1,318,843 2,310,939 — 3,629,782 Deferred Taxes. We account for income taxes using the liabil- ity method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry-forwards. In assessing our ability to realize deferred tax assets, our manage- ment considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evi- dence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. At December 31, 2016, 2017 and 2018 we had tax loss carry-forwards amounting to Ps.111.1 million, Ps.1.5 billion and Ps.1.6 billion, respectively. These losses relate to our and our subsidiaries’ operations on a stand-alone basis, which in conformity with current Mexican Income Tax Law may be carried forward against taxable income generated in the succeeding ten years and may not be used to offset taxable income elsewhere in our consolidated group. During the years ended December 31, 2016, 2017 and 2018 we used tax-loss carry-forwards of Ps.195.1 million, Ps.16.4 million and Ps.154.4 million, respectively. Volaris | 2018 Annual ReportFor the years ended December 31, 2016, 2017 and 2018, no impairment charges were recorded in respect of our long-lived assets. Allowance for Credit Losses. An allowance for credit losses is established using the life-time expected credit loss approach, based on objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. At December 31, 2016, 2017 and 2018, the allowance for credit losses was Ps.19.3 million, Ps.17.8 million and Ps.11.3 million, respectively. C E N T R A L A M E R I C A ( G U A T E M A L A A N D C O S T A R I C A ) According to Guatemala corporate income tax law, under the re- gime on profits from business activities net operating losses can- not offset taxable income in prior or future years. For the year end- ed December 31, 2018, we generated a net operating loss, the benefit of which has not been recognized as a deferred tax asset. According to Costa Rica corporate income tax law, under the regime on profits from business activities, net operating loss- es can offset taxable income in a term of three years. For the years ended December 31, 2018, 2017 and 2016, we obtained net operating losses of Ps.170.7 million, Ps.300.6 million and Ps.57.4 million, respectively, which have not been recognized as deferred tax assets. Impairment of Long-Lived Assets. The carrying value of ro- table spare parts, furniture and equipment is reviewed for im- pairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative im- pairment losses are shown as a reduction in the carrying value of rotable spare parts, furniture and equipment. We record impairment charges on long-lived assets used in op- erations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value in use. The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near fu- ture. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation. 44 Volaris | 2018 Annual ReportO P E R A T I N G R E V E N U E S 2 0 1 7 C O M P A R E D T O 2 0 1 8 For the years ended December 31, 2017 2018 Variation Adjusted(1) (In thousands of pesos, except for % and operating data) Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Other non-passenger revenues Cargo Total operating revenues Operating Data Capacity (in ASMs in thousands) % Load factor booked Booked passengers (in thousands) Average ticket revenue per booked passenger Average other passenger revenue per booked passenger Average total ancillary revenue per booked passenger 17,791,317 18,487,858 696,541 6,098,504 7,892,497 1,793,993 727,392 170,973 697,357 227,438 (30,035) 56,465 24,788,186 27,305,150 2,516,964 18,860,950 21,009,545 2,148,595 84% 16,427 1,086 371 426 85% 18,396 1,006 429 479 — 1,969 (80) 58 53 Revenue passenger miles (RPMs in thousands) 15,917,246 17,748,408 1,831,162 3.9% 29.4% (4.1)% 33.0% 10.2% 11.4% 1.0pp 12.0% (7.4)% 15.6% 12.5% 11.5% (1) As of January 1, 2018, we adopted IFRS 15 using the full retrospective method of adoption, in order to provide comparative results in all periods pre- sented, recognizing the effect in retained earnings as of January 1, 2016. Fare revenues. The increase in fare revenues in 2018 was pri- marily due to growth in our ASM capacity by 11.4% resulting from the incorporation of six new net aircraft, which was partially offset by a lower average ticket revenue per booked passen- ger of 7.4% year over year. Our traffic as measured in terms of RPMs increased 11.5% in 2018, also resulting from the increase in our fleet size. Other passenger revenues. The increase in other passenger revenues in 2018 was primarily due to higher volume of pas- sengers electing to purchase additional services. We continue executing our fare unbundling and demand stimulation strategy. In particular, during 2018, our total ancillary revenues increased due to improved revenue from fees charged for excess bag- gage, advanced seat selection and itinerary changes. Other non-passenger revenues. The decrease in other non-passenger revenues was primarily due to higher revenues from airport incentives recorded during 2017. Cargo. The increase in cargo revenues in 2018 was primarily due to a higher volume of cargo operations recorded during 2018 45 Volaris | 2018 Annual Report2 0 1 6 C O M P A R E D T O 2 0 1 7 Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Other non-passenger revenues Cargo Total operating revenues Operating Data Capacity (in ASMs in thousands) % Load factor booked Booked passengers (in thousands) Average ticket revenue per booked passenger Average other passenger revenue per booked passenger Average total ancillary revenue per booked passenger For the years ended December 31, 2016 2017 Variation Adjusted(1) (In thousands of pesos, except for % and operating data) 17,790,130 17,791,317 1,187 4,919,452 6,098,504 1,179,052 171,623 590,355 170,973 727,392 (650) 137,037 23,471,560 24,788,186 1,316,626 16,703,949 18,860,950 2,157,001 86% 15,005 1,189 328 379 84% 16,427 1,086 371 426 — 1,422 (102) 43 47 0.0% 24.0% (0.4)% 23.2% 5.6% 12.9% (2.0)pp 9.5% (8.6)% 13.2% 12.5% 11.1% Fare revenues. The slight increase in fare revenues in 2017 was primarily due to growth in our ASM capacity by 12.9%, resulting from the incorporation of two new net aircraft, which was par- tially offset by a lower average ticket revenue per booked pas- senger of 8.6% year over year. Our traffic as measured in terms of RPMs increased by 11.1% in 2017, also resulting from the increase in our fleet size. Other passenger revenues. The increase in other passenger revenues in 2017 was primarily due to higher volume of pas- sengers electing to purchase additional services. We continue executing our fare unbundling and demand stimulation strategy. In particular, during 2017, our total ancillary revenues increased due to improved revenue from fees charged for excess bag- gage, advanced seat selection and itinerary changes. Other non-passenger revenues. The increase in other non-pas- senger revenues was primarily due to higher revenues from air- port incentives recorded in 2017. Cargo. Our cargo revenues remained largely unchanged in 2017 as compared to 2016. Revenue passenger miles (RPMs in thousands) 14,325,898 15,917,246 1,591,348 (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adop- tion, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. 46 Volaris | 2018 Annual ReportO P E R A T I N G E X P E N S E S , N E T 2 0 1 7 C O M P A R E D T O 2 0 1 8 Other operating income Fuel For the years ended December 31, 2017 2018 Variation (In thousands of pesos, except for %) (96,765) (621,973) (525,208) 7,255,636 10,134,982 2,879,346 Aircraft and engine rent expense 6,072,502 6,314,930 Landing, take-off and navigation expenses 4,009,915 4,582,967 Salaries and benefits 2,823,647 3,125,393 242,428 573,052 301,746 >100% 39.7% 4.0% 14.3% 10.7% Sales, marketing and distribution expenses 1,691,524 1,501,203 (190,321) (11.3)% Maintenance expenses Other operating expenses 1,433,147 1,517,626 1,088,440 1,129,911 84,479 41,471 Depreciation and amortization 548,687 500,641 (48,046) Total operating expenses, net 24,826,733 28,185,680 3,358,947 5.9% 3.8% (8.8)% 13.5% Total operating expenses, net increased 13.5% in 2018 primarily as a result of growth of operations and other factors described below. Other Operating Income. Other operating income increased Ps. 525.2 million or greater than100% in 2018, primarily due to a higher number of sale and leaseback transactions, which resulted in higher profit realized during 2018. Fuel. The 39.7% increase in fuel expense was primarily as a result of an increase in the average fuel cost per gallon of 29.2% and an increase in fuel gallons consumed of 8.0% which, in turn, was primarily due to more aircraft in operation and a 9.1% increase in our departures. Additionally, during the year ended December 31, 2017, we en- tered into Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2018, their ex- trinsic value benefit of Ps.402.5 million was recycled to the cost of fuel. Aircraft and Engine Rent Expense. The 4% increase in aircraft and engine rent expense was primarily driven by: (i) An increase of Ps.304.7 million related to the full year operation of the five A320 aircraft, (ii) higher aircraft and engine rent expense related to six new net aircraft and two spare engines of Ps.220.0 mil- lion, and (iii) the depreciation of approximately 1.6% in the av- During the year ended December 31, 2018, we entered into Asian Zero-Cost collar options and Asian call options contracts. 47 erage exchange rate of the peso against the U.S. Dollar, which negatively affected our aircraft rent in peso terms in an amount of Ps.17.7 million. These increases were partially offset by (i) Ps.62.7 million related to three aircraft and three spare engines which where disincorporated from our fleet during 2017, (ii) a decrease in our supplemental rent of Ps.155.7 million, and (iii) other rent expenses by Ps.81.6 million. Landing, Take-off and Navigation Expenses. The 14.3% in- crease in landing, take-off and navigation expenses in 2018 was primarily due to an increase in the number of airports we operat- ed in during the year. In addition, our operations as measured by number of departures increased by 9.1%. These increases were partially offset by incentives received from certain airport groups as a result of the growth of our operations. Salaries and Benefits. The 10.7% increase in salaries and ben- efits in 2018 was primarily the result of the annual salary increase, as well as severance payments related to a net decrease of 2.9% in our total number of employees as part of our efficiency and cost reduction plan. Additionally, the variable compensation of our workforce increased also due to higher operations recorded during 2018, as well as the accounting accrual impact related to our management retention plans. Sales, Marketing and Distribution Expenses. The 11.3% de- crease in sales, marketing and distribution expenses was mainly due to efficiencies in our marketing and distribution expenses related to our efficiency and cost reduction plan. Volaris | 2018 Annual ReportMaintenance Expenses. The 5.9% increase in maintenance expenses in 2018 was mainly due to the increase in our fleet size of 8.5% as a result of the addition of six new net aircraft received during the year. Additionally, during 2018 our main- tenance expenses increased due to the depreciation of ap- proximately 1.6% in the average exchange rate of the peso against the U.S. dollar during 2018, since some of these ex- penses are denominated in U.S. dollars. Other Operating Expenses. The 3.8% increase in other op- erating expenses in 2018 was primarily the result of additional technical and communication support and passenger service expenses required for the growth of our operations. Addition- ally, during 2018, other operating expenses on a dollar basis increased due to the depreciation of approximately 1.6% in the average exchange rate of the peso against the U.S. dollar during 2018, since some of these expenses are denominated in U.S. dollars. Depreciation and Amortization. The 8.8% decrease in de- preciation and amortization 2018 was primarily due to lower amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2017 and 2018, we recorded amortization of major main- tenance leasehold improvements of Ps.382.7 million and Ps.313.5 million, respectively. 48 2 0 1 6 C O M P A R E D T O 2 0 1 7 Other operating income Fuel Aircraft and engine rent expense Landing, take-off and navigation expenses Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Other operating expenses Depreciation and amortization For the years ended December 31, 2016 2017 Variation (In thousands of pesos, except for %) (496,742) 5,741,403 5,590,058 3,272,051 2,419,537 1,413,348 1,344,110 952,452 536,543 (96,765) 399,977 (80.5)% 7,255,636 1,514,233 6,072,502 4,009,915 2,823,647 1,691,524 1,433,147 1,088,440 548,687 482,444 737,864 404,110 278,176 89,037 135,988 12,144 26.4% 8.6% 22.6% 16.7% 19.7% 6.6% 14.3% 2.3% Total operating expenses, net 20,772,760 24,826,733 4,053,973 19.5% Total operating expenses, net increased 19.5% in 2017 primarily as a result of growth of operations and other factors described below. Other Operating Income. Other operating income decreased Ps.400.0 million or 80.5% in 2017, primarily because of a lower number of sale and leaseback transactions, which resulted in lower profit realized during 2017. Fuel. Fuel expense increased 26.4% in 2017 as a result of an increase in the average fuel cost per gallon of 18.1% and an increase in fuel gallons consumed of 7.0% which, in turn, was primarily due to more aircraft in operation and a 6.1% increase in our departures. During the years ended December 31, 2017 and 2016, we en- tered into Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2017, their ex- trinsic value of Ps.26.9 million was recycled to the cost of fuel. Aircraft and Engine Rent Expense. Aircraft and engine rent expense increased 8.6%. This increase was primarily driven by: (i) An increase of Ps.821.4 million related to the full year opera- tion of the nine and eight A320 and A321 aircraft, respectively, (ii) higher aircraft and engine rent expense related to two new net aircraft of Ps.9.5 million, and (iii) the depreciation of approx- imately 1.5% of the average exchange rate of the peso against the U.S. Dollar, which negatively affected our aircraft rent in peso Volaris | 2018 Annual ReportOther Operating Expenses. Other operating expenses in- creased 14.3%. This increase was primarily the result of addi- tional administrative support expenses and technical and com- munication support required for the growth of our operations. Additionally, during 2017 other operating expenses on a dollar basis increased due to the depreciation of approximately 1.5% in the average exchange rate of the peso against the U.S. dollar during 2017. Depreciation and Amortization. Depreciation and amortiza- tion increased 2.3% in 2017 primarily due to the amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2016 and 2017, we recorded amortization of major maintenance leasehold improvements of Ps.404.7 million and Ps.382.7 million, respectively. . terms in an amount of Ps.57.8 million. These increases where partially offset by (i) Ps.237.2 million related to four aircraft which where disincorporated from our fleet during 2016, (ii) a decrease in our supplemental rent of Ps.142.7 million, and (iii) other rent expenses by Ps.26.3 million. Landing, Take-off and Navigation Expenses. The 22.6% increase in landing, take-off and navigation expenses in 2017 was primarily due to a 6.2% increase in the number of airports served. In addition, our operations as measured by number of departures increased by 6.1%. These increases were partially offset by incentives received from certain airport groups as a result of the growth of our operations. Salaries and Benefits. The 16.7% increase in salaries and ben- efits in 2017 was primarily the result of a 4.4% increase in our to- tal number of employees, which were required for our increased operations and fleet size. Additionally, the variable compensation of our workforce increased also due to the increased operations recorded during 2017. See Item 6: “Directors, Senior Manage- ment and Employees—Employees.” Sales, Marketing and Distribution Expenses. The 19.7% in- crease in sales, marketing and distribution expenses was mainly due to additional marketing and distribution expenses related to our efforts to promote the new routes and destinations. Maintenance Expenses. The 6.6% increase in maintenance expenses in 2017 was mainly due to our maintenance expenses on a dollar basis, which increased due to the depreciation of approximately 1.5% in the average exchange rate of the peso against the U.S. dollar during 2017. Additionally, during 2017 our fleet size increased 2.9% as a result of the addition of two new net aircraft 49 Volaris | 2018 Annual ReportO P E R A T I N G R E S U L T S 2 0 1 7 C O M P A R E D T O 2 0 1 8 2 0 1 6 C O M P A R E D T O 2 0 1 7 For the years ended December 31, 2018 Variation 2017 Adjusted(1) For the years ended December 31, 2017 Variation 2016 Adjusted(1) Operating Results Operating Results (In thousands of pesos, except for %) (In thousands of pesos, except for %) Total operating revenues 24,788,186 27,305,150 Total operating expenses, net 24,826,733 28,185,680 Operating loss (38,547) (880,530) 2,516,964 3,358,947 (841,983) 10.2% 13.5% Total operating revenues 23,471,560 24,788,186 1,316,626 5.6% Total operating expenses, net 20,772,760 24,826,733 4,053,973 >100% Operating income (loss) 2,698,800 (38,547) (2,737,347) 19.5 n.a (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retro- spective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retro- spective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. Operating Loss. As a result of the factors outlined above, our operating loss was Ps.880.5 million in 2018, a greater than100% increase compared to our operating loss of Ps. 38.5 million in 2017. Operating Income (loss). As a result of the factors outlined above, our operating loss was Ps.38.5 million in 2017, com- pared to our operating income of Ps.2.7 billion in 2016. 50 Volaris | 2018 Annual ReportF I N A N C I A L R E S U L T S 2 0 1 7 C O M P A R E D T O 2 0 1 8 2 0 1 6 C O M P A R E D T O 2 0 1 7 For the years ended December 31, 2017 2018 Variation Adjusted(1) (In thousands of pesos, except for %) Financing Results Finance income Finance cost Exchange loss, net Total financing results 105,795 (86,357) (793,854) (774,416) 152,603 (120,334) (72,475) (40,206) 46,808 (33,977) 721,379 734,210 44.2% 39.3% (90.9)% (94.8)% (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods pre- sented, recognizing the effect in retained earnings as of January 1, 2016. Total Financing Results. The 94.8% decrease in our total fi- nancing loss in 2018 was primarily due to the 90% decrease in our foreign exchange loss year over year. During 2018, we recorded an exchange loss of Ps.72.4 million, which resulted from the 0.3% appreciation of the peso against the U.S. dollar at year-end, since we maintained a net monetary asset position of U.S. $428.6 million in 2018. Our U.S. dollar net monetary asset position mainly resulted from the value of our cash and cash equivalents, security deposits and aircraft main- tenance deposits. Additionally, our finance income increased Ps.46.8 million, mainly due to an increase in our short-term in- vestments. Our finance cost increased by Ps.34.0 million, main- ly due to higher interest paid related to additional working capital financial debt and higher commissions resulting from our letters of credit. 51 For the years ended December 31, 2016 2017 Variation (In thousands of pesos, except for %) Financing Results Finance income Finance cost 102,591 (35,116) 105,795 (86,357) 3,204 3.1% (51,241) >100.0% Exchange loss, net 2,169,505 (793,854) (2,963,359) Total financing results 2,236,980 (774,416) (3,011,396) n.a. n.a. Total Financing Results. The variation in financing results was primarily due to the foreign exchange loss recorded during 2017 as opposed to a gain in 2016. During 2017, we recorded an exchange loss of Ps.793.9 million, which resulted from the 4.5% appreciation of the peso against the U.S. dollar at year-end, since we maintained a net asset po- sition of U.S. $567.5 million in 2017. Our U.S. dollar net asset position mainly resulted from the value of our cash and cash equivalents, security deposits and aircraft maintenance depos- its. Additionally, our finance income increased Ps.3.2 million, mainly due to an increase in short-term investments and our finance cost increased by Ps.51.2 million, mainly due to higher commissions resulting from our credit letters and higher interest paid related to additional financial debt. Volaris | 2018 Annual ReportI N C O M E T A X E X P E N S E A N D N E T I N C O M E 2 0 1 7 C O M P A R E D T O 2 0 1 8 2 0 1 6 C O M P A R E D T O 2 0 1 7 For the years ended December 31, 2017 2018 Variation Adjusted(1) (In thousands of pesos, except for %) For the years ended December 31, 2016 2017 Variation Adjusted(1) (In thousands of pesos, except for %) Net loss Net income (loss) Loss before income tax (812,963) (920,736) (107,773) Income tax benefit Net loss 161,175 238,236 77,061 (651,788) (682,500) (30,712) 13.3% 47.8% 4.7% Income (loss) before income tax 4,935,780 (812,963) (5,748,743) Income tax expense (benefit) (1,457,182) 161,175 1,618,357 Net income (loss) 3,478,598 (651,788) (4,130,386) n.a. n.a. n.a (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods pre- sented, recognizing the effect in retained earnings as of January 1, 2016. (1) On adoption of IFRS 15 we apply the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. We recorded net loss of Ps.682.5 million in 2018 compared to a net loss of Ps.651.8 million in 2017. During the years ended December 31, 2018 and 2017, we recorded a tax benefit of Ps.238.2 million and Ps.161.2 million, respectively. At Decem- ber 31, 2018, our tax loss carry-forwards amounted to Ps.1.6 billion (Ps.1.5 billion of December 31, 2017). During the years ended December 31, 2018 and 2017, we used Ps.154.4 million and Ps.16.4 million, in available tax loss car- ry-forwards, respectively. The effective tax rate during 2018 and 2017 was of 25.9% and 21.3% respectively. 52 We recorded net loss of Ps.651.8 million in 2017 compared to a net income of Ps.3.5 billion in 2016. During the years ended December 31, 2017 and 2016, we recorded a tax benefit of Ps.161.2 million and a tax expense of Ps.1.5 billion, respectively. At December 31, 2017, our tax loss carry-forwards amounted to Ps.1.5 billion (Ps.111.1 million of December 31, 2016). During the years ended December 31, 2017 and 2016, we used Ps.16.4 million and Ps.195.1 million, in available tax loss car- ry-forwards, respectively. The effective tax rate during 2017 and 2016 was of 21.3%* and 29.3%, respectively. *Calculation of effective tax rate may vary due to the recasted financial statements from prior periods after the adoption of IFRS 15; the tax amount variance was deemed as immaterial. Volaris | 2018 Annual ReportB . L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S L I Q U I D I T Y Our primary source of liquidity is cash provided by operations, with our primary uses of liquidity being working capital and cap- ital expenditures. Net cash flows provided by operating activities Net cash flows used in investing activities Net cash flows provided by (used in) financing activities For the years ended December 31, 2016 2017 2018 (Inthousands of pesos) 978,732 (27,958) 10,765 985,869 565,800 (2,260,440) (1,389,395) 1,398,300 (235,152) In recent years, we have been able to meet our working capi- tal requirements through cash from our operations. Our capital expenditures consist primarily of the acquisition of rotable spare parts, furniture and equipment, including pre-delivery payments for aircraft acquisitions. From time to time, we finance pre-deliv- ery payments related to our aircraft with revolving lines of credit with the commercial banks. We have obtained committed fi- nancing for pre-delivery payments in respect of all the aircraft to be delivered through 2022. Our cash and cash equivalents decreased by Ps.1.1 billion, from Ps.6.9 billion at December 31, 2017 to Ps.5.9 billion at Decem- ber 31, 2018. At December 31, 2018, we had available credit lines totaling Ps.6.7 billion, of which Ps.4.1 billion were related to financial debt and Ps.2.7 billion were related to letters of credit (Ps.1.0 billion were undisbursed). At December 31, 2017, we 53 had available credit lines totaling Ps.7.4 billion, of which Ps.4.6 billion were related to financial debt and Ps.2.8 billion were relat- ed to letters of credit (Ps.1.7 billion were undisbursed). We have an investment policy to optimize the performance and ensure availability of, and minimize the risk associated with, the investment of cash, cash equivalents and short-term invest- ments. Such policy provides for guidelines regarding minimum balance, currency mix, instruments, deadlines, counterparties and credit risk. At December 31, 2018, 93.9% of our cash, cash equivalents and short-term investments were denominated in U.S. dollars and 6.1% were denominated in pesos. See note 3 to our audited consolidated financial statements included else- where in this annual report. capital for current and future operations. Net cash flows provid- ed by operating activities totaled Ps.565.8 million and Ps.985.9 million in 2018 and 2017, respectively. Our net cash flows de- creased primarily due to an increase in prepaid expenses and supplier payments as compared to 2017. Net cash flows provided by operating activities totaled Ps.985.9 million and Ps.978.7 million in 2017 and 2016, respectively. Despite reporting a loss in 2017, our net cash flows increased primarily due to a decrease in prepaid expenses and an increase in accrued liabilities and suppliers in 2017 as compared to 2016. Net cash flows used in investing activities. During 2018, net cash flow used in investing activities totaled Ps.1.4 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps.1.2 billion, partially offset by pre- delivery payments reimbursements totaling Ps.0.6 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible as- sets and major maintenance costs, net of disposals of Ps.0.8 billion. During 2017, net cash flow used in investing activities totaled Ps.2.3 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps.1.7 billion, partially offset by pre-delivery payments reimbursements totaling Ps.0.2 billion. Additionally, we recorded other capital expenditures relat- ing to aircraft parts and rotable spare parts acquisitions, intan- gible assets and major maintenance costs, net of disposals of Ps.0.81 billion. Net cash flows provided by operating activities. We rely pri- marily on cash flows from operating activities to provide working During 2016, net cash flow used in investing activities totaled Ps.28.0 million, which consisted primarily of pre-delivery pay- Volaris | 2018 Annual Reportannual interest at TIIE 28 days plus a spread in a range of 20 to 80 basis points. Finally, in December 2018, we rolled over this short-term working capital facility with Bancomext in the amount of Ps.461.3 million, bearing annual interest at TIIE 28 days plus 90 basis points, with final maturity date in January 2019. As of December 31, 2018, we were current with principal and interest payments as well as in compliance with the covenants under our revolving credit facility and short-term working capital facilities. ments for aircraft and engine acquisitions totaling Ps.1.3 billion, partially offset by pre-delivery payments reimbursements total- ing Ps.1.7 billion. Additionally, we recorded other capital expen- ditures relating to aircraft parts and rotable spare parts acqui- sitions, intangible assets and major maintenance costs, net of disposals of Ps.416.0 million. Net cash flows provided by financing activities. During 2018, net cash flows used in financing activities totaled Ps.0.2 billion, which consisted primarily of payments of financial debt related to the aircraft financing pre-delivery payments for a net amount of Ps.0.7 billion, payments of working capital of Ps.0.5 billion and interest paid of Ps.0.2 billion, which were partially offset by proceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps.1.2 billion During 2017, net cash flows provided by financing activities to- taled Ps.1.4 billion, which consisted primarily of proceeds from disbursements under our revolving credit facility with Banco Santander and Banco Nacional de México S.A. of Ps.1.5 billion, and additional short-term working capital facilities with Banco Nacional de México S.A. and Bank of America México, S.A. of Ps.0.9 billion, which were partially offset by payments of aircraft financing pre-delivery payments for a net amount of Ps.0.2 bil- lion, payments of working capital of Ps. 0.7 billion and interest paid of Ps.0.1 billion. During 2016, net cash flows provided by financing activities totaled Ps.10.8 million, which consisted primarily of proceeds from disbursements under our revolving credit facility with Ban- co Santander and Banco Nacional de México S.A. of Ps.1.0 billion, and additional short-term working capital facilities with Banco Nacional de México S.A. and Bank of America México, S.A. of Ps.716.0 million; which were partially offset by payments of aircraft financing pre-delivery payments for a net amount of Ps.1.5 billion, other financing payments of Ps.134.7 million and interest paid of Ps.39.4 million. L O A N A G R E E M E N T S The revolving credit facility with Banco Santander México and Bancomext, dated July 27, 2011 as amended and restated on August 1, 2013 and as further amended on February 28, 2014 and November 27, 2014, under which we are a guarantor, pro- vides financing for pre-delivery payments in connection with our purchase of nineteen A320 aircraft. On August 25, 2015, we en- tered into an additional amendment to such loan agreement to finance pre-delivery payments of eight additional A320 aircraft. On November 2016, we entered into an additional amendment to such loan agreement to finance the pre-delivery payments for the twenty-two remaining A320 aircraft under the Airbus pur- chase agreement. On December 2017, we entered an addition- al amendment to extend the term of the loan agreement to No- vember 2021. Finally, we entered into one further amendment to this loan agreement on November 2018, to extend the term to May 2022. The aggregate principal amount of this revolving line is for up to U.S. $183.0 million, of which U.S. $103.7 million is provided by Banco Santander México and U.S. $79.3 million by Bancomext. This revolving credit facility bears annual interest at three-month LIBOR plus 260 basis points. The final maturity is on May 31, 2022. Any principal repaid may be re-borrowed until May 31, 2022. This revolving line of credit may limit our ability to, among others, declare and pay dividends in the event that we fail to comply with the payment terms thereunder, dispose of certain assets, incur indebtedness and create certain liens. In December 2016, we entered into a short-term working capi- tal facility with Banco Nacional de México S.A. in the amount of Ps.406.3 million, bearing annual interest the Interbank Equilib- rium Interest Rate (tasa de interés interbancaria de equilibrio or the TIIE) 28 days plus 70 basis points. In December 2017, we rolled over this short-term working capital facility with Banco Na- cional de México S.A. in the amount of Ps.948.4 million, bearing 54 Volaris | 2018 Annual ReportC . R E S E A R C H & D E V E L O P M E N T , P A T E N T S A N D L I C E N S E S , E T C . We have registered the trademark “Volaris” with the trademark office in Mexico, the United States and in the countries in which operate in Central America. We have also registered several additional trademarks and slogans with the trademark office in Mexico, the United States and in the countries in which we op- erate in Central America. We operate software products under licenses from our vendors, including Jeppesen Systems AB and Navitaire LLC. Under our agreements with Airbus, we use Airbus’ proprietary information to maintain our aircraft. D . T R E N D I N F O R M A T I O N See Item 5: “Operating and Financial Review and Prospects— Operating Results—Trends and Uncertainties Affecting our Busi- ness.” E . O F F - B A L A N C E S H E E T A R R A N G E M E N T S None of our operating lease obligations are reflected on our statements of financial position. We are responsible for all main- tenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value guarantee to our lessors. 