I n t e g r a t e d A n n u a l R e p o r t Ad a p t a t i o n , F l ex i b i l i t y a n d R e s i l i e n c e Content 1. Volaris, the Lowest Cost Publicly Traded Airline Initiatives in Times of COVID-19 in the Americas Message from the President and Chief Executive Officer 2020 Highlights and Initiatives About Volaris Business Model Volaris Corporate Sustainability Program Corporate Governance Volaris Culture Volaris Family Competitive Advantages Lower Unit Costs A Young and Efficient Fleet Operational Efficiency The You Decide Program and Ancillaries Bus Switching Campaign Route Network Volaris Digital Strategy 2. Volaris Value Creation Volaris Value Creation Model and our Contribution to the SDG Stakeholder Engagement 3 4 6 9 9 10 12 27 28 30 30 30 31 31 34 34 37 39 40 43 Actions to Address COVID-19 Impacts Promptly and Decisively Work Flexibility and Home Office Ultra-Low-Cost Model / Bus Switching Campaign “With Volaris, Fly Sure” Campaign Customer Service and Solution Capacity Recovery Avión Ayuda Volaris Program Initiatives for the Benefit of Communities 3. Volaris Performance 2020 Financial and Operating Metrics Summary 2020 Results Corporate Affairs Supply Chain Responsible Supply Chain Management Program Environmental Protection and Climate Change Mitigation #CielitoLimpio Comprehensive Environmental Protection Policy Ambassadors’ Relations, Practices and Wellbeing Equal Opportunities and Non-Discrimination Talent Attraction, Development and Retention Occupational Health and Safety 45 45 46 47 48 49 50 51 54 57 58 59 60 62 62 64 64 75 75 78 90 Content Human Rights and Community Relations Human Rights Protection Program Customer Wellfare, Privacy and Data Security Aviation security and safety Personal Data Privacy 4. Consolidated Financial Statements 5. Operating and Financial Review and Prospects 6. About this Report Materiality Assessment GRI and SASB Content Index 7. Contact 92 92 93 93 95 96 143 172 174 175 182 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content Content Volaris, the Lowest Cost Publicly Traded Airline in the Americas Content 1.1. Message from the President and Chief Executive Officer 1.2. 2020 Highlights and Initiatives 1.3. About Volaris 1.4. Competitive Advantages Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 1 Content 4 GRI 201: 103-1, 103-2, 103-3 GRI 102-14, 102-15 1.1. Message from the President and Chief Executive Officer To our stakeholders: From the outset, I would like to thank the entire Volaris Family for their hard work and commitment over a year of enormous challenges. I also share the grief of those who have lost their loved ones due to the pandemic. This company and its future depend on you, and together we all will work to support our team members, our families and our customers who have faced unimaginable loss and challenges during this past year. 2020 represented a scenario hardly imaginable. An affected global economy, numerous cities in lockdown, border closures, trips to international and national destinations reduced to a minimum. As a was the case across the globe, the air transportation industry in Mexico suffered a strong impact. Volaris responded decisively to this deep crisis. Faced with unprecedented challenges, Volaris assessed the changing needs of its staff and customers. Although the process was difficult at times, Volaris quickly adapted to the “new normal”, finding opportunities to re-position itself and, at the same time, contribute actively to the economic recovery of Mexico and the region. We achieved this through dialogue with our Customers, for whom we developed new digi- tal tools to better serve them and give them the confidence to be able to fly with us under strict biosafety protocols, in accordance with the highest national and international stan- dards. These were endorsed by the World Travel & Tourism Council (WTTC) “Safe Travels” and by the governments of Mexico City and the state of Yucatan. We have been working Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact closely with our government and industry partners to support the recovery of the tourism sector, which is so vital to our national economy. We have also contributed in solidarity with the country by transporting more than 45 tons of humanitarian aid, as well as rescuers, medical personnel, organs and tissues for transplant purposes and patients, through the Avión Ayuda Volaris program. Even in the face of the health crisis and economic shocks caused by the pandemic, Volaris proven to be resilient, emerging as the leading airline in terms of market recovery in Mexico and the Americas. It is an achievement in the eyes of all, that we take pride on and that compels us to recognize our strengths. This was possible due to numerous factors implemented around our business model, including financial discipline, resilience and adaptation to the new normal, understanding the needs of our stakeholders, a corporate sustainability strategy and, of course, the extraordinary work of the Volaris Family. Also, thanks to the dialogue with our Ambassadors and the union, we preserved all our jobs, a remarkable achievement that laid a strong foundation for our newly-renewed business concession to provide air transportation services for 20 more years. The ultra-low-cost business model has proven to be the most resilient to the global pandemic. Our priority now is to continue to offer safe and reliable service while maintaining strong cost discipline in order to deliver the lowest prices in the market and increase total revenue per available seat mile. In 2020 we launched thirteen new routes, five domestic and eight international, diversified our point-to-point network, and strengthened our presence at Mexico City International Airport. Also, in the last quarter of the year, we recovered the profit- ability of our business. Volaris continued to offer low base fares during 2020. Although the company’s total consolidated operating revenues decreased 36% compared to the previous year, we managed to offset them through revenue from our ancillary services, reaching a record figure of MX$ 659 per passenger, a 24% increase compared to the previous year. As we rebuild the sector, we adapt to the new reality that de- mands a world that is more equal, fair and environmentally responsible, starting from the premise that the viability of the long-term business is closely linked to its sustainability. For this purpose, we integrated our corporate sustainability strategy – in line with the UN Sustainable Development Goals and the ESG criteria– into our business model, so today we are one of the five airlines in the Dow Jones Sustainability Index and the only one to be part of the Mila-Pacific Alliance Index. Through efficient fuel management, in 2020, the company reduced emissions by 12.5% in terms of gCO2/RPK, compared to 2015, equivalent to 35.8 million gallons in fuel savings and a reduction of 247,278 tons of CO2 emissions. We closed 2020 with 86 aircraft with an average age of 5.3 years, one of the youngest fleets in the Americas. Thirty-five percent of them are Airbus A320 Family NEO aircraft, with the most advanced technology to reduce fuel consumption and sound footprint. Today we have one of the most competitive fleet expansion plans and engine agreements on the market, and we achieved one of the fastest recoveries in capacity. We are also returning to the ultra-low unit cost levels prior to the pandemic, capital- ized the company through a primary follow-on equity offering and ensured the job continuity of our Ambassadors. With our industry leadership comes great responsibility, and we are therefore working to ensure that our growth remains sustainable. Our challenge is to reduce, by 2026, 23% of carbon emissions in our operations, compared to 2015, to maintain and retain talent, to generate new jobs, continue to evolve toward a digital business and advance the democratization of the skies at the lowest prices, to help revitalize and strengthen the econ- omy of the markets where we operate. Although we have survived a global crisis, we are mindful that enormous challenges await us in the coming years. We are heartened by the fact that in the face of the worst crisis in Content 5 modern history, the Volaris DNA has proved the strength of a world-class company to respond effectively to global challenges. On behalf of the Board of Directors and myself, I want to sin- cerely thank all Volaris Ambassadors, Customers, investors and financial institutions, authorities, members of the industry, suppliers and communities in which we operate for being part of this success story. Enrique J. Beltranena President and Chief Executive Officer Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 14.7 million reserved passengers 69 destinations +50 under the codeshare agreement with Frontier 209 routes +117 under the codeshare agreement with Frontier +6.5 million followers in social media Content 6 Ps. $22.16 billion Total Operating Income Ps. $9.70billion Ancillary Revenue Net proceeds from a subsequent IPO for US $164.4 millon 80% of our ticket and ancillary services’ sales were through the volaris.com website and our mobile app 1.2. 2020 Highlights and Initiatives 1st year in the Dow Jones Sustainability MILA Pacific Alliance Index 1st public airline in the American continent to recover capacity measured in available seat miles (ASMs) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 7 86 aircraft; 35% of fleet is Airbus A320neo Family 38% of our Customers used mobile check-in; equal to saving 25.96 tons of paper 12.5% reduction of g CO2/RPK emissions vs. 2015 Negotiation of 171 Pratt & Whitney GTF engines for NEO aircraft +144 tons of paper saved; equal to saving 2,460 trees and +3.8 million liters of water vs. 2019 2026 Goals: vs. 2015 -23% g CO2/RPK emissions -22% fuel consumption 35.8 million gallons of fuel saved vs. 2015 We renewed the ISO 9001 and 14001 Certifications in operating areas and processes, as well as in administrative activities in our corporate offices (green offices) 33,274 certified carbon credits purchased since 2015 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact +45 tons of humanitarian aid transported through the Avión Ayuda Volaris Program 4,846 Ambassadors in Mexico and Central America 344 organs and tissues transported for transplant purposes since 2009 891 airplane tickets donated to fulfill dreams since 2015, in alliance with Dr. Sonrisas foundation 42,931 training hours in 2020 Approximately, 76% of our Ambassadors are unionized 1st airline with a biosafety protocol, obtaining the “Safe Travels” stamp from the WTTC, the Tourist Safety stamp of Mexico City and the Best Health Practices Certificate from the Government of Yucatan 11th consecutive year as a Socially Responsible Company (ESR), a badge granted by CEMEFI Content 8 42 strategic alliances to create value in the communities where we operated in 2020 Alliance with the Mexican Red Cross to transport medical equipment and volunteers to vulnerable communities and mitigating health risks resulting from the COVID-19 pandemic 7th consecutive year as Top Member in the implementation of The Code-ECPAT Alliance with the Sinibí Jípe association for supporting Rarámuri women. Purchasing hand-made face masks; thus reactivating our operations and creating value for the community Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Business Model “ Volaris has proven to be a resilient airline due to its business model, which has ad- justed to the challenges and opportunities brought by the COVID-19 pandemic. We are one of the airlines with the lowest unit costs in the world, allowing us to offer the lowest prices in the Mexican market and, thus, consolidate ourselves as the leading airline in the country in terms of the num- ber of transported passengers.” Holger Blankenstein Executive Vice President Airline Commercial and Operations Our disruptive, ultra-low-cost business model helps us make air travel accessible for every- one, so more people can travel well! GRI 102-1, 102-5, 102-6 1.3. About Volaris Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (NYSE: VLRS and BMV: VOLAR), is an ul- tra-low-cost carrier (ULCC), with point-to-point operations, serving Mexico, the United States of America and Central America. Volaris offers low base fares to build its market, providing quality service and extensive Customer choice. Since beginning operations in March 2006, Volaris has increased its routes from 5 to 209 and its fleet from 4 to 86 aircraft. Volaris offers more than 337 daily flight segments on routes that connect 44 cities in Mexico and 25 cities in the United States of America and Central America, with one of the youngest fleets in the Americas. Volaris targets passengers who are visiting friends and relatives (VFR) and cost-conscious business and leisure travelers both in Mexico and in selected destinations in the United States of America and Central America. Content 9 Capacity increase More ancillaries Resilient ULCC Business Model Cost reduction Low base fares More customers Cost reduction Low costs are the Volaris’ foun- dation for building our market, stimulating demand and main- taining a high load factor. Low base fares We are committed to offering the lowest base fares to our Custom- ers while achieving a profitable growth. More customers We strive to make air travel accessible to everyone, so more people can travel well! By offering low fares that compete with bus fares more peo- ple choose air travel. More ancillaries We offer a wide array of ancil- lary products to supplement our Customers’ trips. This way, our Customers only pay for what they actually need and Volaris increases its non-ticket revenue. Capacity increase We aim to expand and diversify our network by increasing the number of point-to-point routes, focusing on our target Custom- ers, i.e., the VFR segment. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-12, 102-20 Volaris Corporate Sustainability Program “ At Volaris we strive to satisfy the present needs of our Customers, planning the ideal scenarios for future generations. By inte- grating our Corporate Sustainability Pro- gram to the Company’s business model we focus on creating an appropriate environ- ment so that ultra-low-cost aviation cre- ates value for our stakeholders and remains a growth engine for many years to come. Our Program is aligned with the Environ- mental, Social and Governance (ESG) crite- ria and with the United Nations Sustainable Development Goals (SDG)”. José Alfonso Lozano Corporate Affairs Director We have focused our efforts on integrating our Corporate Sustainability Program to our busi- ness model and we have aligned our initiatives and goals to the SDGs and ESG Principles. The Program’s three approaches are: Economic and Corporate Governance Focus, People Care Focus and Planet Care Focus. VOLARIS CORPORATE SUSTAINABILITY PROGRAM Economic and Corporate Governance Focus A. Business Strategy – Ultra-Low-Cost Business Model Cost reduction Low fares Stimulate demand You Decide Scheme Capacity increase Operational efficiency and reliability People Care Focus A. Ambassadors’ Relations, Practices and Wellbeing Volaris Culture Equal opportunities and non-discrimination Organizational development Corporate voluntary work Compensation and benefits Occupational health and safety B. Corporate Governance B. Human Rights and Community Relations Board of Directors and Committee Management Risk management and opportunity identification Volaris Code of Ethics and compliance Transparency and legality Information privacy and cybersecurity C. Corporate Affairs Collaborating in public policy development Collaborating in the industry’s public decisions Strengthening corporate reputation D. Supply Chain Supply chain responsible management Human Rights Protection Program Avión Ayuda Volaris Program C. Customer Welfare Aviation security and safety Privacy and personal data protection Customer service and solutions Planet Care Focus #CielitoLimpio Comprehensive Environmental Protection Policy A. Efficient Fuel Consumption Management (Fuel Saving Program) Fleet renewal Investing in the best technology Implementation of fuel-saving techniques B. #CielitoLimpio Carbon Emissions Offset Program C. Eco-friendly Initiatives and Efforts towards Biodiversity Recycling Paperless policy Reduction of electricity consumption Reforestation Ecological strategic alliances Environmental protection awareness campaigns D. Regulatory Compliance Emissions’ reporting Hazardous waste management Environmental management – Working Group Green Team Content 10 Based on the four main topics of the Economic and Corporate Governance Focus, we carry out actions in order to: Reduce costs and optimize resources Ensure low fares to stimulate demand Maintain high standards of operational efficiency Implement the best Corporate Governance practices Work in a culture of ethics and legality, implementing anticorruption and antibribery practices, managing risks and crises, and ensuring the protection of information and transparency in all our processes Participate in the processes of public policy creation Manage our supply chain responsibly As part of our Planet Care Focus, we defined our Comprehensive Environmental Protection Policy, called #CielitoLimpio, which includes actions and initiatives (environmental programs) aiming to contribute to the planet’s protection, reducing Volaris’ carbon footprint and guiding our opera- tions towards a more eco-efficient management. This Policy includes the following initiatives: Efficient fuel consumption management through the Fuel Saving Program consisting of purchasing a young fleet, investing in the best technology and implementing other fuel-saving techniques, such as reduction of on-board weight and flight techniques, among others. The #CielitoLimpio Carbon Emissions Offset Program, through which our Customers have the option to offset part of the carbon footprint produced by their flight. With these voluntary contributions, we purchase carbon credits certi- fied by the Mexican Carbon Platform. