Controladora Vuela Compañía de Aviación, S.A.B. de C.V. Annual Report 2018

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FY2018 Annual Report · Controladora Vuela Compañía de Aviación, S.A.B. de C.V.

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We Fly Differently

2018 Annual Report

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C O N T E N T S

CONTENTSVolaris | 2018 Annual ReportC 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

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 ReportOAG 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-

Volaris | 2018 Annual ReportFurthermore, 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.

* 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 ReportO 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%

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 ReportW 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

Las Vegas
12:08 PM

Boarding time
8:14 AM

Flight
Y4 966

Terminal
Terminal 1

Arrive on time!

Check-in
wherever
you want!

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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.

Volaris | 2018 Annual ReportStrong 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.

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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

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 Report2 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

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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

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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.

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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

Adults

Minor

Infant

Promo code

Book your
flight and your
hotel with us!

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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

2014

9,723

201 8

201 7

201 6

201 5

201 4

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 ReportM A R K E T
O U T L O O K

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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.

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.

Send message

Volaris | 2018 Annual Report2 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

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Search ﬂights

From
Select your origin

To
Select your destination

Departure date

Select date

Return date

Select date

One way

Round trip

Adults

Minor

Infant

Promo code

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%)

321

(35)

(2.5%)

(0.03)

(0.34)

27,305

28,186

(881)

(3.2%)

501

6,315

(683)

(2.5%)

(0.67)

(6.74)

24,788

24,827

(39)

(0.2%)

549

6,073

(652)

(2.6%)

(0.64)

(6.44)

1,011,876,677

10.2%

13.5%

>100%

(3.1) pp

(8.8%)

4.0%

4.7%

0.1 pp

4.7%

0.0%

Send message

Volaris | 2018 Annual ReportA 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 !!

a ll y h

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

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

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”

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

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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

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

M E M B E R S

*As of 2019

Volaris | 2018 Annual ReportR 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.

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S O C I A L
R E S P O N S I B I L I T Y

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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

*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 ReportO 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

Check the
status of any
of your flights!

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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.

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.

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%

72%

23%

68%

29%

100%

(2)%

25%

24%

14%

10%

89%

11%

21%

(6)%

15%

29%

25%

16%

11%

100%

(3)%

(2)%

37%

23%

17%

11%

103%

(3)%

(2)%

Volaris | 2018 Annual ReportRevenue Recognition

G E N E R A L

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.

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.

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 ReportOperating 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

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 Reportnary 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

(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

0.3

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.

Volaris | 2018 Annual ReportRegarding 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.

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 ReportPresident 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.

Volaris | 2018 Annual ReportMajor 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

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 ReportC 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

Volaris | 2018 Annual Reportand 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.

Volaris | 2018 Annual ReportE 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.

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 ReportManagement 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

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 ReportMovements 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

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.

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 ReportL 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

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 Reportwe 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.

Volaris | 2018 Annual ReportDuring 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.

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 ReportFor 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.

Volaris | 2018 Annual ReportO 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)

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

Volaris | 2018 Annual Report2 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)

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.

Volaris | 2018 Annual ReportO 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.

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 ReportMaintenance 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.

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 ReportOther 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

Volaris | 2018 Annual ReportO 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

(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.

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.

Volaris | 2018 Annual ReportF 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.

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.

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 ReportI 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

(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.

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 ReportB . 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

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 Reportannual 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

Volaris | 2018 Annual ReportC . 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.

Volaris | 2018 Annual ReportF . 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.

Volaris | 2018 Annual ReportControladora 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

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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

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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

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 ReportIAV 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.

Volaris | 2018 Annual ReportIAV 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.

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 ReportC 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.

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

(85,034)

(83,365)

291,178

1,804,528

4,948,376
98,890

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

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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$

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.

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.

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.

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.

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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

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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.

–

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)

(2,614)

–

(1,243)

(3,857)

–

4,192

–

437,286

144,812

–

(30,131)

114,681

–

(4,756)

–

(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$

(4,263)

US$

520

US$

465,971

(198,584)

22,156

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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)

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.

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)

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

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%

Costa Rica

100%

Guatemala

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%

Comercializadora Volaris, S.A. de C.V.

Merchandising of services

Mexico

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)

*
**
(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%

Recruitment and payroll

Mexico

100%

Loyalty Program

México

100%

–

Travel agency

Mexico

100%

Pre-delivery payments
financing (Note 5)

Mexico

100%

Mexico

100%

Mexico

100%

Mexico

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.

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

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

–

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.

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.

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

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.

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:

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

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.

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).

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

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.

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%

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

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

¢.

580.8534

7.5337

¢.

609.6100

7.7440

¢.

572.2000

7.3509

¢.

572.5600

7.3448

¢.

564.3332

7.4931

¢.

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

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

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.

Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G

iii)

Seniority premiums

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.

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.

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

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

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.

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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

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.

(6,155,693)

(57,189)*

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

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.

(4,960,343)

(40,891)*

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

Ps.

5,927,576

Ps.

(74,484)

Ps.

5,853,092

Net income

Ps.

3,519,489

Ps.

(40,891)

Ps.

3,478,598

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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

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

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.

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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.

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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.

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%

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

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.

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

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

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.

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.

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.

62,440

–

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

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.

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

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.

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:

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 –

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

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.

122,948

–

Ps.

–

Ps.

–

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:

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.

8,266

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,

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

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:

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.

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

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

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.

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

–

(4,472)

4,585

20,500

(15,915)

505

(49)

–

(471)

1,357

5,703

(4,346)

129

–

493

(831)

3,555

9,261

(5,706)

131

–

(692)

3,618

7,240

(3,622)

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

–

(404,659)

(496,253)

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

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

–

(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)

–

(482)

446

5,496

(5,050)

1,050

1,040

–

(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

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

Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G

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.

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.

idated statements of operations.

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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,

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.

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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

V2527M–A5

V2527E–A5

V2527–A5

PW1100

PW1127G–JM

–

* 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

A320

A320NEO

A321

A321NEO

132

133

233

232

271N

231

271N

–

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.

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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

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.

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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.

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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.

4,977

1,424

6,401

Ps.

3,657

1,000

4,657

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).

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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.

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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

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.

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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)

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

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As of December 31, 2017, the total number of authorized shares was 1,011,876,677; represented by common registered

(Loss) Earnings per share

shares, issued and with no par value, fully subscribed and paid, comprised as follows:

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

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

(0.679)

1,011,877

(0.644)

1,011,877

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

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

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

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

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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

2017

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

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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

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

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

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The borrowing costs related to the acquisition or construction of qualifying assets are capitalized as part of the cost of

the asset (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

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22 . COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

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:

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.

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,

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

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Volaris | 2018 Annual Report20:18 p.m.100%IAV 4G