55 Volaris | 2018 Annual ReportF . T A B U L A R D I S C L O S U R E O F C O N T R A C T U A L O B L I G A T I O N S The following table sets forth certain contractual obligations as of December 31, 2018: Contractual Obligations* Payments due by Period Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (In thousands of pesos) Debt (1) Operating lease obligations (2) Flight equipment, spare engines and spare parts purchase obligations (3) 3,523,198 45,954,985 1,212,259 6,080,953 2,285,852 25,087 — 11,768,366 10,344,368 17,761,298 21,064,384 1,506,903 5,940,142 5,847,475 7,769,864 Total future payments on contractual obligations 70,542,567 8,800,115 19,994,360 16,216,844 25,531,248 Includes scheduled interest payments. (1) (2) Does not include maintenance deposit payments because they depend on the utilization of the aircraft. (3) Our contractual purchase obligations consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. In December 2011, we signed an amendment to our purchase agreement with Airbus for an additional order of 44 A320 family aircraft for delivery between 2014 and 2020. *Disclosure of contractual obligations does not include obligations relating to our post-employment benefits which totaled Ps.18.2 million at December 31, 2018. Committed expenditures for these aircraft, spare engines, spare parts and related flight equipment, including estimated amounts for contractual price escalations of pre-delivery payments, will be approximately Ps.21.1 billion from 2019 to 2022 and thereafter. parts and rotable spare parts, construction and improvements to leased assets, and major maintenance costs (leasehold im- provements to flight equipment recorded into rotable spare parts furniture and equipment, net). In 2019, we expect our capital expenditures, excluding pre-deliv- ery payments, to be Ps.1.6 billion, consisting primarily of aircraft G . S A F E H A R B O R Not applicable. 56 Volaris | 2018 Annual ReportControladora Vuela Compañía de Aviación, S.A.B. de C.V. and Subsidiaries (D.B.A. Volaris) C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Years Ended December 31, 2018, 2017 and 2016 with Independent Auditor’s Report 20:18 pm My trips Retrieve your booking Last name Reservation code Check-in Check all your bookings! t r o p e R l a u n n A 8 1 0 2 | s i r a o V l 57 Independent Auditor’s Report Audited Consolidated Financial Statements: Consolidated Statements of Financial Position Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 58 61 62 63 64 65 66 Do you remember how much did our flight to Cancun cost? 17:01 pm Hahaha, no, let me check it on my trips... 17:02 pm Promise I’ll download it today... 17:03 pm Told you it was awesome! 17:02 pm IND E PE NDENT AU D ITOR´S RE PO RT To the Shareholders and the Board of Directors of Controladora Vuela Compañía de Aviación, S. A. B. de C. V. and subsidiaries IAV 4G 20:18 p.m. 100% OPINION KEY AUDIT MATTERS certain aircraft and engine components, as established in the lease agreements. The Company estimates the return condition provision related to airframe, engine We have audited the accompanying consolidated financial statements of Controladora Key audit matters are those matters that, in our professional judgment, were of most overhaul and limited life parts using certain assumptions including the projected Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries (the “Company”), which significance in our audit of the consolidated financial statements for the year ended usage of the aircraft and the expected costs of maintenance tasks to be performed comprise the consolidated statement of financial position as at December 31, 2018, December 31, 2018. These matters were addressed in the context of our audit of the at the return of the lease. and the related consolidated statements of operations, comprehensive income, consolidated financial statements as a whole, and in forming our opinion thereon, and changes in equity and cash flows for the year then ended, and notes to the consol- we do not provide a separate opinion on these matters. For each matter below, our Based on significant management´s judgement in estimating the amount and timing idated financial statements, including a summary of significant accounting policies. description of how our audit addressed the matter is provided in that context. of future costs, as well as the significant amount of the provision, we have determined this to be a key audit matter and during our audit we focused on the Company´s In our opinion, the accompanying consolidated financial statements present fairly, We have fulfilled the responsibilities described in the “Auditor’s Responsibilities for assumptions in estimating the provision. in all material respects, the consolidated financial position of Controladora Vuela the Audit of the Consolidated Financial Statements” section of our report, includ- Compañía de Aviación, S.A.B. de C.V. and subsidiaries as at December 31, 2018, ing in relation to these matters. Accordingly, our audit included the performance and their financial performance and cash flows for the year then ended in accor- of procedures designed to respond to our assessment of the risks of material How our audit addressed the matter We tested the design and operational effectiveness of the Company’s key inter- dance with International Financial Reporting Standards (“IFRS”) as issued by the misstatement of the accompanying consolidated financial statements. The results nal controls over return condition obligations. We inspected the Company’s lease International Accounting Standards Board. of our audit procedures, including the procedures performed to address the matters agreements to verify the return condition obligations beyond scheduled routine below, provide the basis for our audit opinion on the accompanying consolidated major maintenance. We assessed the methodology applied in the calculation of BASIS FOR AUDIT OP INION financial statements. the provision prepared by management and tested the key assumptions, including the aircraft usage projections based on the scheduled flight plan and the projected We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements” section of our report. We are independent of the Company in accordance with the PRO VI SIO N FO R RETURN C ONDIT ION O BL IGATIONS costs of maintenance by comparing them to historical and actual costs incurred or Description of the key audit matter The Company’s lease agreements require that the underlying aircraft and engines We evaluated the Company’s disclosure of this matter in Note 1 and 15c of the maintenance costs specified in agreements with vendors. International Ethics Standards Board of Accountants’ Code of Ethics for Professional be returned to lessors under specific maintenance conditions. The Company has consolidated financial statements. Accountants (“IESBA Code”) together with the ethical requirements that are relevant a provision for return condition obligations of Ps.98,702 as of December 31, 2018. to our audit of the consolidated financial statements in Mexico according to the Related disclosures are included in Notes 1n and 15c of the consolidated financial AIRCRAFT AND ENGINE L EASES “Código de Ética Profesional del Instituto Mexicano de Contadores Públicos” (“IMCP statements. Code”), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have The provision covers the cost to fulfill return condition that must be satisfied at the Description of the key audit matter The Company obtains its entire fleet of aircraft and most of its engines under lease 58 obtained is sufficient and appropriate to provide a basis for our opinion. expiration of the related leases and are related to maintenance and replacement of agreements, which in accordance with current standards, should be classified Volaris | 2018 Annual ReportIAV 4G 20:18 p.m. 100% as operating lease or finance lease at the inception of the lease considering the performance of the related major maintenance activities. These lease agreements guidelines established in International Accounting Standard 17 (IAS 17) Leases. provide that maintenance deposits are reimbursable to the Company upon comple- ASSESSMENT OF REC OVERABI LIT Y OF DEFERRED TAX ASSETS When the risks and benefits incidental to the ownership of the leased asset remain tion of the maintenance event in an amount equal to the lesser of (i) the amount of the substantially with the lessor, the leases are classified as operating leases. All the maintenance deposits held by the lessor associated with the specific maintenance Company’s leases have been classified as operating leases and the lease payments event, or (ii) the qualifying costs of the specific maintenance event. Deposits paid for are generally recognized as an expense in the statement of operations over the lease which a maintenance event is not expected to perform during the term of the aircraft Description of the key audit matter The Company has available tax losses of Ps.1,559,829 as of December 31, 2018. The Company has recognized a deferred tax asset for the tax losses to the extent it term on a straightline basis. lease, are generally maintained by the lessor to cover future maintenance costs, is probable they will be realized through future taxable profits. At December 31, 2018 and as a result they are expensed as supplemental rental at the time the obligation the Company recognized a deferred tax asset of Ps.309,320. Related disclosures Based on the unique terms and usage conditions of each lease as specified in the is incurred. related agreements, the potential impacts of the proper classification of the leases are included in Notes 2 iii) and 19 to the financial statements. and in light of the fact that in 2018 the Company entered into lease agreements for The Company makes certain assumptions at the inception of a lease and at each ten aircraft and two spare engines, as well as two extensions of existing aircraft reporting date to determine the recoverability of maintenance deposits. The key leases and two spare engines, we have determined this to be a key audit matter and assumptions include the estimated time between the maintenance events, the costs during our audit we focused on the analysis performed by management to classify of future maintenance and the number of flight hours the aircraft is estimated to Based on the significant amount of the tax losses as well as the judgment involved in management’s assessment of the likelihood the Company will generate future taxable income to realize the tax losses, we have determined this to be a key audit matter and during our audit we focused on the Company´s assumptions used in the projections of the Company’s leases. be flown before it is returned to the lessor. Maintenance deposits are recorded as future taxable income to support the recoverability of the deferred tax asset. How our audit addressed the matter We tested the design and operational effectiveness of the Company’s key internal controls over lease accounting. We read the lease agreements and analyzed their recoverable to the extent qualifying maintenance costs are expected to be incurred during the lease term. Any excess is recognized as additional lease expense in the consolidated income statement as supplemental rent. How our audit addressed the matter We tested the design and operational effectiveness of the Company’s internal controls over the recognition and measurement of deferred tax assets and the assessment of terms and conditions, including their payment terms, the rates of established lease Based on significant management´s judgements and assumptions in estimating the assumptions used in projecting the Company’s future taxable income. payment, among others. We also involved our internal specialist in evaluating assump- recoverability of these deposits, we have determined this to be a key audit matter tions used by management in determining the present value of the lease payments. and during our audit we focused on the Company´s assumptions in estimating the Lastly, we assessed management’s framework for forming a judgement about the recoverability of these deposits. accounting classification of each new leases. We evaluated the Company’s disclosure of this matter in Notes 1p and 14 to the How our audit addressed the matter We tested the effectiveness of controls over the process of aircraft maintenance We evaluated the Company’s key assumptions and estimates in relation to the likeli- hood of generating sufficient future taxable income based on business plans and the projected financial and tax future income, prepared by management. We involved our specialists in the evaluation of significant inputs used by the Company. consolidated financial statements. deposits, inspected the lease agreements and tested the analysis of the estimates We reviewed the Company’s disclosures of the matter in Notes 2 iii) and 19 to the AIR CRAFT MA INTENA NCE DE P OSI TS PAI D T O LESSO RS deposits and the recognition of the unrecoverable amounts as part of supplemen- tal rent. OTHER INFO RMATION prepared by management to determine the recoverability of the maintenance consolidated financial statements. Description of the key audit matter Certain of the Company’s lease agreements require the payment of maintenance We assessed the estimation of the major maintenance costs expected to be incurred deposits to lessors during the lease term for the underlying aircraft and engines. The by comparing them to historical amounts and/or costs of aircraft and engines main- Company has booked aircraft maintenance deposits to lessors of Ps.6,495,021 as tenance specified in agreements with vendors, as well as the usage projections of December 31, 2018. Related disclosure is included in Note 11 of the consolidated applied to determine the timing of the maintenance by comparing them with the Management is responsible for the other information. The other information compris- es the information included in the Annual Report to be presented to the Comisión Nacional Bancaria y de Valores (“CNBV”) and the annual report to be presented to the stockholders, but does not include the consolidated financial statements and our financial statements. Company’s scheduled flight plans and the term of the lease agreement. auditor’s report thereon. Most of the Company’s lease agreements require the Company to pay maintenance We evaluated the Company’s disclosure of the matter in Notes 1j and 11 to the Our opinion on the financial statements does not cover the other information and we deposits to aircraft lessors to be held as collateral in advance of the Company’s consolidated financial statements. will not express any form of assurance conclusion thereon. 59 Volaris | 2018 Annual ReportIAV 4G 20:18 p.m. 100% In connection with our audit of the consolidated financial statements, our respon- As part of an audit in accordance with ISAs, we exercise professional judgment and We also provide those charged with governance with a statement that we have sibility is to read the other information identified above when it becomes available maintain professional skepticism throughout the audit. We also: complied with relevant ethical requirements regarding independence and communi- and, in doing so, consider whether the other information is materially inconsistent cate with them all relationships and other matters that may reasonably be thought to with the consolidated financial statements or our knowledge obtained in the audit, • Identify and assess the risks of material misstatement of the financial state- bear on our independence, and where applicable, related safeguards. or otherwise appears to be materially misstated. ments, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and From the matters communicated with those charged with governance, we determine When we read the annual report to be presented to the CNBV and the annual report appropriate to provide a basis for our opinion. The risk of not detecting a mate- those matters that were of most significance in the audit of the financial statements to be presented to stockholders, if we conclude that there is a material misstatement rial misstatement resulting from fraud is higher than for one resulting from error, as at December 31, 2018 and are therefore the key audit matters. We describe these therein, we are required to communicate the matter to those charged with gover- as fraud may involve collusion, forgery, intentional omissions, misrepresenta- matters in our auditor’s report unless law or regulation precludes public disclosure nance and to issue a declaratory on annual report requested by CNBV which will tions, or the override of internal control. about the matter or when, in extremely rare circumstances, we determine that a describe the matter. matter should not be communicated in our report because the adverse conse- • Obtain an understanding of internal control relevant to the audit in order to quences of doing so would reasonably be expected to outweigh the public interest RESP ONSIBILI T Y OF M ANAGE M EN T AN D O F THOSE CHARG E D WITH GOVERNA NC E FOR THE FI NANCI AL STATEMENTS design audit procedures that are appropriate in the circumstances, but not for benefits of such communication. the purpose of expressing an opinion on the effectiveness of the Company’s Management is responsible for the preparation and fair presentation of the accom- panying consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. AUDITOR’S RESPONSI BILITI ES FOR THE AUDI T O F THE CONS OLIDATED FIN AN CI AL S TAT EMENT S Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. 60 internal control. The engagement partner on the audit resulting in this independent auditor’s report, is who signs it. • Evaluate the appropriateness of accounting policies used and the reasonable- ness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signif- icant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements and, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial state- ments, including the disclosures, and whether the financial statements repre- sent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Mancera, S.C. A member practice of Ernst & Young Global José Andrés Marín Valverde Mexico City, Mexico April 25, 2019 Volaris | 2018 Annual ReportC O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) CO NSOLIDATED STAT EMENTS OF FI N A NCIAL POS IT ION (I N TH OUSANDS OF MEXICAN PESOS) 2 018 ( TH OU S A N D S O F U. S . D O LL A R S * ) AT D ECE M B E R 31, 2 018 2 017 A D J U S TE D AT JA N UA RY, 1 2 017 A D J U S TE D 2 018 ( TH OU S A N D S O F U. S . D O LL A R S * ) AT D ECE M B E R 31, 2 018 2 017 A D J U S TE D AT JA N UA RY, 1 2 017 A D J U S TE D A S S E T S Current assets: Cash and cash equivalents (Note 6) US$ 297,870 Ps. 5,862,942 Ps. 6,950,879 Ps. 7,071,251 Accounts receivable: Related parties (Note 7) Other accounts receivable (Note 8) Recoverable value added tax and others Recoverable income tax Inventories (Note 9) Prepaid expenses and other current assets (Note 10) Financial instruments (Notes 3 and 5) Guarantee deposits (Note 11) 420 25,834 31,100 17,162 15,103 36,059 3,172 40,169 8,266 508,479 612,146 337,799 297,271 709,750 – 478,467 400,464 570,361 294,850 – 427,403 342,348 192,967 243,884 767,713 1,562,526 62,440 497,403 543,528 790,635 1,352,893 1,167,209 Total current assets 466,889 9,189,728 11,313,030 11,551,116 Non–current assets: L I A B I L I T I E S A N D E Q U I T Y Short–term liabilities: Unearned transportation revenue Suppliers Related parties (Note 7) Accrued liabilities (Note 15a) Other taxes and fees payable (Note 1q) Income taxes payable Financial instruments (Notes 3 and 5) Financial debt (Note 5) Other liabilities (Note 15c) Total short–term liabilities Long–term liabilities: Financial debt (Note 5) Accrued liabilities (Note 15b) Other liabilities (Note 15c) Employee benefits (Note 16) Deferred income taxes (Note 19) Rotable spare parts, furniture and equipment, net (Note 12) 293,772 5,782,282 4,375,697 2,525,008 Total long–term liabilities Intangible assets, net (Note 13) Financial instruments (Notes 3 and 5) Deferred income taxes (Note 19) Guarantee deposits (Note 11) Other assets Other long–term assets 9,100 – 179,124 190,420 – – 30,143 593,302 562,445 114,041 324,281 559,083 321,980 6,337,496 6,098,252 6,559,878 7,863 3,757 154,757 126,423 148,364 73,962 – – Total non–current assets 666,615 13,120,923 11,353,237 10,230,655 Total liabilities Equity (Note 18): Capital stock Treasury shares Contributions for future capital increases Legal reserve Additional paid–in capital Retained earnings Accumulated other comprehensive income Total equity Total assets US$ 1,133,504 Ps. 22,310,651 Ps. 22,666,267 Ps. 21,781,771 Total liabilities and equity * Convenience translation to U.S. dollars (Ps. 19.6829) – Note 1y. 61 The accompanying notes are an integral part of these consolidated financial statements. US$ 123,890 Ps. 2,438,516 Ps. 2,293,309 Ps. 2,228,051 861,805 65,022 1,077,438 40,931 55,149 903 117,787 98,160 207 6,246 61,590 5,981 469,913 117,409 6,972 16,661 922 55,655 197,619 667,532 151,073 (6,232) – 14,794 93,333 216,730 (3,726) 1,085,499 17,775 2,318,392 1,932,082 4,065 122,948 1,212,259 117,724 9,249,260 2,310,939 137,233 327,934 18,153 1,095,452 3,889,711 13,138,971 2,973,559 (122,661) 1 291,178 1,837,073 4,265,876 (73,346) 9,171,680 2,050,973 1,245,247 111,292 – 2,403,562 280,744 9,503,496 1,079,152 199,848 216,702 19,289 1,616,282 3,131,273 1,785,439 1,476,242 196,242 14,144 1,051,237 284,200 7,962,382 943,046 169,808 136,555 13,438 1,836,950 3,099,797 12,634,769 11,062,179 2,973,559 2,973,559 (85,034) (83,365) 1 291,178 1,804,528 4,948,376 98,890 1 38,250 1,800,613 5,853,092 137,442 465,972 10,719,592 US$ 1,133,504 Ps. 22,310,651 Ps. 22,666,267 Ps. 21,781,771 10,031,498 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G C O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) CO NSOLIDATED STAT EMENTS OF OP E RATION S (I N TH OUSANDS OF MEXICAN PESOS, EXCEPT FOR EARNINGS PER SHARE E X PR ESS ED IN MEXICA N PESOS) 2 018 ( TH OU S A N D S O F U. S . D O LL A R S *, E XCE P T FO R E A R N I N G S PE R S H A R E ) 2 018 FO R TH E Y E A R S E N D E D D ECE M B E R 31, 2 017 A D J U S TE D 2 016 A D J U S TE D US$ US$ US$ US$ 939,285 400,982 1,340,267 35,430 11,555 1,387,252 (31,600) 514,913 320,833 232,840 158,787 76,269 77,104 57,406 25,435 (44,735) 7,753 (6,114) (3,682) (46,778) 12,104 (34,674) (0.034) (0.034) Ps. Ps. Ps. Ps. 18,487,858 7,892,497 26,380,355 697,357 227,438 27,305,150 (621,973) 10,134,982 6,314,930 4,582,967 3,125,393 1,501,203 1,517,626 1,129,911 500,641 (880,530) 152,603 (120,334) (72,475) (920,736) 238,236 (682,500) (0.674) (0.674) Ps. Ps. Ps. Ps. 17,791,317 6,098,504 23,889,821 727,392 170,973 24,788,186 (96,765) 7,255,636 6,072,502 4,009,915 2,823,647 1,691,524 1,433,147 1,088,440 548,687 (38,547) 105,795 (86,357) (793,854) (812,963) 161,175 (651,788) (0.644) (0.644) Ps. Ps. Ps. Ps. 17,790,130 4,919,452 22,709,582 590,355 171,623 23,471,560 (496,742) 5,741,403 5,590,058 3,272,051 2,419,537 1,413,348 1,344,110 952,452 536,543 2,698,800 102,591 (35,116) 2,169,505 4,935,780 (1,457,182) 3,478,598 3.438 3.438 Operating revenues (Notes 1d and 24): Passenger revenues: Fare revenues Other passenger revenues Non- passenger revenues Other non-passenger revenues (Note 1d) Cargo Other operating income (Note 20) Fuel Aircraft and engine rent expenses (Note 14c) Landing, take-off and navigation expenses Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Other operating expenses (Note 20) Depreciation and amortization (Notes 12 and 13) Operating (loss) income Finance income (Note 21) Finance cost (Note 21) Foreign exchange (loss) gain, net (Loss) income before income tax Income tax benefit (expense) (Note 19) Net (loss) income (Loss) Earnings per share basic: (Loss) Earnings per share diluted: *Convenience translation to U.S. dollars (Ps. 19.6829) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. 62 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G C O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) CO NSOLIDATED STAT EMENTS OF CO MP REHENSIVE INCOME (I N TH OUSANDS OF MEXICAN PESO) Net (loss) income for the year Other comprehensive (loss) income: Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods: Net (loss) gain on cash flow hedges (Note 22) Income tax effect (Note 19) Exchange differences on translation of foreign operations Other comprehensive (loss) income not to be reclassified to profit or loss in subsequent periods: Remeasurement gain (loss) of employee benefits (Note 16) Income tax effect (Note 19) Other comprehensive (loss) income for the year, 2 018 ( TH OU S A N D S O F U. S . D O LL A R S )* 2 018 FO R TH E Y E A R S E N D E D D ECE M B E R 31, 2 017 A D J U S TE D 2 016 A D J U S TE D US$ (34,674) Ps. (682,500) Ps. (651,788) Ps. 3,478,598 (14,413) 4,324 (283,691) 85,107 1,126 22,156 304 (91) 5,989 (1,797) (42,148) 12,017 (7,178) (1,776) 533 624,694 (187,408) (4,756) (442) 132 net of tax US$ (8,750) Ps. (172,236) Ps. (38,552) Ps. 432,220 Total comprehensive (loss) income for the year, net of tax *Convenience translation to U.S. dollars (Ps. 19.6829) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. US$ (43,424) Ps. (854,736) Ps. (690,340) Ps. 3,910,818 63 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G C O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) CO NSOLIDATED STAT EMENTS OF CH AN GES IN E QUITY (I N TH OUSANDS OF MEXICAN PESOS) C A P I TA L S T O C K T R E A S U R Y S H A R E S C O N T R I B U T I O N S F O R F U T U R E C A P I TA L I N C R E A S E S L E G A L R E S E R V E A D D I T I O N A L PA I D – I N C A P I TA L R E TA I N E D E A R N I N G S ( AC C U M U L AT E D L O S S E S ) R E M E A S U R E M E N T O F E M P L OY E E B E N E F I T S C A S H F L O W H E D G E S E XC H A N G E D I F F E R E N C E S O N T R A N S L AT I O N O F F O R E I G N O P E R AT I O N S T O TA L E Q U I T Y Balance as of December 31, 2015 Ps. 2,973,559 Ps. (91,328) Ps. Treasury shares Exercise of stock options (Note 17) Forfeited shares from incentive plan Long–term incentive plan cost (Note 17) Net income for the period IFRS 15 adoption (Note 1x) Other comprehensive (loss) income items Total comprehensive income (loss) Balance as of December 31, 2016 Legal reserve increase (Note 18) Treasury shares Exercise of stock options (Note 17) Long–term incentive plan cost (Note 17) Net loss for the period IFRS 15 adoption (Note 1x) Other comprehensive (loss)items Total comprehensive (loss) – – – – – – – – 2,973,559 – – – – – – – – Balance as of December 31, 2017 2,973,559 Treasury shares Exercise of stock options (Note 17) Long–term incentive plan cost (Note 17) Net loss for the period Other comprehensive gain (loss) items Total comprehensive (loss) – – – – – – (17,025) 17,536 963 6,489 – – – – (83,365) – (10,108) 638 7,801 – – – – (85,034) (57,320) 10,648 9,045 – – – Balance as of December 31, 2018 Ps. 2,973,559 Ps. (122,661) Ps. US$ 151,073 US$ (6,232) US$ *Convenience translation to U.S. dollars (Ps. 19.6829) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. 