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 11 Eco-friendly initiatives, such as paper saving and electricity consumption reduction programs, recycling initiatives and removal of plastic in our operations. Efforts for biodiversity, such as reforestation and environmental awareness campaigns. Environmental regulation compliance, through emissions’ report- ing, correct hazardous waste management, and certifications such as ISO 14001 and 9001. Finally, through our People Care Focus, we strengthen our com- mitment to People, who are the core of any sustainable business management, i.e., commitment to our Ambassadors, to the com- munities where we operate and to our Customers. Ambassadors’ Relations, Practices and Wellbeing. We have the best labor practices in place to guarantee strong and last- ing labor relations that promote the wellbeing and personal and professional development of our Ambassadors, through: - Volaris Culture - Equal opportunities and non-discrimination - Organizational development - Corporate volunteering - Compensation and benefits - Occupational health and safety Human Rights and Community Relations. We voluntarily as- sume the commitment to create strategic partnerships and implement programs to safeguard Human Rights and to pro- tect people in vulnerable situations. The initiatives that allow us to meet these goals are: - Human Rights Protection Program - Avión Ayuda Volaris Program Thanks to our efforts and commitment to the best ESG practices, Volaris became a member of the Dow Jones Sustainability Index. We are one of the five airlines in- cluded in this index globally, and the only one in the MILA Pacific Alliance. Customer Welfare. As one of the essential factors in the Com- pany’s sustained growth and business continuity, we continu- ously strive to guarantee our Customers’ welfare, protect their rights and provide the best travel experiences by providing: - An aviation security and safety program - Personal data protection protocols - Plans, programs and continuous training to provide the best customer service For the 11th consecutive year and as a result of our best practices that contribute to the wellbeing of all our stake- holders, we were awarded the Socially Responsible Com- pany (ESR) badge granted by the Mexican Center for Philanthropy (CEMEFI). Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-18, 102-22, 102-23, 102-24, 102-25, 102-26, 102-27, 102-28, 102-33, 102-35, 102-36 Corporate Governance The Volaris Board of Directors and senior man- agement are committed to implementing in the Company the highest Corporate Governance standards. Since 2013 we have been listed on the Mexican Stock Exchange (BMV) and the New York Stock Exchange (NYSE). As a pub- licly traded company, we adhere to the best corporate governance practices in an effort to manage the Company within a framework of legality and transparency and to inform our investors of the Company’s financial activities. The Board of Directors is comprised of 14 proprietary directors and 4 alternate direc- tors, 64% of whom —9 proprietary and 2 alternate directors— are independent. Furthermore, 14% of the members of our Board of Directors are women. During 2020, the Board of Directors met five times for ordinary meetings and on three occa- sions approved unanimous resolutions passed by all members without a meeting. During meetings, the Board assessed and resolved a wide array of relevant matters, i.e., approving the Compa- ny’s consolidated financial results for fiscal year 2019 and quarterly results for fiscal year 2020; taking note of risk and contingency reports and information on operating, financial, and legal matters; approving reports on Company’s man- agement, including the report on strategic is- sues; approving reports submitted by the Audit and Corporate Governance Committee and the Compensation and Nominations Committee; approving operations and actions recommended and deemed appropriate by the management and the Committees; meeting attendance per- centage was 100%. Voting Rights (Dual Class Shares) According to Mexican laws, all holders of Series A and B shares of Volaris are entitled to one vote.* Board of Directors and Committees The Board of Directors of Volaris is elected by the Annual Ordinary General Shareholders´ Meet- ing. Company Bylaws provide that the Board shall consist of no more than 21 directors, 25% of whom must be independent, pursuant to the Mexican Securities Market Law. Our Board of Directors is comprised of qualified members with a background and expertise in aviation, business, marketing, finance, economics, law and technology, besides meeting the legal criteria for independence. Pursuant to our Bylaws and the Mexican Secu- rities Market Law, any shareholder or group of shareholders representing 10% of Volaris’ out- standing capital stock is entitled to appoint one director. Content 12 Proprietary Directors Alternate Directors Brian H. Franke Chairman of the Board Andrew Broderick Alternate William A. Franke Director Andrew Broderick Alternate Harry F. Krensky Director Marco Baldocchi Kriete Director Rodrigo Antonio Escobar Nottebohm Alternate Enrique Javier Beltranena Mejicano Director Alfonso González Migoya Independent Director Stanley L. Pace Independent Director William Dean Donovan Independent Director José Luis Fernández Fernández Independent Director José Carlos Silva Sánchez-Gavito Alternate Joaquín Alberto Palomo Déneke Independent Director José Carlos Silva Sánchez-Gavito Alternate John A. Slowik Independent Director José Carlos Silva Sánchez-Gavito Alternate Ricardo Maldonado Yañez Independent Director Eugenio Macouzet de León Alternate Guadalupe Phillips Margain Independent Director Mónica Aspe Bernal Independent Director Jaime Esteban Pous Fernández Secretary Non-member Under our Bylaws Board Directors must be elected annually. In April 2020, the Board increased the number of directors from 12 to 14 so that the average tenure of our current directors was 7.7 years. * Holders of ADS and CPOs shall not be entitled to vote the underlying Series A shares. Mexican holders of Series A shares shall be entitled to vote their shares on all matters. Holders of Series B shares shall be entitled to vote their shares on all matters and will have the specific voting rights described under “Shareholders’ Meetings.” Series A shares underlying the CPOs and CPOs underlying the ADS will be voted by the CPO trustee in the same manner as the majority of Series A shares votes cast at the relevant Shareholders’ Meeting in all cases. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Proprietary directors Brian H. Franke has been a member of our Board of Directors since 2010 and Chairman of the Board since April 2020. Currently, he is a principal specializ- ing in aviation investments with Indigo Partners LLC, a private equity firm based in the United States. Mr. Franke has been a member of the board of directors of Tiger Airways Holdings (Singapore) since 2008 and Tiger Airways Australia since May 2009. He is also a member of the board of directors of Frontier, JetSMART and APiJET, joining the latter in 2020. Pri- or to that, Mr. Franke was vice president of Franke & Company Inc., a boutique private equity firm focused on small and medium enterprises investments. He was also a director in marketing for Anderson Com- pany, a U.S. real estate developer, from 1989 to 1992 and a marketing manager for United Brands Inc., a U.S. distribution and licensing company for consumer goods, from 1987 to 1989. Mr. Franke holds a Bachelor of Science in Business from the University of Arizona and a master’s degree in international management from Thunderbird School of Global Management. He also serves on the University of Arizona Foundation Board and participates on its Investment Committee. He is William A. Franke’s son. * There is a direct line blood relationship (lineal consanguinity) between Brian H. Franke and William A. Franke. William A. Franke has been a member of our Board of Directors since 2010. He is also a member of the board of directors of Wizz Air Holdings Plc (Hungary). He is currently the managing member of Indigo Partners LLC (since 2002), a private equity firm. Mr. Franke is chairman of the board of directors of Frontier, JetSMART (Chile), Energet (Canada) and APiJET (USA) and was the founding chairman of Tiger Airways Holdings (Singapore), a member of the board of directors of Spirit and the Chief Ex- ecutive Officer / chairman of America West Airlines from 1993 to 2001. He is also a member of the board of directors of Falcon Acquisitions Group, Inc. Mr. Franke has undergraduate and graduate degrees from Stanford University. He also has an honorary doctorate from Northern Arizona University awarded in 2008. He is Brian H. Franke’s father. Harry F. Krensky has been a member of our Board of Directors since our founding. He is also a member of the board of directors of Traxion, a transportation company, of H+ (SISI), a hospital operator, and of AMCO International, an education company. Mr. Kren- sky is managing partner of the private equity firms Discovery Americas and Discovery Air. Previously, he was a founder of emerging market hedge fund managers Discovery Capital Management and Atlas Capital Management, and a founder of Deutsche Bank’s emerging market hedge fund. He has been an assistant professor in international business at the NYU Stern Business School and was a member of the Board of Trustees of Colby College. Mr. Krensky has a Bachelor of Arts from Colby College, a mas- ter’s degree from the London School of Economics and Political Science and a Master of Business Ad- ministration from the Columbia University Graduate School of Business. Marco Baldocchi Kriete has been a member of our Board of Directors since April 2020 and interim director from July 2019 to April 2020. Since 2010, he served as an alternate director. He is the Chief Executive Officer of Central American Comercial, S.A. de C.V, a retail company in Latin America. He was a founding member of Transactel Inc. He is currently a member of the board of Aeromantenimiento (MRO Holdings, Inc.). Past board experience includes One- link Holdings, Avianca-Taca and Banco Agricola. Mr. Baldocchi has a Bachelor of Arts from Vanderbilt University and a Master of Business Administration from the Kellogg School of Management. Content 13 Enrique Javier Beltranena Mejicano has been our Chief Executive Officer since March 2006 and a member of our Board of Directors since Sep- tember 2016. He previously held several executive positions at Grupo TACA, such as chief operating officer, human resources and institutional relations vice president, cargo vice president and commer- cial director for Mexico and Central America. He was also general director of Aviateca in Guatemala. Mr. Beltranena started his career in the aerospace industry in 1988. During the 1990s, he was respon- sible for the commercial merger of Aviateca, Sahsa, Nica, Lacsa and TACA Peru, consolidating them into a single management entity called Grupo TACA. While at Grupo TACA, Mr. Beltranena also led the development of the single operating codeshare and negotiated the open sky bilateral agreements en- tered between each of the Central American coun- tries and the United States. In 2001, as the chief operating officer of Grupo TACA, Mr. Beltranena led its complete reorganization. In 2017, Mr. Beltranena participated in one of the largest joint negotiations with Airbus for the purchase of single-aisle aircraft. In 2009, Mr. Beltranena was awarded with the Federico Bloch Awards by the Latin American & Caribbean Air Transport Association. In 2012, Mr. Beltranena was named Entrepreneur of The Year Mexico after being nominated for the EY Hall of Fame in Monaco by Ernst & Young – Innovation. In 2011, he was also nominated and named Entrepreneur of The Year in Mexico by Ernst & Young – Mexico. He was also awarded with the National Order of Merit by the President of France. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Alfonso González Migoya has been a member of our Board of Directors since November 2014. He served as our Chairman of the Board from November 2014 to April 2020. He is also a director at FEMSA, Coca Cola FEMSA, Bolsa Mexicana de Valores and Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM), among others. Previously, Mr. González was chairman and chief executive officer of Grupo Industrial Saltillo, chief executive officer of Servicios Interpuerto Monterrey, held different senior positions at Grupo ALFA and was executive vice president and chief financial officer of Grupo Financiero BBVA Bancomer. Mr. González holds a Bachelor of Science in Electromechanical Engineer- ing from ITESM and a Master of Business Adminis- tration from Stanford University Graduate School of Business. Stanley L. Pace has been a member of our Board of Directors since April 2017. He is a senior partner and director at Bain & Company where he has served as a member and chairman of most of the company’s key governance boards. Mr. Pace was the founder of the transformation and airline practices at Bain & Company and has led many of the company’s largest and most successful relationships and transforma- tions. For a period of two years in the late 1990s, Mr. Pace was the chief executive officer of ATA. At that time, ATA was the largest charter airline in the world. Mr. Pace received an undergraduate degree in finance from the University of Utah, where he graduated as valedictorian. He later received his Master of Business Administration from Harvard Business School, where he graduated with honors. William Dean Donovanhas been a member of our Board of Directors since 2010 (prior to April 2017, he served as an alternate director). Mr. Donovan sits on the board of Prophet Brand Strategy, a marketing consultancy, and was a board member at the Metro- politan Bank. In 2005, he co-founded Volaris along with several other parties. Between 1989 and 2003, Mr. Donovan worked with Bain & Company. He was Managing Director of Bain Africa between 1999 and 2002 and head of Bain’s airline practice and auto practice at various times. He is also a consultant for Stellar Labs, a software company focused on fleet optimization and revenue management in the private aviation industry. Mr. Donovan co-founded Casino Marketing Alliance, a provider of marketing and an- alytics services to the casino industry. Mr. Donovan has served as chief operating officer of Nimblefish Technologies, a specialized micromarketing agen- cy and as chief executive officer of SearchForce, a paid search workflow management and optimization platform. Mr. Donovan received his Bachelor of Arts from the University of California Berkeley, where he graduated Phi Beta Kappa and Summa Cum Laude, and his Master of Business Administration from the Wharton School at the University of Pennsylvania. José Luis Fernández Fernández has been one of our independent directors since 2012 serving also as the Chairman of our Audit and Corporate Governance Committee. He is also a member of the audit committees of various companies, including Grupo Televisa, S.A.B., Grupo Financiero Banamex and Banco Nacional de México S.A., and an alternate member of the board of Arca Continental, S.A.B. de C.V. Mr. Fernández is a non-managing limited partner at Chevez Ruiz Zamarripa. Mr. Fernández has a degree in Public Accounting from Universi- dad Iberoamericana and is certified by the Mexican Institute of Public Accountants. Joaquín Alberto Palomo Déneke has been one of our directors since 2005 and serves also as a member of our Audit and Corporate Governance Committee. He is also a member of the board of directors of Aeroman. Mr. Palomo has over two de- cades of experience in the financial air transpor- tation and commercial aerospace sectors, where he created and implemented the first reorganiza- tion of Grupo TACA. He also actively participated in the planning, purchasing negotiation, closing, organization and eventual merger of AVIATECA, Tan/Sahsa, TACA de Honduras, Nica, Lacsa, Isleña de Inversiones, La Costeña, Aeroperlas and Trans American Airlines to form Grupo TACA. Mr. Palomo negotiated the financing of more than $1 billion in aircraft leases, sales and leasebacks. Mr. Palomo has a Bachelor of Science degree in Agricultural Economics from Texas A&M University. Content 14 John A. Slowik has been one of our directors since 2012 and serves also as a member of our Audit and Corporate Governance Committee. He has over three decades of experience in the air transportation and commercial aerospace sectors as a banker at Citi (and its predecessors) and Credit Suisse, where he managed its America’s Airline Industry invest- ment banking practice. His extensive experience includes corporate and investment banking, where his activities involved public and private capital raising, structured debt issuance, aircraft leasing, capital investment and mergers and acquisitions. Mr. Slowik is also a member of the board of directors of Fan Engine Securitization, Ltd. and Turbine USA LLC, private commercial jet engine leasing compa- nies operating out of Ireland and the United States, respectively. He is also an alternate director of Rotor Engine Securitization Ltd., a private commercial jet engine leasing company operating out of Ireland. Mr. Slowik is a board member and chairman of the audit committee of Quintillion Subsea Holdings, LLC, a privately held company operating a subsea fiber optic cable system connecting Nome to Prudhoe Bay, with four landing stations in between, and a terrestrial fiber optic cable system connecting Prud- hoe Bay to Fairbanks, Alaska. Mr. Slowik serves as a senior advisor to volofin Capital Management Ltd., a specialty finance company focused on delivering innovative financing solutions for the commercial aviation market. Mr. Slowik has an undergraduate degree in Mechanical Engineering from Marquette University and a master’s degree in management from the Kellogg School, Northwestern University. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Ricardo Maldonado Yáñez has been one of our independent directors since April 2018. He is a partner at Mijares, Angoitia, Cortés y Fuentes, S.C., since 1999. Mr. Maldonado has 25 years of experi- ence providing advice and counseling to Mexican and foreign companies and clients on domestic and cross-border merger and acquisition transactions, joint ventures and strategic alliances. He also rep- resents issuers and financial institutions in public and private debt and equity offerings, and advises clients on the negotiation, structuring and drafting of commercial loans, on complex financings and on infrastructure projects. Mr. Maldonado also focuses part of his practice on corporate governance matters advising family-owned and publicly listed compa- nies. Mr. Maldonado serves as member and/or secre- tary of the board of directors of several companies including Grupo Televisa, Consorcio Arca, Grupo Aeroportuario del Centro Norte (OMA) and ICA Tenedora, S.A. de C.V. Mr. Maldonado received his LLM from University of Chicago Law School, holds a certificate on Corporate Law from the Instituto Tecnológico Autónomo de México and holds a law degree from the Universidad Nacional Autónoma de México. He is a member of the National Association of Corporate Directors (NCD) and of the Interna- tional Corporate Governance Network (ICGN). Content 15 Guadalupe Phillips Margain has been one of our directors since April 2020. She is the Chief Exec- utive Officer of Empresas ICA Tenedora, S.A. de C.V. She previously worked at Grupo Televisa, where she was Vice-president of Finance and Risk having also held other positions. Ms. Phillips serves as member of the board of directors of several companies in- cluding Grupo Televisa, Grupo Financiero Banorte, Innova, Grupo Axo and Grupo Aeroportuario del Centro Norte (OMA). Ms. Phillips holds a Ph.D. and a M.A.L.D. (Master of Arts in Law and Diplomacy) from The Fletcher School of Law and Diplomacy, Tufts University and holds a law degree from the Instituto Tecnológico Autónomo de México. Board of Directors’ Duties Our Company is managed by the Board of Di- rectors and the Chief Executive Officer. The Board of Directors establishes the guidelines and general strategy for conducting our busi- ness and supervises compliance with these standards. Pursuant to the Mexican Securities Market Law and our Bylaws, the duties of our Board of Di- rectors include, among others, the following: approving our general strategy; monitoring our management and that of our the annual submission to our Ordinary Gen- eral Shareholders’ Meeting of (i) the Chief Ex- ecutive Officer´s report and (ii) the opinion of the Board of Directors on the contents of the such report; creating special committees and granting them authority, provided that committees shall not have the authority to take any action which by law or under our Bylaws is expressly reserved to our shareholders or our Board of Directors; voting the shares we hold in our subsidiaries; subsidiaries; and Mónica Aspe Bernal has been one of our direc- tors since April 2020. She is the Chief Executive Offi- cer of AT&T, Mexico. She was previously ambassador to Mexico’s Permanent Delegation to the OECD. She served as Vice-Minister of Communications of the Ministry of Communications and Transportation. Ms. Aspe holds a master’s degree in political science from Columbia University and a degree on Political Science from the Instituto Tecnológico Autónomo de México. subject to the prior input from the Audit and the Corporate Governance Committee, ap- proving, on a case-by-case basis (i) transac- tions with related parties, subject to certain limited exceptions, (ii) the election of our Chief Executive Officer, his compensation and removal, and the policies for the appointment and comprehensive compensation of other executive officers, (iii) our guidelines for in- ternal controls and internal audits, including those for our subsidiaries (iv) our accounting policies, (v) our financial statements and those of our subsidiaries, (vi) unusual or non-recur- ring transactions and any operations during any fiscal year involving (a) the acquisition or sale of assets with a value equal to or exceed- ing 5% of our consolidated assets, or (b) the granting of collaterals or guarantees or the acceptance of liabilities with a value equal to or exceeding 5% of our consolidated assets, and (vii) the selection of the external auditors; calling Shareholders’ Meetings and taking ac- tion based upon their resolutions; policies to be followed for the disclosure of in- formation. Our Bylaws provide that the meetings of our Board of Directors are validly convened and held if a majority of the members or their respective alternates are present. Resolutions passed at these meetings will be valid if they are approved by a majority of the disinterested members of the Board of Directors. The chairman of the Board of Directors will not have a tie-breaking vote. The members of our Board of Directors are appointed annually by our Annual Ordinary General Shareholders´ Meeting. All our direc- tors remain in office for one year and may be reelected. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Committees Our Board of Directors is supported by Committees approved by the Annual Ordinary General Shareholders’ Meeting. Committees analyze specific matters and issue recommendations to the Board of Directors. Content 16 Audit and Corporate Governance Committee Compensation and Nominations Committee Main duties: Main duties: Supervising, evaluating and analyzing the external auditors and their reports Analyzing and supervising the preparation of our financial state- ments and recommending their approval to the Board of Directors Reporting to the Board of Directors on the status of our internal controls, our internal audit and their adequacy Supervising related-party transactions and their execution accor- ding to the applicable laws Requesting our executive officers or independent experts, as appro- priate, to submit reports Submitting proposals to the Board of Directors relating to the appoint- ment or removal of officers to or from the Company’s first two corporate levels Proposing the creation and amendment of any incentive plan for Am- bassadors Consulting with third-party experts in connection with any issues related to compensation, organizational development, labor market studies and other related matters Proposing compensation packages for officers within the first four cor- porate levels Investigating and informing the Board of Directors of any irregula- Proposing to our Board of Directors the execution, amendment or ter- rities encountered Calling shareholders’ meetings mination of any collective bargaining agreements Assessing the performance of relevant executives and reporting it to the Board of Directors and the Audit and Corporate Governance Committee José Luis Fernández Fernández Independent Chairman Joaquín Alberto Palomo Déneke John A. Slowik Independent Directors José Carlos Silva Sanchez-Gavito Independent Alternate Director Jaime Esteban Pous Fernández Secretary Non-member Marco Baldocchi Kriete Chairman Brian Franke Harry F. Krensky Enrique Javier Beltranena Mejicano Directors Rodrigo Antonio Escobar Nottebohm Alternate Director Ricardo Maldonado Yañez Secretary Non-member Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 17 The Sustainability Committee consists of the fol- lowing members: the President and Chief Exec- utive Officer, the Corporate Affairs Director who is responsible for managing Volaris’ Corporate Sustainability Program and serves as Secretary. The President and Chief Executive Officer re- ports to the Board of Directors the most relevant aspects of the Company’s sustainability efforts. GRI 102-19, 102-20, 102-21, 102-26, 102-29, 102-31, 102-32 Committees of Senior Mangement The Company has also the following Committees not regulated by the Mexican Securities Market Law. Ethics Committee Cybersecurity Committee Sustainability Committee As part of redefining the Volaris’ sustainability strategy in 2020, we decided to create the Sus- tainability Committee. This Committee meets monthly and its main duties are: Ensuring the business’ sustainable development Integrating sustainability into our business strat- egy by involving the Company’s senior manage- ment in all matters related to ESG issues and other business sustainability trends Making decisions that favor the Company’s sustainability strategy and setting future goals. Furthermore, we’re seeking to transform into actions every one of the agreements reached by this Committee thus achieving cross-sectional sustainability in all areas of Volaris. This Committee meets monthly, and its main duties are: This Committee meets monthly and its main duties are: Ensuring compliance with the Volaris Code of Ethics, solving conflicts through effective and timely decisions Building an ethical culture in the Company and periodically reviewing and updating best practices and business conduct standards Ensuring that all reports sent through the Whistle Blowing Line on malpractice, miscon- duct or non-compliance with current stan- dards and regulations are received and ad- dressed Assessing disputes, conflicts, and misconduct related to the Code of Ethics Proposing sanctions and action plans for cases related to breaches of the Code of Ethics Reviewing the operating guidelines that guar- antee compliance with the Code of Ethics Supervising the existence and implementa- tion of a training plan on ethical culture for all Ambassadors The Ethics Committee consists of the following members: the President and Chief Executive Of- ficer, the Chief Legal Officer VP, the Customer Sales and Service Director, the Human Resources Director, the Internal Audit Director, the Comp- troller and Compliance Director, the Operational Safety Director, and the Organizational Devel- opment Director. Observing and discussing global trends in cy- bersecurity and data protection Analyzing the different historical threats and the steps that have been taken to solve them Observing and discussing the cybersecurity and data protection strategy that has been imple- mented and any following evolutionary steps In coordination with the Internal Audit depart- ment, providing certainty to the Audit and Cor- porate Governance Committee regarding the steps that have been taken on matters of cy- bersecurity, data protection and the Company’s cyber incident recovery capabilities The Cybersecurity Committee consists of the following members: the President and Chief Executive Officer, the Executive Vice President Airline Commercial and Operations, the Chief Financial Officer SVP, the Chief Legal Officer VP, the Comptroller and Corporate Compliance Director, the Technology and Corporate Trans- formation Senior Director, the Information Se- curity and IT Internal Control Manager and the IT Security Manager. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Senior Management The Board of Directors is responsible for managing the appointment, compensation and removal of se- nior mangement, in accordance with recommenda- tions made by the Compensation and Nominations Committee and the Audit and Corporate Governance Committee. As of April 30, 2021, 75% of our senior mangement are men and 25% are women. Activities of the Management Team Our President and Chief Executive Officer, as well as other members of our senior management are required to direct their activities towards creating value for the Company, making decisions that significantly transcend the admin- istrative, financial, operating and legal situation of Volaris. Senior management members duties include, mainly, (i) complying with agreements reached at our shareholders’ meeting and those of our Board of Directors, (ii) submit- ting the main strategies for the business for the approval of the Board of Directors, (iii) submitting proposals for our internal control system for the approval of the Audit and Corporate Governance Committee, (iv) disclosing all material information to the public, (v) complying with the applicable laws related to share repurchases and subse- quent purchases, (vi) initiating actions regarding liabilities incurred by us, (vii) complying with applicable regula- tions relating to payment of dividends, (viii) maintaining adequate accounting and recordkeeping internal control systems and mechanisms, and (ix) establishing internal mechanisms and controls which will allow us to verify that the actions and operations of the Company and legal entities controlled by it have adhered to the applicable regulations, as well as monitoring the results of those internal mechanisms and controls and taking the necessary measures, if any are required. The relevant executives shall be responsible for any non-com- pliance or failure to timely and diligently address all matters related to their tenure, as provided in the applicable laws and the Company’s by-laws. Senior Management Compensation Compensation at Volaris is mostly aimed at creating value for its shareholders, its Customers and Ambassadors. Therefore, the Company has a General Compensation Policy closely linked and aligned with Volaris’ strategy, mission, vision and conducts. This Policy establishes the guidelines for defining and devel- oping the compensation strategy at the Company’s different levels, paying, initially, a suitable equitable compensation according to the obligations, responsibilities, complexity and contribution of each office to the results of Volaris and, secondly, a competitive compensation, by participating in several compensation surveys aimed at comparing our total compensation levels versus market levels and, making sure we implement the best practices that create value for our Ambassadors and our shareholders. The General Compensation Policy and other policies resulting thereof are reviewed by the Compensation and Nominations Committee and the Audit and Corporate Governance Com- mittee, and based on their recommendation are ultimately approved by the Board of Directors. Additionally, to achieve a high level of performance-oriented results, more than 50% of our executive’s total compensa- tion is based on short and long-term variable compensation plans, as measured by the most important key performance indicators (KPIs) of our business, i.e., financial, operating and commercial. Content 18 Finally, total compensation as a concept includes not only salary com- pensation but also benefits, provisions and emotional salary. The latter understood as the Ambassador’s growth, development, working envi- ronment and conditions and, overall, his/her experience at Volaris, all together constituting the strongest bond between the Ambassador and the Company. Enrique Javier Beltranena Mejicano President and Chief Executive Officer Mr. Beltranena has been our Chief Executive Officer since March 2006 and a member of our Board of Directors since September 2016. He previously held several executive positions at Grupo TACA, such as chief operating officer, human resources and institutional relations vice president, cargo vice president and commercial director for Mexico and Central America. He was also general director of Aviateca in Guatema- la. Mr. Beltranena started his career in the aerospace industry in 1988. During the 1990s, he was responsible for the commercial merger of Aviateca, Sahsa, Nica, Lacsa and TACA Peru, consolidating them into a single management entity called Grupo TACA. While at Grupo TACA, Mr. Beltranena also led the development of the single operating codeshare and negotiated the open sky bilateral agreements entered between each of the Central American countries and the United States. In 2001, as the chief operating officer of Grupo TACA, Mr. Beltranena led its complete reorganization. In 2017, Mr. Beltranena participated in one of the largest joint negotiations with Airbus for the purchase of single-aisle aircraft. In 2009, Mr. Beltranena was awarded with the Federico Bloch Awards by the Latin American & Caribbean Air Transport Association. In 2012, Mr. Beltranena was named Entrepreneur of The Year Mexico after being nominated for the EY Hall of Fame in Monaco by Ernst & Young – Inno- vation. In 2011, he was also nominated and named Entrepreneur of The Year in Mexico by Ernst & Young – Mexico. He was also awarded with the National Order of Merit by the President of France. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 19 Holger Blankenstein Executive Vice President Airline Commercial and Operations Jaime Esteban Pous Fernández Senior Vice President and Chief Financial Officer José Luis Suárez Durán Senior Vice President and Chief Operating Officer Mr. Blankenstein has been our Executive Vice President Air- line Commercial and Operations since November 2017. Prior to his current position, starting on 2009, he was our Chief Commercial Officer, leading the areas of sales, marketing, planning, itineraries, revenue management and cargo and the IT department. Blankenstein was part of the team that took the Company public in 2013; he has been with the Company since its inception in 2005, as one of the founding members of the team he was involved both setting up and launching the airline. Prior to that, from 2003 to 2005, he was Director of Strategic Development at TACA International Airlines in El Salvador, where he led many key projects such as the integrat- ed airline systems migration, TACA’s maintenance business growth strategy and the business plan for Volaris. He began his career in 1998 as a consultant in the Munich office of Bain & Company. Blankenstein transferred to the Sydney office in 2000. He was involved in financial services, automotive and retail industries. Blankenstein earned an MBA from the Univer- sity of Iowa and a graduate degree in business and economics from Goethe University in Frankfurt, Germany. Mr. Pous has been our Chief Financial Officer since March 2021. He previously served as our interim Chief Financial Officer since June 2020 and as our Senior Vice President, Chief Legal Officer and Corporate Affairs since November 2017. Prior thereto, he served as our Chief Legal Officer since January 2016 and as our General Counsel since January 2013. Additionally, he has served as secretary of our Board of Di- rectors since 2018 and secretary of our Audit and Corporate Governance Committee since 2013. Prior to joining us, he worked at Grupo Televisa, where he had been legal direc- tor from 1999 to 2012. Mr. Pous received his LLM from The University of Texas at Austin, School of Law and holds a law degree from the Instituto Tecnológico Autónomo de México. Mr. Suárez has been our Chief Operating Officer since Novem- ber 2017. He previously served as our Operating Executive Officer since October 2015. He joined Volaris in early 2006 as sales director. In 2012, he held the position of Retail and Customer Service Director, where he supervised airport ope- rations, ramp management, flight attendants and customer solutions. Prior to joining Volaris, Mr. Suárez Durán worked for ten years at Sabre Holdings. Mr. Suárez Durán received his master’s degree in science in Industrial Engineering and master’s degree in business administration from the University of Missouri, Columbia. He also holds a degree in Executive Management from IPADE and a Bachelor of Science in In- dustrial Engineering from the Universidad Iberoamericana. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Carolyn Prowse* Vice President and Chief Commercial Officer Jimmy Zadigue Internal Audit Director Isela Cervantes Rodríguez Interim Chief Legal Officer Content 20 Mr. Zadigue has been our Internal Audit Director since Novem- ber 2020. He previously served as our Internal Audit Director from April 2011 to February 2019. Mr. Zadigue worked as the internal audit director of Sempra Mexico (IEnova), as direc- tor of operations, finance and administration at Swarovski in Mexico and as director of finance and business control at Bombardier North America. Mr. Zadigue is also a Chartered Public Accountant in Canada. He holds a Bachelor of Business Administration degree from HEC-Montreal and a Master of Science degree in Accounting Sciences from the Université du Québec. Mrs. Cervantes has been our interim Chief Legal Officer since March 2021 and is the deputy secretary of our Board of Di- rectors. She joined Volaris in June 2007 and was previously in charge of the legal corporate and securities compliance department. She holds a Law Degree from Escuela Libre de Derecho and received her LLM from Universidad Panamericana. Carolyn Prowse has been our Chief Commercial Officer since March 2019. Prior to joining Volaris, Ms. Prowse ran her own business advising aviation clients in Europe, Africa, the In- dian Ocean and the Middle East on a wide range of topics including strategy, transformation and restructuring. Most recently, she worked with easyJet on their five-year plan and core strategic initiatives, and other clients include advisory firms, hedge funds and both full service and low cost airlines and their shareholders. From 2011 to 2013 she was Senior Vice President, Corporate Strategy and Special Projects for Eti- had Airways in Abu Dhabi, responsible for strategy, mergers & acquisitions, the corporate program management office and other key initiatives and special projects. Her career in aviation also includes ten years with British Airways Plc in London. Carolyn’s background also includes roles in invest- ment banking (managing a global portfolio of private equity, investment banking and strategic investments) and strategy consulting with LEK Consulting. She has a bachelor’s degree in chemistry from the University of Oxford. * On April 29, 2021, our Board of Directors was informed that Ms. Prowse has resigned from her position effective May 7, 2021. Holger Blankens- tein, our Executive Vice President Airline Commercial and Operations, will temporarily perform the functions of the Commercial Vice-Presiden- cy while a replacement is appointed. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 201: 103-1, 103-2, 103-3 GRI 102-11, 102-13, 102-15, 102-29, 102-30 Risks and Opportunities Volaris is a Mexican airline listed on the Mexi- can Stock Exchange (BMV) and the New York Stock Exchange (NYSE). Risk management is of vital importance as a tool for achieving the Company’s objectives, for decision making, for strengthening sustainable growth and for build- ing confidence among our stakeholders in the short, medium and long term. Therefore, at Volaris we have implemented the best international practices and systems for risk management, such as COSO (reference standard containing the main directives for the implementation and management of a control system), COSO ERM (integrated framework for enterprise risk management), and COBIT (refer- ence framework aimed at controlling and super- vising information technology). These systems help us identify and evaluate the Company’s risks in a timely manner, define indicators for monitoring purposes, and develop mitigation plans to avoid impact on our operations. These management systems include: a) Control environment: a culture of control environment is endorsed throughout the Company, from our Board of Directors to our commitment to each of the Company’s Ambassadors as far as complying with our values and ethical principles, governed by our Code of Ethics and the applicable regulations. b) Risk assessment: the risks and opportunities to which Volaris is exposed are continuously monitored through different communication channels, such as interviews, surveys, ques- tionnaires, among others, and assessed based on their impact and probability level. Additionally, these are prioritized by their level of importance and their alignment with the Company’s strategic objectives. c) Control activities: control activities and/or mitigation plans are defined and reviewed jointly with every individual responsible for each risk, establishing monitoring indicators, which in turn are reviewed by the parties re- sponsible as part of the self-certification pro- cesses and follow-up of their daily activities. d) Information and communication: efficient determination of the information and esca- lation channels, in order to have relevant and quality information that supports the other control components, with the purpose of disseminating such information to the entire Company. e) Monitoring: continuous assessments are car- ried out, which are integrated into the busi- ness processes at the Company’s different levels providing timely information. Indepen- dent evaluations, performed periodically, may vary in scope and frequency depending on risk assessment, the effectiveness of ongoing evaluations, and other senior management considerations. Results are evaluated by com- paring them against the criteria established by regulators, other recognized bodies or by the senior management, the Audit and Corporate Governance Committee and the Board of Directors; subsequently, deficiencies are reported to senior management and the Board of Directors, as appropriate. The control framework allows for enterprise risk management (ERM), internal control, and fraud detection in compliance with regulators’ standards, such as the U.S. Securities and Ex- change Commission (SEC), the Mexican Stock Exchange (MSE), and the National Banking and Securities Commission (CNBV). The meetings of the Board of Directors include the submission of the Risk and Contingency Report (operating, financial and legal). Like- wise, an Enterprise Risk Management (ERM) Report is submitted to the Audit and Corporate Governance Committee. The resolutions ad- opted are submitted to the Board of Directors for approval. The President and Chief Executive Officer, as well as the Vice President and Chief Financial Officer are responsible for certifying the inter- nal control system, which is submitted to the Board of Directors for its approval with the prior opinion of the Audit and Corporate Governance Committee. In the most recent assessment of our Internal Control on Financial Reporting, the Company’s external auditors did not report any material or significant deficiencies. It must be mentioned that Volaris manages all risks and opportunities that have an impact on our operations in order to design mitigation strategies, allowing our business to be sustain- able in the future. For more information, please see Form 20F on our Investor Relations website: http://ir.volaris.com/English/home/default.aspx Content 21 Risks related to Mexico Certain political and social events in Mexico, as well as changes in Mexican federal government policies may have an adverse effect on our business, op- erating results, financial condition and Annual Report. Adverse economic conditions in Mexico may adversely affect our business, op- erating results and financial condition. If inflation rates increase, demand for our services may decrease and our costs may increase. In addition, currency fluc- tuations or the devaluation and depre- ciation of the peso, as well as events in other countries, could adversely impact the Mexican economy and hence our business, our securities’ market value, financial condition and operating results. Mexican antitrust legislation may affect the fares charged to our Customers. Security in Mexico has adversely im- pacted, and may continue to impact, the Mexican economy, which could have a negative effect on our business. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 22 Risks related to the airline industry We operate in an extremely competitive industry. Our industry is heavily impacted by the price and availability of fuel. Our inability to renew our concession or its revocation by the Mexican government would have a material adverse impact on us. Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances. The industry is particularly sensitive to changes in economic conditions. Our industry is heavily regulated and is subject to increasingly rigorous environ- mental regulations. Compliance with appli- cable laws involves significant costs, and regulations enacted in Mexico, the United States and Central America may significant- ly increase our costs in the future. Airlines are often affected by factors beyond their control, including air traffic conges- tion at airports, weather conditions, natural disasters, health outbreaks, pandemics or increased security measures, any of which could harm our business, operating results and financial condition. Certain airline consolidations and reorgani- zations could adversely affect the industry. Since the airline industry is characterized by high fixed costs and relatively elastic revenue, airlines cannot quickly reduce their costs to respond to shortfalls in expected revenue. Terrorist attacks or war may cause crises in the industry, which may alter travel behavior or increase costs. Increases in insurance costs and/or signif- icant reductions in coverage could harm our business. Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, COVID-19 and other highly contagious diseases could lead to suspension of domestic and interna- tional flights and changes in travel behavior. This could have a material adverse effect on the airline industry, our reputation, the price of our shares, our business, operating results and financial condition. For more information, please see Form 20F on our Investor Relations website: http://ir.volaris.com/English/home/default.aspx Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 23 Risks related to our business There is a possibility that we may not be able to implement our growth strategy. We have a significant number of fixed obli- gations that may impair our liquidity, thus affecting our business, operating results and financial condition. Our ultra-low-cost structure is one of our main competitive advantages and many factors could affect our ability to control our costs. Our fuel hedging strategy may not reduce our fuel costs. Inability to obtain lease or debt financ- ing for additional aircraft may impair our growth strategy. Our limited credit lines and loan facilities make us highly dependent upon our oper- ating cash flows. We are highly dependent on the Mexico City, Tijuana, Guadalajara and Cancun airports for a large part of our business. Our maintenance costs will increase as our fleet ages. Our business could be harmed by a change in the availability or cost of air transport infrastructure and airport facilities. We are exposed to increases in landing charges and airport restrictions, as well as other airport access fees, and cannot be assured access to adequate facilities and landing rights necessary to achieve our expansion plans. We rely on maintaining a high daily aircraft utilization rate to implement our ultra-low- cost structure, which makes us especially vulnerable to flight delays or cancellations and aircraft unavailability. Our reputation and business could be adversely affected in the event of an emer- gency, accident or similar incident involving our aircraft. Failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on our business, our financial condition and operating results. The growth of our operations to the United States of America is dependent on contin- ued positive safety assessment in Mexico and the Central American countries in which we operate. We rely heavily on technology and auto- mated systems to operate our business and any failure or non-compliance by their operators could affect our business. We rely on third-party service providers to perform essential functions for our operations. Our processing, storage, use and disclosure of personal data could lead to liability as a result of government regulations. We depend on our non-ticket revenue to remain profitable, and we may not be able to maintain or increase our non-ticket reve- nue base. Restrictions or increased taxes applicable to fares or other charges applicable to ancillary products and services paid by Customers could harm our business, finan- cial condition and operating results. Changes in how we or third parties are permitted to operate at airports could have a material adverse effect on our business. We rely on a number of exclusive suppliers for our fuel, aircraft and engines. Any real or perceived problem with the Airbus A320 Family aircraft or IAE and P&W engines could adversely affect our operations. Cyber-attacks or other incidents involving network or IT security, including breaches in data privacy, could have an adverse effect on our business. Inability to attract and retain qualified Ambassadors or failure to maintain our Company culture could harm our business. Increased labor costs, union disputes, Ambas- sador strikes, and other labor-related disrup- tions could adversely affect our operations. Our business, financial condition and oper- ating results could have a negative material impact if we lose the services of our key Ambassadors. Our operating results could fluctuate. We don’t have a Control group. Volaris is a holding company and does not have any material assets other than the shares of its subsidiaries. Changes in accounting standards could impact our reported earnings. For more information, please see Form 20F on our Investor Relations website: http://ir.volaris.com/English/home/default.aspx Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 201: 103-1, 103-2, 103-3 GRI 102-11, 102-15 Data Privacy and Cybersecurity Cyber-attacks or other cyber-incidents involving network or IT security may cause equipment failures or disruptions to our operations. Our inability to operate our networks as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other airlines. Cyber-attacks, which include malware, computer viruses, phishing, denial of service and other means of disruption or unauthorized access to companies, have increased in frequency, scope and potential harm in recent years. We take preventive response and electronic threat recovery actions to reduce the risk of cyber incidents and protect our information technology and communications. During 2020, we experienced security inci- dents that did not have any negative financial or reputational impact, as they were detected and contained in a timely manner and with the appropriate instruments. Despite all our preventive measures, there is always a risk that we may suffer a major cyber-attack that we are unable to mitigate. The costs associated with a major cyber-at- tack could increase our costs on cybersecurity measures, litigation, reputational damage, lost revenue from business interruption and loss of existing Customers and business partners. We therefore have a cybersecurity insurance and we constantly strengthen our protocols to prevent the theft of valuable information, such as financial data and confidential information, and to protect the privacy of confidential data of Customers and Ambassadors against network or IT security breaches. In response to such threats, global legislative and regulatory focus on data privacy and cyber- security has been reinforced, particularly with respect to critical infrastructure providers, including those in the transportation sector. Consequently, we must comply with a growing and fast-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements to notify regulators and affected individuals in the event of a data security incident. The regulatory environment is increasingly challenging and could pose important obliga- tions and risks to our business, including signifi- cantly greater compliance costs and substantial penalties. Other countries and states, as well as some of our commercial partners –such as credit card companies– may issue similar regulations in the future, so we develop sound strategies and processes to prevent any attack on information security. In 2020, the efforts in cybersecurity were: Assurance of operational continuity in the face of social distancing due to the COVID-19 pandemic, through secure virtual networks (VPN). Implementation of double authentication factor to reduce the risk of unauthorized use of access accounts to Microsoft 365 services. Risk mitigation associated with advanced threat attacks on emerging collaboration technologies, such as Microsoft Teams. Strengthening traffic monitoring and analytics in the www.volaris.com ecosystem to detect non-human traffic. Content 24 Development and implementation of “playbooks” for frequent threats. Increased number of exercises related to security assessments of the technological environment (ethical hacking) and validation of our information security culture program or security awareness (phishing test) effectiveness. The Cybersecurity Committee met twice. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-16, 102-17, 102-25, 412-2 TR-AL-520a.1 Volaris Code of Ethics At Volaris, we have available a Code of Ethics for all Ambassadors, suppliers and any third par- ty with whom we do business. This document establishes our core values, standards and the Volaris Culture, all of which regulate our daily actions and behaviors. The Code of Ethics ad- dresses the following: Occupational health and safety Equal opportunities and non-discrimination Human Rights protection –including avoidance of child and forced labor– Anticorruption practices Environmental protection Necessary elements to offer the best Customer service At Volaris, we have an ethical culture guiding the actions of all our Ambassadors. Hence, all labor relations and with third parties are ca- rried out under a framework of legality, respect for Human Rights and non-discrimination. All Ambassadors must know and comply with the provisions of the Code of Ethics. Therefore, from their very first day of employment, Ambassadors familiarize themselves with this document. Also, Ambassadors are required to take an annual on- line course to reinforce and update their knowl- edge on the expected ethical conducts. Volaris encourages free and healthy compe- tition with all airlines in the industry. During 2020, we reviewed our Code of Ethics. We carried out working sessions with the Pres- ident and Chief Executive Officer, the manage- ment and our Ambassadors, to suggest amend- ments and updates to the Code and to adjust this instrument to the new requirements of our stakeholders and to the latest trends that will be driving our business profitability in the future. Amendments were authorized by the Audit and Corporate Governance Committee in 2020, and by the Board of Directors in 2021. In 2020, The most relevant amendments to the Code of Ethics were: 1. Updating the Letter of the President and Chief Executive Officer, using a more inclusive lan- guage and focused on the concept of person and dignity. 