64 1 – – – – – – – – 1 – – – – – – – – 1 – – – – – – 1 – Ps. 38,250 Ps. 1,791,040 Ps. 2,374,494 Ps. (2,304) Ps. (292,474) Ps. – – – – – – – – 38,250 252,928 – – – – – – – 291,178 – – – – – – 17,025 – (963) (6,489) – – – – 1,800,613 – 10,108 – (6,193) – – – – 1,804,528 41,590 – (9,045) – – – – – – – 3,519,489 (40,891) – 3,478,598 5,853,092 (252,928) – – – (594,599) (57,189) – (651,788) 4,948,376 – – – (682,500) – (682,500) – – – – – – (310) (310) (2,614) – – – – – – (1,243) (1,243) (3,857) – – – – 4,192 4,192 – – – – – – 437,286 437,286 144,812 – – – – – – (30,131) (30,131) 114,681 – – – – – – – – – – – (4,756) (4,756) (4,756) – – – – – – (7,178) (7,178) (11,934) – – – – Ps. 6,791,238 – 17,536 – – 3,519,489 (40,891) 432,220 3,910,818 10,719,592 – – 638 1,608 (594,599) (57,189) (38,552) (690,340) 10,031,498 (15,730) 10,648 – (682,500) (172,236) (854,736) Ps. 291,178 Ps. 1,837,073 Ps. 4,265,876 Ps. 335 Ps. (83,903) Ps. 10,222 Ps. 9,171,680 US$ 14,793 US$ 93,333 US$ 216,730 US$ 17 US$ (4,263) US$ 520 US$ 465,971 (198,584) (198,584) 22,156 22,156 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G C O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) CO NSOLIDATED STAT EMENTS OF CA S H F LOWS (I N TH OUSANDS OF MEXICAN PESOS) ( TH OU S A N D S O F U. S . D O LL A R S * ) 2 018 FO R TH E Y E A R S E N D E D D ECE M B E R 31, 2 016 2 017 A D J U S TE D A D J U S TE D 2 018 ( TH OU S A N D S O F U. S . D O LL A R S * ) 2 018 FO R TH E Y E A R S E N D E D D ECE M B E R 31, 2 016 2 017 A D J U S TE D A D J U S TE D 2 018 O PE R AT I N G AC T I V I T I E S (Loss) income before income tax Non–cash adjustment to reconcile income before tax to net cash flows from operating activities: Depreciation and amortization (Notes 12 and 13) Provision for doubtful accounts (Note 8) Finance income (Note 21) Finance cost (Note 21) Net foreign exchange differences Financial instruments (Notes 4 and 22) US$ (46,778) Ps. (920,736) Ps. (812,963) Ps. 4,935,780 Financial instruments Other liabilities Unearned transportation revenue 25,435 540 (7,753) 6,114 7,142 (23,117) 500,641 10,621 (152,603) 120,334 140,575 (455,009) 86,357 35,116 504,366 (1,054,333) 50,007 353,943 548,687 4,720 536,543 9,164 Interest received Income tax paid (105,795) (102,591) Net cash flows provided by operating activities 7,377 41,033 (1,976) 31,510 7,753 (10,517) 28,746 145,207 807,644 (38,875) 620,202 152,602 (207,004) 565,800 65,258 126,053 11,198 1,595,923 105,795 237,204 (450,902) 528,365 1,848,150 102,591 (715,849) (972,009) 985,869 978,732 (139,368) (3,608) 33,957 (2,743,155) (71,007) 668,365 (2,521,752) (2,198,697) (130,908) (60,792) 213,947 1,733,093 38,429 (70,590) 756,402 (1,389,395) 178,273 (2,260,440) 498,438 (27,958) 10,648 (57,320) (175,170) (28,567) (1,193,589) 1,208,846 (235,152) 638 (10,108) (105,388) – 20,186 (17,025) (39,350) (137,830) (924,867) (1,531,460) 2,438,025 1,398,300 1,716,244 10,765 541 (2,912) (8,899) (1,451) (60,641) 61,416 (11,946) (53,790) (1,483) (1,058,747) (29,190) 6,950,879 123,729 (244,101) 961,539 952,399 353,143 5,157,313 US$ 297,870 Ps. 5,862,942 Ps. 6,950,879 Ps. 7,071,251 7,071,251 I N V E S T I N G AC T I V I T I E S Acquisitions of rotable spare parts, furniture and equipment (Note 12) Acquisitions of intangible assets (Note 13) Pre–delivery payments reimbursements (Note 12) Proceeds from disposals of rotable spare parts, furniture and equipment Net cash flows used in investing activities F I N A N C I N G AC T I V I T I E S Proceeds from exercised stock options (Note 17) Treasury shares purchase Interest paid Other finance interest paid Payments of financial debt Proceeds from financial debt Net cash flows (used in) provided by financing activities (Decrease) increase in cash and cash equivalents Net foreign exchange differences on cash balance Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Net gain on disposal of rotable spare parts, furniture and equipment and gain on sale of aircraft (Note 20) (30,829) Employee benefits (Note 16) Aircraft and engine lease extension benefit 325 (606,812) 6,401 (64,978) (483,565) 4,657 3,122 and other benefits from service agreements (4,945) (97,330) (100,580) (82,178) Management incentive and long–term incentive plans (Note 17) 656 12,919 8,783 4,826 Cash flows from operating activities before changes in working capital Changes in operating assets and liabilities: Related parties Other accounts receivable Recoverable and prepaid taxes Inventories Prepaid expenses Other assets Guarantee deposits Suppliers Accrued liabilities Other taxes and fees payable (73,210) (1,440,999) 123,261 4,155,827 (1,596) 87 974 (123) (305) (571) 11,788 712 18,961 28,359 (31,422) 1,711 19,168 (2,421) (6,001) (11,228) 232,019 14,022 373,203 558,174 (24,091) 139,774 (438,966) (50,966) 50,706 (157,370) (361,377) (80,811) 726,020 (1,027,040) 21,941 57,425 196,082 289,920 353,014 19,540 (1,957,350) 136,178 231,656 523,524 *Convenience translation to U.S. dollars (Ps. 19.6829) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. 65 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G C O N T R O L A D O R A V U E L A C O M P A Ñ Í A D E A V I A C I Ó N , S . A . B . D E C . V . A N D S U B S I D I A R I E S ( D . B . A . V O L A R I S ) NO T ES TO CON SOLIDATED FI NAN CIAL STAT EMENTS FOR THE YEARS ENDED DECEMBER 31, 2018, 2 017 AN D 2016 (I N TH OUSANDS OF MEXICAN PESOS AND THOUSAND S OF U.S. DOLLARS, EXCEPT WHEN INDICATED OTHE RWISE) 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements and notes were authorized for issuance by the Company’s Chief Executive Officer, Enrique Beltranena, and Vice–president and Chief Financial Officer, Sonia Jerez Burdeus, on April 11, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Controladora” or the “Company”) was incorporated in Mexico in 2019. Those consolidated financial statements and notes were approved by the Company´s Board of Directors and by the accordance with Mexican Corporate laws on October 27, 2005. Shareholders on April 24, 2019. The accompanying consolidated financial statements were approved for issuance in the Company´s annual report on Form 20–F by the Company´s Chief Executive Officer and Vice–president and Chief Financial Controladora is domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, Officer on April 25, and subsequent events were considered through that date (Note 25). 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. Shares conversion A ) R E L E VA N T E V E N T S Concesionaria’s concession was granted by the Mexican federal government through the Mexican Communications and equivalent number of Series A Shares. This conversion has no impact either on the total number of outstanding shares nor On February 16, 2018, one of the Company´s shareholders concluded the conversion of 45,968,598 Series B Shares for the Transportation Ministry (Secretaría de Comunicaciones y Transportes) on May 9, 2005 initially for a period of five years and on the earnings–per–share calculation. (Note 18) was extended on February 17, 2010 for an additional period of ten years. New code–share agreement Concesionaria made its first commercial flight as a low–cost airline on March 13, 2006. The Company operates under the On January 16, 2018, the Company and Frontier Airlines (herein after Frontier) entered into a code–share operations agree- trade name of “Volaris”. On June 11, 2013, Controladora Vuela Compañía de Aviación, S.A.P.I. de C.V. changed its corporate ment, which started operations in September. 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 destinations as the Company’s customers are able to buy a ticket throughout any of Frontier’s actual destinations; and Exchange (“NYSE”) and on the Mexican Stock Exchange (Bolsa Mexicana de Valores, or “BMV”), and on September 18, Frontier customers gain first–time access to new destinations in Mexico through Volaris presence in Mexican airports. 2013 its shares started trading under the ticker symbol “VLRS” and “VOLAR”, respectively. Tickets from Frontier can be purchased directly from the Volaris’ website. Through this alliance, the Company´s customers gain access to additional cities in the U.S. beyond the current available On November 16, 2015, certain shareholders of the Company completed a secondary follow–on equity offering on Purchase of 80 A320 New Engine Option (“NEO”) aircraft the NYSE. On December 28, 2017, the Company amended the agreement with Airbus, S.A.S. (“Airbus”) for the purchase of addi- tional 80 A320NEO family aircraft to be delivered from 2022 to 2026, to support the Company’s targeted growth markets On November 10, 2016, the Company, through its subsidiary Vuela Aviación, S.A. (“Volaris Costa Rica”), obtained from the in Mexico, United States and Central America. The related commitments for the acquisitions of such aircraft are disclosed Costa Rican civil aviation authorities an air operator certificate to provide air transportation services for passengers, cargo in Note 23. and mail, in scheduled and non–scheduled flights for an initial period of five years. On December 1, 2016, Volaris Costa Rica 66 started operations. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G B ) B A S I S O F PR E PA R AT I O N Statement of compliance NAME PRINCIPAL ACTIVITIES COUNTRY % EQUIT Y INTEREST 2018 2017 2016 These consolidated financial statements comprise the financial statements of the Company and its subsidiaries at December Concesionaria 31, 2018, 2017 and 2016 and for each of the three years in the period ended December 31, 2018 and were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Volaris Costa Rica Items included in the financial statements of each of the Company’s entities are measured using the currency of the Vuela, S.A. (“Vuela”)* primary economic environment in which the entity operates (“functional currency”). The presentation currency of the Company’s consolidated financial statements is the Mexican peso, which is used also for compliance with its legal and tax obligations. All values in the consolidated financial statements are rounded to the nearest thousand (Ps.000), except Vuela El Salvador, S.A. de C.V.* when otherwise indicated. Air transportation services for passengers, cargo and mail throughout Mexico and abroad Air transportation services for passengers, cargo and mail in Costa Rica and abroad Air transportation services for passengers, cargo and mail in Guatemala and abroad Air transportation services for passengers, cargo and mail in El Salvador and abroad Mexico 100% 100% 100% Costa Rica 100% 100% 100% Guatemala 100% 100% 100% El Salvador 100% – – The Company has consistently applied its accounting policies to all periods presented in these consolidated financial Servicios Earhart, S.A.* Recruitment and payroll Guatemala 100% 100% 100% Comercializadora Volaris, S.A. de C.V. Merchandising of services Mexico 100% 100% 100% statements, and provide comparative information in respect of the previous period. The Company presents an additional statement of financial position at January 1, 2017, due to a retrospective application of accounting policies as a result of the adoption of IFRS 15 “Revenue from contracts with customers” See Note 1 x. Basis of measurement and presentation The accompanying consolidated financial statements have been prepared under the historical–cost convention, except for derivative financial instruments that are measured at fair value and investments in marketable securities measured at fair value through profit and loss (“FVTPL”). The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the accompanying consoli- dated financial statements and notes. Actual results could differ from those estimates. Servicios Corporativos Volaris, S.A. de C.V. (“Servicios Corporativos”) Servicios Administrativos Volaris, S.A. de C.V. (“Servicios Administrativos”) Comercializadora V Frecuenta, S.A. de C.V. (“Loyalty Program”)** Viajes Vuela, S.A. de C.V. (“Viajes Vuela”) (1) Deutsche Bank México, S.A., Trust 1710 Deutsche Bank México, S.A., Trust 1711 C ) B A S I S O F C O N S O L I DAT I O N The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiar- ies. At December 31, 2018, 2017 and 2016, for accounting purposes the companies included in the consolidated financial statements are as follows: Irrevocable Administrative Trust number F/307750 “Administrative Trust” Share administration trust (Note 17) Irrevocable Administrative Trust number F/745291 Share administration trust (Note 17) Irrevocable Administrative Trust number CIB/3081 “Administrative Trust” Share administration trust (Note 17) 67 * ** (1) The Companies have not started operations yet in Guatemala and El Salvador. The Company has not started operations yet With effect from July 16, 2018, the name of the Company was changed from Operaciones Volaris, S.A. de C.V. to Viajes Vuela, S.A. de C.V. Recruitment and payroll Mexico 100% 100% 100% Recruitment and payroll Mexico 100% 100% 100% Loyalty Program México 100% – – Travel agency Mexico 100% 100% 100% Pre-delivery payments financing (Note 5) Pre-delivery payments financing (Note 5) Mexico 100% 100% 100% Mexico 100% 100% 100% Mexico 100% 100% 100% Mexico 100% 100% 100% Mexico 100% – – Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  The financial statements of the subsidiaries are prepared for the same reporting period as the parent Company, using D ) R E V E N U E R E C O G N I T I O N consistent accounting policies. Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. As of January 1, 2018, the Company adopted IFRS 15 using the full retrospective method of adoption, in order to provide and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if, and only if, the Company has: The main impact of IFRS 15 is the timing of recognition of certain air travel–related services (“ancillaries”). Under the new standard, certain ancillaries are recognized when the Company satisfies its performance obligations which is typically when (i) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee). the air transportation service is rendered (at the time of the flight). This change arises primarily because those ancillaries do (ii) Exposure, or rights, to variable returns from its involvement with the investee. (iii) The ability to use its power over the investee to affect its returns. not constitute separate performance obligations or represent administrative tasks that do not represent a different promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation. Also, certain complimentary services including re–accommodation in other airlines provided to When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant customers are recorded as a reduction of revenues. facts and circumstances in assessing whether it has power over an investee, including: (i) The contractual arrangement with the other vote holders of the investee. excess baggage, itinerary changes and other air travel–related services, changed with adoption of IFRS 15, since they are The classification of certain ancillary fees in the statement of operations, such as advanced seat selection, fees charged for (ii) Rights arising from other contractual arrangements. (iii) The Company’s voting rights and potential voting rights. part of the single performance obligation of providing passenger transportation See Note 1 x. Passenger revenues The Company re–assesses whether or not it controls an investee if facts and circumstances indicate that there are changes Revenues from the air transportation of passengers are recognized at the earlier of when the service is provided or when to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control the non–refundable ticket expires at the date of the scheduled travel. over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date Ticket sales for future flights are initially recognized as contract liabilities under the caption “unearned transportation reve- the Company gains control until the date the Company ceases to control the subsidiary. nue” and, once the transportation service is provided by the Company or when the non–refundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as passenger ticket revenues and the unearned transportation All intercompany balances, transactions, unrealized gains and losses resulting from intercompany transactions are revenue is reduced by the same amount. All the Company’s tickets are non–refundable and are subject to change upon a eliminated in full. payment of a fee. Additionally, the Company does not operate a frequent flier program. On consolidation, the assets and liabilities of foreign operations are translated into Mexican pesos at the rate of exchange The most significant passenger revenue includes revenues generated from: (i) fare revenue and (ii) other passenger reve- prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates nues. Other passenger services include but are not limited to fees charged for excess baggage, bookings through the call of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive center or third–party agencies, advanced seat selection, itinerary changes and charters. They are recognized as revenue income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is when the obligation of passenger transportation service is provided by the Company or when the non–refundable ticket recognized in profit or loss. expires at the date of the scheduled travel. The Company also classifies as other passenger revenue “V Club” and other similar services, which are recognized as reve- nue over time when the service is provided, since customer simultaneously receives and consumes the benefits provided by the Company. 68 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  Non–passenger revenues Breakdown of revenues: The most significant non–passenger revenues include revenues generated from: (i) revenues from other non–passenger As of December 31, 2018, 2017 and 2016, the revenues from customers of contracts is described as follows: services described below and (ii) cargo services. REVENUE RECOGNITION AS OF AT THE FLIGHT TIME AT THE SALE TOTAL DECEMBER 31, 2018 DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL REVENUES Revenues from other non–passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and advertising spaces to third parties. They are recognized as Passenger Revenues revenue at the time the service is provided. Fare Revenues Ps. 12,336,095 Ps. 6,151,763 Ps. – Ps. – Ps. 18,487,858 The Company concluded that the timing of satisfaction of revenue from advertising spaces is to be recognized over time 17,518,667 8,750,138 Other Passenger Revenues 5,182,572 2,598,375 68,264 68,264 43,286 43,286 7,892,497 26,380,355 because the customer simultaneously receives and consumes the benefits provided by the Company. The Company also evaluated the principal versus agent considerations as it relates to certain non–air travel services arrangements with third party providers. No changes were identified under this analysis as the Company is agent for those services provided by third parties. Non–Passenger Revenues Other Non–Passenger revenues Cargo Total 685,219 221,324 12,138 6,114 – – – – 697,357 227,438 Ps. 18,425,210 Ps. 8,768,390 Ps. 68,264 Ps. 43,286 Ps. 27,305,150 Other considerations analyzed as part of revenue from contracts with customers REVENUE RECOGNITION AS OF AT THE FLIGHT TIME AT THE SALE TOTAL DECEMBER 31, 2017 (ADJUSTED) DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL REVENUES All revenues offered by the Company including sales of tickets for future flights, other passenger related services and non–passenger revenue must be paid through a full cash settlement. The payment of the transaction price is equal to the Passenger Revenues cash settlement from the client at the sales time (using different payment options like credit or debit cards, paying through Fare Revenues Ps. 12,284,795 Ps. 5,506,522 Ps. – Ps. – Ps. 17,791,317 a third party or directly at the counter in cash). There is little or no judgment to determine the point in time of the revenue Other Passenger Revenues 4,087,664 1,992,696 recognition, and the amount of it. Even if mainly all of the sales of services are initially recognized as contract liabilities, there is no financing component in these transactions. The cost to obtain a contract is represented by the commissions paid to the travel agencies and the bank commissions charged by the financial institutions for processing electronic transactions (Note 10). The Company does not incur any additional costs to obtain and fulfill a contract that is eligible for capitalization. Non–Passenger Revenues Other Non–Passenger revenues Cargo Total 16,372,459 7,499,218 723,297 165,907 4,095 5,066 11,283 11,283 – – 6,861 6,861 6,098,504 23,889,821 – – 727,392 170,973 Ps. 17,261,663 Ps. 7,508,379 Ps. 11,283 Ps. 6,861 Ps. 24,788,186 Trade receivables are mainly with financial institutions due to transactions with credit and debit cards, and therefore they are REVENUE RECOGNITION AS OF AT THE FLIGHT TIME AT THE SALE TOTAL DECEMBER 31, 2016 (ADJUSTED) DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL REVENUES non–interest bearing and are mainly on terms of 24 to 48 hours. The Company has the right of collection at the beginning of the contracts and there are no discounts, payment incentives, bonuses or other variable considerations subsequent to the purchase that could modify the amount of the transaction price. The Company does not have any obligations for returns, refunds and other similar obligations. All revenues from the Company related to future services, or services are rendered through a period of time less than 12 months. 69 Passenger Revenues Fare Revenues Ps. 11,701,014 Ps. 6,089,116 Ps. Other Passenger Revenues 3,238,826 1,680,626 14,939,840 7,769,742 Non–Passenger Revenues Other Non–Passenger revenues Cargo Total 587,270 166,934 3,085 4,689 Ps. 15,694,044 Ps. 7,777,516 Ps. – – – – – – Ps. Ps. – – – – – – Ps. 17,790,130 4,919,452 22,709,582 590,355 171,623 Ps. 23,471,560 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G Transactions from unearned transportation revenues. Subsequent measurement 2018 2017 ADJUSTED 2016 ADJUSTED 1. Financial assets at FVTPL which include financial assets held for trading. The subsequent measurement of financial assets depends on their initial classification, as is described below: January 1, Deferred Recognized in revenue during the year Ps. 2,293,309 Ps. 2,228,051 Ps. 1,957,254 2. Financial assets at amortized cost, whose characteristics meet the SPPI criterion and were originated to be held to 26,254,391 (26,109,184) 23,714,649 (23,649,391) 22,778,110 (22,507,313) collect principal and interest in accordance with the Company’s business model. 3. Derivative financial instruments are designated for hedging purposes under the cash flow hedge (“CFH”) account- December 31, Ps. 2,438,516 Ps. 2,293,309 Ps. 2,228,051 ing model and are measured at fair value. The performance obligations related to contract liability are recognized over the following 12 months and are related to the Derecognition scheduled flights and other passenger services purchased by the client in advance. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecog- E ) CA S H A N D CA S H E Q U I VA L E N T S nized when: a) The rights to receive cash flows from the asset have expired; Cash and cash equivalents are represented by bank deposits and highly liquid investments with maturities of 90 days or less b) The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay at the original purchase date. For the purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash and short–term investments as defined above. the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement; and either (i) the Company has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of F ) F I N A N C I A L I N S T R U M E N T S – I N I T I A L R E C O G N I T I O N A N D S U B S E Q U E N T M E A S U R E M E N T the asset; or A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. i) Financial assets Initial recognition When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass–through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Classification of financial assets and initial recognition The Company determines the classification and measurement of financial assets, in accordance with the categories ii) Impairment of financial assets in IFRS 9, which are based on both: the characteristics of the contractual cash flows of these assets and the business model objective for holding them. Financial assets include those carried at FVTPL, whose objective to hold them is for trading purposes (short–term The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired in the Cash Generating Units (CGU). An impairment exists if one or more events has occurred since the initial recognition of an asset (an incurred ‘loss event’), that has an impact on the estimated future investments), or at amortized cost, for accounts receivables held to collect the contractual cash flows, which are cash flows of the financial asset or the group of financial assets that can be reliably estimated. characterized by solely payments of principal and interest (“SPPI”). Derivative financial instruments are also considered financial assets when these represent contractual rights to receive cash or another financial asset. All the Company’s financial assets are initially recognized at fair value, including derivative financial instruments. 70 Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in receivable, the probability that they will enter bankruptcy or other financial Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G reorganization and observable data indicating that there is a measurable decrease in the estimated cash flows, such as Financial liabilities at FVTPL changes in arrears or economic conditions that correlate with defaults. Financial liabilities at FVTPL include financial liabilities under the fair value option, which are classified as held for Further disclosures related to impairment of financial assets are also provided in Note 2vi) and Note 8. cial instruments that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. During trading, if they are acquired for the purpose of selling them in the near future. This category includes derivative finan- the years ended December 31, 2018, 2017 and 2016 the Company has did not designated any financial liability as For trade receivables, the Company records allowance for credit losses in accordance with the objective evidence of at FVTPL. the incurred losses. Derecognition Based on this evaluation, allowances are taken into account for the expected losses of these receivables. For the years A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. ended December 31, 2018, 2017 and 2016, the Company recorded expected credit losses on accounts receivable of Ps.10,621, Ps.4,720 and Ps.9,164, respectively (Note 8). When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition iii) Financial liabilities of the original liability and the recognition of a new liability. Initial recognition and measurement The difference in the respective carrying amounts is recognized in the consolidated statements of operations. Financial liabilities are classified, at initial recognition, as financial liabilities at FVTPL, loans and borrowings, accounts payables to suppliers, unearned transportation revenue, other accounts payable and financial instruments. Offsetting of financial instruments Financial assets and financial liabilities are offset, and the net amount is reported in the consolidated statement of All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of financial position if there is: directly attributable transaction costs. Subsequent measurement (i) A currently enforceable legal right to offset the recognized amounts, and (ii) An intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. The measurement of financial liabilities depends on their classification as described below: Financial liabilities at amortized cost G ) OT H E R AC C O U N T S R E C E I VA B L E Accounts payable, are subsequently measured at amortized cost and do not bear interest or result in gains and losses Other accounts receivables are due primarily from major credit card processors associated with the sales of tickets and are due to their short–term nature. stated at cost less allowances made for credit losses, which approximates fair value given their short–term nature. Loans and borrowings are the category most relevant to the Company. After initial recognition at fair value (consid- H ) I N V E N TO R I E S eration received), interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the Inventories consist primarily of flight equipment expendable parts, materials and supplies, and are initially recorded at EIR amortization process. acquisition cost. Inventories are carried at the lower of cost and their net realization value. The cost is determined on the basis of the method of specific identification and expensed when used in operations. Amortized cost is calculated by taking into account any discount or premium on issuance and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statements of operations. This amortized cost category generally applies to interest–bearing loans and borrowings (Note 5). 71 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G I ) I N TA N G I B L E A S S E T S consolidated statements of operations. Thus, any excess of the required deposit over the expected cost of the major main- tenance event is recognized as supplemental rent in the consolidated statements of operations starting from the period the Cost related to the purchase or development of computer software that is separable from an item of related hardware determination is made. For the years ended December 31, 2018, 2017 and 2016, the Company expensed as supplemental is capitalized separately and amortized over the period in which it will generate benefits not exceeding five years on a rent Ps.87,019, Ps.103,648 and Ps.143,923, respectively. straight–line basis. The Company annually reviews the estimated useful lives and salvage values of intangible assets and any changes are accounted for prospectively. Any usage–based maintenance deposits to be paid to the lessor, related with a major maintenance event that (i) is not expected to be performed before the expiration of the lease agreement, (ii) is nonrefundable to the Company and (iii) is not The Company records impairment charges on intangible assets used in operations when events and circumstances indicate substantively related to the maintenance of the leased asset, is accounted for as supplemental rent in the consolidated that the assets or related cash generating unit may be impaired and the carrying amount of a long–lived asset or cash statements of operations. The Company records lease payment as supplemental rent when it becomes probable and generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) its value in use. reasonably estimable that the maintenance deposits payments will not be refunded. The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near During the year ended December 31, 2018, 2017 and 2016, the Company added ten, five and 17 new net aircraft to its fleet, future. The recoverable amount of long–lived assets is sensitive to the uncertainties inherent in the preparation of projections respectively. Some lease agreements of these aircraft do not require the obligation to pay maintenance deposits to lessors and the discount rate used in the calculation. in advance in order to ensure major maintenance activities, so the Company does not record guarantee deposits regarding these aircraft. However, some lease agreements provide the obligation to make a maintenance adjustment payment to the J ) G UA R A N T E E D E P O S I T S lessors at the end of the contract period. Guarantee deposits consist primarily of aircraft maintenance deposits paid to lessors, deposits for rent of flight equipment The maintenance adjustment covers maintenance events that are not expected to be made before the termination of the and other guarantee deposits. Aircraft and engine deposits are held by lessors in U.S. dollars and are presented as current contract; for such agreements the Company accrues a liability related to the amount of the costs to be incurred at the lease assets and non–current assets, based on the recovery dates of each deposit established in the related agreements (Note 11). term, since no maintenance deposits had been made, Note 15c). The Company recognizes supplemental rent as incurred Aircraft maintenance deposits paid to lessors in the consolidated statement of operations. Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as For the years ended December 31, 2018, 2017 and 2016, the Company expensed as supplemental rent for these mainte- collateral in advance of the Company’s performance of major maintenance activities. These lease agreements provide that nance tasks Ps.212,582, Ps.162,108 and Ps.201,434, respectively. maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, The Company makes certain assumptions at the inception of the lease and at each consolidated statement of financial or (ii) the qualifying costs related to the specific maintenance event. position date to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and Substantially all these maintenance deposits are calculated based on a utilization measure of the leased aircrafts and the number of flight hours the aircraft and engines is estimated to be utilized before it is returned to the lessor. engines, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft and engines until the completion of the maintenance of the aircraft and engines. In the event that lease extensions are negotiated, any extension benefit is recognized as a deferred lease incentive. The Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. consolidated statement of financial position. These deposits are recorded as a monetary asset and are revaluated in order to record the foreign currency changes at each reported period. The portion of prepaid maintenance deposits that is deemed During the years ended December 31, 2018, 2017 and 2016, the Company extended the lease term of two, three and two unlikely to be recovered, primarily relating to the rate differential between the maintenance deposits and the expected cost aircraft agreements, respectively. Additionally, the Company extended the lease term of two spare engines in 2018 and two for the next related maintenance event that the deposits serve to collateralize, is recognized as supplemental rent in the spare engines during 2017. These extensions made available to the Company maintenance deposits that were recognized aggregate benefit of extension is recognized as a reduction of rental expense on a straight–line basis, except where another 72 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G in prior periods in the consolidated statements of operations as supplemental rent of Ps.0, Ps.65,716 and Ps.92,528 during (ii) Major maintenance consists of a series of more complex tasks that can take up to six weeks to accomplish and typically 2018, 2017 and 2016, respectively. The maintenance event for which the maintenance deposits were previously expensed are required approximately every five to six years. was scheduled to occur after the original lease term and as such the supplemental rental payments were expensed. However, when the leases were amended the maintenance deposits amounts became probable of recovery due to the Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major over- longer lease term and as such they are being recognized as an asset. haul and repair is capitalized (leasehold improvements to flight equipment) and amortized over the shorter of the period The effect of these lease extensions were recognized as a guarantee deposit and a lease incentive in the consolidated estimated based on assumptions including estimated usage. The United States Federal Aviation Administration (“FAA”) statements of financial position at the time of lease extension. and the Mexican Civil Aeronautic Authority (Dirección General de Aeronáutica Civil, or “DGAC”) mandate maintenance to the next major maintenance event or the remaining contractual lease term. The next major maintenance event is intervals and average removal times as suggested by the manufacturer. Because the lease extension benefits are considered lease incentives, the benefits are deferred in the statement of financial position and are being recognized on a straight–line basis over the remaining revised lease terms. For the years ended These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and December 31, 2018, 2017 and 2016, the Company amortized Ps.84,637, Ps.88,224 and Ps.74,748, respectively, of lease suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents incentives which was recognized as a reduction of rent expenses in the consolidated statements of operations. that could damage an airframe, engine, or major component to a level that would require a heavy maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated life would decrease K ) A I R C R A F T A N D E N G I N E M A I N T E N A N C E before the next maintenance event, resulting in additional expense over a shorter period. The Company is required to conduct various levels of aircraft maintenance. Maintenance requirements depend on the type During the years ended December 31, 2018, 2017 and 2016, the Company capitalized major maintenance events as of aircraft, age and the route network over which it operates. part of leasehold improvements to flight equipment for an amount of Ps.676,457, Ps.529,331 and Ps.226,526, respec- Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly tively (Note 12). checks, annual airframe checks and periodic major maintenance and engine checks. For the years ended December 31, 2018, 2017 and 2016, the amortization of major maintenance leasehold improvement costs was Ps.313,464, Ps.382,745 and Ps.404,659 respectively (Note 12). The amortization of deferred maintenance Aircraft maintenance and repair consists of routine and non–routine works, divided into three general categories: (i) routine costs is recorded as part of depreciation and amortization in the consolidated statements of operations. maintenance, (ii) major maintenance and (iii) component service. (i) Routine maintenance requirements consist of scheduled maintenance checks on the Company’s aircraft, including pre– parts for the Company’s fleet when they are required. It also provides aircraft parts that are included in the redelivery flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled tasks performed as conditions of the contract (hard time) without constituting an additional cost at the time of redelivery. The monthly main- required. These type of maintenance events are currently serviced by Company mechanics and are primarily completed tenance cost associated with this agreement is recognized as incurred in the consolidated statements of operations. (iii) The Company has a power–by–the hour agreement for component services, which guarantees the availability of aircraft at the main airports that the Company currently serves. All other maintenance activities are sub–contracted to qualified maintenance business partner, repair and overhaul provides miscellaneous engines coverage, caps the cost of foreign objects damage events, ensures there is protection organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish from annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscel- and typically are required approximately every 22 months. laneous engines coverage is recorded monthly as incurred in the consolidated statements of operations. The Company has an engine flight hour agreement (component repair agreement), that guarantees a cost per overhaul, All routine maintenance costs are expensed as incurred. 73 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G L ) R OTA B L E S PA R E PA R T S , F U R N I T U R E A N D E Q U I PM E N T, N E T Company records impairment charges on rotable spare parts, furniture and equipment used in operations when events and Rotable spare parts, furniture and equipment, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight–line method. circumstances indicate that the assets may be impaired or when the carrying amount of a long–lived asset or related cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell and (ii) its value in use. Aircraft spare engines have significant components with different useful lives; therefore, they are accounted for as separate items (major components) of spare engine parts (Note 12d). The value in use calculation is based on a discounted cash flow model, using projections of operating results for the near future. The recoverable amount of long–lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation. Pre–delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of the aircraft. The borrowing costs related to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset. During 2018, the Company performed its annual impairment test. The recoverable amount of rotable spare parts, furniture and equipment assets was determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management, covering a five–year period. The projected cash flows have been updated to reflect the future operating cashflows. It was concluded that the fair value less costs of disposal did not exceed the value in use. Consequently, for the years ended December 31, 2018, 2017 and 2016, there were no impairment charges recorded in During the years ended December 31, 2018, 2017 and 2016, the Company capitalized borrowing costs which amounted to respect of the Company’s value of rotable spare parts, furniture and equipment. Ps.357,920 Ps.193,389 and Ps.95,445, respectively (Note 21). The rate used to determine the amount of borrowing cost was 4.41%, 3.30% and 2.88%, for the years ended December 31, 2018, 2017 and 2016, respectively. M ) FO R E I G N C U R R E N CY T R A N S AC T I O N S A N D E XC H A N G E D I F F E R E N C E S Depreciation rates are as follows: Aircraft parts and rotable spare parts Aircraft spare engines Standardization Computer equipment Communications equipment Office furniture and equipment Electric power equipment Workshop machinery and equipment Service carts on board ANNUAL DEPRECIATION RATE in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The Company’s consolidated financial statements are presented in Mexican peso, which is the reporting and functional currency of the parent company. For each subsidiary, the Company determines the functional currency and items included 8.3–16.7% 4.0–8.3% The financial statements of foreign subsidiaries prepared under IFRS and denominated in their respective local currencies, Remaining contractual lease term are translated into the functional currency as follows: 25% 10% 10% 10% 10% 20% • Transactions in foreign currencies are translated into the respective functional currencies at the exchange rates at the dates of the transactions. • All monetary assets and liabilities were translated at the exchange rate at the consolidated statement of financial position date. • All non–monetary items that are measured in terms of historical cost in a foreign currency are translated using the Leasehold improvements to flight equipment The shorter of: (i) remaining contractual lease The Company reviews annually the useful lives and salvage values of these assets and any changes are accounted for profits were generated. prospectively. • Revenues, costs and expenses are translated at the average exchange rate during the applicable period. term, or (ii) the next major maintenance event exchange rates at the dates of the initial transactions. • Equity accounts are translated at the prevailing exchange rate at the time the capital contributions were made and the The Company assesses, at each reporting date, whether there is an objective evidence that rotable spare parts, furniture and equipment is impaired in the Cash Generating Unit (CGU). The Company identified only one CGU, which is the fleet. The 74 Any differences resulting from the currency translation are recognized in the consolidated statements of operations. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  For the year ended December 31, 2018, 2017 and 2016, the exchange rates of local currencies translated to functional currencies are as follows: COUNTRY Costa Rica Guatemala LOCAL CURRENCY FUNCTIONAL CURRENCY AVERAGE EXCHANGE RATE FOR 2018 EXCHANGE RATE AS OF 2018 AVERAGE EXCHANGE RATE FOR 2017 EXCHANGE RATE AS OF 2017 AVERAGE EXCHANGE RATE FOR 2016 EXCHANGE RATE AS OF 2016 EXCHANGE RATES OF LOCAL CURRENCIES TRANSL ATED TO FUNCTIONAL CURRENCIES Colon Quetzal U.S. dollar U.S. dollar ¢. Q. 580.8534 7.5337 ¢. Q. 609.6100 7.7440 ¢. Q. 572.2000 7.3509 ¢. Q. 572.5600 7.3448 ¢. Q. 564.3332 7.4931 ¢. Q. 561.1000 7.5221 The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2018, 2017 and 2016, were The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under Ps.19.6829, Ps.19.7354 and Ps.20.6640, respectively, per U.S. dollar. specific conditions of maintenance. The costs of return, which in no case are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be Foreign currency differences arising on translation into the presentation currency are recognized in OCI. Exchange differ- estimated reliably. These return costs are recognized on a straight–line basis as a component of supplemental rent and ences on translation of foreign entities for the year ended December 31, 2018, 2017 and 2016, were Ps.22,156, Ps.(7,178) the provision is included as part of other liabilities, through the remaining lease term. The Company estimates the provision and Ps.(4,756), respectively. N ) L I A B I L I T I E S A N D PR OV I S I O N S related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2018, 2017 and 2016, the Company expensed as supplemental rent Ps.659,106, Ps.851,410 and Ps.933,730, respectively. Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it O ) E M PLOY E E B E N E F I T S is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are i) Personnel vacations discounted using a current pre–tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting The Company and its subsidiaries in Mexico and Central America recognize a reserve for the costs of paid absences, is used, the increase in the provision due to the passage of time is recognized as a finance cost. such as vacation time, based on the accrual method. For the operating leases, the Company is contractually obligated to return the leased aircraft in a specific condition. The ii) Termination benefits Company accrues for restitution costs related to aircraft held under operating leases throughout the term of the lease, The Company recognizes a liability and expense for termination benefits at the earlier of the following dates: based upon the estimated cost of satisfying the return condition criteria for each aircraft. These return obligations are related to the costs to be incurred in the reconfiguration of aircraft (interior and exterior), painting, carpeting and other costs, which a) When it can no longer withdraw the offer of those benefits; and are estimated based on current cost adjusted for inflation. The return obligation is estimated at the inception of each leasing b) When it recognizes costs for a restructuring that is within the scope of IAS 37, Provisions, Contingent Liabilities and arrangement and recognized over the term of the lease (Note 15c). Contingent Assets, and involves the payment of termination benefits. The Company records aircraft lease return obligation reserves based on the best estimate of the return obligation costs The Company is demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termi- under each aircraft lease agreement. nation and is without realistic possibility of withdrawal. For the years ended December 31, 2018, 2017 and 2016, no termination benefits provision has been recognized. 75 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  iii) Seniority premiums v) Long–term incentive plan (“LTIP”) and long term retention plan (LTRP) In accordance with Mexican Labor Law, the Company provides seniority premium benefits to the employees which The Company has adopted a Long–term incentive plan (“LTIP”). This plan consists of a share purchase plan (equity– rendered services to its Mexican subsidiaries under certain circumstances. These benefits consist of a one–time settled) and a share appreciation rights “SARs” plan (cash settled), and therefore accounted under IFRS 2 “Shared payment equivalent to 12 days’ wages for each year of service (at the employee’s most recent salary, but not to exceed based payments”. This incentive plan has been granting annual extensions in the same terms from the original granted twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employ- in 2014. ees terminated involuntarily prior to the vesting of their seniority premium benefit. Obligations relating to seniority premiums other than those arising from restructurings, are recognized based upon (equity–settled). This plan does not include cash compensations granted through appreciation rights on the Company’s actuarial calculations and are determined using the projected unit credit method. shares. The retention plans granted in previous periods will continue in full force and effect until their respective During 2018, the Company approved a new long–term retention plan (“LTRP”), which consisted in a purchase plan due dates and the cash compensation derived from them will be settled according to the conditions established in The latest actuarial computation was prepared as of December 31, 2018. Remeasurement gains and losses are recog- each plan. nized in full in the period in which they occur in OCI. Such remeasurement gains and losses are not reclassified to profit or loss in subsequent periods. vi) Share–based payments The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate a) LTIP based on government bonds (Certificados de la Tesorería de la Federación, or “CETES” in Mexico), less the fair value of plan assets out of which the obligations are to be settled. – Share purchase plan (equity–settled) For entities in Costa Rica and Guatemala there is no obligation to pay seniority premium or other retirement Restricted Stock Units (“RSUs”), which has been classified as an equity–settled share–based payment. The cost Certain key employees of the Company receive additional benefits through a share purchase plan denominated in benefits. iv) Incentives of the equity–settled share purchase plan is measured at grant date, taking into account the terms and conditions on which the share options were granted. The equity–settled compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain performance targets. These incentives are payable shortly after the end of each quarter and are account- During the years ended December 31, 2018, 2017 and 2016, the Company expensed Ps19,980, Ps.13,508 and ed for as a short–term benefit under IAS 19, Employee Benefits. A provision is recognized based on the estimated Ps.7,816, respectively, related to RSUs granted under the LTIP and LTRP. The expenses were recorded under the amount of the incentive payment. During the years ended December 31, 2018, 2017 and 2016 the Company expensed caption salaries and benefits. Ps.67,680, Ps.48,384 and Ps.40,829, respectively, as quarterly incentive bonuses, recorded under the caption salaries and benefits. – SARs plan (cash settled) During the year ended December 31, 2015, the Company adopted a new short–term benefit plan for certain key person- amount of the cash payment is determined based on the increase in the share price of the Company between the nel whereby cash bonuses are awarded when certain Company’s performance targets are met. These incentives are grant date and the time of exercise. The liability for the SARs is measured, initially and at the end of each reporting payable shortly after the end of each year and also are accounted for as a short–term benefit under IAS 19. A provision period until settled, at the fair value of the SARs, taking into account the terms and conditions on which the SARs is recognized based on the estimated amount of the incentive payment. During the years ended December 31, 2018, were granted. The compensation cost is recognized in the consolidated statement of operations under the caption 2017 and 2016 the Company recorded an expense for an amount of Ps.50,000, Ps.0, and Ps.53,738, respectively, of salaries and benefits, over the requisite service period (Note 17). The Company granted SARs to key employees, which entitle them to a cash payment after a service period. The under the caption salaries and benefits. 76 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  During the years ended December 31, 2018, 2017 and 2016, the Company recorded a (benefit) expense for Ps.(186), vii) Employee profit sharing Ps.(8,999), Ps.31,743, respectively, related to the SARs included in the LTIP. These amounts were recorded under The Mexican Income Tax Law (“MITL”), establishes that the base for computing current year employee profit sharing the caption salaries and benefits. b) Management incentive plan (“MIP”) – MIP I shall be the taxpayer’s taxable income of the year for income tax purposes, including certain adjustments established in the Income Tax Law, at the rate of 10%. For the years ended December 2018, 2017 and 2016, the employee profit sharing is Ps.14,106, Ps.8,342 and Ps.9,967, respectively, and is presented as an expense in the consolidated state- ments of operations. Subsidiaries in Central America do not have such profit sharing benefit, as it is not required by local regulation. Certain key employees of the Company receive additional benefits through a share purchase plan, which has been classified as an equity–settled share–based payment. The equity–settled compensation cost is recognized in the P ) L E A S E S consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). The total cost of this plan has been totally recognized during the required service period. The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at – MIP II On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrange- ment conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. employees, this plan was named MIP II. In accordance with this plan, the Company granted SARs to key employ- Property and equipment lease agreements are recognized as finance leases if the risks and benefits incidental to ownership ees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined of the leased assets have been transferred to the Company when (i) the ownership of the leased asset is transferred to the based on the increase in the share price of the Company between the grant date and the time of exercise. The Company upon termination of the lease; (ii) the agreement includes an option to purchase the asset at a reduced price; (iii) the liability for the SARs is measured initially and at the end of each reporting period until settled at the fair value of term of the lease is for the major part of the economic life of the leased asset; (iv) the present value of minimum lease payments the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation cost is at least substantially all of the fair value of the leased asset; or (v) the leased asset is of a specialized nature for the Company. is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). When the risks and benefits incidental to the ownership of the leased asset remain mostly with the lessor, they are classified as operating leases and rental payments are charged to results of operations on a straight–line over the term of the lease. During the years ended December 31, 2018, 2017 and 206, the Company recorded a (benefit) expense for Ps.(5,052), Ps.(16,499) and Ps.54,357, respectively, related to MIP II into the consolidated statement of operations. The Company’s lease contracts for aircraft, engines and components parts are classified as operating leases. c) Board of Directors Incentive Plan (BODIP) Sale and leaseback Certain members of the Board of Directors of the Company receive additional benefits through a share–based The Company enters into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery plan, which has been classified as an equity–settled share–based payment and therefore accounted under IFRS 2 and the lessor agrees to lease such aircraft or engine back to the Company. Leases under sale and leaseback agreements “Shared based payments”. meet the conditions for treatment as operating leases. If a sale and lease back transaction is at fair value and results as an operating lease, any profit or loss is recognized immediately. In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during Q ) OT H E R TA X E S A N D F E E S PAYA B L E a four years period with an exercise price share at Ps.16.12, which was determined on the grant date. Under this plan, no service or performance conditions are required to the board members for exercise the option to acquire The Company is required to collect certain taxes and fees from customers on behalf of government agencies and airports shares, and therefore, they have the right to request the delivery of those shares at the time they pay for them. and to remit these to the applicable governmental entity or airport on a periodic basis. These taxes and fees include federal 77 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure fees. will have taxable profits before the unused tax losses or unused tax credits expire; (c) whether the unused tax losses result These charges are collected from customers at the time they purchase their tickets, but are not included in passenger from identifiable causes which are unlikely to recur; and (d) whether tax planning opportunities are available to the Company revenue. The Company records a liability upon collection from the customer and discharges the liability when payments are that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilized. remitted to the applicable governmental entity or airport. R ) I N C O M E TA X E S Current income tax The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is substantively enacted, at the reporting date. realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Current income tax relating to items recognized directly in equity is recognized in equity. Management periodically evaluates reporting date. positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are and establishes provisions where appropriate. recognized in correlation to the underlying transaction in OCI. Deferred tax Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. and their carrying amounts for financial reporting purposes at the reporting date. The charge for income taxes incurred is computed based on tax laws approved in Mexico, Costa Rica and Guatemala at Deferred tax liabilities are recognized for all taxable temporary differences, except, in respect of taxable temporary differ- the date of the consolidated statement of financial position. ences associated with investments in subsidiaries when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. S ) D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S A N D H E D G E AC C O U N T I N G Deferred tax assets are recognized for all deductible temporary differences, the carry–forward of unused tax credits and The Company mitigates certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and any available tax losses to the extent that it is probable that taxable profit will be available against which the deductible exchange rate fluctuations, through a risk management program that includes the use of derivative financial instruments. temporary differences, and the carry–forward of unused tax credits and available tax losses can be utilized, except, in respect of deductible temporary differences associated with investments in subsidiaries deferred tax assets are recognized In accordance with IFRS 9, derivative financial instruments are recognized in the consolidated statement of financial position only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits at fair value. At inception of a hedge relationship, the Company formally designates and documents the hedge relationship will be available against which the temporary differences can be utilized. to which it wishes to apply hedge accounting, as well as the risk management objective and strategy for undertaking the The Company considers the following criteria in assessing the probability that taxable profit will be available against which item or transaction, the nature of the risks being hedged and how the entity will assess the effectiveness of changes in the the unused tax losses or unused tax credits can be utilized: (a) whether the entity has sufficient taxable temporary differ- hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attribut- hedge. The documentation includes the hedging strategy and objective, identification of the hedging instrument, the hedged ences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which able to the hedged risk(s). the unused tax losses or unused tax credits can be utilized before they expire; (b) whether it is probable that the Company 78 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  Only if such hedges are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge The Company has two geographic areas identified as domestic (Mexico) and international (United States of America and item(s) and are assessed on an ongoing basis to determine that they have been effective throughout the financial reporting Central America) Note 24. periods for which they were designated, hedge accounting treatment can be used. W ) C U R R E N T V E R S U S N O N – C U R R E N T C L A S S I F I CAT I O N Under the cash flow hedge (CFH) accounting model, the effective portion of the hedging instrument’s changes in fair value is recognized in OCI, while the ineffective portion is recognized in current year earnings. During the years ended December 31, The Company presents assets and liabilities in the consolidated statement of financial position based on current/non– 2018, 2017 and 2016, there was no ineffectiveness with respect to derivative financial instruments. The amounts recognized current classification. An asset is current when it is: (i) expected to be realized or intended to be sold or consumed in normal in OCI are transferred to earnings in the period in which the hedged transaction affects earnings. operating cycle, (ii) expected to be realized within twelve months after the reporting period, or, (iii) cash or cash equivalent The realized gain or loss of derivative financial instruments that qualify as CFH is recorded in the same caption of the hedged other assets are classified as non–current. A liability is current when: (i) it is expected to be settled in normal operating cycle, item in the consolidated statement of operations. (ii) it is due to be settled within twelve months after the reporting period, or, (iii) there is no unconditional right to defer the unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All Accounting for the time value of options The Company accounts for the time value of options in accordance with IFRS 9, which requires all derivative financial settlement of the liability for at least twelve months after the reporting period. The Company classifies all other liabilities as non–current. Deferred tax assets and liabilities are classified as noncurrent assets and liabilities. instruments to be initially recognized at fair value. Subsequent measurement for options purchased and designated as CFH X ) I M PAC T O F N E W I N T E R N AT I O N A L F I N A N C I A L R E P O R T I N G S TA N DA R D S requires that the option’s changes in fair value be segregated into its intrinsic value (which will be considered the hedging instrument’s effective portion in OCI) and its correspondent changes in extrinsic value (time value and volatility). The extrinsic New and amended standards and interpretations already effective value changes will be considered as a cost of hedging (recognized in OCI in a separate component of equity) and accounted The Company applied for the first–time certain standards and amendments, which are effective for annual periods begin- for in income when the hedged items also are recognized in income. ning on or after January 1, 2018. The Company has not early adopted any other standard interpretation or amendment that has been issued but is not yet effective different from IFRS 9 that was adopted in the 2014 consolidated financial T ) F I N A N C I A L I N S T R U M E N T S – D I S C LO S U R E S statements. IFRS 7 requires a three–level hierarchy for fair value measurement disclosures and requires entities to provide additional Although these new standards and amendments applied for the first time in 2018, except for IFRS 15, they did not have disclosures about the relative reliability of fair value measurements (Notes 4 and 5). a material impact on the annual consolidated financial statements of the Company. The nature and the impact of these U ) T R E A S U RY S H A R E S changes to each new standard and amendment are described below: IFRIC 22 — Foreign Currency Transactions and Advance Considerations The Company’s equity instruments that are reacquired (treasury shares), are recognized at cost and deducted from equity. IFRIC 22 clarifies that the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of treasury shares. Any difference it) on the derecognition of a non–monetary asset or non–monetary liability relating to advance consideration, the date of the between the carrying amount and the consideration received, if reissued, is recognized in additional paid in capital. Share– transaction is the date on which an entity initially recognizes the non–monetary asset or non–monetary liability arising from based payment options exercised during the reporting period are settled with treasury shares (Note 17). the advance consideration. V ) O PE R AT I N G S E G M E N T S This interpretation does not have any impact on the Company’s consolidated financial statements. Management of Controladora monitors the Company as a single business unit that provides air transportation and related services, accordingly it has only one operating segment. 79 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  IFRS 15 Revenue from Contracts with Customers Impact of adoption on the consolidated statements of operations IFRS 15 was issued in May 2014 and amended in April 2016 and establishes a five–step model to account for 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 will supersede all current revenue recognition requirements under IFRS. IFRS 15 also requires additional disclo- sures about the nature, timing, and uncertainty of revenue cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company adopted the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016. In 2018, the Company modified certain amounts in the consolidated statements of financial position as of December 31, 2017 and in the consolidated statements of operations for the years period ended December 31, 2017 and 2016 as required by IAS 1 Presentation of Financial Statements, as part of the effect of adopting IFRS 15 is, as follows: Impact of adoption on the consolidated statements of financial position AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2017 ADJUSTMENT ADJUSTED AS OF DECEMBER 31, 2017 Operating revenues Passenger revenues Fare revenues Ps. 17,791,317 Ps. – Ps. 17,791,317 Other passenger revenues – 6,098,504 6,098,504 Ps. 17,791,317 Ps. 6,098,504 Ps. 23,889,821 Non– passenger revenues Other non–passenger revenues Ps. 6,883,085 Ps. (6,155,693) Ps. Cargo 170,973 7,054,058 24,845,375 Ps. Ps. – Ps. Ps. (6,155,693) (57,189)* Ps. Ps. 727,392 170,973 898,365 24,788,186 Operating expenses Operating income (loss) Net loss Ps. 24,826,733 – Ps. 24,826,733 18,642 (57,189) (38,547) Ps. (594,599) Ps. (57,189) Ps. (651,788) AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2017 ADJUSTMENT ADJUSTED AS OF DECEMBER 31, 2017 AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2016 ADJUSTMENT ADJUSTED AS OF DECEMBER 31, 2016 Short–term liabilities Unearned transportation revenue Ps. 2,161,636 Ps. 131,673 Ps. 2,293,309 Equity Retained earnings Ps. 5,080,049 Ps. (131,673) Ps. 4,948,376 AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2016 ADJUSTMENT ADJUSTED AS OF DECEMBER 31, 2016 Short–term liabilities Unearned transportation revenue Ps. 2,153,567 Ps. 74,484 Ps. 2,228,051 Operating revenues Passenger revenues Fare revenues Ps. 17,790,130 Ps. – Ps. 17,790,130 Other passenger revenues – 4,919,452 4,919,452 Ps. 17,790,130 Ps. 4,919,452 Ps. 22,709,582 Non– passenger revenues Other non–passenger revenues Ps. 5,550,698 Ps. (4,960,343) Ps. 590,355 Cargo 171,623 5,722,321 23,512,451 Ps. Ps. – Ps. Ps. (4,960,343) (40,891)* Ps. Ps. 171,623 761,978 23,471,560 Operating expenses Operating income (loss) Ps. 20,772,760 Ps. – Ps. 20,772,760 2,739,691 (40,891) 2,698,800 Equity Retained earnings 80 Ps. 5,927,576 Ps. (74,484) Ps. 5,853,092 Net income Ps. 3,519,489 Ps. (40,891) Ps. 3,478,598 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G Impact on basic and diluted earnings per share (EPS) payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the Loss per share Ps. (0.588) Ps. (0.644) AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2017 AS ADJUSTED terms and conditions of a share–based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Company’s accounting policy for cash–settled share–based payments is consistent with the approach clarified in the amendments. In addition, the Company has no share–based payment transaction with net settlement features for withholding tax obligations and had not made any modi- fications to the terms and conditions of its share–based payment transaction. Therefore, these amendments do not have Earnings per share Ps. 3.478 Ps. 3.438 New amended standards and interpretations not yet effective IFRS 16 Leases AS PREVIOUSLY REPORTED AS OF DECEMBER 31, 2016 AS ADJUSTED any impact on the consolidated financial statements. * The nature of the adjustments is described as follows: IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC–15 Operating Leases–Incentives and SIC–27 Evaluating the Substance of Transactions Involving the Legal Form The main impact of the IFRS 15 adoption, is the timing of recognition of certain air travel–related services (“ancillaries”). of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and Under IAS 18, certain ancillaries, such as channel fee, itinerary changes and more flexibility, were recognized as revenue requires lessees to account for all leases under a single on–balance sheet model similar to the accounting for finance leases at the time of the booking by customer (or when the service was provided); however, under IFRS 15, those ancillaries are under IAS 17. The standard includes two recognition exemptions for lessees – leases of ’low–value’ assets (e.g., personal recognized when the air transportation service is rendered (at the time of the flight) or at ticket expiration. computers) and short–term leases (i.e., leases with a lease term of 12 months or less). This change arises primarily because those ancillaries do not constitute separate performance obligations but represent At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and administrative tasks that do not constitute a distinct performance obligation and therefore should be accounted for together an asset representing the right to use the underlying asset during the lease term (i.e., the right–of–use asset). with the air fare as a single performance obligation of providing passenger transportation. Also, certain complimentary services including re–accommodation in other airlines provided to customers are recorded as reduction to revenues. Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on Additionally, the classification of certain ancillary fees in the statement of operations, such as advanced seat selection, fees (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to charges for excess baggage, itinerary changes and other air travel–related services, changed upon adoption of IFRS 15, determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as since they are part of the single performance obligation of providing passenger transportation services. an adjustment to the right–of–use asset. In addition, for leases denominated in a foreign currency other than the functional the right–of–use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events currency of the Company (which is the Mexican Peso) the lease liability will be remeasured with a charge to foreign exchange The Company has also identified and implemented changes to its accounting policies and practices, systems and controls, of the period. as well as designed and implemented specific controls over its evaluation of the impact of the new guidance on the Company, including the cumulative effect calculation, disclosure requirements and the collection of relevant data into the IFRS 16 also requires lessees to make more extensive disclosures than under IAS 17. reporting process. Amendments to IFRS 2 Classification and Measurement of Share–based Payment Transactions entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective The IASB issued amendments to IFRS 2 Share–based Payment that address three main areas: the effects of vesting approach. The standard’s transition provisions permit certain relief. conditions on the measurement of a cash–settled share–based payment transaction; the classification of a share–based IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Early application is permitted, but not before an 81 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G Transition to IFRS 16 Due to the adoption of IFRS 16, the Company operating profit will improve, while its interest expense will increase. This is The Company adopted IFRS 16 on the mandatory date January 1, 2019, through the full retrospective method starting on due to the change in the accounting for expenses of leases that were classified as operating leases under IAS 17. January 1, 2017.The Company applied the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4, see Note 14 for more information on the Company´s lease agreements. IFRIC 23 — Uncertainty over Income Tax Treatments During 2018, the Company performed a detailed impact assessment of IFRS 16. In summary, the impact of IFRS 16 adop- of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over tion is expected to be as follows: income tax treatments under IAS 12. IFRIC 23 clarifies the accounting for uncertainties in income taxes, the interpretation is to be applied to the determination The estimated impact on the statements of financial situation as of January 1, 2017, December 31, 2017 and December An entity has to consider whether it is probable that the relevant authority will accept each tax treatment, or group of tax 31, 2018: 2017 2018 Assets Property, plant and equipment AS OF JANUARY 1, 2017 AS OF DECEMBER 31, 2017 AS OF DECEMBER 31, 2018 treatments, that it used or plans to use in its income tax filing; if the entity concludes that it is probable that a particular tax treatment is accepted, the entity has to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment included in its income tax filings. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted. The Company expects to adopt this interpretation at the effective date. (Right–of–use–assets) Ps. 23,709,968 Ps. 25,075,501 Ps. 31,985,598 Y ) C O N V E N I E N C E T R A N S L AT I O N Deferred income tax Prepaid expenses Liabilities Lease liabilities Equity 2,699,552 (266,959) 2,231,702 – 2,271,031 – Ps. 32,639,927 Ps. 32,436,015 Ps. 39,463,811 U.S. dollar amounts at December 31, 2018 shown in the consolidated financial statements have been included solely for the convenience of the reader and are translated from Mexican pesos, using an exchange rate of Ps.19.6829 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, 2018. 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 Retained Earnings Ps. 6,497,366 U.S. dollars is solely for information purposes and does not represent that 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 The estimated impact on the statement of operations for the years ended December 31, 2017 and 2018: can be translated or realized. Depreciation expense Operating lease expense Operating income Financial costs Foreign exchange (gain) loss Income tax expense (benefit) Net (income) loss 82 FOR THE YEAR ENDED DECEMBER 31, 2017 FOR THE YEAR ENDED DECEMBER 31, 2018 Ps. 3,522,738 Ps. 4,123,513 (5,038,920) (1,516,182) 1,381,027 (1,434,290) 467,850 Ps. (1,101,595) Ps. (5,718,657) (1,595,144) 1,682,420 30,423 (39,328) 78,371 2 . SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Note 1 to the Company’s consolidated finan- cial statements provides a detailed discussion of the significant accounting policies. Certain of the Company’s accounting policies reflect significant judgments, assumptions or estimates about matters that are both inherently uncertain and material to the Company’s financial position or results of operations. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  Actual results could differ from these estimates. Revisions to accounting estimates are recognized in the period in which iii) Deferred taxes the estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the Deferred tax assets are recognized for all available tax losses to the extent that it is probable that taxable profit will be carrying amounts of assets and liabilities within the next financial year are discussed below. available against which the losses can be utilized. Management’s judgment is required to determine the amount of deferred i) Aircraft maintenance deposits paid to lessors The Company makes certain assumptions at the inception of a lease and at each reporting date to determine the tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning opportunities to advance taxable profit before expiration of available tax losses. recoverability of maintenance deposits. The key assumptions include the estimated time between the maintenance Tax losses relate to operations of the Company on a stand–alone basis, in conformity with current Tax Law and may be events, the costs of future maintenance, the date the aircraft is due to be returned to the lessor and the number of flight carried forward against taxable income generated in the succeeding years at each country and may not be used to offset hours the aircraft is estimated to be flown before it is returned to the lessor (Note 11). taxable income elsewhere in the Company’s consolidated group (Note 19). ii) LTIP, LTRP and MIP (equity settled) During the years ended December 31, 2018, 2017 and 2016, the Company used Ps.154,353, Ps.16,378 and Ps.195,116, The Company measures the cost of its equity–settled transactions at fair value at the date the equity benefits are respectively, of the available tax loss carry–forwards (Note 19). conditionally granted to employees. The cost of equity–settled transactions is recognized in earnings, together with a corresponding increase in treasury Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position shares, over the period in which the performance and/or service conditions are fulfilled. For grants that vest on meeting cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows performance conditions, compensation cost is recognized when it becomes probable that the performance condition model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a iv) Fair value of financial instruments will be met. The cumulative expense recognized for equity–settled transactions at each reporting date until the vesting degree of judgment is required in establishing fair values. date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assump- tions about these factors could affect the reported fair value of financial instruments (Note 4). The Company measures the cost of equity–settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share–based payment transactions v) Impairment of long–lived assets requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the The Company assesses whether there are indicators of impairment for long–lived assets annually and at other times when grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expect- such indicators exist in the related CGU. Impairment exists when the carrying amount of a long–lived asset or cash gener- ed life of the share option, volatility and dividend yield, and making assumptions about them. The assumptions and ating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value–in–use. The models used for estimating fair value for share–based payment transactions are disclosed in (Note 17). value–in–use calculation is based on a discounted cash flow model, using the Company’s projections of operating results for the near future. The recoverable amount of long–lived assets is sensitive to the uncertainties inherent in the preparation SARs plan (cash settled) of projections and the discount rate used in the calculation. The cost of the SARs plan is measured initially at fair value at the grant date, further details of which are given in (Note 17). This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The vi) Allowance for expected credit loss liability is remeasured to fair value at each reporting date up to, and including the settlement date, with changes in fair An allowance for expected credit loss on accounts receivables is established in accordance with the information mentioned value recognized in salaries and benefits expense together with the grant date fair value. As with the equity settled in Note 1f) ii). awards described above, the valuation of cash settled award also requires using similar inputs, as appropriate. 83 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Financial risk management During the year ended December 31, 2018, the Company entered into US Gulf Coast Jet Fuel 54 Asian Zero–Cost collar options and US Gulf Coast Jet fuel 54 Asian call options designated to hedge 45.6 thousand gallons. Such hedges represent a portion of the projected consumption for the next twelve months. Additionally, as of December 31, 2017, the Company The Company’s activities are exposed to different financial risks stemmed from exogenous variables which are not under entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 61.1 million gallons. Such hedges represented their control but whose effects might be potentially adverse such as: (i) market risk, (ii) credit risk, and (iii) liquidity risk. The a portion of the projected consumption for the next nine months of operations. Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on net earnings and working capital requirements. The Company uses derivative financial instru- In accordance with IFRS 9 the Company separates the intrinsic value from the extrinsic value of an option contract; as ments to hedge part of such risks. The Company does not enter into derivatives for trading or speculative purposes. such, the change in the intrinsic value can be designated as hedge accounting. Because extrinsic value (time and volatility values) of the Asian call options is related to a “transaction related hedged item”, it is required to be segregated and The sources of these financial risks exposures are included in both “on balance sheet” exposures, such as recognized accounted for as a cost of hedging in OCI and accrued as a separate component of stockholders’ equity until the related financial assets and liabilities, as well as in “off–balance sheet” contractual agreements and on highly expected forecasted hedged item matures and therefore impacts profit and loss. The underlying (US Gulf Coast Jet Fuel 54) of the options held transactions. These on and off–balance sheet exposures, depending on their profiles, do represent potential cash flow by the Company is a consumption asset (energy commodity), which is not in the Company’s inventory. Instead, it is directly variability exposure, in terms of receiving less inflows or facing the need to meet outflows which are higher than expected, consumed by the Company’s fleet at different airport terminals. Therefore, although a non–financial asset is involved, its therefore increase the working capital requirements. initial recognition does not generate a book adjustment in the Company’s inventories. Since adverse movements erode the value of recognized financial assets and liabilities, as well some other off–balance Rather, it is initially accounted for in the Company’s OCI and a reclassification adjustment is made from OCI to profit and sheet financial exposures such as operating leases, there is a need for value preservation, by transforming the profiles of loss and recognized in the same period or periods in which the hedged item is expected to be allocated to profit and loss. these fair value exposures. Furthermore, the Company hedges its forecasted jet fuel consumption month after month, which is congruent with the maturity date of the monthly serial Asian call and Zero–Cost collar options. The Company has a Finance and Risk Management department, which identifies and measures financial risk exposures, in order to design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the corporate As of December 31, 2018, 2017 and 2016, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was governance level for approval. Market risk a) Jet fuel price risk Ps.48,199, Ps.497,403 and Ps.867,809, respectively, as for the Zero–Cost collars it was a (loss) of Ps.(122,948) and is presented as part of the financial assets in the consolidated statement of financial position. (See Note 5). The Company did not hold any position in Zero–Cost collars for the periods ended 2017 and 2016. The amount of cost of hedging derived from the extrinsic value changes of these options as of December 31, 2018 recog- Since the contractual agreements with jet fuel suppliers include reference to jet fuel index, the Company is exposed to fuel nized in other comprehensive income totals Ps.134,096 (the positive cost of hedging in December 2017 and 2016 totals price risk which might have an impact on the forecasted consumption volumes. The Company’s jet fuel risk management Ps.163,836 and Ps.218,038, respectively), and will be recycled to the fuel cost during 2019, as these options expire on a policy aims to provide the Company with protection against increases in jet fuel prices. In an effort to achieve the aforesaid, monthly basis and the jet fuel is consumed. During the years ended December 31, 2018, 2017 and 2016, the net (positive) / the risk management policy allows the use of derivative financial instruments available on over the counter (“OTC”) markets negative cost of these options recycled to the fuel cost was Ps.(402,493), Ps.26,980 and Ps.305,166, respectively. with approved counterparties and within approved limits. Aircraft jet fuel consumed in the years ended December 31, 2018, 2017 and 2016 represented 36%, 29% and 28%, of the Company’s operating expenses, respectively. 84 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G the end of the year: Jet fuel risk Asian Calls The following table includes the notional amounts and strike prices of the derivative financial instruments outstanding as of POSITION AS OF DECEMBER 31, 2016 JET FUEL ASIAN CALL OPTION CONTRACTS MATURITIES 1 HALF 2017 2 HALF 2017 2017 TOTAL 1 HALF 2018 3Q 2018 2018 TOTAL POSITION AS OF DECEMBER 31, 2018 JET FUEL ASIAN CALL AND ZERO – COST COLL ARS OPTION CONTRACTS MATURITIES Jet fuel risk 1 HALF 2019 2 HALF 2019 2019 TOTAL Notional volume in gallons Notional volume in gallons (thousands)* 12,790 13,842 26,632 Strike price agreed rate per gallon (U.S. dollars)** US$ 1.84 US$ 1.84 US$ 1.84 Approximate percentage of hedge (of expected consumption value) 10% 10% Jet fuel risk Zero–Cost collars Notional volume in gallons (thousands)* 18,963 Strike price agreed rate per gallon (U.S. dollars)** US$ 1.91/2.46 US$ Approximate percentage of hedge (of expected consumption value) 15% – – –% All–in Approximate percentage of hedge (of expected consumption value) 25% 10% * US Gulf Coast Jet 54 as underlying asset ** Weighted average (thousands)* 55,436 63,362 118,798 62,492 7,746 70,238 Strike price agreed rate per gallon (U.S. dollars)** US$ 1.6245 US$ 1.4182 US$ 1.5145 US$ 1.6508 US$ 1.5450 US$ 1.6392 Approximate percentage of hedge (of expected consumption value) 51% 53% 52% 45% 10% 24% 10% 18,963 * US Gulf Coast Jet 54 as underlying asset ** Weighted average US$ 1.91/2.46 The following table illustrates the sensitivity of US Gulf Coast Jet Fuel 54 Zero Cost Collars to a reasonably possible change in fuel prices, with all other variables held constant, on the caption of accumulated other comprehensive income. The calcu- lations were made considering a parallel movement of +/–5% in the spot price of the US Gulf Coast Jet 54 as of December 31, 2018: 15% 18% SENSITIVIT Y OF POSITION AS OF DECEMBER 31, 2018 EFFECT ON EQUIT Y ( THOUSANDS OF U.S. DOLL ARS) US Gulf Coast Jet Fuel 54 spot level +5% –5% 1.67 –1.51 POSITION AS OF DECEMBER 31, 2017 JET FUEL ASIAN CALL OPTION CONTRACTS MATURITIES 1 HALF 2018 2 HALF 2018 2018 TOTAL Jet fuel risk b) Foreign currency risk Notional volume in gallons (thousands)* 69,518 61,863 131,381 Mexican Peso is the functional currency of the Company, a significant portion of its operating expenses are denominated in Strike price agreed rate per gallon U.S. dollar; thus, Volaris relies on sustained U.S. dollar cash flows coming from operations in the United States of America (U.S. dollars)** US$ 1.6861 US$ 1.8106 US$ 1.7447 and Central America to support part of its commitments in such currency, however there’s still a mismatch. Foreign currency Approximate percentage of hedge risk arises from possible unfavorable movements in the exchange rate which could have a negative impact in the Company’s (of expected consumption value) 60% 50% 55% cash flows. To mitigate this risk, the Company may use foreign exchange derivative financial instruments. * US Gulf Coast Jet 54 as underlying asset ** Weighted average 85 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  While most of the Company’s revenue is generated in Mexican pesos, although 32% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2018 (30% at December 31, 2017 and 33% at December 31, 2016) and U.S. dollar denominated collections accounted for 38%, 40% and 38%, of the Company’s total collections in 2018, 2017 and 2016, respectively. Off–balance sheet transactions exposure: Aircraft and engine operating lease THOUSANDS OF U.S. DOLL ARS 2018 2017 2016 Company’s expenditures, particularly those related to aircraft leasing and acquisition, are denominated in U.S. dollar. In addition, although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican peso /U.S. dollar exchange rate. The Company’s foreign exchange on and off–balance sheet exposure as of December 31, 2018, 2017 and 2016 is as set forth below: payments (Note 14) US$ 2,334,767 US$ 1,840,316 US$ 1,727,644 Aircraft and engine commitments (Note 23) Total 1,070,187 1,123,377 315,326 US$ 3,404,954 US$ 2,963,693 US$ 2,042,970 THOUSANDS OF U.S. DOLL ARS dollars to hedge approximately 20% and 9% of its future 12 and 6 months of aircraft rental expenses. A portion of the 2018 2017 2016 Company’s position foreign currency forwards matured throughout the fourth quarter of 2018 (November & December), all During the year ended December 31, 2018 and 2017, the Company entered into foreign currency forward contracts in U.S. Assets: Cash and cash equivalents US$ 279,829 US$ 344,038 US$ 297,565 Other accounts receivable Aircraft maintenance deposits paid to lessors Deposits for rental of flight equipment Derivative financial instruments Total assets Liabilities: Financial debt (Note 5) Foreign suppliers Taxes and fees payable Derivative financial instruments Total liabilities 10,957 329,983 32,166 3,172 656,107 155,455 51,012 14,823 6,246 227,536 13,105 352,142 25,343 25,204 759,832 128,296 53,729 10,304 – 192,329 11,619 343,787 30,025 41,996 724,992 76,789 56,109 6,874 684 140,456 of the Company’s position in foreign currency forward contracts from 2017 matured throughout the second half of the year (August, September, November and December), therefore there was no outstanding balance as of December 31, 2017. As of December 31, 2018, the unrealized gains of Ps.14,241 relating to the foreign currency forward contracts is included in OCI. For the year ended December 31, 2018, the net loss on the foreign currency forward contracts is Ps.52,516, which was recognized as part of rental expense in the consolidated statements of operations. For the year ended December 31, 2017, the net loss on the foreign currency forward contracts was Ps.11,290 which was recognized as part of rental expense in the consolidated statements of operations. As there were no foreign currency forward contracts as of December 31, 2016, no impact was recognized in the consolidat- ed statements of operations. 