2. Structural change, currently divided into: a. culture, pillars and behaviors b. principles c. management of the Volaris Code of Ethics d. Policies related to the Code of Ethics e. Letter of Adherence to the Code of Ethics 3. Adding a section on “Principles” with stake- holders. 4. Update of Volaris Mission. 5. Incorporation of the Responsible Supply Chain Management program. 6. Incorporation of the Volaris Corporate Sus- tainability Program. 7. Establishing the review and update criteria applicable to the Code of Ethics. 8. Adding the training process to the Code for Ambassadors. 9. Amendment to the departments that com- prise the Ethics Committee. Furthermore, the Code of Ethics establishes our commitment to maintain free and responsible market competition, prohibiting anti-compet- itive and monopolistic practices at all times. In addition, we comply with all the applicable regulations that help our competitiveness and profitability in the industry. 100% our Ambassadors were certified in our Code of Ethics. Committed to continuous improvement, we added and described in detail the concepts of diversity, non-discrimination, child labor, forced labor, conflict of interest, non-com- plexity-simplification, harassment, labor-re- lated abuse and money laundering. Content 25 10. Updating of Volaris Ethics Line’s supplier. 11. Removal of exhibits and their subsequent replacement by policies related to the Code. Furthermore, we have internal policies that re- inforce the Code of Ethics’ guidelines: Immunity Policy which protects people who report safety violations. Conflict of Interest by Relationship Policy, which defines procedures to avoid and resolve any conflicts of interest that may arise. Child-Grandparent Policy, which allows all Ambassadors to hold discussions with their supervisor’s boss if they feel intimidated by their immediate supervisor or if the latter is violating the Code of Ethics. Ethics Line Policy, which allows Ambassadors, suppliers, and the union to report any non-compliance or suspected non-compliance with the Code of Ethics, through established communication channels. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Anticorruption Practices Together with the Code of Ethics and the previous policies that govern our daily behaviors, all Volaris operations are aligned with the Anticorruption Compliance Policy and the Fraud Preven- tion and Control Policy, which include compliance with all the applicable anticorruption laws, such as the Foreign Corrupt Practices Act (FCPA). This has several objectives, like complying with our responsibilities as a public company listed on the NYSE, ensuring transparent practices in line with the legal framework, as well as avoiding any act of corruption, including fraud, bribery, extortion and embezzlement. Some of the policies that help us achieve these goals are: Anticorruption Compliance Policy and Fraud Prevention and Control Policy: These policies are directed to managing and implementing actions related to fraud, bribery, extortion, embezzlement, prohibition of facilitation payments, and restricted donations to political parties. Management of Gifts and Benefits from Suppliers and Third-Parties: this policy establishes the guidelines for relationships with third parties, such as suppliers or public officers, among others, preventing the exchange of benefits for any preferential treatment or other activities that could lead to a conflict of interest. Management of Gifts and Benefits for Suppliers and Third Parties: this policy establishes the guidelines for giving gifts to third parties, in order to create proper commercial relations or to satisfy certain local traditions; these can- not be of considerable value and must comply with the Law. Likewise, it is prohibited to give gifts or benefits to suppliers or third parties in exchange for practices related to bribery, illegal payments or improper fees. Donations Policy: updated in 2020, this policy establishes the guidelines for giv- ing, receiving, and managing donations to support social assistance institutions and individuals, through the Company’s social responsibility programs, such as the Avión Ayuda Volaris Program and donations with purpose. In 2020, there were no corruption incidents, as defined by the Anticorruption Compliance Policy and the Fraud Prevention and Control Policy. In 2020, we had 98% training sessions on anticorruption practices. Ethics Line During 2020 we celebrated the seven years of implementation of the Volaris Ethics Line, a set of communication tools managed by Ethics Global, so that Ambassadors, suppliers and the union can report or denounce any breach or suspected non-compliance with the Company’s Code of Ethics. The procedure to report any breach to the Code of Ethics starts by receiving the complaint through any channel of the Whistle Blowing Line; subsequently, attention, management and advice are given and, if necessary, corrective and pre- ventive measures are applied for future cases. Once a report or complaint is received, an inves- tigation is carried out and recommendations or guidance are provided. Every month, a summary of the cases reported, investigated and their recommendations is shared with the members of the Ethics Committee. Additionally, if a mem- ber deems it appropriate, an Ethics Committee meeting will be scheduled to discuss the cas- es and the corresponding recommendations. Moreover, the Audit and Corporate Governance Committee is informed about these reports in its ordinary meetings. Communication channels: Website lineadeescuchavolaris.com Email reporte@lineadeescuchavolaris.com Telephone 800 T Escucho (800-837-2824) App ETHICSGLOBAL Available for IOS and Android Content 26 In 2020, 123 reports were received on the Volaris Ethics Line, of which 80% were attended and resolved, 20% are currently under investigation. Three cases were related to fraud issues and pertinent actions were taken; the rest, for the most part, were related to work environment topics and mishandling of assets. All reports were reviewed and investigated by the corre- sponding areas and action plans were imple- mented to solve each one. Benefits of the Volaris Ethics Line: Strengthening the culture of integrity and ethics. Assuring the people who report of the confidentiality of the process; reports are managed by a third party. Ensuring proper and independent management of all cases reported. Encouraging respect among Ambassadors and people’s individual development. Promoting a sense of belonging within the Volaris Family. Acting as a deterrent by reducing unethical conducts. Detecting cases affecting the work environment. Reducing staff turnover. Ensuring a workplace free of violence and discrimination. Contributing to comply with the guidelines of the Anticorruption Compliance Policy and the Fraud Prevention and Control Policy. Contributing to comply with the guidelines of the Sarbanes Oxley Act. Minimizing the risks of bribery, fraud and corruption. Preventing economic losses. Standardizing ethical practices in organizations’ business units and geographic locations. Automating information gathering for analysis. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-16 Volaris Culture With our person-centered Culture, we transcend to continue offering the best travel experiences. Our organizational culture, which is person-cen- tered, is composed of all the values and behav- iors expected from our Ambassadors3. Therefore, we have defined five pillars at Volaris for their comprehensive development: health, family, professional development, spirit and social commitment. During 2020, due to the COVID-19 pandemic, we focused on the health pillar. Hence, we strive to create value for Ambassadors through a strategy that prioritizes their physical, mental and family wellbeing. Physical wellbeing: 24-hour medical care, phys- ical activation content through the “With you at a distance” campaign, as well as COVID-19 detection tests for part of our administrative staff who returned to the offices and reactivat- ed operating Ambassadors. Content 27 Mental wellbeing: 116 “Sofa Talks”, weekly con- tent and challenges for recreation, intellectual and cultural stimulation, among other activities. Volaris Culture Family wellbeing flexible hours and home-office for Ambassadors with children in school and those who care for senior adults or people in vulnerable situations. In 2020, we amended our Mission! With the best people and at a low cost, we enable more people to travel well. “ A person-centered culture allows Volaris to achie- ve the results that keep us as the top airline in Mexico in passenger transport. It is not only a theo- retical philosophy, it is evident in every program, forum, initiative and strategy, positively impacting Ambassadors. It is a culture that must be expe- Vision Transcend by creating and living the best travel experiences. Pillars Safety, Customer Service and Sustained Profitability Behaviors Credibility, Respect, Fairness, Fellowship and Pride. rienced and renewed daily in our work centers Even while socially distancing, we maintain our family spirit and at a distance.” Juliana Angarita Organizational Development Director Aiming to preserve closeness among Ambassadors and reactivate operations effi- ciently, we implemented live communication forums with our senior management. Officers informed our entire family about the situation at Volaris, the outlook and reactivation plans. Furthermore, we held 16 “Sofa Talks” to promote the physical, mental and family wellbeing of all Ambassadors. Each forum, directed by experts from several fields, were attended by 300 Ambassadors on average and dealt with topics such as stren- gthening personal finances, family leadership, living together at home, emotions workshop, nutrition advice, breast cancer and others. 3 By Ambassador(s) we refer to all the women and men employed by Volaris and any of its subsidiaries. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 402: 103-1, 103-2, 103-3 GRI 102-7, 102-8 Volaris Family At Volaris, we are all a great family. We strive to create a work environment that ensures equal opportunities and our Ambassadors’ physical and emotional integrity. We aim to promote a sense of pride and belonging, as we las to attract and retain the best talent. 2,239 46% Women 2,607 54% Men Central America 67 86% Men Central America 94 4,846 Ambassadors are part of our family in Mexico and Central America. Ambassadors breakdown by gender and country Mexico 2,172 Mexico 2,513 Content 28 14% Women 25% Women Gender diversity in the Board of Directors Gender diversity among Officers and Managers Ambassadors with disabilities: < 25% Breakdown by age group: < 30 years: 25-50% of our workforce 30-50 years: 50-75% of our workforce > 50 years: <25% of our workforce Women Men 75% Men In addition, the percentage of women in key positions is: 34% in management positions 50% in junior management positions 31% in management positions with revenue-generating functions 2% in Science, Technology, Engineering and Mathematics (STEM) related positions Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Turnover 2020 total turnover rate 8.9% vs 14.7% in 2019 2020 voluntary turnover rate 3.5% vs 12.1% in 2019 Turnover rate by gender 46% Women 54% Men Content 29 Turnover rate by region 16% 14% 7% 8% 11% 8% 9% In 2020 we retained our talent and reduced the turnover rate compared to 2019, due to the implementation of initiatives to ensure our Ambassadors’ comprehensive wellbeing in the face of the COVID-19 pandemic. s r e h t O y t i C o c x e M i s r e t r a u q d a e H a n a u j i T y e r r e t n o M n u c n a C l j a r a a a d a u G Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact In 2020, 14.7 million passengers chose to travel with Volaris. We are the Mexican airline with the largest number of transported passengers. 5% of surveyed Customers traveled in an airplane for the first time. We are the Latin American airline with the most routes to the United States of America. 1.4. Competitive Advantages GRI 102-10 GRI 201: 103-1, 103-2, 103-3 Lower Unit Costs We strive to decrease our cost structure by offseting any challenging situations, by reduc- ing fixed costs and maintaining a high-density seating configuration and aircraft utilization. This strategy, together with our ultra-low-cost business model, have yielded exceptional results for Volaris. We have stimulated demand and sat- isfied our Customers’ needs and expectations; in addition, we have successfully adjusted to the current complicated situation resulting from the global pandemic, and maintained our profitability. Content 30 TR-AL-000.F A Young and Efficient Fleet We have one of the youngest and most efficient fleets in the American conti- nent; 86 aircraft with an average age of 5.3 years. Each aircraft has 188 seats on average and 79% are equiped with sharklets, aerodynamic devices that reduce fuel consumption by approximate- ly 4% and prevent around 18,000 tons of CO2 emissions. In accordance with our ultra-low-cost strategy and our commitment to become the greenest airline in Mexico, we have steadily increased the number of Airbus NEO aircraft, which burn less fuel and offer competitive lease rates. Addition- ally, these aircraft have eco-efficient engines and sharklets; thereby reducing CO2 emissions and fuel consumption, minimizing our environmental footprint. With the success of our strategies, we are the publicly traded airline with the lowest costs in the Americas. We are a resilient airline; we achieved one of the fastest recoveries worldwide per available seat mile by taking advantage of current market opportunities and adjusting our operations. As of December 2020, the Mexican airline industry recovered 56%; Volaris accounts for 17% of this recovery. In 2020, we acquired 7 new A320neo air- craft; 35% of our fleet are NEO aircraft and by 2023 it will be 58% Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 31 GRI 102-2, 102-6, 102-7 The You Decide Program and Ancillaries One of our greatest competitive advantages is our You Decide program. This ticket price-disag- gregation framework allows us to offer the lowest base fare –Fly Basic– and ancillary services on a separate basis, so that our Customers only pay for what they need; hence, there is absolute transparency about the base fares and optional services purchased by the Customer. With the You Decide program, we were able to make the benefits of air transport availa- ble to more and more people. As of the date of this report, we have the following fares: Operational Efficiency In line with our cost reduction strategy and ability to adjust, we use several indicators to monitor operational efficiency. Itinerary reliability On-time performance (departure) On-time performance (arrival) Maintenance reliability Baggage irregularities Booked passengers Available seat miles (ASMs) Load factor Consumed fuel gallons Ambassadors per aircraft at the end of the period Average daily aircraft utilization (block hours) Average daily aircraft utilization (flown hours) Airports where we operate Passenger flight segments c i s a B 1 personal item (must fit underneath the seat) Lowest fare No checked baggage c i s s a l C 1 personal item (must fit underneath the seat) s u P l 1 carry-on bag 1 personal item (must fit underneath the seat) 2 carry-on bags 1 checked bag (25 kg) Priority boarding Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 32 Furthermore, we have developed programs to strengthen ties with our frequent Customers and offer them special fares and promotions, creating a loyalty relationship between them and the Company. This will help us to maintain their preference in the future. In 2020, we produced Ps. $9.70 billion in non-ticket revenue, approximately 39% of our total revenue. v. club v. pass Volaris-INVEX Credit Card This membership offers fares at a lower cost, and the possibility to choose from among three dif- ferent options: individual, group (owner plus six passengers), and subscription (individual, with monthly payments). The benefits are: Best prices on all flights Savings of at least Ps. $100.00 Mexican pesos on each flight Exclusive promotions every Thursday Members of v.pass have access to the best prices on one-way or round-trip tickets once a month for any of our domestic destinations. The benefits are: During 2020, we continued strengthening our partnership with Banco INVEX to offer even more benefits and oppor- tunities for our Customers. Some of these benefits are: Fixed monthly payment Only taxes are paid (VAT and airport fees) Not subject to seasonal price variations Baggage at preferential rates Access to v.club fares Electronic credits earned on purchases made with the INVEX credit card, which in turn can be used to pay for flights Initial and anniversary bonuses deposited directly to the electronic wallet 3, 6, and 11 months of credit with no interest Additional baggage at no cost to the credit card holder and companions 15% discount on the purchase of products from the In the Clouds on-board menu 395,940 members 23,600 members 294,000 members Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Due to the situation resulting from the COVID-19 pandemic, we created three additional products to protect our Customers in all stages of their journey. Content 33 Offering unlimited time and date changes during off season, with no difference in fare. This travel cancellation or interruption insurance provi- des coverage in case of travel delays and air transpor- tation for family member in case the beneficiary has an accident. Provides medical assistance, support in case of accidental death and medical transport in emergencies. YaVas emerging business This digital platform offers Customers the option to buy air travel + hotel + other travel-experience services at a lower price. We pro- vide our Customers a wide range of destinations, the best hotels, and excellent tourist packages at affordable prices in Mexico, the United States of America, and Central America. Our goal is to make aviation and tourism affordable for everyone, contributing to the economic and social development of the com- munities where we operate, enabling our Customers to have access to air transportation and tourist services. Therefore, YaVas is alig- ned with the 2020-2024 Tourism Sector Program of the Mexican Government, which has four priority objectives: 1) guaranteeing a social and respectful approach to Human Rights in the country’s tourism activity; 2) fostering a well-balanced development of tou- rist destinations in Mexico; 3) strengthening the diversification of tourism markets at national and international levels; and 4) promo- ting sustainable tourism in the national territory. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Bus Switching Campaign In 2020, we were more committed than ever to make flying accessible for everyone. We thus offered promotional fares at costs lower than bus fares on similar routes, aiming to stimulate demand for air services among passengers who have traveled long distances in buses. GRI 102-2, 102-4, 102-6, 102-7, 102-10 Route Network We have a diversified point-to-point route network. This structure improves our resilien- ce to the challenges faced by the industry today, by allowing us to offer more travel and connectivity options to our Customers visiting friends and relatives. Content 34 In 2020, approximately 40% of Volaris’ Mexican capacity competed only against bus companies. 209 routes operated 127 domestic 82 international +117connecting routes under the codeshare agreement with Frontier 69 destinations 22 3 United States of America Central America 44 Mexico +50destinations under the codeshare agreement with Frontier Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 21 16 12 20 17 18 5 8 6 9 14 59 47 15 31 28 38 32 42 40 43 44 35 36 45 3 2 4 7 19 60 48 65 56 37 58 53 33 24 54 55 41 62 49 66 30 51 23 46 25 26 34 27 63 50 64 29 61 52 39 67 57 69 +150Destinations Flights to Mexico, USA and Central America with get out of town prices! Content 35 2020 Route Map 11 22 1 13 10 68 1. Charlotte 2. Chicago (Midway) 3. Chicago (O´Hare) 4. Dallas Fort Worth 5. Denver 6. Fresno 7. Houston 8. Las Vegas 9. Los Ángeles 18. Sacramento 19. San Antonio 20. San José, California 21. Seattle 22. Washington D.C. 23. Acapulco 24. Aguascalientes 25. Campeche 26. Cancún 35. Culiacán 36. Durango 37. Guadalajara 38. Hermosillo 39. Huatulco 40. La Paz 41. León 42. Loreto 43. Los Cabos 52. Puerto Escondido 53. Puerto Vallarta 54. Querétaro 55. San Luis Potosí 56. Tampico 57. Tapachula 58. Tepic 59. Tijuana 60. Torreón Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 10. Miami 11. Nueva York 12. Oakland 13. Orlando 14. Ontario 15. Phoenix 16. Portland 17. Reno 27. Chetumal 28. Chihuahua 29. Ciudad del Carmen 30. Ciudad de México 31. Ciudad Juárez 32. Ciudad Obregón 33. Colima 34. Cozumel 44. Los Mochis 45. Mazatlán 46. Mérida 47. Mexicali 48. Monterrey 49. Morelia 50. Oaxaca 51. Puebla 61. Tuxtla Gutiérrez 62. Uruapan 63. Veracruz 64. Villahermosa 65. Zacatecas 66. Zihuatanejo 67. Guatemala, Guatemala 68. San José, Costa Rica 69. San Salvador, El Salvador +150DestinationsFlights to Mexico, USA and Central Americawith get out of town prices!1. Charlotte2. Chicago (Midway)3. Chicago (O´Hare)4. Dallas Fort Worth5. Denver6. Fresno7. Houston8. Las Vegas9. Los Angeles10. Miami11. New York12. Oakland13. Orlando14. Ontario15. Phoenix16. Portland17. Reno18. Sacramento19. San Antonio20. San Jose, California21. Seattle22. Washington D.C.23. Acapulco24. Aguascalientes25. Campeche26. Cancun27. Chetumal28. Chihuahua29. Ciudad del Carmen30. Mexico City31. Ciudad Juarez32. Ciudad Obregon33. Colima34. Cozumel35. Culiacan36. Durango37. Guadalajara38. Hermosillo39. Huatulco40. La Paz41. Leon42. Loreto43. Los Cabos44. Los Mochis45. Mazatlán46. Merida47. Mexicali48. Monterrey49. Morelia50. Oaxaca51. Puebla52. Puerto Escondido53. Puerto Vallarta54. Queretaro55. San Luis Potosi56. Tampico57. Tapachula58. Tepic59. Tijuana60. Torreón61. Tuxtla Gutierrez62. Uruapan63. Veracruz64. Villahermosa65. Zacatecas66. Zihuatanejo67. Guatemala, Guatemala68. San Jose, Costa Rica69. San Salvador, El Salvador211612181765321741931283832353637245456626355302352506164292527263446676869573951493366585365604844454043421310221198144715592041 Content 36 GRI 102-6, 102-7 Codeshare Agreement with Frontier* Since 2018, we began our codeshare operations with the U.S. airline Frontier, which enables our Mexican passengers to visit new U.S. desti- nations and American Customers to fly to new cities in Mexico. Strong potential for connectivity 20connecting airports 50 new destinations in the United States of America +117 new connecting roundtrip routes * Due to the FAA downgrade of Mexico (from Category 1 to Category 2), Frontier has removed its code from flights operated by Volaris, although customers still have the option to purchase flights from Volaris and Frontier through our website. + Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 37 New CBX Services Volaris Digital Strategy 1% 80% We established an alliance with the Cross Border Xpress (CBX) bridge, which con- nects the Tijuana International Airport with San Diego, California. At the beginning of 2020, we began operating with this new station, which facilitates border crossing to and from any of the routes we offer at the Tijuana airport. Now, our Customers can purchase the CBX service on our website in the following two manners: As an ancillary product to the flight to or from Tijuana. As a station, i.e., as part of the flight to and from any of the 36 national routes we offer in Tijuana. With this alliance, we were able to reinfor- ce the strategy of connecting our Custo- mers in the VFR (Visiting Friends and Fa- mily) segment on both sides of Mexico’s northern border. In addition, we contribute to the recovery of local economies. Since Volaris was founded in 2006, innovation and disruption have been part of the airline’s DNA. The COVID-19 pandemic changed many things in the world, including the way people travel by plane and how goods and services are purchased. At Volaris, we adapted quickly and saw an opportunity in the crisis to accel- erate crucial adjustments in our digital plat- forms. During the pandemic, the first thing we accomplished to fulfill our Customers’ needs was the implementation of a self-service tool to deal with the flights affected, thus allowing the Customer to make automatic flight changes. Another modification was the migration of our reservation system, as well as the update of our website volaris.com. We launched an ambitious website with state-of-the-art technology, a proj- ect developed with the advisory services of Google, focused on a significant improvement of the User Experience. We made a simple and intuitive website for all our Customers, simpli- fying flight searches, the buying process and other self-services, such as Mobile Check-in or flight changes. With these actions, we reduced the website’s loading time by 50%, going from 10 to 5 seconds on average. Customer Service is one of the most important pillars of our Company, we therefore launched a new chatbot attending 80% of the conversations through digital channels we have with our Customers. We’re able to meet our Customers’ needs in a more efficient way. Volaris’ current digital strategy is based on three pillars: 14% Being faster Better performance on mobile devices Providing a great User Experience The Company’s next challenge is to continue leading the reopening of the skies and reacti- vating flights to and from destinations where we operate and beyond. Our business model and the discipline of all our Ambassadors place Volaris in a favorable position to achieve what we intend to do. During 2020, Volaris was a clear example of resilience in overcoming this turbulence. Today, we feel ready and completely confident to push Mexico and tourism forward, inviting our more than 6 million followers on social media and those who do not follow us yet, to take off together and continue on our mission to enable more people to travel well. Our mobile apps have reached 10 million downloads since their launch. 5% 2020 Sales distribution Website and mobile app Call center Travel agents Airport booths 80% of ticket and ancillary product sales were through the website and mobile app. In 2020, 80% of our Customers checked in online, through our mobile app or website. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 38 Marketing and Customer Communication At Volaris, we want more people to travel well. Our Mission is reflected in all the marketing campaigns we carry out. The success of our promotions, Customer attraction and retention, the sale of ancillary services and our brand’s recognition depend largely on them. By meeting our objectives, we ensured that more people had access to the benefits of air transport and we were able to consolidate sustained profit- ability for the Company. All the terms, conditions and relevant informa- tion of our services can be consulted on our website, at airports booths, on social networks and by email. During 2020, we conducted several campaigns on our digital channels, social networks, televi- sion and radio to position Volaris as the leading airline in Mexico and to build trust and empathy with Customers, contributing to the reactivation of the economy and the airline industry and to promote tourism. #WeAreTogetherInThis 1st stage. Maintaining Customers informed about affected flights, flight changes on the website, flexibility options to re- schedule trips, travel requirements and restrictions. 2nd stage. Developing inspirational initia- tives for those people who remained at home and could not travel due to social distancing as a result of the COVID-19 pandemic. 3rd stage. Communicating our efforts for contributing to the communities where we operate, such as the trans- portation of humanitarian cargo and medical personnel for several govern- mental, non-governmental and private institutions. Closing wings During April, we communicated our operations’ reduction through an empathetic and emo- tional brand message, evidencing that we would continue flying for all those in need and that we would soon reactivate our operations. With Volaris, Fly Sure We were the first Mexican airline to implement and communicate our biosecurity protocols. In alliance with IATA and Airbus, we depicted airplanes as the safest means of transport during the pandemic, earning trust from our Customers. Furthermore, we carried out dis- ruptive events at bus facilities in key cities to attract new Customers and continue with our bus switching strategy aimed at inviting more people to travel with us. Through campaigns focused on low fares, safety and flexibility, we restored the Customers’ trust on air travel amid the COVID-19 pandemic. In 2002, we achieved a 40% passenger share in the domestic market, which posi- tions us as the leading airline in passenger transport in Mexico. Leading the reopening of the skies to activate Mexico When we reactivated operations, we focused on communicating our leadership in terms of new routes, destinations, operations, transported Customers and biosecurity protocols, consolidating ourselves as the best option to travel within the country and to the United States of America. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content Content Volaris Value Creation Content 2.1. Volaris Value Creation Model and our Contribution to the SDG 2.2. Stakeholder Engagement 2.3. Initiatives in Times of COVID-19 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 2LA CREACIÓN DE VALOR DE VOLARIS Volaris Value Creation Model Value created for our stakeholders Content 40 GRI 102-12, 102-21, 102-40, 102-42, 102-43, 102-44 2.1. Volaris Value Creation Model and our Contribution to the SDG Economic and Corporate Governance Focus People Care Focus A. Business Strategy – Ultra-Low-Cost Business Model A. Ambassadors’ Relations, Practices and Wellbeing B. Corporate Governance C. Corporate Affairs D. Supply Chain B. Human Rights and Community Relations C. Customer Welfare The Volaris Value Creation Model brings togeth- er the Corporate Sustainability Program and the identification of our stakeholders, along with the economic, social and environmental value that we create for each of them. Through this model we are able to maintain open communication channels to listen to their expectations and im- plement actions to meet their needs. In addition, we have identified the Sustainable Development Goals (SDG) most impacted by our operations in order to contribute to their goals and ensure the prosperity of present and future generations. Throughout this report, we describe how our initiatives and actions con- tribute to each SDG. Planet Care Focus #CielitoLimpio Comprehensive Environmental Protection Policy A. B. Efficient Fuel Consumption Management #CielitoLimpio Carbon Emissions Offset Program C. Eco-friendly Initiatives and Efforts toward Biodiversity D. Regulatory Compliance s r e m o t s u C s r o d a s s a b m A y t i n u m m o C s r e i l p p u S s r o t s e v n I Accessibility and connectivity Low prices Security Travel experience Corporate reputation Pollution footprint offset Alignment with Sustainable Development Goals (SDGs) Volaris Family Equal opportunities and non-discrimination Competitive payment Sense of pride and belonging Safety and wellbeing Union relations Awareness of environmental protection Alignment with Sustainable Development Goals (SDGs) Reduction of pollution footprint Human Rights protection Positive impact in the Communities where we operate Awareness of environmental protection Strategic partnerships to achieve goals Corporate volunteering Encouraging tourism and economic development Alignment with Sustainable Development Goals (SDGs) Reliable customer Long-term relationships Sustainable Supply Chain Human Rights protection Reduction of pollution footprint Environmental protection Alignment with Sustainable Development Goals (SDGs) Short, medium and long-term business plan Return of investment Revenue generation Cost reduction Resources optimization Strict risk control Ethics and transparency Alignment with Sustainable Development Goals (SDGs) / s e i t i r o h t u A y r t s u d n I Law enforcement Employment generation and economic development Collaboration and communication with the government and its agencies Tax payment Obtainment and renewal of operational certifications Reduction and offseting of the pollution footprint Alignment with Sustainable Development Goals (SDGs) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 41 No poverty Ending poverty in all its forms everywhere 1. Air transportation connectivity and accessibility 2. Promoting tourism and economic development in the communities where we operate 3. Responsible Supply Chain Management Program 4. Direct and indirect employment creation 5. Formal employment 6. Diversity and Equal Employment Opportunities Policy 7. Fair wages, and benefits above the minimum established by law 8. 9. Avión Ayuda Volaris Program Carbon Emissions Offset Program Good health and well-being Ensure healthy lives and promote well-being for all at all ages 1. Prohibiting tobacco use on board 2. Responsible Supply Chain Management Program 3. Social security and major medical expenses insurance for Ambassadors and family 4. Biosecurity protocols in working spaces 5. Occupational health programs for Ambassadors and family 6. Avión Ayuda Volaris Program 7. Aviation Security and Safety 8. Addiction-free company 9. Comprehensive Environmental Protection Policy Quality education Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Decent work and economic growth Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all 1. Partnerships with schools related to aviation professions 2. Programs for attracting young talent 3. Training programs Gender equality Achieve gender equality and empower women and girls 1. Corporate Governance structure 2. Volaris Code of Ethics 3. Volaris Ethics Committee and Whistle Blowing Line 4. Diversity and Equal Employment Opportunities Policy 5. Compensation Policy 6. Maternity, Paternity and Use of Breastfeeding Rooms Policy 7. Home Office and Flex-time Policy 8. Talent attraction and promotion 9. Performance management 10. Recognition programs 11. Talent Review and Succession Planning 12. Career Paths 13. Leadership Development 14. Training programs 15. Fair wages, and benefits above the minimum established by law Carbon Emissions Offset Program 1. Corporate Governance structure 2. Corporate Affairs 3. Responsible Supply Chain Management Program 4. 