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. Net foreign currency position US$ 428,571 US$ 567,503 US$ 584,536 The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long–term debt At April 25, 2019, date of issuance of these financial statements, the exchange rate was Ps.18.95 per U.S. dollar. obligations and flight equipment operating lease agreements with floating interest rates. In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) changes may have on operational lease payments indexed to the London Inter Bank Offered Rate (“LIBOR”). The Company on the derecognition of a non–monetary asset or non–monetary liability relating to advance consideration, the date of the uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these transaction is the date on which the Company initially recognizes the non–monetary asset or non–monetary liability arising instruments as an accounting hedge. In most cases, when a derivative can be tailored within the terms and it perfectly matches from the advance consideration. If there are multiple payments or receipts in advance, the Company determines the trans- cash flows of a leasing agreement, it may be designated as a CFH and the effective portion of fair value variations are recorded action date for each payment or receipt of advance consideration. in equity until the date the cash flow of the hedged lease payment is recognized in the consolidated statements of operations. The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such 86 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  During the years ended December 31, 2018 and 2017, the Company did not have any interest rate swaps. As of December DECEMBER 31, 2017 31, 2016, the Company had outstanding hedging contracts in the form of interest rate swaps with notional amount of US$ 70 million and fair value of Ps.14,144, respectively, recorded in liabilities. For the years ended December 31, 2017 and 2016, the reported loss on the interest rate swaps was Ps.13,827 and Ps.48,777, respectively, which was recognized as part of rental expense in the consolidated statements of operations. All the Company’s position in the form of interest rate swaps matured on March 31 and April 30, 2017 consequently there is no outstanding balance as of December 31, 2018 and 2017. 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 acqui- sition of new aircraft and renewal of its fleet, the Company requires liquid funds to meet its obligations. WITHIN ONE YEAR ONE TO FIVE YEARS TOTAL Interest–bearing borrowings: Pre–delivery payments facilities (Note 5) Ps. 1,449,236 Ps. 1,079,152 Ps. 2,528,388 Short–term working capital facilities (Note 5) 948,354 – 948,354 Total Ps. 2,397,590 Ps. 1,079,152 Ps. 3,476,742 DECEMBER 31, 2016 WITHIN ONE YEAR ONE TO FIVE YEARS TOTAL The Company attempts to manage its cash and cash equivalents and its financial assets, relating the term of investments with Interest–bearing borrowings: those of its obligations. Its policy is that the average term of its investments may not exceed the average term of its obligations. Pre–delivery payments facilities (Note 5) Ps. 328,845 Ps. 943,046 Ps. 1,271,891 This cash and cash equivalents position is invested in highly–liquid short–term instruments through financial entities. Short–term working capital facilities (Note 5) 716,290 The Company has future obligations related to maturities of bank borrowings and derivative contracts. The Company’s off– Derivative financial instruments: balance sheet exposure represents the future obligations related to operating lease contracts and aircraft purchase contracts. Interest rate swaps contracts 14,144 – – 716,290 14,144 The Company concluded that it has a low concentration of risk since it has access to alternate sources of funding. Total Ps. 1,059,279 Ps. 943,046 Ps. 2,002,325 The table below presents the Company’s contractual principal payments required on its financial liabilities and the derivative financial instruments fair value: e) Credit risk DECEMBER 31, 2018 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 Credit risk is the risk that any counterparty will not meet its obligations under a financial instrument or customer contract, WITHIN ONE YEAR ONE TO FIVE YEARS TOTAL other financial instruments including derivatives. Interest–bearing borrowings: Financial instruments that expose the Company to credit risk involve mainly cash equivalents and accounts receivable. Pre–delivery payments facilities (Note 5) Ps. 734,635 Ps. 2,310,939 Ps. 3,045,574 Credit risk on cash equivalents relate to amounts invested with major financial institutions. Short–term working capital facilities (Note 5) 461,260 – – 461,260 122,948 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. 122,948 Ps. 1,318,843 Ps. 2,310,939 Ps. 3,629,782 Derivative financial instruments: Jet fuel Asian Zero–Cost collars options contracts Total 87 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high The principal or the most advantageous market must be accessible to the Company. 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 pricing the asset or liability, assuming that market participants act in their economic best interest. 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. The assessment of a non–financial asset’s fair value considers the 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 The fair value of an asset or a liability is assessed using the course of thought which market participants would use when To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any highest and best use. 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, 2018, the Company concluded that its credit risk The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available related to its outstanding derivative financial instruments is low, since it has no significant concentration with any single to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. counterparty and it only enters into derivative financial instruments with banks with high credit–rating assigned by interna- tional credit–rating agencies. f) Capital management 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: Management believes that the resources available to the Company are sufficient for its present requirements and will be sufficient to meet its anticipated requirements for capital expenditures and other cash requirements for the 2018 fiscal year. • Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities. The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios to support • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly its business and maximize the shareholder’s value. No changes were made in the objectives, policies or processes for or indirectly observable. managing capital during the years ended December 31, 2018, 2017 and 2016. The Company is not subject to any externally imposed capital requirement, other than the legal reserve (Note 18). • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. 4. FAIR VALUE MEASUREMENTS 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 The only financial assets and liabilities recognized at fair value on a recurring basis are the derivative financial instruments. input that is significant to the fair value measurement as a whole) at the end of each reporting period. Fair value is the price that would be received from sale of an asset or paid to transfer a liability in an orderly transaction For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the between market participants at the measurement date. The fair value measurement is based on the presumption that the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 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. 88 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  Set out below, is a comparison by class of the carrying amounts and fair values of the Company’s financial instruments, The following table summarizes the fair value measurements at December 31, 2017: other than those for which carrying amounts are reasonable approximations of fair values: CARRYING AMOUNT FAIR VALUE 2018 2017 2016 2018 2017 2016 Assets Derivative financial instruments Ps. 62,440 Ps. 497,403 Ps. 867,809 Ps. 62,440 Ps. 497,403 Ps. 867,809 Liabilities Financial debt Derivative financial (3,506,834) (3,476,742) (1,988,181) (3,515,550) (3,481,741) (1,988,445) Net 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. 497,403 Ps. – Ps. 497,403 Liabilities for which fair values are disclosed: Interest–bearing loans and borrowings** Ps. – – (3,481,741) Ps. (2,984,338) Ps. – – (3,481,741) Ps. (2,984,338) instruments (122,948) – (14,144) (122,948) – (14,144) * Jet fuel forwards levels and LIBOR curve. ** LIBOR curve and TIIE Mexican interbank rate. Includes short–term and long–term debt. Total Ps. (3,567,342) Ps. (2,979,339) Ps. (1,134,516) Ps. (3,576,058) Ps. (2,984,338) Ps. (1,134,780) There were no transfers between level 1 and level 2 during the period. The following table summarizes the fair value measurements at December 31, 2018: The following table summarizes the fair value measurements at December 31, 2016: FAIR VALUE MEASUREMENT QUOTED PRICES IN ACTIVE MARKETS LEVEL 1 SIGNIFICANT OBSERVABLE INPUTS LEVEL 2 SIGNIFICANT UNOBSERVABLE INPUTS LEVEL 3 TOTAL 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. Foreign currency forward Liabilities Derivatives financial instruments: Jet fuel Asian Zero–Cost collars options contracts* Liabilities for which fair values are disclosed: Interest–bearing loans and borrowings** Net Ps. – – – – – Ps. 48,199 Ps. 14,241 (122,948) (3,515,550) Ps. (3,576,058) Ps. – – – – – * Jet fuel forwards levels and LIBOR curve. ** LIBOR curve and TIIE Mexican interbank rate. Includes short–term and long–term debt. There were no transfers between level 1 and level 2 during the period. Assets Derivatives financial instruments: Jet fuel Asian call options contracts* Ps. – Ps. 867,809 Ps. – Ps. 867,809 Ps. 48,199 14,241 Liabilities Derivatives financial instruments: Interest rate swap contracts** (122,948) Liabilities for which fair values are disclosed: Interest–bearing loans and borrowings** Net Ps. – – – (14,144) (1,988,445) Ps. (1,134,780) Ps. – – – (14,144) (1,988,445) Ps. (1,134,780) (3,515,550) Ps. (3,576,058) * Jet fuel forwards levels and LIBOR curve. ** LIBOR curve and TIIE Mexican interbank rate. Includes short–term and long–term debt. There were no transfers between level 1 and level 2 during the period. 89 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  The following table summarizes the loss from derivatives financial instruments recognized in the consolidated statements of 5. FINANCIAL ASSETS AND LIABILITIES operations for the years ended December 31, 2018, 2017 and 2016: Consolidated statements of operations At December 31, 2018, 2017 and 2016, 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. INSTRUMENT FINANCIAL STATEMENTS LINE 2018 2017 2016 a) Financial assets Jet fuel Asian call options 2018 2017 2016 contracts Fuel Ps. (402,493) Ps. 26,980 Ps. 305,166 Foreign currency forward Aircraft and engine rent expenses Interest rate swap contracts Aircraft and engine rent expenses (52,516) – 11,290 13,827 – 48,777 Derivative financial instruments designated as cash flow hedges (effective portion Total Ps. (455,009) Ps. 52,097 Ps. 353,943 recognized within OCI) The following table summarizes the net (loss) gain on CFH before taxes recognized in the consolidated statements of Foreign currency forward contracts Jet fuel Asian call options Ps. 48,199 14,241 comprehensive income for the years ended December 31, 2018, 2017 and 2016: Total financial assets Ps. 62,440 Ps. 497,403 Ps. 497,403 Ps. 867,809 – – 867,809 Consolidated statements of other comprehensive (loss) income Presented on the consolidated statements of financial position as follows: INSTRUMENT FINANCIAL STATEMENTS LINE 2018 2017 2016 Current Non–current Ps. Ps. 62,440 – Ps. Ps. 497,403 – Ps. 543,528 324,281 Jet fuel Asian call options Contracts Jet fuel Zero cost collars Interest rate swap contracts Foreign currency forward Total (Note 22) OCI OCI OCI OCI Ps. (174,984) Ps. (54,202) Ps. 583,065 (122,948) – 14,241 – 14,144 (2,090) – 41,629 – Ps. (283,691) Ps. (42,148) Ps. 624,694 The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2018, 2017 and 2016 were Ps.19.6829, Ps.19.7354 and Ps.20.6640, respectively, per U.S. dollar. 90 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G b) Financial debt (ii) The following table provides a summary of the Company’s scheduled principal payments of financial debt and accrued (i) At December 31, 2018, 2017 and 2016, the Company’s short–term and long–term debt consists of the following: 2018 2017 2016 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, 2022, bearing annual interest rate at the three–month LIBOR plus a interest at December 31, 2018: Finance debt denominated in foreign currency: 2019 2020 2021 2022 Total Santander/Bancomext Ps. 748,865 Ps. 1,508,757 Ps. 777,095 Ps. 25,087 Ps. 3,059,804 Citibanamex Total 463,394 – – – 463,394 Ps. 1,212,259 Ps. 1,508,757 Ps. 777,095 Ps. 25,087 Ps. 3,523,198 spread of 260 basis points. Ps. 3,045,574 Ps. 2,528,388 Ps. 1,271,891 (iii) Since 2011, the Company has financed the pre–delivery payments for the acquisition of its aircraft through a revolving II. In December 2016, the Company entered into a short–term working capital facility with Banco Nacional de México S.A. (“Citibanamex”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a financing facility. During the year ended December 31, 2018, the pre–delivery payments for one A320NEO aircraft were financed through this revolving financing facility. On August 1, 2013, the Company signed an amendment to the loan agreement to finance the pre–delivery payments of eight 90 basis points. 461,260 948,354 406,330 additional A320CEO (“Current Engine Option”) that were delivered in 2015 and 2016. III. In December 2016, the Company entered into a U.S. dollar denom- On February 28, 2014 and November 27, 2014, the Company signed amendments to the loan agreement to finance pre– inated short–term working capital facility with Bank of America México S.A. Institución de Banca Múltiple (“Bank of America”) in U.S. dollars, bearing annual interest rate at the one–month LIBOR plus 160 basis points. IV. Accrued interest Less: Short–term maturities Long–term TIIE: Mexican interbank rate delivery payments of two and four additional A320CEO, respectively, one was delivered in 2014 and five in 2016. – – 309,960 additional A320NEO aircraft to be delivered between 2017 and 2018. One of this aircraft was incorporated to the Company´s On August 25, 2015, the Company signed an amendment to the loan agreement to finance pre–delivery payments of eight fleet during 2017. 16,364 5,972 3,523,198 3,482,714 1,212,259 2,403,562 6,102 1,994,283 1,051,237 On November 30, 2016, the Company signed an additional amendment to the loan agreement to finance pre–delivery payments of 22 additional A320NEO aircraft to be delivered between 2019 and 2020. This amendment was modified on December 19, Ps. 2,310,939 Ps. 1,079,152 Ps. 943,046 2017 to reschedule the delivery dates of the aircraft listed on August 25, 2015 and November 30, 2016, seven and 22 aircraft, respectively. The new delivery date will be between 2019 and 2021. In accordance with this amendment the revolving line with Santander Bancomext will expire as of November 30, 2021. This amendment was modified on November 28, 2018 to reschedule the delivery dates of 26 aircraft listed between 2019 and 2021. The new delivery date will be between 2019 and 2022. In accordance with this last amendment the revolving line with Santander Bancomext will expire as of May 31, 2022. 91 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G The “Santander/Bancomext” loan agreement provides for certain covenants, including limits to the ability to, among others: i) Incur debt above a specified debt basket unless certain financial ratios are met. ii) Create liens. iii) Merge with or acquire any other entity without the previous authorization of the Banks. iv) Dispose of certain assets. JANUARY 1, 2017 NET CASH FLOWS ACCRUED INTEREST FOREIGN EXCHANGE MOVEMENT CURRENT VS NON – CURRENT RECL ASSIFICATION DECEMBER, 31, AND OTHER 2017 Current interest–bearing loans and borrowings Ps. 1,051,237 Ps. 419,350 Ps. (130) Ps. 25,924 Ps. 907,181 Ps. 2,403,562 Non–current interest – v) Declare and pay dividends or make any distribution on the Company’s share capital unless certain financial ratios are met. bearing loans and borrowings 943,046 1,093,808 – (50,521) (907,181) 1,079,152 At December 31, 2018, 2017 and 2016, the Company was in compliance with the covenants under the above–mentioned loan agreement. Total liabilities from financing activities Ps. 1,994,283 Ps. 1,513,158 Ps. (130) Ps. (24,597) Ps. – Ps. 3,482,714 For purposes of financing the pre–delivery payments, Mexican trusts were created whereby, the Company assigned its rights and obligations under the Airbus Purchase Agreement with 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 agreement (Deutsche Bank Mexico, S.A. Trust 1710 and 1711). Current interest–bearing JANUARY 1, 2016 NET CASH FLOWS ACCRUED INTEREST FOREIGN EXCHANGE MOVEMENT CURRENT VS NON – CURRENT RECL ASSIFICATION DECEMBER, 31, AND OTHER 2016 (iv) At December 31, 2018, the Company have available credit lines totaling Ps.6,721,139, of which Ps.4,063,947 were related loans and borrowings Ps. 1,371,202 Ps. (753,897) Ps. (1,239) Ps. 121,269 Ps. 313,902 Ps. 1,051,237 to financial debt and Ps.2,657,192 were related to letters of credit (Ps.1,048,241 were undrawn). At December 31, 2017, Non–current interest – the Company had available credit lines totaling Ps.7,368,346, of which Ps.4,616,861 were related to financial debt and bearing loans and borrowings 219,817 938,681 – 98,450 (313,902) 943,046 Ps.2,751,485 were related to letters of credit (Ps.1,739,775 were undrawn). At December 31, 2016, the Company had avail- Total liabilities from able credit lines totaling Ps.6,936,237, of which Ps.5,048,477 were related to financial debt and Ps.1,887,760 were related to financing activities Ps. 1,591,019 Ps. 184,784 Ps. (1,239) Ps. 219,719 Ps. – Ps. 1,994,283 letters of credit (Ps.3,703,184 were undrawn). Changes in liabilities arising from financing activities c) Other financial liabilities At December 31, 2018, 2017 and 2016, the changes in liabilities from financing activities from the Company are summarized in the following table: JANUARY 1, 2018 NET CASH FLOWS ACCRUED INTEREST FOREIGN EXCHANGE MOVEMENT CURRENT VS NON – CURRENT RECL ASSIFICATION DECEMBER, 31, AND OTHER 2018 Current interest–bearing loans and borrowings Ps. 2,403,562 Ps. (793,363) Ps. 10,392 Ps. 71,380 Ps. (479,712) Ps. 1,212,259 Non–current interest – bearing loans and borrowings 1,079,152 808,620 – (56,945) 480,112 2,310,939 Total liabilities from financing activities Ps. 3,482,714 Ps. 15,257 Ps. 10,392 Ps. 14,435 Ps. 400 Ps. 3,523,198 92 2018 2017 2016 Derivative financial instruments designated as CFH (effective portion recognized within OCI): Zero cost collar options Ps. 122,948 Ps. Interest rate swap contracts – Total financial liabilities Ps. 122,948 Ps. Presented on the consolidated statements of financial position as follows: Current Non–current Ps. Ps. 122,948 – Ps. Ps. – – – – – Ps. Ps. Ps. Ps. – 14,144 14,144 14,144 – Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 6. CASH AND CASH EQUIVALENTS An analysis of this caption is as follows: b) During the years ended December 31, 2018, 2017 and 2016, the Company had the following transactions with related parties: RELATED PARTY TRANSACTIONS COUNTRY OF ORIGIN 2018 2017 2016 2018 2017 2016 Short–term investments Ps. 4,796,554 Ps. 5,982,314 Ps. 4,433,559 Cash in banks Cash on hand 1,061,150 5,238 963,162 5,403 2,632,878 4,814 Total cash and cash equivalents Ps. 5,862,942 Ps. 6,950,879 Ps. 7,071,251 Revenues: Transactions with affiliates Frontier Code–share Expenses: Transactions with affiliates Aeroman USA Ps. 8,358 Ps. – Ps. – 7. REL ATED PARTIES Aircraft and engine maintenance El Salvador/Guatemala Ps. 341,726 Ps. 249,266 Ps. 304,399 One Link, Mijares Angoitia, Servprot and Human Capital a) An analysis of balances due from/to related parties at December 31, 2018, 2017 and 2016 is provided below. All companies Aeroman are considered affiliates, since the Company’s primary shareholders or directors are also direct or indirect shareholders of Technical support Mexico/El Salvador/ Guatemala 4,796 8,088 8,105 Call center fees and other fees Mexico/El Salvador 4,800 202,689 173,197 the related parties: TYPE OF TRANSACTION COUNTRY OF ORIGIN 2018 2017 2016 TERMS Due from: Frontier Airlines Inc. (“Frontier”) Code–share USA Ps. Ps. 8,266 8,266 Ps. Ps. – – Ps. Ps. – – 30 days been recognized. c) Servprot Frontier started having transactions with the Company in September 2018. During the years ended December 31, 2017 and 2016 the Company did not have any revenue transactions with related parties. As of December 31, 2018, 2017 and 2016, there have been no guarantees provided or received for any related party receiv- ables or payables. For the years ended December 31, 2018, 2017 and 2016, no provision for expected credit losses had Due to: One Link, S.A. de C.V. (“One Link”) Call center fees El Salvador Ps. – Ps. 24,980 Ps. 33,775 30 days Aeromantenimiento, S.A. Aircraft and engine (“Aeroman”) maintenance El Salvador 15,024 15,951 30,627 30 days Frontier Airlines Inc. (“Frontier”) Code–share USA 2,751 SearchForce, Inc. (“SearchForce”) Internet services Mexico – – – – 30 days 620 30 days Ps. 17,775 Ps. 40,931 Ps. 65,022 Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, the Company’s Chief Executive Officer and member of the board of directors, and Rodolfo Montemayor, a member of the board of directors, until April 19, 2018 is shareholder 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, 2018, 2017 and 2016 the Company expensed Ps.2,804, Ps.1,838 and Ps.1,733, respectively for this concept. d) Aeroman Aeroman is a related party because Roberto José Kriete Ávila, a member of the Company’s board of directors, and members of his immediate family are shareholders of Aeroman. The Company entered into an aircraft repair and maintenance service agreement with Aeroman on January 1, 2017. This agreement provides that the Company has to use Aeroman, exclusively for aircraft repair and maintenance services, subject to availability. Under this agreement, Aeroman provides inspection, 93 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G maintenance, repair and overhaul services for aircraft. The Company makes payments under this agreement depending on j) Directors and officers the services performed. This agreement is for a 5 years term. As of December 31, 2018, 2017 and 2016, the balances due During the year ended December 31, 2018, 2017 and 2016, the chairman and the independent members of the Company’s under the agreement with Aeroman were Ps.15,024, Ps.15,951 and Ps.30,627, respectively. The Company incurred expens- board of directors received an aggregate compensation of approximately Ps.7,178, Ps.8,993 and Ps.7,751, respectively, and es in aircraft, engine maintenance and technical support under this agreement of Ps.346,522, Ps.251,731 and Ps.308,731 the rest of the directors received a compensation of Ps.5,217, Ps.7,834 and Ps.7,308, respectively. for the years ended December 31, 2018, 2017 and 2016, respectively. e) Human Capital International During the years ended December 31, 2018, 2017 and 2016, all the Company’s senior managers received an aggregate compensation of short and long–term benefits of Ps.180,001, Ps.134,370 and Ps.160,762, respectively, these amounts were The Company entered into a professional services agreement with Human Capital International HCI, S.A. de C.V., or Human recognized in salaries and benefits in the consolidated statement of operations. Capital International, on February 25, 2015, for the selection and hiring of executives. Rodolfo Montemayor Garza, member of the Company’s board of directors until April 19, 2018, is a founder and chairman of the board of directors of Human For the years ended December 31, 2018, 2017 and 2016 the cost of the share–based payments transactions (MIP and LTIP) Capital International. As of December 31, 2018, 2017 and 2016, the Company recognized an expense under this agreement were Ps.19,980, Ps.13,508 and Ps.7,816, respectively. Cash–settled payments transactions MIP II and SARs were Ps.(5,238), of Ps.324, Ps.816 and Ps.3,127, respectively. Ps.(25,498) and Ps.86,100, respectively (Note 17). f) One Link Starting 2015, the Company adopted a new short–term benefit plan for certain personnel whereby cash bonuses are One Link was a related party until December 31, 2017, because Marco Baldocchi, an alternate member of the board, was awarded for meeting certain Company’s performance target. During the years ended December 31, 2018,2017 and 2016, a director of the Company. Pursuant to this agreement, One Link received calls from the customers to book flights and the Company recorded a provision in the amount of Ps.50,000, Ps.0, and Ps.53,738 respectively. provides customers with information about fares, schedules and availability. As of December 31, 2017 and 2016, the balance due under this agreement was Ps.24,980 and Ps.33,775, respectively, and the Company recognized an expense under this agreement of Ps.200,035 and Ps.168,337 for the years ended December 31, 2017 and 2016, respectively. 8. OTHER ACCOUNTS RECEIVABLE , NET g) SearchForce An analysis of other accounts receivable at December 31, 2018 and 2017, is detailed below: SearchForce is a related party because William Dean Donovan, a member of the board, is a director of the Company. Pursuant to this agreement, SearchForce provides consultation services, reports, findings, analysis or other deliverables to us regarding the software and the implementation of the internet marketing strategy developed to the Company at its request. As of December 31, 2018, 2017 and 2016, the balance due under this agreement was Ps.0, Ps.0 and Ps.620. The Company recognized an expense under this agreement of Ps.0, Ps.1,946 and Ps.3,446 for the years ended December 31, 2018, 2017 and 2016, respectively. h) Mijares, Angoitia, Cortés y Fuentes Mijares, Angoitia, Cortés y Fuentes is a related party because Ricardo Maldonado Yañez and Eugenio Macouzet de León, member and alternate member, respectively, of the board of the Company since April 2018, are partners of Mijares, Angoitia, Cortés y Fuentes. As of December 31, 2018, the balance due under this agreement was Ps.0 and the Company recognized an expense under this agreement of Ps.1,672, for the year ended December 31, 2018. i) Frontier Frontier is a related party because Mr. William A. Franke and Brian H. Franke are members of the board of the Company and Frontier as well as Indigo Partners have significant investments in both Companies. As of December 31, 2018, the net balance due under this agreement was Ps.8,266 and the Company recognized revenue under this agreement of Ps.8,358 94 for the year ended December 31, 2018. Ps. Current: Credit cards Benefits from suppliers Other accounts receivable Other points of sales Affinity credit card Cargo clients Travel agencies and insurance commissions Marketing services receivable Airport services Employees Insurance claims Allowance for credit losses 96,646 68,946 101,487 71,054 55,172 41,408 39,806 7,999 9,991 27,274 – 519,783 (11,304) 2018 2017 2016 Ps. 191,322 Ps. 253,374 – 117,582 54,719 40,517 34,655 27,925 13,435 5,898 8,878 1,345 496,276 (17,809) – 26,236 23,867 8,950 29,901 20,477 11,070 9,479 7,551 55,815 446,720 (19,317) 427,403 Ps. 508,479 Ps. 478,467 Ps. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G Accounts receivable have the following aging: DAYS 0–30 31–60 61–90 91–120 2018 IMPAIRED 2018 NOT IMPAIRED TOTAL 2018 2017 IMPAIRED 2017 NOT IMPAIRED TOTAL 2017 2016 IMPAIRED 2016 NOT IMPAIRED TOTAL 2016 Ps. 8,725 Ps. 388,644 Ps. 397,369 Ps. 16,962 Ps. 415,847 Ps. 432,809 Ps. 15,723 Ps. 398,721 Ps. 414,444 – – 2,579 69,648 27,138 23,049 69,648 27,138 25,628 – – 847 38,705 17,918 5,997 38,705 17,918 6,844 – – 3,594 11,231 14,492 2,959 11,231 14,492 6,553 Ps. 11,304 Ps. 508,479 Ps. 519,783 Ps. 17,809 Ps. 478,467 Ps. 496,276 Ps. 19,317 Ps. 427,403 Ps. 446,720 The movement in the allowance for credit losses from January 1, 2016 to December 31, 2018 is as follows: 9. INVENTORIES Ps. Balance as of January 1, 2016 Write–offs Increase in allowance Balance as of December 31, 2016 Write–offs Increase in allowance Balance as of December 31, 2017 Write–offs Increase in allowance Balance as of December 31, 2018 Ps. (24,612) 14,459 (9,164) (19,317) 6,228 (4,720) (17,809) 17,126 (10,621) (11,304) An analysis of inventories at December 31, 2018, 2017 and 2016 is as follows: 2018 2017 2016 Spare parts and accessories of flight equipment Ps. 289,737 Ps. 285,185 Ps. 235,330 Miscellaneous supplies 7,534 9,665 8,554 Ps. 297,271 Ps. 294,850 Ps. 243,884 The inventory items are consumed during or used mainly in delivery of in–flight services and for maintenance services by the Company and are valued at the lower of cost or replacement value. During the years ended as of December 31, 2018, 2017 and 2016, the amount of consumption of inventories, recorded as an operating expense as part of maintenance expense was Ps.290,206, Ps.242,265 and Ps.186,719, respectively. 95 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 10. PREPAID EXPENSES AND OTHER CURRENT ASSETS 11. GUARANTEE DEPOSITS An analysis of prepaid expenses and other current assets at December 31, 2018, 2017 and 2016 is as follows: An analysis of this caption at December 31, 2018, 2017 and 2016 is as follows: 2018 2017 2016 2018 2017 2016 Advances to suppliers Prepaid aircraft rent Prepaid insurance Other prepaid expenses Sales commission to travel agencies (Note 1d) Advances for constructions of aircraft and engines Loss on sale and leaseback Ps. 273,251 Ps. 346,263 Ps. 274,254 76,896 22,682 215,784 68,712 65,642 59,620 54,501 – 13,764 transactions to be amortized (Note 14) 3,047 3,047 705,105 668,306 47,663 33,555 73,413 31,437 3,047 Ps. 709,750 Ps. 767,713 Ps. 1,562,526 Current asset: Aircraft maintenance deposits paid to lessors (Note 1j) Ps. 729,899 Ps. 1,317,663 Ps. 1,145,913 Deposits for rental of flight equipment Other guarantee deposits Non–current asset: Aircraft maintenance deposits paid to lessors (Note 1j) Deposits for rental of flight equipment Other guarantee deposits 1,220 59,516 790,635 5,765,122 531,261 41,113 6,337,496 17,178 18,052 1,352,893 5,631,304 441,110 25,838 6,098,252 14,155 7,141 1,167,209 5,951,831 589,804 18,243 6,559,878 Ps. 7,128,131 Ps. 7,451,145 Ps. 7,727,087 96 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 12 . ROTABLE SPARE PARTS, FURNITURE AND EQUIPMENT, NET GROSS VALUE ACCUMULATED DEPRECIATION NET CARRYING VALUE AT DECEMBER 31, 2018 AT DECEMBER 31, 2017 AT DECEMBER 31, 2016 AT DECEMBER 31, 2018 AT DECEMBER 31, 2017 AT DECEMBER 31, 2016 AT DECEMBER 31, 2018 AT DECEMBER 31, 2017 AT DECEMBER 31, 2016 Leasehold improvements to flight equipment Ps. 3,221,167 Ps. 2,382,687 Ps. 1,709,868 Ps. (2,083,053) Ps. (1,769,589) Ps. (1,386,844) Ps. 1,138,114 Ps. 613,098 Ps. 323,024 – 3,672,090 2,783,303 1,206,330 Pre–delivery payments 3,672,090 2,783,303 1,206,330 Aircraft parts and rotable spare parts Aircraft spare engines Construction and improvements in process Standardization Constructions and improvements Computer equipment Workshop tools Electric power equipment Communications equipment Workshop machinery and equipment Motorized transport equipment platform Service carts on board Office furniture and equipment 609,232 323,410 142,738 203,611 132,446 44,563 23,454 15,438 12,305 9,530 5,496 5,403 66,546 506,735 323,410 193,607 192,808 131,503 30,113 20,500 15,439 11,229 8,405 5,587 5,403 44,749 393,522 323,025 255,374 176,975 120,886 24,172 20,500 14,818 9,261 7,240 5,703 5,403 36,310 – (233,403) (34,917) – (127,136) (117,211) (28,016) (20,085) (10,316) (7,394) (5,049) (5,050) (5,277) (28,240) – (181,091) (18,132) – (113,407) (106,335) (20,790) (18,229) (9,185) (6,502) (4,345) (4,701) (5,021) (137,712) (1,337) – (94,864) (85,873) (16,972) (15,915) (7,890) (5,706) (3,622) (4,346) (4,645) 375,829 288,493 142,738 76,475 15,235 16,547 3,369 5,122 4,911 4,481 446 126 325,644 305,278 193,607 79,401 25,168 9,323 2,271 6,254 4,727 4,060 886 382 255,810 321,688 255,374 82,111 35,013 7,200 4,585 6,928 3,555 3,618 1,357 758 17,657 (22,454) (18,653) 38,306 22,295 Total Ps. 8,487,429 Ps. 6,655,478 Ps. 4,309,387 Ps. (2,705,147) Ps. (2,279,781) Ps. (1,784,379) Ps. 5,782,282 Ps. 4,375,697 Ps. 2,525,008 * During the years ended December 31, 2018, 2017 and 2016, the Company capitalized borrowing costs of Ps.357,920, Ps.193,389 and Ps.95,445, respectively. The amount of this line is net of disposals of capitalized borrowing costs related to sale and leaseback transactions of Ps.242,678, Ps.110,274 and Ps.84,936, respectively. 97 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G AIRCRAFT PARTS AND ROTABLE SPARE PARTS AIRCRAFT SPARE ENGINES CONSTRUCTIONS AND IMPROVEMENTS STANDARDIZATION COMPUTER EQUIPMENT OFFICE FURNITURE AND EQUIPMENT ELECTRIC POWER EQUIPMENT WORKSHOP TOOLS MOTORIZED TRANSPORT EQUIPMENT PLATFORM COMMUNICATIONS EQUIPMENT WORKSHOP MACHINERY AND EQUIPMENT SERVICE CARTS ON BOARD PRE–DELIVERY PAYMENTS CONSTRUCTION AND IMPROVEMENTS IN PROCESS LEASEHOLD IMPROVEMENTS TO FLIGHT EQUIPMENT TOTAL Net book amount as of December 31, 2015 Ps. 179,947 Ps. – Ps. 18,202 Ps. 83,886 Ps. 4,195 Ps. 12,932 Ps. 9,033 Ps. 4,815 Ps. 1,326 Ps. 3,764 Ps. 4,179 Ps. 1,453 Ps. 1,583,835 Ps. 140,926 Ps. 501,157 Ps. 2,549,650 Additions Disposals and transfers Borrowing costs, net* Other movements Depreciation As of December 31, 2016 Cost Accumulated depreciation Net book amount as of 110,592 323,025 2,218 21,953 (1,299) – – (33,430) 255,810 393,522 (137,712) – – – (1,337) 321,688 323,025 (1,337) – – 32,441 (17,848) 35,013 120,886 (85,873) – – – (23,728) 82,111 176,975 (94,864) 740 – – 4,814 (2,549) 7,200 24,172 517 (110) – 7,877 (3,559) 17,657 36,310 (16,972) (18,653) 1,467 (1,626) – – (1,946) 6,928 14,818 (7,890) 4,217 – – 25 (4,472) 4,585 20,500 (15,915) 505 (49) – 46 (471) 1,357 5,703 (4,346) 129 – – 493 (831) 3,555 9,261 (5,706) 131 – – – (692) 3,618 7,240 (3,622) 36 1,345,081 161,560 226,526 2,198,697 – – – (731) 758 5,403 (4,645) – – – (1,738,309) 10,507 716 (1,733,093) (2,132) – (44,980) 10,507 – – 1,206,330 1,206,330 – (404,659) (496,253) 255,374 255,374 323,024 2,525,008 1,709,868 4,309,387 – – (1,386,844) (1,784,379) December 31, 2016 Ps. 255,810 Ps. 321,688 Ps. 35,013 Ps. 82,111 Ps. 7,200 Ps. 17,657 Ps. 6,928 Ps. 4,585 Ps. 1,357 Ps. 3,555 Ps. 3,618 Ps. 758 Ps. 1,206,330 Ps. 255,374 Ps. 323,024 Ps. 2,525,008 115,173 (930) – – 385 – – – (44,409) (16,795) 325,644 506,735 (181,091) 305,278 323,410 – – – 10,371 (20,216) 25,168 131,503 (18,132) (106,335) 15,833 1,845 6,805 – – – (18,543) 79,401 192,808 (113,407) – – 4,087 (3,809) 9,323 30,113 (15) – 1,649 (3,801) 22,295 44,749 (20,790) (22,454) – – – 620 (1,294) 6,254 15,439 (9,185) – – – – (2,314) 2,271 20,500 (18,229) – – – – (471) 886 5,587 (4,701) – – – 1,968 (796) 4,727 11,229 (6,502) 123 – – 1,041 (722) 4,060 8,405 (4,345) – – – – (376) 382 5,403 (5,021) 1,707,805 206,932 529,331 2,584,232 (213,947) (3,555) (101,224) (319,671) 83,115 – – (265,144) 244,712 83,115 (696) – (382,745) (496,291) – – 2,783,303 2,783,303 193,607 193,607 613,098 4,375,697 2,382,687 6,655,478 – – (1,769,589) (2,279,781) December 31, 2017 Ps. 325,644 Ps. 305,278 Ps. 25,168 Ps. 79,401 Ps. 9,323 Ps. 22,295 Ps. 6,254 Ps. 2,271 Ps. 886 Ps. 4,727 Ps. 4,060 Ps. 382 Ps. 2,783,303 Ps. 193,607 Ps. 613,098 Ps. 4,375,697 106,240 260,131 (1,735) (260,131) – – – – 689 – – 67 (54,320) (16,785) (10,689) (13,729) 375,829 609,232 288,493 323,410 15,235 132,446 76,475 203,611 10,803 5,316 – – – – – 9,123 (7,215) 16,547 44,563 652 – – 21,568 (6,209) 38,306 66,546 – – – – (1,132) 5,122 15,438 (10,316) 2,673 – – 281 (1,856) 3,369 23,454 (20,085) – – – 42 (482) 446 5,496 (5,050) 1,050 1,040 – – 26 (892) 4,911 12,305 (7,394) (2) – 110 (727) 4,481 9,530 (5,049) 1,485,643 142,703 676,457 2,693,397 – – – – (256) 126 (712,098) 115,242 – – 3,672,090 5,403 3,672,090 (89) – – – (193,483) 162,023 (974,055) 115,242 (243) – (313,464) (427,756) 142,738 142,738 1,138,114 5,782,282 3,221,167 8,487,429 Accumulated depreciation (233,403) (34,917) (117,211) (127,136) (28,016) (28,240) (5,277) – – (2,083,053) (2,705,147) Additions Disposals and transfers Borrowing costs, net* Other movements Depreciation As of December 31, 2017 Cost Accumulated depreciation Net book amount as of Additions Disposals and transfers Borrowing costs, net* Other movements Depreciation As of December 31, 2018 Cost Net book amount as of December 31, 2018 Ps. 375,829 Ps. 288,493 Ps. 15,235 Ps. 76,475 Ps. 16,547 Ps. 38,306 Ps. 5,122 Ps. 3,369 Ps. 446 Ps. 4,911 Ps. 4,481 Ps. 126 Ps. 3,672,090 Ps. 142,738 Ps. 1,138,114 Ps. 5,782,282 98 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G a) Depreciation expense for the years ended December 31, 2018, 2017 and 2016, was Ps.427,756, Ps.496,291 and Ps.496,253, The current purchase agreement with Airbus requires the Company to accept delivery of 106 Airbus A320 family aircraft respectively. Depreciation charges for the year are recognized as a component of operating expenses in the consolidated during the following nine years (from January 2019 to November 2026). The agreement provides for the addition of 106 statements of operations. Aircraft to its fleet as follows: three in 2019, eight in 2020, thirteen in 2021, thirteen in 2022, sixteen in 2023, thirteen in 2024, b) In October 2005 and December 2006, the Company entered into purchase agreements with Airbus and International Aero Engines AG (“IAE”) for the purchase of aircraft and engines, respectively. Under such agreements and prior to the delivery Commitments to acquisitions of property and equipment are disclosed in Note 23. of each aircraft and engine, the Company agreed to make pre–delivery payments, which were calculated based on the fifteen in 2025 and twenty–five in 2026 reference price of each aircraft and engine, and following a formula established for such purpose in the agreements. During the years ended December 31, 2018, 2017 and 2016 the Company entered into aircraft and spare engines sale and leaseback transactions, resulting in a gain of Ps.609,168, Ps.65,886 and Ps.484,827, respectively, that was recorded under In 2011, the Company amended the agreement with Airbus for the purchase of 44 A320 family aircraft to be delivered from the caption other income in the consolidated statement of operations (Note 20). 2015 to 2020. The new order includes 14 A320CEO and 30 A320NEO. During the year ended December 31, 2011, the Company entered into aircraft and spare engines sale and leaseback trans- On August 16, 2013, the Company entered into certain agreements with IAE and United Technologies Corporation Pratt & actions, which resulted in a loss of Ps.30,706. This loss was deferred on the consolidated statements of financial position Whitney Division (“P&W”), which included the purchase of the engines for 14 A320CEO and 30 A320NEO respectively, to be and is being amortized over the contractual lease term. As of December 31, 2018, 2017 and 2016, the current portion of the delivered between 2014 and 2020. This agreement also included the purchase of one spare engine for the A320CEO fleet loss on sale amounts to Ps.3,047, Ps.3,047 and Ps.3,047, respectively recorded in the consolidated statement of operations (which was received during the fourth quarter of 2016) and six spare engines for the A320NEO fleet to be received from 2017 as additional aircraft rental expense, that is recorded in the caption of prepaid expenses and other current assets (Note 10), to 2020. In November 2015, the Company amended the agreement with the engine supplier to provide major maintenance and the non–current portion amounts to Ps.8,366, Ps.11,413 and Ps.14,460, respectively, which is recorded in the caption services for the engines of sixteen aircrafts (10 A320NEO and 6 A321NEO). This agreement also includes the purchase of of other assets in the consolidated statements of financial position. three spare engines, two of them for the A320NEO fleet, and one for the A321NEO fleet. The Company received credit notes from P&W in December 2017 of Ps.58,530 (US$3.06 million), which are being amortized term. This agreement includes a total component support agreement (power–by–the hour) and guarantees the availability of on a straight–line basis, prospectively during the term of the agreement. As of December 31, 2018, and 2017, the Company aircraft components for the Company’s fleet when they are required. The cost of the total component support agreement is amortized a corresponding benefit from these credit notes of Ps.4,878 and Ps.1,219, respectively, which is recognized as an recognized as maintenance expenses in the consolidated statement of operations. c) On August 27, 2012, the Company entered into a total support agreement with Lufthansa Technik AG (“LHT”) for a five–year offset to maintenance expenses in the consolidated statements of operations. Additionally, during December 2017, the Company amended the agreement with Airbus for the purchase of 80 A320 family which were amortized on a straight–line basis, during the term of the agreement. As of December 31, 2018, 2017 and 2016, aircraft to be delivered from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement the Company amortized a corresponding benefit from these credit notes of Ps.0, Ps.6,580 and Ps.9,292, respectively, which and prior to the delivery of each aircraft, the Company agreed to make pre–delivery payments, which shall be calculated was recognized as an offset to maintenance expenses in the consolidated statements of operations. As part of the original total support agreement with LHT, the Company received credit notes of Ps.46,461 (US$3.5 million), based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. During December 2017, the Company entered into a new total support agreement with Lufthansa for 66 months, with an In November 2018, the Company amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries effective date on July 1, 2018. This agreement includes similar terms and conditions as the original agreement. between 2019 and 2022. During the years ended December 31, 2018, 2017 and 2016, the amounts paid for aircraft and spare engine pre–deliv- on a straight–line basis, prospectively during the term of the agreement. As of December 31, 2018, the Company amortized ery payments were of Ps.1,485,643 (US$77.1 million), Ps.1,707,805 (US$90.0 million) and Ps.1,345,081 (US$82.7 million), a corresponding benefit from these credit notes of Ps.7,191, recognized as an offset to maintenance expenses in the consol- As part of the new agreement, the Company received credit notes of Ps.28,110 (US$1.5 million), which are being amortized respectively. 99 idated statements of operations. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G d) On October 12, 2016 and December 12, 2016, the Company acquired two aircraft spare engines, which were accounted for estimated useful life of 25 years. The Company identified the major components as separate parts at their respective cost. at cost for a total amount of Ps.323,025. The assets contain two major components which are assumed to have different These major components of the spare engines are presented as part of the aircraft spare engines and depreciated over their useful lives, the limited life parts (LLPs) have an estimated useful life of 12 years, and the rest of the aircraft engine has an useful life. 13. INTANGIBLE ASSETS, NET The composition and movement of intangible assets is as follows: GROSS VALUE ACCUMULATED AMORTIZATION NET CARRYING AMOUNT USEFUL LIFE YEARS 2018 2017 2016 2018 2017 2016 2018 2017 2016 AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, Software 1 – 4s Ps. 503,467 Ps. 441,803 Ps. 313,028 Ps. (324,343) Ps. (251,383) Ps. (198,987) Ps. 179,124 Ps. 190,420 Ps. 114,041 Balance as of January 1, 2016 Ps. Additions Disposals Amortization Exchange differences Balance as of January 1, 2017 Additions Disposals Amortization Exchange differences Balance as of December 31, 2017 Additions Disposals Amortization Exchange differences Balance as of December 31, 2018 94,649 60,792 (1,277) (40,290) 167 114,041 130,908 (1,976) (52,396) (157) 190,420 71,007 (9,368) (72,885) (50) Ps. 179,124 Software amortization expense for the years ended December 31, 2018, 2017 and 2016 was Ps.72,885, Ps.52,396 and Ps.40,290, respectively. These amounts were recognized in depreciation and amortization in the consolidated statements of operations. 100 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 14. OPERATING LEASES The most significant operating leases are as follows: a) Aircraft and engine rent. At December 31, 2018, the Company leases 77 aircraft (71 and 69 as of December 31, 2017 and 2016, respectively) and 10 spare engines under operating leases (8 and 11 as of December 31, 2017 and 2016, respec- tively) that have maximum terms through 2032. Rents are guaranteed by deposits in cash or letters of credit. The aircraft lease agreements contain certain covenants to which the Company is bound. The most significant covenants include the following: (i) Maintain the records, licenses and authorizations required by the competent aviation authorities and make the corre- sponding 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. ENGINE T YPE MODEL AT DECEMBER 31, 2018 AT DECEMBER 31, 2017 AT DECEMBER 31, 2016 V2500 V2500 V2500 V2527M–A5 V2527E–A5 V2527–A5 PW1100 PW1127G–JM 3 3 2 2 10 3 3 2 – 8 3 4 4 – 11 * Certain of the Company’s aircraft and engine lease agreements include an option to extend the lease term period. Terms and condi- tions are subject to market conditions at the time of renewal. During the year ended December 31, 2018, the Company incorporated ten new aircraft to its fleet (three of them based on the terms of the Airbus purchase agreement and seven from a lessor´s order book). These new aircraft lease agreements were accounted as operating leases. Also, the Company extended the lease term of two aircraft (effective from 2019) and two spare engines (effective from February and April 2018), and returned four aircraft to their respective lessors. As of December 31, 2018, 2017 and 2016, the Company was in compliance with the covenants under the above mentioned aircraft lease agreements. During the year ended December 31, 2018, the Company also incorporated two NEO spare engines to its fleet based on the terms of the Pratt and Whitney purchase agreement (FMP). These two engines incorporated were subject to sale and leaseback transactions and their respective lease agreements were accounted as operating leases. Composition of the fleet and spare engines, operating leases*: During the year ended December 31, 2017, the Company incorporated five aircraft to its fleet (one of them based on the terms of the Airbus purchase agreement and four from a lessor´s order book). These new aircraft lease agreements were AIRCRAFT T YPE MODEL AT DECEMBER 31, 2018 AT DECEMBER 31, 2017 AT DECEMBER 31, 2016 accounted for as operating leases. Also, the Company returned three aircraft to their respective lessors. All the aircraft A319 A319 A320 A320 A320NEO A321 A321NEO 132 133 233 232 271N 231 271N 4 4 39 4 12 10 4 77 6 6 39 4 6 10 – 71 6 9 39 4 1 10 – 69 incorporated through the lessor´s aircraft order book were not subject to sale and leaseback transactions. Additionally, during 2017 the Company extended the lease term of three aircraft (effective from 2018) and two spare engines (effective from July 2017 and September 2017, respectively). Such leases were accounted for as operating leases and were not subject to sale and leaseback transactions. During the year ended December 31, 2016, the Company incorporated 17 aircraft to its fleet (eight of them based on the terms of the Airbus purchase agreement and 9 from a lessor’s aircraft order book). These new aircraft lease agreements were accounted for as operating leases. Also, the Company returned four aircraft to their respective lessors. All the aircraft incorporated through the lessor’s aircraft order book were not subject to sale and leaseback transactions. 101 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  Additionally, during 2016 the Company extended the lease term of two aircraft effective from 2016 and entered into certain agreements with different lessors to lease five spare engines which were received during the same period. Such leases were accounted for as operating leases and were not subject to sale and leaseback transactions. During 2016, the Company purchased two spare engines, which were accounted as part of the property, plant and equipment (See Note 12). As of December 31, 2018, 2017 and 2016, all of the Company’s aircraft and spare engines lease agreements were accounted for as operating leases. Provided below is an analysis of future minimum aircraft and engine lease payments in U.S. dollars and its equivalent in 2019 2020 2021 2022 2023 2024 and thereafter OPERATING LEASES DENOMINATED IN U.S. DOLLARS EQUIVALENT IN MEXICAN PESOS * OPERATING LEASES DENOMINATED IN MEXICAN PESOS US$ Ps. 9,754 6,017 3,111 1,763 721 3,534 191,989 118,428 61,243 34,691 14,201 69,553 Ps. 131,166 88,237 16,114 13,302 10,108 33,459 Total US$ 24,900 Ps. 490,105 Ps. 292,386 Mexican pesos: 2019 2020 2021 2022 2023 2024 and thereafter AIRCRAFT OPERATING LEASES ENGINE OPERATING LEASES IN U.S. DOLLARS IN MEXICAN PESOS(1) IN U.S. DOLLARS IN MEXICAN PESOS(1) * Convenience translation to U.S. dollars (Ps. 19.6829) c) Rental expense charged to results of operations is as follows: US$ 301,632 Ps. 5,936,992 US$ 7,314 Ps. 143,961 296,205 288,462 275,451 238,970 897,251 5,830,173 5,677,769 5,421,674 4,703,623 17,660,502 6,694 6,537 6,064 5,066 5,121 131,757 128,667 119,357 99,714 100,796 Real estate: Airports facilities Aircraft and engine (Note 1p) Ps. 6,314,930 Ps. 6,072,502 Ps. 5,590,058 2018 2017 2016 Total US$ 2,297,971 Ps. 45,230,733 US$ 36,796 Ps. 724,252 Offices, maintenance warehouse and hangar (1) Using the exchange rate as of December 31, 2018 of Ps. 19.6829. (Note 20) Total rental expenses on real estate 56,288 36,483 92,771 44,251 30,544 74,795 40,591 33,517 74,108 Such amounts are determined based on the stipulated rent contained within the agreements without considering renewals and using the prevailing exchange rate and interest rates at December 31, 2018. Total cost of operating leases Ps. 6,407,701 Ps. 6,147,297 Ps. 5,664,166 During the years ended December 31, 2018, 2017 and 2016 the Company entered into aircraft and spare engines sale and leaseback transactions, resulting in a gain of Ps.609,168, Ps.65,886 and Ps.484,827, respectively, that was recorded under b) Rental of land and buildings. The Company has entered into land and property lease agreements with third parties for the the caption other income in the consolidated statement of operations (Note 20). premises where it provides its services and where its offices are located. These leases are recognized as operating leases. Provided below is an analysis of future minimum land and building lease payments denominated in U.S. dollars or Mexican pesos as established in the respective lease agreements: 102 During the year ended December 31, 2011, the Company entered into aircraft and spare engines sale and leaseback trans- actions, which resulted in a loss of Ps.30,706. This loss was deferred in the consolidated statements of financial position and is being amortized over the contractual lease term. As of December 31, 2018, 2017 and 2016, the current portion of the loss on sale amounts to Ps.3,047 each year, which is recorded in the caption of prepaid expenses and other current assets (Note 10), and the non–current portion amounts to Ps.8,366, Ps.11,413 and Ps.14,460, respectively, which is recorded in the caption of other assets in the consolidated statements of financial position. For each of the years ended December 31, 2018, 2017 and 2016, the Company amortized a loss of Ps.3,047, as additional aircraft rental expense. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 15. ACCRUED LIABILITIES c) An analysis of other liabilities is as follows: a) An analysis of accrued liabilities at December 31, 2018, 2017 and 2016 is as follows: BALANCE AS OF JANUARY 1, 2018 INCREASE FOR THE YEAR PAYMENTS BALANCE AS OF DECEMBER 31, 2018 Fuel and traffic accrued expenses Ps. 1,315,363 Ps. 1,106,913 Ps. 922,607 Employee profit sharing (Note 16) 9,063 14,106 8,185 14,984 2018 2017 2016 Aircraft lease return obligation Ps. 488,383 Ps. 774,614 Ps. 832,323 Ps. 430,674 Maintenance and aircraft parts accrued expenses Sales, marketing and distribution accrued expenses Maintenance deposits Salaries and benefits Accrued administrative expenses Aircraft and engine lease extension benefit (Note 1j) Deferred revenue from V Club membership Information and communication accrued expenses Supplier services agreement Depositary services benefit Advances from travel agencies Others b) Accrued liabilities long–term: 79,280 194,366 130,897 283,538 141,371 187,072 67,306 50,796 59,557 45,008 10,634 – 482 77,985 143,758 132,519 114,781 90,459 83,047 76,261 44,638 10,634 1,473 650 51,474 102,880 179,288 170,994 80,981 85,124 32,771 32,950 6,333 2,068 1,536 37,010 Ps. 2,318,392 Ps. 2,050,973 Ps. 1,785,439 Ps. 497,446 Ps. 788,720 Ps. 840,508 Ps. 445,658 Short–term maturities Long–term Ps. 117,724 Ps. 327,934 BALANCE AS OF JANUARY 1, 2017 INCREASE FOR THE YEAR PAYMENTS BALANCE AS OF DECEMBER 31, 2017 Aircraft lease return obligation Ps. 410,060 Ps. 937,982 Ps. 859,659 Ps. 488,383 Employee profit sharing (Note 16) 10,695 8,342 9,974 9,063 Ps. 420,755 Ps. 946,324 Ps. 869,633 Ps. 497,446 Short–term maturities Long–term Ps. 280,744 Ps. 216,702 BALANCE AS OF JANUARY 1, 2016 INCREASE FOR THE YEAR PAYMENTS BALANCE AS OF DECEMBER 31, 2016 2018 2017 2016 Aircraft lease return obligation Ps. 149,326 Ps. 1,025,757 Ps. 765,023 Ps. 410,060 Employee profit sharing (Note 16) 10,173 9,967 9,445 10,695 Aircraft and engine lease extension benefit (Note 1j) Ps. 61,730 Ps. 107,400 Ps. 127,831 Supplier services agreement Depositary services benefit Other 66,539 – 8,964 77,174 – 15,274 4,350 1,473 36,154 Short–term maturities Long–term Ps. 159,499 Ps. 1,035,724 Ps. 774,468 Ps. 420,755 Ps. 284,200 Ps. 136,555 Ps. 137,233 Ps. 199,848 Ps. 169,808 During the years ended December 31, 2018, 2017 and 2016 no cancellations or write–offs related to these liabilities were 103 recorded. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 16. EMPLOYEE BENEFITS The components of net period cost recognized in the consolidated statement of operations and the obligations for seniority The significant assumptions used in the computation of the seniority premium obligations are shown below: premium for the years ended December 31, 2018, 2017 and 2016, are as follows: 2018 2017 2016 2018 2017 2016 Analysis of net period cost: Current service cost Interest cost on benefit obligation Net period cost Ps. Ps. 4,977 1,424 6,401 Ps. Ps. 3,657 1,000 4,657 Ps. Ps. 2,421 701 3,122 Changes in the defined benefit obligation are as follows: Financial: Discount rate Expected rate of salary increases Annual increase in minimum salary Biometric: Mortality (1) Disability (2) 9.91% 5.65% 4.15% 7.72% 5.50% 4.00% 7.78% 5.50% 4.00% EMSSA 09 IMSS–97 EMSSA 09 IMSS–97 EMSSA 09 IMSS–97 Defined benefit obligation at January 1, Ps. 19,289 Ps. 13,438 Ps. 10,056 (1) Mexican Experience of social security (EMSSA). (2) Mexican Experience of Instituto Mexicano del Seguro Social (IMSS). 2018 2017 2016 Net period cost charged to profit or loss: Current service cost Interest cost on benefit obligation Remeasurement losses in other comprehensive income: Actuarial changes arising from changes in assumptions Payments made 4,977 1,423 (5,989) (1,547) 3,657 1,000 1,776 (582) 2,421 701 442 (182) Accruals for short–term employee benefits at December 31, 2018, 2017 and 2016, respectively, are as follows: Employee profit–sharing (Note 15c) Ps. 14,984 Ps. 9,063 Ps. 10,695 2018 2017 2016 Defined benefit obligation at December 31, Ps. 18,153 Ps. 19,289 Ps. 13,438 The key management personnel of the Company include the members of the Board of Directors (Note 7). 104 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 17. SHARE– BASED PAYMENTS a) LTRP As the Administrative Trust is controlled and therefore consolidated by Controladora, shares purchased in the market and held within the Administrative Trust are presented for accounting purposes as treasury stock in the consolidated statement of changes in equity. On November 6, 2014, the shareholders of the Company and the shareholders of its subsidiary Servicios Corporativos, approved an amendment to the current LTRP for the benefit of certain key employees, based on the recommendations In November 2018 and 2017, April and October and 2016, extensions to the LTIP were approved by the Company’s of the Board of Directors of the Company at its meetings held on July 24 and August 29, 2014. For such purposes on shareholder’s and Company’s Board of Directors, respectively. The total cost of the extensions approved were Ps.63,961 November 10, 2014 an irrevocable Administrative Trust was created by Servicios Corporativos and the key employees. The (Ps.41,590 net of withheld taxes), Ps.15,765 (Ps.10,108 net of withheld taxes) and Ps.14,532 (Ps.9,466 net of withheld taxes), new plan was restructured and named LTIP, which consists of a share purchase plan (equity–settled transaction) and SARs respectively. Under the terms of the incentive plan, certain key employees of the Company were granted a special bonus plan (cash settled). that was transferred to the Administrative Trust for the acquisition of Series A shares of the Company. On October 18, 2018, the Board of Directors of the Company approved a new long–term retention plan LTRP for certain As of December 31, 2018, 2017 and 2016, the number of shares into the Administrative Trust associated with the Company’s executives of the Company, through which the beneficiaries of the plan, will receive shares of the Company once the service share purchase payment plans is as follows: conditions are met. This plan does not include cash compensations granted through appreciation rights on the Company’s shares. The retention plans granted in previous periods under LTRP will continue in full force and effect until their respective due dates and the cash compensation derived from them will be settled according to the conditions established in each plan. b) LTIP – Share purchase plan (equity–settled) Under the share purchase plan (equity– settled), in November 2014 certain key employees of the Company were granted with a special bonus by an amount of Ps.10,831, to be used to purchase Company’s shares. The plan consisted in: (i) Servicios Corporativos granted a bonus to each key executive; (ii) The bonus amount by Ps.7,059, net of withheld taxes, was transferred on November 11, 2014, as per the written instructions of each key employees, to the Administrative Trust for the acquisition of Series A shares of the Company Outstanding as of December 31, 2015 Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year Outstanding as of December 31, 2016 Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year through an intermediary authorized by the BMV based on the Administration Trust’s Technical Committee instructions; Outstanding as of December 31, 2017 (iii) Subject to specified terms and conditions set forth in the Administrative Trust, the acquired shares were in escrow under the Administrative Trust for its administration until the vesting period date for each key executive, date as of which the key executive can fully dispose of the shares and instruct as desired. (iv) The share purchase plan provides that if the terms and conditions are not met by the vesting period date, then the Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year shares would be sold in the BMV, and Servicios Corporativos would be entitled to receive the proceeds of the sale of Outstanding as of December 31, 2018 shares. NUMBER OF SERIES A SHARES 617,001 513,002 – (425,536) (86,419) 618,048 * 547,310 – (345,270) – 820,088 * 3,208,115 – (353,457) (121,451) 3,553,295 * (v) The key employees’ account balance will be tracked by the Administrative Trust. The Administrative Trust’s objectives * These shares are presented as treasury shares in the consolidated statement of financial position as of December 31, are to acquire Series A shares on behalf of the key employees and to manage the shares granted to such key executive 2018, 2017 and 2016. based on instructions set forth by the Technical Committee. 105 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  The vesting period of the shares granted under the Company’s share purchase plans is as follows: The fair value of these SARs is estimated at the grant date and at each reporting date using the Black–Scholes option pricing model, taking into account the terms and conditions on which the SARs were granted (vesting schedule in tables below). NUMBER OF SERIES A SHARES VESTING PERIOD 1,284,373 1,207,862 1,061,060 3,553,295 November 2018 – 2019 November 2019 – 2020 November 2020 – 2021 NUMBER OF SARS EXERCISABLE DATE 1,348,777 757,809 2,106,586* November 2019 November 2020 In accordance with IFRS 2, the share purchase plans are classified as equity–settled transactions on the grant date. This valuation is the result of multiplying the total number of Series A shares deposited in the Administrative Trust and the price per share, plus the balance in cash deposited in the Administrative Trust. For the years ended December 31, 2018, 2017 and 2016, the compensation expense recorded in the consolidated state- ment of operations amounted to Ps.19,980, Ps.13,508 and Ps.7,816, respectively. All shares held in the Administrative Trust * Includes forfeited SARs of 484,656, 145,769 and 0 for the years ended December 31, 2018, 2017 and 2016, respectively. During the years ended December 31, 2018, 2017 and 2016, the Company made a cash payment to key employees related to the SARs plan in the amount of Ps.0, Ps.6,021 and Ps.31,261, respectively. Such payments were determined based on the increase in the share price of the Company from the grant date to the are considered outstanding for both basic and diluted (loss) earnings per share purposes, since the shares are entitled to exercisable date. dividend if and when declared by the Company. During 2018 and 2016, some key employees left the Company; therefore, the vesting conditions were not fulfilled. In accor- dance with the terms of the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares, the c) MIP – MIP I number of forfeited shares as of December 31, 2018 and 2016 were (121,451) and (86,419), respectively. In April 2012, the Board of Directors authorized a MIP for the benefit of certain key employees, subject to shareholders’ – SARs (cash settled) approval. On December 21, 2012, the shareholders approved the MIP consisting of: (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of the Company’s fully diluted capital stock; (ii) a grant of options On November 6, 2014, the Company granted 4,315,264 SARs to key employees that entitle them to a cash payment and vest as to acquire shares of the Company or CPOs having shares as underlying securities for which, as long as certain conditions long as the employee continues to be employed by the Company at the end of each anniversary, during a 3 years period. The occur, the employees will have the right to request the delivery of those shares (iii) the creation of an Administrative Trust to total amount of the appreciation rights granted under this plan at the grant date was Ps.10,831 at such date. deposit such shares in escrow until they are delivered to the officers or returned to the Company in the case that certain conditions do not occur; and (iv) the execution of share sale agreements setting forth the terms and conditions upon which Under the LTIP extensions, the number of SARs granted to certain key executives of the Company were 0, 3,965,351 and the officers may exercise its shares at Ps.5.31 (five Mexican pesos 31/100) per share. 2,044,604, which amounts to Ps.0, Ps.15,765 and Ps.14,532, for the years ended December 31, 2018, 2017 and 2016, respectively. The SARs vest as long as the employee continues to be employed by the Company at the end of each anni- On December 24, 2012, the Administrative Trust was created and the share sale agreements were executed. On December versary, during a three years period. 27, 2012, the trust borrowed Ps.133,723 from the Company and immediately after; the trust paid the Company the same amount borrowed as purchase price for the shares. Fair value of the SARs is measured at each reporting date. The carrying amount of the liability relating to the SARs as of December 31, 2018, 2017 and 2016 were Ps.537, Ps.723 and Ps.15,744, respectively. The share sale agreements provide that the officers may pay for the shares at the same price upon the occurrence of either an initial public offering of the Company’s capital stock or a change of control and as long as they remain employees until the The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits options are exercised, with a maximum term of ten years. Upon payment of the shares by the officers to the Management over the service period. During the years ended December 31, 2018, 2017 and 2016, the Company recorded a (benefit) Trust, it has to pay such amount back to the Company as repayment of the loan, for which the Company charges no interest. 106 expense of Ps.(186), Ps.(8,999) and Ps.31,743, respectively, in the consolidated statement of operations. The MIP has been classified as equity–settled, by which, the grant date, fair value is fixed and is not adjusted by subsequent Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G changes in the fair value of capital instruments. Equity–settled transactions are measured at fair value at the date the equity Movements in share options benefits are conditionally granted to employees. The total cost of the MIP determined by the Company was Ps.2,722 to be recognized from the time it becomes probable the performance condition will be met over the vesting period. Total cost The following table illustrates the number of shares options and fixed exercise prices during the year: of the MIP related to the vested shares has been fully recognized in the consolidated statements of operations during the vesting years. This cost was determined by using the improved Binomial valuation model from Hull and White, on the date in which the NUMBER OF SHARE OPTIONS EXERCISE PRICE IN MEXICAN PESOS TOTAL IN THOUSANDS OF MEXICAN PESOS plan had already been approved by the shareholders and a shared understanding of the terms and conditions of the plan Outstanding as of December 31, 2015 15,857,856 Ps. 5.31 Ps. 84,269 was reached with the employees (December 24, 2012, defined as the grant date), with the following assumptions: Dividend yield (%) Volatility (%) Risk–free interest rate (%) Expected life of share options (years) Exercise share price (in Mexican pesos Ps.) Exercise multiple Fair value of the stock at grant date 2012 0.00% 37.00% 5.96% 8.8 5.31 1.1 1.73 Granted during the year Forfeited during the year Exercised during the year – – (3,299,999) Outstanding as of December 31, 2016 12,557,857 Ps. Granted during the year Forfeited during the year Exercised during the year – – (120,000) Outstanding as of December 31, 2017 12,437,857 Ps. Granted during the year Forfeited during the year Exercised during the year – – (2,003,876) Outstanding as of December 31, 2018 10,433,981 Ps. – – 5.31 5.31 – – 5.31 5.31 – – 5.31 5.31 Ps. – – (17,536) 66,733 – – (638) Ps. 66,095 – – (10,654) 55,441 Ps. The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome. At December 31, 2018, 2017 and 2016, 10,433,981, 12,437,857 and 12,557,857 share options pending to exercise were considered as treasury shares, respectively. Under the methodology followed by the Company, at the grant date and December 31, 2012, the granted shares had no positive intrinsic value. – MIP II In 2018, 2017 and 2016, the key employees exercised 2,003,876, 120,000 and 3,299,999 Series A shares. As a result, the Such extension was modified as of November 6, 2016. Under MIP II, 13,536,960 share appreciation rights of our Series key employees paid Ps.10,654, Ps.638 and Ps.17,536 for the years ended December 31, 2018, 2017 and 2016, respectively, A shares were granted to be settled annually in cash in a period of five years in accordance with the established service to the Management Trust corresponding to the exercised shares. conditions. In addition, a five–year extension to the period in which the employees can exercise MIP II once the SARs are On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees. vested was approved. Thereafter, the Company received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. Fair value of the SARs is measured at each reporting period using a Black–Scholes option pricing model, taking into consid- eration the terms and conditions granted to the employees. The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date. 107 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  The carrying amount of the liability relating to the SARs as of December 31, 2018, 2017 and 2016 was Ps.32,807, Ps.37,858 In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit and Ps.54,357, respectively. The compensation cost is recognized in the consolidated statement of operations under the of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during a four years period caption of salaries and benefits over the service period. with an exercise price share at Ps.16.12, which was determined on the grant date. Under this plan, no service or perfor- mance conditions are required to the board members for exercise the option to acquire shares, and therefore, they have the During the years ended December 31, 2018, 2017 and 2016, the Company recorded a (benefit) expense of Ps.(5,052), right to request the delivery of those shares at the time they pay for them. Ps.(16,499) and Ps.54,357, respectively, in the consolidated statement of operations. No SARs were exercised during 2018. The vesting schedule is summarized in the table below: For such purposes on August 29, 2018 the Trust Agreement number CIB/3081 was created by Controladora Vuela, Compañia NUMBER OF SARs 1,695,500 2,825,840 3,391,020 7,912,360* VESTING DATE February 2019 February 2020 February 2021 de Aviación S.A.B de C.V as trustee and CIBanco, S.A., Institucion de Banco Multiple as trustor. The number of shares hold as of December 31, 2018 available to be exercised is 1,103,638. 18. EQUIT Y As of December 31, 2018, 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: * Includes forfeited SARs of 1,563,520, 0, and 0, for the years ended December 31, 2018, 2017 and 2016, respectively. The (benefit) expense recognized for the Company’s retention plans during the year is shown in the following table: 2018 2017 2016 (Benefit) expense arising from cash–settled share–based payments transactions Ps. (5,238) Ps. (25,498) Ps. 86,100 Expense arising from equity–settled Series A shares (1) Series B shares (1) Treasury shares (Note 17) SHARES FIXED CLASS I VARIABLE CLASS II TOTAL SHARES 10,478 13,702 24,180 – 24,180 923,814,326 88,038,171 923,824,804 88,051,873 1,011,852,497 1,011,876,677 (15,212,365) 996,640,132 (15,212,365)* 996,664,312 share–based payments transactions 19,980 13,508 7,816 * The number of forfeited shares as of December 31, 2018 were 121,451, which are include in treasury shares. Total expense (benefit) arising from share–based payments transactions Ps. 14,742 Ps. (11,990) Ps. 93,916 (1) On February 16, 2018, one of the Company´s shareholders converted 45,968,598 Series B Shares for the equivalent d) Board of Directors Incentive Plan (BODIP) Certain members of the Board of Directors of the Company receive additional benefits through a share–based plan, which has been classified as an equity–settled share–based payment and therefore accounted under IFRS 2 “Shared based number of Series A Shares. This conversion has no impact either on the total number of outstanding shares nor on the earnings-per-share calculation. payments”. 108 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G  As of December 31, 2017, the total number of authorized shares was 1,011,876,677; represented by common registered a) (Loss) Earnings per share shares, issued and with no par value, fully subscribed and paid, comprised as follows: SHARES to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Basic (loss) earnings per share (“LPS or EPS”) amounts are calculated by dividing the net (loss) income for the year attributable Series A shares Series B shares Treasury shares (Note 17) FIXED CLASS I VARIABLE CLASS II TOTAL SHARES 3,224 20,956 24,180 – 24,180 877,852,982 133,999,515 877,856,206 134,020,471 1,011,852,497 1,011,876,677 (13,257,945) 998,594,552 (13,257,945) 998,618,732 As of December 31, 2016, 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: Diluted LPS or EPS amounts are calculated by dividing the (loss) profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares, if any), by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares (to the extent that their effect is dilutive). The following table shows the calculations of the basic and diluted (loss) earnings per share for the years ended December 31, 2018, 2017 and 2016. AT DECEMBER 31, 2018 2017 2016 SHARES FIXED CLASS I VARIABLE CLASS II TOTAL SHARES Net (loss) income for the period Ps. (682,500) Ps. (651,788) Ps. 3,478,598 Series A shares Series B shares Treasury shares (Note 17) 3,224 20,956 24,180 – 24,180 877,852,982 133,999,515 877,856,206 134,020, 471 1,011,852,497 1,011,876,677 (13,175,905) 998,676,592 (13,175,905) 998,700,772 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 Weighted average number of shares outstanding (in thousands): Basic Diluted LPS –EPS: Basic Diluted 1,011,877 1,011,877 (0.679) (0.679) 1,011,877 1,011,877 (0.644) (0.644) 1,011,877 1,011,877 3.438 3.438 dividends and the repayment of capital. Holders of the Company’s Series A common stock and Series B common stock There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and are entitled to dividends when, and if, declared by a shareholders’ resolution. The Company’s revolving line of credit with the date of authorization of these financial statements. 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. Only Series A shares from the Company are listed. b) In accordance with the Mexican Corporations Act, the Company is required to allocate at least 5% of the net income of each year to increase the legal reserve. This practice must be continued until the legal reserve reaches 20% of capital stock. As During the years ended December 31, 2018, 2017 and 2016, the Company did not declare any dividends. of December 31, 2018 and 2017, the Company’s legal reserve was Ps.291,178 or 9.8% our capital stock. As of December 31, 2016 the legal reserve was Ps.38,250. 109 At an ordinary general shareholders’ meeting held on April 19, 2017 the shareholders approved to increase legal reserve in the amount of Ps.252,928. As of December 31, 2018, 2017 and 2016 the Company’s legal reserve has not reached the 20% of its capital stock. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G c) Any distribution of earnings in excess of the net tax profit account (Cuenta de utilidad fiscal neta or “CUFIN”) balance will be b) For the years ended December 31, 2018, 2017 and 2016, the Company reported on a consolidated basis taxable income of subject to corporate income tax, payable by the Company, at the enacted income tax rate at that time. A 10% withholding Ps.777,513, Ps.171,046 and Ps.2,702,355, respectively, which was partially offset by tax losses from prior years. tax is imposed on dividends distributions to individuals and foreign shareholders from earnings generated starting January 1, 2014. In accordance with the MITL and Costa Rican Income Tax Law (CRITL), tax losses may be carried forward against taxable income generated in the succeeding ten and three years, respectively. Carryforward tax losses are restated based on d) Shareholders may contribute certain amounts for future increases in capital stock, either in the fixed or variable capital. Said inflation. contributions will be kept in a special account until the shareholders meeting authorizes an increase in the capital stock of the Company, at which time each shareholder will have a preferential right to subscribe and pay the increase with the c) An analysis of consolidated income tax expense for the years ended December 31, 2018, 2017 and 2016 is as follows: contributions previously made. As it is not strictly regulated in Mexican law, the shareholders meeting may agree to return the contributions to the shareholders or even set a term in which the increase in the capital stock has to be authorized. Consolidated statements of operations 19. INCOME TA X 2018 2017 2016 a) In accordance with the MITL, the Company and its Mexican subsidiaries are subject to income tax and each files its tax returns on an individual entity basis and the related tax results are included in the accompanying consolidated financial statements. The income tax is computed taking into consideration the taxable and deductible effects of inflation, such as depreciation calculated on restated assets values. Taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the annual inflation adjustment. (i) Based on the approved law, corporate income tax rate for 2018 and thereafter is 30%. (ii) The tax rules include limits in the deductions of the exempt compensation amount certain items, as follows: Wages Current year income tax expense Ps. (232,824) Ps. (51,313) Ps. (706,244) Deferred income tax benefit (expense) 471,060* 212,488** (750,938)*** Total income tax benefit (expense) Ps. 238,236 Ps. 161,175 Ps. (1,457,182) * Includes translation effect by Ps.2,683 **Includes translation effect by Ps.1,008 ***Includes translation effect by Ps.1,242 and benefits paid to workers 47% of income paid to workers and in certain cases up to 53% (holiday bonus, savings fund, employee profit sharing, seniority premiums) will be deductible for employers. As a result, certain wage and salary Consolidated statements of OCI provisions have difference between tax and book values at year–end. (iii) The MITL sets forth criteria and limits for applying some deductions, such as: the deduction of payments which, in turn, are exempt income for workers, contributions for creating or increasing provisions for pension funds, contributions to the Mexican Institute of Social Security payable by the worker that are paid by the employer, as well as the possible non–deduction of payments made to related parties in the event of failing to meet certain requirements. (iv) Taxable income for purposes of the employee profit sharing is the same used for the Corporate Income Tax except for certain items. 2018 2017 2016 Deferred tax related to items recognized in OCI during the year Net gain (loss) on cash flow hedges Ps. 85,107 Ps. 12,017 Ps. (187,408) Remeasurement (loss) gain of employee benefits (1,797) 533 132 (v) A 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders from earnings Deferred tax charged to OCI Ps. 83,310 Ps. 12,550 Ps. (187,276) generated starting January 1, 2014. The income tax rates for 2018, 2017 and 2016 in Guatemala and Costa Rica are 25% and 30%, respectively. 110 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G d) A reconciliation of the statutory corporate income tax rate to the Company’s effective tax rate for financial reporting purpos- e) An analysis of consolidated deferred taxes is as follows: es is as follows: 2018 2017 Statutory income tax rate Non–deductible expenses Unrecorded deferred taxes on tax losses Foreign countries difference with Mexican statutory rate Inflation of tax losses Amendment tax return effects and other tax adjustments Inflation on furniture, intangible and equipment Annual inflation adjustment 30.00% (3.53%) (5.56%) (0.02%) 1.79% (0.08%) 2.91% 0.36% 25.87% 30.00% (3.90%) (14.55%) (0.32%) 1.50% (0.31%) 4.91% 4.00% 21.33% 2016 30.00% 0.28% 0.09% 0.04% (0.01%) (0.11%) (0.38%) (0.63%) 29.28% 2018 2017 2016 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF OPERATIONS Ps. 460,590 Ps. (2,621) Ps. 463,211 Ps. (18,415) Ps. 481,626 Ps. (16,637) 324,445 (27,544) 351,989 8,695 343,294 56,727 Deferred income tax assets: Intangible Provisions Tax losses available for offsetting against future taxable income 309,320 (33,762) 343,082 309,758 33,324 (25,030) Extension lease agreement 149,305 6,170 143,135 41,411 101,724 25,405 Unearned transportation revenue 735,355 699,414 35,941 (29,814) 65,755 7,039 Mexican income tax matters For Mexican purposes, corporate income tax is computed on accrued basis. MITL requires taxable profit to be determined by considering revenue net of tax deductions. Prior years’ tax losses can be utilized to offset current year taxable income. Income tax is determined by applying the 30% rate on the net amount after tax losses utilization. Allowance for doubtful accounts Employee benefits Employee profit sharing Financial instruments For tax purposes, income is considered taxable at the earlier of: (i) the time the revenue is collected, (ii) the service is provided or (iii) the time of the issuance of the invoice. Expenses are deductible for tax purposes generally on accrual basis, with some exceptions, once the requirements established in the tax law are fulfilled. Deferred income tax liabilities: 4,902 5,446 4,493 35,955 (2,422) 1,456 1,777 7,324 5,786 2,716 433 1,222 (490) 6,891 4,031 3,206 – (49,151) – (61,168) (2,179) 886 158 – 2,029,811 642,468 1,304,033 312,800 978,683 46,369 Central America (Guatemala and Costa Rica) Rotable spare parts, furniture According to Guatemala Corporate Income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2018, the Company obtained a net operating income. According to Costa Rica Corporate Income tax law, under the regime on profits from business activities, net operating losses can offset taxable income in a term of three years. For the years ended December 31, 2018, 2017 and 2016, the Company generated net operating losses for an amount of Ps.170,731, Ps.300,613 and Ps.57,414, respectively, for which no deferred tax asset has been recognized. and equipment, net 645,024 168,107 476,917 108,890 368,027 103,926 Prepaid expenses and other assets Inventories Other prepayments 170,466 (25,686) 196,152 (239,586) 435,738 280,660 88,895 32,057 726 (1,212) 88,169 33,269 15,286 (7,023) 72,883 23,979 40,292 23,717 2,531,961 174,091 2,357,870 101,320 2,256,550 796,065 Ps. (502,150) Ps. 468,377 Ps. (1,053,837) Ps. 211,480 Ps. (1,277,867) Ps. (749,696) Supplemental rent 1,595,519 32,156 1,563,363 223,753 1,339,610 363,783 111 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G Reflected in the consolidated statement of financial position as follows: Deferred tax assets Deferred tax liabilities 2018 2017 2016 During 2017, the Company recognized a deferred tax asset for the carry–forward of available tax losses of Concesionaria, Ps. 593,302 Ps. 562,445 Ps. 559,083 Comercializadora and Operaciones Volaris, based on the positive evidence of the Company to generate taxable profit relat- ed to the same taxation authority against which the available tax losses can be utilized before they expire. Positive evidence includes Concesionaria’s actions to increase its aircraft fleet in the following years, increase in flight frequencies, and routes, inside and outside of Mexico; the profit of Comercializadora and Operaciones Volaris, respectively, is derived directly from (1,095,452) (1,616,282) (1,836,950) Concesionaria’s operations. Deferred tax liability, net Ps. (502,150) Ps. (1,053,837) Ps. (1,277,867) A reconciliation of deferred tax liability, net is as follows: 2018 2017 2016 Opening balance as of January 1, Ps. (1,053,837) Ps. (1,277,867) Ps. (340,895) Deferred income tax benefit (expense) during the current year recorded on profits 468,377 211,480 (749,696) Deferred income tax benefit (expense) during the current year recorded in accumulated other comprehensive income (loss) 83,310 12,550 (187,276) Closing balance as of December 31, Ps. (502,150) Ps. (1,053,837) Ps. (1,277,867) An analysis of the available tax losses carry–forward of the Company at December 31, 2018 is as follows: YEAR OF LOSS HISTORICAL LOSS RESTATED TAX LOSS UTILIZED AMOUNT TOTAL REMAINING YEAR OF EXPIRATION 2016 2016 2017 2017 2018 2018 Ps. 57,414 Ps. 57,414 Ps. – Ps. 57,414 52,221 300,613 57,215 300,613 1,068,498 1,150,140 170,731 3,191 170,731 3,290 57,215 – 122,359 – – – 300,613 1,027,781 170,731 3,290 Ps. 1,652,668 Ps. 1,739,403 Ps. 179,574 Ps. 1,559,829 2019 2026 2020 2027 2021 2028 At December 31, 2018, 2017 and 2016, the table shown above includes deferred income tax asset recognized by Concesionaria and Operaciones Volaris (2018), Comercializadora (2017) for tax losses carry–forwards to the extent that the HISTORICAL LOSS RESTATED TAX LOSS TOTAL UTILIZED REMAINING AMOUNT realization of the related tax benefit through future taxable profits is probable. The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax Comercializadora Ps. 52,221 Ps. 57,215 Ps. 57,215 Ps. – assets and deferred tax liabilities relate to income taxes levied by the same tax authority. Concesionaria Operaciones Volaris According to IAS 12, Income Taxes, a deferred tax asset should be recognized for the carry–forward of available tax losses Vuela Aviación 1,067,836 3,853 528,758 1,149,425 4,005 528,758 122,359 – – 1,027,066 4,005 528,758 to the extent that it is probable that future taxable income will be available against which the available tax losses can be Ps. 1,652,668 Ps. 1,739,403 Ps. 179,574 Ps. 1,559,829 A breakdown of available tax loss carry–forward of Controladora and its subsidiaries at December 31, 2018 is as follows: utilized. In this regards, the Company has recognized at December 31, 2018, 2017 and 2016 a deferred tax asset for tax Unrecognized NOLs losses of Ps.309,320, Ps.343,082 and Ps.33,324 respectively. Tax rate Deferred income tax (528,758) Ps. 1,031,071 30% Ps. 309,320 112 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G f) At December 31, 2018 the Company had the following tax balances: 21. FINANCE INCOME AND COST Restated contributed capital account (Cuenta de capital de aportación or “CUCA”) CUFIN* * The calculation comprises all the subsidiaries of the Company. 2018 Ps. 3,917,548 3,107,037 An analysis of finance income is as follows: Interest on cash and equivalents Ps. 152,437 Ps. 105,151 Ps. Interest on recovery of guarantee deposits Others 166 – 644 – 2018 2017 2016 78,793 23,792 6 Ps. 152,603 Ps. 105,795 Ps. 102,591 20. OTHER OPERATING INCOME AND EXPENSES An analysis of other operating income is as follows: An analysis of finance cost is as follows: Gain on sale and leaseback (Note 14c) Ps. 609,168 Ps. 65,886 Ps. 484,827 Cost of letter credit notes Ps. 2018 2017 2016 Loss on sale of rotable spare parts furniture and equipment Administrative benefits Other income (2,356) – 15,161 (908) 27,180 4,607 (1,262) 9,072 4,105 Ps. 621,973 Ps. 96,765 Ps. 496,742 Interest on debts and borrowings* Bank fees and others Other finance costs Ps. 2018 57,277 56,916 6,141 – 2017 42,294 37,565 5,279 1,219 2016 Ps. 28,067 1,245 5,804 – 35,116 Ps. 120,334 Ps. 86,357 Ps. An analysis of other operating expenses is as follows: Administrative and operational support expenses Ps. Technology and communications Passenger services Insurance Rents of offices, maintenance 2018 2017 Ps. 570,409 385,841 70,337 60,892 562,739 373,394 59,261 54,569 Ps. warehouse and hangar (Note 14c) 36,483 30,544 Disposal of intangible, rotable spare parts, furniture and equipment Others – 5,949 11 7,922 2016 541,826 266,898 45,439 56,414 33,517 436 7,922 Ps. 1,129,911 Ps. 1,088,440 Ps. 952,452 113 * The borrowing costs related to the acquisition or construction of qualifying assets are capitalized as part of the cost of the asset (Note 12) Interest expense not capitalized is related to the short term working capital facility from Citibanamex. Interest on debts and borrowings Ps. 414,836 Ps. 230,954 Ps. Capitalized interest (Note 12) (357,920) (193,389) 2018 2017 2016 96,690 (95,445) Net interest on debts and borrowing in the consolidated statements of operations Ps. 56,916 Ps. 37,565 Ps. 1,245 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G 22 . COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) b) On January 18, 2018, the Mexican antitrust authority, Comisión Federal de Competencia Económica (“COFECE”), served An analysis of the other comprehensive income for the years ended December 31, 2018, 2017 and 2016 is as follows: Volaris with a preliminary ruling of potential responsibility (Dictamen de Probable Responsabilidad or “DPR”) in which the investigating body of COFECE asserts certain allegations regarding antitrust activities in Mexico´s domestic commercial air passenger transportation market during the period from April 2008 up to February 2010 by different Mexican carriers, Derivative financial instruments: Reclassification of call options and forwards during the year to profit or loss (Note 4) Ps. (455,009) Ps. 52,097 Ps. 353,943 24. OPERATING SEGMENTS 2018 2017 2016 including Volaris. 277,899 The Company is managed as a single business unit that provides air transportation services. The Company has two Extrinsic value of changes on jet fuel Asian call options Extrinsic value of changes on jet fuel Zero cost collars Gain (loss) of the matured foreign currency forward contracts Gain (loss) of the not–yet matured interest rate swap contracts 227,509 (122,948) 66,757 – (81,182) – (13,380) 317 geographic segments identified below: – – (7,148) Total Ps. (283,691) Ps. (42,148) Ps. 624,694 23. COMMITMENTS AND CONTINGENCIES Aircraft related commitments and financing arrangements Operating revenues: Domestic (Mexico) International: United States of America and Central 2018 2017 2016 Ps. 18,493,476 Ps. 17,272,946 Ps. 15,694,044 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: America* 8,811,674 7,515,240 7,777,516 Total operating revenues Ps. 27,305,150 Ps. 24,788,186 Ps. 23,471,560 COMMITMENT EXPENDITURES IN U.S. DOLLARS COMMITMENT EXPENDITURES EQUIVALENT IN MEXICAN PESOS(1) 2018, 2017 and 2016, respectively. * United States of America represents approximately 32%, 30% and 32% of total revenues from external customers in 2019 2020 2021 2022 and thereafter US$ 76,559 Ps. 136,936 164,856 691,836 1,506,903 2,695,298 3,244,844 13,617,339 US$ 1,070,187 Ps. 21,064,384 (1) Using the exchange rate as of December 31, 2018 of Ps.19.6829. All aircraft acquired by the Company through the Airbus purchase agreement through December 31, 2018 have been executed through sale and leaseback transactions. Revenues are allocated by geographic segments based upon the origin of each flight. The Company does not have material non–current assets located in foreign countries. 25. SUBSEQUENT EVENTS Subsequent to December 31, 2018 and through April 25, 2019: 1. On April 9, the Company presented its new brand named “YaVas”, operated through its subsidiary “Viajes Vuela”. YaVas is a on line travel agency (www.yavas.com), which offers the opportunity to find in one single webpage: airline tickets, Litigation hotels, transfers and other supplemental travel services. a) 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, 2. On March 28, 2019, COFECE served the Company the final ruling dated March 19, 2019 issued by the Board of 114 results of operations, or cash flows. Commissioners in its meeting held March 14, 2019 that resolved that no liability is to be imposed against the Company. Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G CONTACT HEADQUARTERS Av. Antonio Dovalí Jaime No. 70 13th Floor, Tower B Zedec Santa Fe C.P. 01210, Mexico City INVESTOR RELATIONS María Elena Rodríguez Asiain Andrea A. González Anzures +5255 52616444 ir@volaris.com 115 Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G

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