5. Direct and indirect employment creation 6. Diversity and Equal Employment Opportunities Policy 7. Partnerships with schools related to aviation professions 8. Programs for attracting young talent 9. Performance management 10. Recognition Programs 11. Career and development plans 12. Training programs 13. Formal employment 14. Fair wages, and benefits surpassing the minimum established by law 15. Occupational health and safety 16. Biosecurity protocols in working spaces 17. Relations with the union 18. Avión Ayuda Volaris Program Industry, innovation and infrastructure Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation 16. Agreements with day care centers 17. Occupational health and safety 18. Programs and partnerships for Human Rights protection 19. Responsible Supply Chain Management Program 1. Accessible air transportation 2. Corporate Affairs - public policy to influence airport infrastructure processes 3. Investment in young fleet and new technology Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Reducing inequalities Reduce inequality within and among countries Responsible consumption and production Ensure sustainable consumption and production patterns Peace, justice and strong institutions Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Content 42 1. Connectivity and accessibility of air transportation 2. Payment facilities through various channels and for all income levels 3. Responsible Supply Chain Management Program 4. Volaris Code of Ethics 5. Volaris Ethics Committee and Whistle Blowing Line 6. Diversity and Equal Employment Opportunities Policy 7. Compensation Policy 8. Maternity, Paternity, and Use of Breastfeeding Rooms Policy 9. Home Office and Flex-time Policy 10. Agreements with daycare centers 11. Direct and indirect employment creation 12. Formal employment 13. Performance management 14. Recognition Programs 15. Talent Review and Succession Planning 16. Career Paths 17. Leadership Development 18. Training programs 19. Fair wages, and benefits above the minimum established by law 20. Relations with labor union 21. Occupational health and safety 22. Avión Ayuda Volaris Program 23. Programs and partnerships for Human Rights protection 24. Carbon Emissions Offset Program 1. Corporate Governance structure 2. Responsible Supply Chain Management Program 3. Comprehensive Environmental Protection Policy 4. Programs and partnerships for Human Rights protection 5. Integrated Annual Report Climate action Take urgent action to combat climate change and its impacts 1. Corporate Affairs 2. Responsible Supply Chain Management Program 3. Home Office and Flex-time Policy 4. Corporate voluntary work activities focused on environmental issues 5. Comprehensive Environmental Protection Policy 1. Corporate Governance structure 2. Corporate Affairs 3. Information privacy and cybersecurity 4. Responsible Supply Chain Management Program 5. Diversity and Equal Employment Opportunities Policy 6. Corporate voluntary work activities 7. Avión Ayuda Volaris Program 8. Programs and partnerships for Human Rights protection Partnerships for the goals Strengthen the means of implementation and revitalize the global partnership for sustainable development 1. Corporate Affairs 2. Strategic partnerships or the Company’s operation 3. Responsible Supply Chain Management Program 4. Strategic partnerships for the Corporate Voluntary Work Program, Human Rights protection, the operation of the Avión Ayuda Volaris Program, and the Emissions Offset Program Carbon Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 43 with numerous institutions in the public and private sectors, civil society organizations, academia, and the industry, among others. In 2021, we shall carry out our new materiality assessment and dialogue with stakeholders, in order to learn about their most pressing issues. We decided to complete the analysis in the sec- ond half of 2021 in order to obtain updated re- sults on the new normal, reflecting the change in habits and requirements resulting from the COVID-19 pandemic. The resilience of our business model was strengthened by our stakeholders’ empathy during the most critical moments for the Com- pany. Thanks to their invaluable support, to- day we are one of the airlines with the highest capacity recovery worldwide and a leader in Mexico in terms of passengers. Our Compa- ny’s success reflects the contribution of each Ambassador, Customer, investor, supplier and authority who have accompanied us along the way. We would not have been able to take off in 2020 without them. GRI 102-43-, 102-44 2.2. Stakeholder Engagement During 2020, we strengthened communica- tions with our stakeholders like never before through a more open dialogue that allowed us to create value even in the harshest months of an unprecedented global crisis. Listening and understanding the needs and concerns of our main stakeholders provides us guidance to set goals, redefine strategies and identify risks and opportunities in order to run the business in a sustainable manner in the future. Since the start of the pandemic, we have main- tained a proactive and transparent discourse with all investors about the implementation of the biosecurity protocol, capacity evolution, competition and recovery. Since we were the first airline to receive the Safe Travels seal from the WTTC, as well as other biosecurity recog- nitions, we were able to reinforce the group’s confidence, as well as that of our Customers, Ambassadors and authorities. We were able to respond better and faster to our passengers’ needs by focusing our efforts in Customer service innovation. Strengthening our channels such as the Volaris website, WhatsApp and Chatbot Vane on Facebook revolutionized the way we interact with them. In addition, through monthly meetings via sev- eral corporate communication channels led by our management team, we held permanent di- alogue with all our Ambassadors to follow up on their work plans and address concerns relat- ed to salaries and job stability. Every week, we carried out “Sofa Talks” with experts in mental health, emotional intelligence, nutrition, child psychology and personal finances, providing Ambassadors with tools to ensure their well- being in the workplace and with their families. These actions helped us maintain internal com- munication open, creating value for our most important pillar, the Volaris Family. Moreover, in 2021, we will perform the first work environ- ment survey to listen and understand the most pressing issues for our Ambassadors and to create even more value for them. Similarly, 2020 revealed our suppliers as strate- gic business partners. Through an honest and direct dialogue, we reached agreements with approximately 360 suppliers for implementing savings and payment deferral plans, increasing our cash flow and making it possible to extend payment terms up to an additional 31 days. Furthermore, we were in constant communi- cation and coordination with industry associa- tions, such as the International Air Transport As- sociation (IATA) to develop collaborative plans, protocols and strategies, as well as to obtain data and projections, in order to reach a sus- tainable worldwide reactivation of the industry. Finally, we maintained constant communication with authorities to develop initiatives for the benefit of the entire value chain of the aviation and tourism industries in Mexico, which has al- lowed us to establish agreements that have con- tributed to the recovery of both sectors. Also, by activating our Avión Ayuda Volaris program, we established a communication line with the com- munities where we operate and where several associations were first responders to the health emergency. It should be mentioned that through this program we created new strategic alliances Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Strategies for Stakeholder Engagement Stakeholders Key issues Communication channels Content Results 44 Customers Ambassadors Community Suppliers Investors Low fares Quality service Security and biosecurity Customer experience and satisfaction Customer service Environmental impact Carbon offsetting mechanism Corporate sustainability strategy Connectivity Occupational health and safety Job security Experience and Ambassadors’ engagement Equal opportunities and non-discrimination Training and development Career and growth paths Corporate voluntary work Environmental impact Labor and family wellbeing Company’s profitability Corporate sustainability strategy Economic and social development of the communities and regions where we operate Strategic partnerships to achieve goals Support for civil organizations Corporate voluntary work Donations Environmental impact Carbon offsetting mechanism Human Rights protection Corporate sustainability strategy Avión Ayuda Volaris Medium and long- term agreements Fair trade conditions Economic performance of the Company Human Rights protection Environmental impact Corporate sustainability strategy Economic performance of the Company Corporate Governance Risk Management Corporate Affairs Economic consequences due to environmental impact Corporate sustainability strategy Digital platform (website, app, and social media) Call Center Volaris sale points Airports On-board service and magazine Net Promoter Score (NPS) External communication/means of communication, marketing campaigns, and corporate brand management strategies Integrated Annual Report Accessibility and connectivity (opening new routes) Low prices Security and biosecurity Confidence in going back to air travel More people using air transportation Travel experience Corporate reputation Opportunity to offset part of the pollution footprint Contribution to Sustainable Development Goals (SDG) Volaris Whistle Blowing Line Human resources team in main airports where we operate Institutional communication Surveys Periodic reports from the Executive Committee and management team Special messages from the President and Chief Executive Officer and management team Labor union Integrated Annual Report Ethics cases reported to be investigated A great place to work (Volaris Family) Equal opportunities and non-discrimination practices Competitive compensation Sense of pride and belonging Biosecurity and wellbeing Union relations Awareness of environmental protection Contribution to Sustainable Development Goals (SDG) On-board magazine Biannual reports issued by foundations Integrated Annual Report Corporate voluntary work activities External communication/means of communication, marketing campaigns and corporate brand management strategies Meetings and phone calls Institutional communication channels Informative circulars Annual evaluation Audits Integrated Annual Report Committees and Board of Directors meetings Annual Shareholders’ Meeting Financial reports Integrated Annual Report Relevant events broadcast Volaris website Media Volaris news letters Surveys, indexes and ratings Pollution footprint reduction Economic impact from tourism, VFR passengers and business travel Human Rights protection Positive impact on communities where we operate Awareness of environmental protection Strategic alliances to achieve goals Corporate voluntary work Contribution to Sustainable Development Goals (SDG) Sustainable reactivation of the airline industry and its value chain Reliable customer Long-term relationships Sustainable Supply Chain Human Rights protection Reduction of pollution footprint Environmental protection Contribution to Sustainable Development Goals (SDG) Contracts’ renegotiation Short, medium and long-term business plan Return on investment Income generation Cost reduction Resource optimization Strict risk control Ethics and transparency Contribution to Sustainable Development Goals (SDG) Sustainable reactivation of the airline industry Authorities / Industry Regulatory compliance Contribution to the economic development of the countries where we operate Job creation Employee health and safety Environmental impact Reactivation of the airline industry and its value chain Corporate sustainability strategy Biosecurity protocols Direct communication with strategic partnerships Participation in chambers and discussion forums Events and conferences Meetings Lobbying Integrated Annual Report Media Regulatory compliance Employment creation and economic development Collaboration and communication with the government and its agencies Tax payment Obtaining and renewing operating certifications Reduction and offsetting of pollution footprint Contribution to Sustainable Development Goals (SDG) Sustainable reactivation of the airline industry Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 45 GRI 201-1 2.3. Initiatives in Times of COVID-19 Actions to Address COVID-19 Impacts Promptly and Decisively The airline industry worldwide experienced un- precedented hardships due to the COVID-19 pandemic. It is not yet possible to determine the full loss and effects on the global industry, or when the negative effects will abate. However, at Volaris we managed to take off and, by the end of 2020 –an unprecedented year for the airline industry– we not only returned to pre-pandemic operating levels, in the last quar- ter we also recovered our business profitability. In 2020, we began operations on thirteen new routes, five domestic and eight international, we diversified our point-to-point network and reinforced our presence at the Mexico City In- ternational Airport. All of this was possible as a result of six main strategies: 1. Focus on our ultra-low-cost business model 2. Implementation of biosecurity protocols 3. Bus switching campaign 4. Development of a liquidity preservation program 5. Acceleration of cost reduction strategies 6. Adoption of a conservative and flexible growth plan Additionally, through our Avión Ayuda Volaris program and together with our strategic al- lies, we continued to support the communities where we operate during the health emergency, generating social and economic value for all those benefited. Our ultra-low-cost business model creates a virtuous cycle that begins with a relentless focus on low costs as part of our organizational culture. This has positioned us as the publicly traded airline with the lowest costs in the Amer- icas and among the main lowest cost carriers globally. In order to protect the wellbeing of our pas- sengers, crew and ground personnel, we imple- mented a new biosecurity and cleaning protocol through which we regained the trust of our VFR and pleasure Customers, especially bus passengers, based on a point-to-point model that enabled Volaris to achieve one the fastest capacity recoveries in the world. During the last years, we have prepared our Company with the lowest cost structure pos- sible, allowing us to offer very low rates –bus level low–consequently producing a conversion of bus passengers to airplane passengers. We executed multiple actions to strengthen liquidity, reduce costs and capture market op- portunities. We implemented a strict liquidity preservation program that included negotia- tions with key lessors and suppliers that pro- duced $266 million dollars in benefits for 2020. We also postponed $200 million dollars in PDP financing until 2023. As part of the liquidity preservation program, we negotiated cost reductions and credit exten- sions with more than 360 suppliers, dropping also non-essential expenses. During 2020, we were able to successfully negotiate contracts with our main suppliers, seeking to improve the commercial conditions that would allow us to continue operating, without breaching our con- tractual commitments. Some of these contracts are for the sale and maintenance of engines, auxiliary power units, avionics and seats for our Airbus A320neo Family aircraft that we pur- chased in 2017. The Company signed an agree- ment with Pratt and Whitney for the purchase of 171 additional GTF engines, along with main- tenance services in a long-term variable scheme at competitive prices. These negotiations will improve the existing contracts throughout the useful life of these aircraft in an approximate amount of $300 million dollars. All this, in addition to the benefits that already apply to our current fleet as part of the negotiations with the same suppliers. We also implemented licensing and online train- ing programs to reduce costs. And we bene- fitted from our labor contracts with variable compensation schemes based on productivity. Our flexible and strategic operating plan allowed us to reduce capacity and cancel or consoli- date flights to protect our profitability. Month by month, we regain capacity with a focus on growth flexibility and cash generation. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 46 Throughout the year and since the beginning of the pandemic, some members of the manage- ment team held monthly informative sessions to notify the Ambassadors about the Company’s operating and financial status, the outlook for reactivation and the eventual return to our offices. Finally, due to all the aforementioned initiatives, we managed to preserve the almost 5,000 jobs of the Company, contributing to the country’s economic recovery, and creating value for our Ambassadors and their families. We closely monitor capacity reductions from competitor for potential opportunities, testing new ancillary products, and launching specific promotions to stimulate air travel. Therefore, we were able to open new destinations and increase our operations at this airport. Additionally, we decreased scheduled capacity to protect our profitability. Likewise, we strength- ened our relationships with Customers, updating our website and maintaining close communi- cation through social media and Volaris email. In December 2020, we closed an upsized prima- ry follow-on equity offering of 134 million CPOs, in the form of ADSs, priced at 11.25 dollars per ADS in the United States of America and other countries outside of Mexico, pursuant to our Shelf Registration Statement filed with the SEC. In connection with the offering, the underwriters exercised their option to purchase up to 20.1 million additional CPOs in the form of ADSs, completing a total offering of 154.1 million CPOs in the form of ADSs; we obtained approximately $164.4 million dollars in net proceeds for cor- porate purposes. Volaris closed the year 2020 with the stron- gest financial balance of the Mexican airlines, with cash and cash equivalents of $506 million dollars, mainly in U.S. dollars. The net debt to EBITDA leverage ratio closed the fourth quarter at 8.7 times, reflecting a healthy balance sheet in comparison with the industry standard in the 2020 scenario. Volaris financial debt is used solely to invest in the business’ growth. In 2020, when the COVID-19 pandemic began, we started operations in thirteen new routes, five domestic and eight inter- national ones. Work Flexibility and Home Office During the beginning of the COVID-19 pandemic, we implemented the home office policy for all administrative Ambassadors, in order to preser- ve their health and safety. To make this new way of working more efficient, we employed digital tools, such as enabling digital platforms for all Ambassadors. The beginning of remote work officially began on March 31st and, as operations started to reac- tivate, it was also necessary to implement several support areas so that certain Ambassadors re- turned in a tiered scheme and by groups to the corporate offices. However, as a special case, people vulnerable be- cause of chronic diseases or age, and those who were caring for senior citizens, children, or with particular situations had the flexibility to work remotely indefinitely. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 47 Ultra-Low-Cost Model / Bus Switching Campaign At Volaris, we maintain our focus on VFR (Customers Visiting Friends and Relatives), people who seek low prices, and on small and medium enterprise segments. These segments have shown the greatest demand for air travel in Mexico as the industry recovers from COVID-19. programs. Our current and potential competi- tors include traditional network airlines, low-cost carriers, regional airlines and new airlines. We usually compete in markets served by legacy 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 Volaris. As of December 31, 2020, Volaris was the national market leader in number of trans- ported passengers. In the current competitive environment, Volaris has taken advantage of market opportunities, consolidating our leadership in market share measured in number of passengers among Mexi- can airlines. During 2020, Volaris transported more than 14.7 million passengers. In addition, we achieved one of the fastest recoveries globally, in terms of available seat miles, as a result of our resilient ultra-low-cost business model, focused on the segments of Customers who visit friends and family and leisure travelers in Mexico and the cross-border markets of the United States of America. We are aware that the airline industry is highly competitive. In 2020, it was highly impacted by the pandemic. The main competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger ameni- ties and related services, number of routes served from a city, Customer service, safety reputation, code-sharing relationships and frequent flier As of December 2020, our domestic mar- ket share went up 9 percentage points to 40% and our international market share rose 6 percentage points to 14%, compa- red to the same period in 2019. Our principal competitors for the domestic market are Grupo Aeroméxico, Interjet and VivaAerobus; the latter two are low-cost carriers in Mexico. In 2020, the Mexican low-cost carri- ers (including Volaris) combined had 71.5% of the domestic market based on passenger flight segments. In 2020, our domestic market share was 38.3%, which placed us as leaders, according to the AFAC. On June 30, 2020, Grupo Aeroméxi- co, our largest competitor by domestic and inter- national market share in 2019, announced that it was filing for Chapter 11 bankruptcy protection in the United States of America. According to its public filings with the CNBV, Grupo Aeroméxico has maintained regular operations during the restructuring process but has received court approval to return at least 19 aircraft to lessors, which would reduce its fleet size by around 15%. On the other hand, Interjet, our second largest competitor by international market share in 2019, has been unable to resume international flights since it suspended routes in March 2020 and has not operated any domestic flights since December 2020. Our major competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious businesspeople. These low base fares are possible due to our low CASM, which at Ps. $141.3 cents (U.S. $6.60 cents) was the lowest CASM in Latin Ameri- ca in 2020, compared to Avianca (U.S. $26.11 cents), Azul (U.S. $10.75 cents), Copa (U.S. $17.29 cents), Gol (U.S. $8.78 cents), Grupo Aeroméx- ico (U.S. $17.98 cents) and LATAM (U.S. $17.33 cents). Additionally, we have lower costs than our publicly traded market competitors in the United States of America, including Alaska Air (U.S. $14.33 cents), Frontier (U.S. $9.53 cents), Spirit (U.S. $8.36 cents), American (U.S. $19.39 cents), Delta (U.S. $22.01 cents), Jet Blue (U.S. $14.29 cents), Southwest Airlines (U.S. $12.44 cents) and United (U.S. $17.68 cents). Furthermore, we face domestic competition from long-distance bus companies. Hence, we set some of our promotional fares at prices lower than bus fares for similar routes in order to stimu- late demand for air travel among passengers who have been regular bus passengers in the past. We believe a small shift in bus passengers to air travel would dramatically increase the number of airline passengers and bring the air travel per capita figures in Mexico closer to those of other countries in the Americas. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS “With Volaris, Fly Sure” Campaign “ I am extremely proud and grateful with the Volaris Family and all the Ambassadors who work daily so that more Customers travel safely with our biosecurity protocol. This standard has been recognized by several bodies, such as the World Travel and Tour- ism Council, SimpliFlying, the Government of Mexico City and the Government of Yu- catán. With our campaign “With Volaris, Fly Sure” we have regained the trust of millions of passengers who travel with Volaris. We are very happy to welcome you back on our flights, making sure you travel well!” Enrique J. Beltranena President and Chief Executive Officer Due to the unexpected arrival of the health crisis due to COVID-19, during the year, we adjusted our operations and developed measures to protect the health of all our Customers and Ambassadors. We performed based on our ultra-low-cost strat- egy and the support of a great team that worked passionately to continue creating value for Volaris, for our stakeholders and for Mexico. Since the beginning of the COVID-19 pandemic, we strictly followed all the recommendations of the World Health Organization (WHO) to ensure safety at all our flights’ stages. Likewise, the air in the aircraft cabin is complete- ly renewed every three minutes with HEPA filter technology, which capture up to 99.9% of viruses and bacteria, and each aircraft is thoroughly san- itized with industrial-grade disinfectants once a day, in addition to undergoing periodic cleaning and routine disinfection on each flight. Content 48 We developed a biosecurity protocol to continue offering the best travel experi- ences safely throughout all the flight stag- es. This protocol is aligned with the recom- mendations issued by the International Air Transport Association (IATA), the Europe- an Aviation Safety Agency (EASA) and the World Health Organization (WHO). As part of our biosecurity protocol, we imple- mented all the necessary security measures: strengthening touchless check-in –we ask all Customers to acquire their boarding pass and ancillary services electronically– taking tempera- ture, mandatory use of face masks, applying antibacterial gel, sanitizing mats at the entrance of counters and aircraft , indications for social distancing, request of health form, safety kit such as masks, face masks and gloves for Am- bassadors, continuous disinfection of our work areas and aircraft, as well as orderly boarding and disembarking processes. We trained all Ambassadors in the pro- tocol’s security measures to handle any emergency. We participated in the launch of the health and safety standard “APEX (Air- line Passenger Experience Association) Health Safety, powered by SimpliFly- ing” and due to the biosecurity proto- col that we implemented, we obtained the Platinum level certification. We obtained the Global Security Seal (Safe Travels Stamp) granted by the World Travel and Tourism Coun- cil (WTTC), thus contributing to the responsible and safe reactivation of tourism. We were the first airline in Mexico to receive the Tourism Security Stamp from Mexico City due to the quality and safety of our operations. We received the Certificate of Best Sanitary Practices from the state of Yucatan, which endorses the proto- cols and sanitary measures that we implemented and reinforces the stra- tegic alliance between Yucatan and Volaris, reaffirming our commitment to reactivate tourism and the Mexi- can economy. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 49 Furthermore, we implemented the “With Volaris, Fly Sure” marketing campaign, focused on com- municating to Customers specific actions for their protection. The three pillars that respond to the new normal are: Security, through a reinforced protocol Flexibility, offering adjustments and changes at no additional charge Discounts and low fares in our routes “ At Volaris, we are prepared to offer our Cus- tomers what they need to get on the plane again. We are committed to providing them all the operating safety and sanitary security measures, recognized by national and interna- tional organizations, so that they travel peace- fully and without setbacks, in the context in which we currently live. Today, more than ever, our main objective is to offer security and trust to our Customers and Ambassadors.” José Luis Suárez, Senior Vice President and Chief Operating Officer Customer Service and Solution “ Our priority is the health and safety of our Customers and Ambassadors; therefore, we strive to simplify their travel plans, so that, when operations are completely re- activated, we are able to provide the best attention, taking off together once more.” Enrique J. Beltranena President and Chief Executive Officer We are aware that the industry and times are constantly changing and that innovation is a key element to offer our Customers a distin- guishing element at all stages of their travel. Consequently, the team responsible for digital products and technology did extensive research to identify best practices in online development and experience, even obtaining the advice from a team of technical experts from Google. Thus, in 2020 we launched a new website to substantially improve the User Experience, making it simpler, more intuitive and Custom- er-friendly, facilitating flight searches, and self-service for processes like check-in, flight changes and ticket purchases. Due to the sanitary crisis and subsequent closed borders, we were forced to cancel flights. To minimize the impact on our Customers and to meet their expectations, we implement the flight guarantee, which allows Customers to quickly and automatically select the option that best suits their needs. In case of cancellations, a notice is automatically sent via email to the affected Customer, and different alternatives are presented. Electronic credit. Offers the refund of the purchase plus an additional 25% in electronic credits to be redeemed later. Flight change at no charge. Full refund. In addition, we continued improving the tools to provide solutions for our Customers with a professional and straightforward service. This year we strengthened our Contact Center to automate Customer service processes and pro- vide faster solutions. Customers can select the Contact Center’s channel of their choice. Social Media. Through our social networks – Facebook, Twitter or Instagram– Customers can solve general questions related to ser- vices, products, destinations and promotions with an estimated response time of four to six hours. Facebook Messenger and WhatsApp. We provide immediate personalized attention through the chatbot or an agent in just four hours for Customers who have any questions about their flight. Contact Form. Option for Customers who need to clarify or follow up any particular case. Call center. Channel for Customers who wish to buy a flight and cannot do so through any digital channels. We use the Net Promoter Score (NPS) to measure loyalty, satisfaction and the pro- bability that our Customers may recom- mend Volaris, enabling us to discover areas for improvement at the Customer contact points* in order to improve their experien- ce. In 2020, we obtained a 30.5% rating vs 28.9% in 2019. * Customer contact points are: 1. Purchase processes; 2. Documentation; 3. Boarding process; 4. Flight experience and 5. Baggage claim. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Capacity Recovery During 2020, capacity in terms of passenger transportation of airlines worldwide significantly decreased in the second quarter of the year, due to the COVID-19 pandemic. The Mexican air transportation market was no exception. The four main commercial airlines in the country suffered a sharp contraction in the number of transported passengers in the months of April and May. However, due to our ultra-low-cost business model and our performance during the sanitary crisis and confinement, at Volaris we were able to increase and recover passenger transport capacity as of June 2020. For the fourth quarter of the year, the number of passengers we transported significantly surpassed the competition, as can be seen below. Content 50 2020 passengers 1,814,474 1,642,515 1,647,867 1,488,152 1,315,599 980,414 1,178,801 1,276,890 881,600 1,036,082 822,187 704,638 Passengers 1,552,373 1,465,319 1,299,533 1,101,695 1,142,301 897,109 633,196 697,340 665,331 513,022 506,404 586,367 418,350 1,102,449 998,369 916,188 863,224 858,931 803,614 181,731 167,181 147,267 89,915 25,068 131,279 90,419 14,835 238,297 201,937 24,942 38,811 38,737 41,547 33,425 17,545 4,039 January February March April May June July August September October November December *Notes: Figures obtained from the AFAC for Volaris (do not include passengers flying within Central America and from Central America to the United States of America) and competing airlines. We have made slight modifications to the data, which is presented for informational purposes only. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 51 Avión Ayuda Volaris Program “ Faced with the health emergency derived from COVID-19, at Volaris we activated our Avión Ayuda Volaris program. Through this program, we seek to create value for the communities where we operate; in coordination with partner institutions, in our airplanes we transport humanitarian aid, health personnel, volunteers, among others. We aim to facilitate care for people affected by the disease, as well as to ensure that the pandemic’s first responders have the necessary resources to continue such amazing work.” Enrique Beltranena, President and Chief Executive Officer +45 tons of humanitarian aid transported through the Avión Ayuda Volaris program 42 strategic alliances with governmental institutions, private companies and NGOs 344 organs and tissues transported for transplant purposes since 2009 +500 migrants who were in Mexico and could not return to Costa Rica, their native country, due to the health contingency derived from COVID-19 and the closure of borders, returned home safely thanks to our Reuniendo Familias program, in coordination with the immigration and consular authorities of both countries. “ During 2020, the alliance of the Mexican Red Cross with Volaris was essential to provide an effective response to the health emergency caused by COVID-19. Volaris helped us transport more than 20 tons of humanitarian aid and volunteers to different states of Mexico. Undoubtedly, the collaboration between both organizations has allowed us to create more value for the communities we support.” Lic. Fernando Suinaga, Mexican Red Cross National President Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Our Avión Ayuda Volaris program is one of the ini- tiatives that creates the greatest value for society in the communities where we operate. Through our operations and the largest route network in Mexico, we transport by air, safely and efficiently, humanitarian aid, organs and tissues for transplant purposes, medical personnel, volunteers, patients, and people who are in some vulnerability situation due to: natural disasters emergencies, human- itarian / migratory crises, health emergencies, emergencies and medical treatments, as well as to fulfill dreams. The pillars that comprise the Avión Ayuda Volaris program are: Pillar 1 Support in natural disaster emergencies / civil protection Pillar 2 Organ and tissue transportation for transplant purposes Pillar 3 Support in emergencies and medical treatments Pillar 4 Support in health crises Pillar 5 Dream fulfillment Pillar 6 Reuniendo Familias program During the COVID-19 pandemic, airlines world- wide played a very significant role in the timely and efficient air transportation of humanitarian aid. According to United Nations statements, border closures and flight cancellations affect the availability of basic products and medicines throughout countries. Hence, coordinated ef- forts between the public, private and civil so- ciety sectors for the transportation and distri- bution of these products are essential. Commercial airlines have the greatest imme- diate capacity range. Global air connectivity allows humanitarian aid to quickly reach emer- gency locations. Similarly, after a health emer- gency, natural disaster or otherwise, airlines help reactivate the tourism industry in affected areas by transporting tourists from all over the world. During 2020, we activated our Avión Ayuda Volaris program to transport volunteers, health personnel and humanitarian aid, such as bios- ecurity material, aimed at making sure that COVID-19 first responders had the necessary supplies to continue helping those in need. Through 42 strategic partnerships created with governmental institutions, private companies and NGOs, we transported more than 45 tons of cargo for humanitarian purposes and granted more than 135 airplane tickets to more than 25 cities in the country. Content 52 2020 Strategic Partnerships Governmental institutions Secretaría de Relaciones Exteriores de México Instituto Mexicano del Seguro Social (IMSS) Fundación IMSS Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE) Centro Nacional de Trasplantes (CENATRA) Secretaría de Salud de Baja California Secretaría de Turismo del Estado de Yucatán Secretaría de Turismo del Estado de Quintana Roo Secretaría de Turismo del Estado de Baja California Sur Secretaría de Turismo del Estado de Oaxaca Secretaría de Turismo del Estado de Guerrero Gobierno Municipal de León, Guanajuato Gobierno Municipal de La Paz, BCS Gobierno Municipal de Los Cabos, BCS Gobierno Municipal de Mérida, Yucatán Gobierno del Municipio de Puerto Vallarta, Jalisco Consulates of Costa Rica and Mexico Non-Governmental Organizations Cruz Roja Mexicana Fundación Mexicana para la Salud, A.C. (FUNSALUD) The Code- ECPAT Airlink CADENA A.C. FUCAM, A.C. Sinibí Jípe Arise MX Causa en común A.C. Aviation Sans Frontières ADRA Internacional World Vision Humanitarian Aid Desértica A.C. Fundación CIE (#TogetherWithTablets) Fundación ALMA Rescate Animal, A.C. Fundación Dr. Sonrisas Amigos de Sian Ka’an Private Companies Grupo Herdez Bonafont Head & Shoulders AXA Seguros Universal NBC Cross Border Xpress (CBX) Airbus Foundation Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 53 Moreover, through the coordinated efforts between the National Transplant Center and our suc- cessful protocol, we continued transporting organs and tissues for transplant purposes to different states of Mexico. In 2020, we transported 26 organs and tissues, a patient who received a cornea, and 12 doctors to deliver organs. For 11 years we have transported more than 344 organs and tis- sues that have saved the lives of hundreds of people in our country. In addition, through our Reuniendo Familias program and in coordination with the immigration and consular authorities of both countries, we achieved that more than 500 migrants who were in Mexico and could not return to Costa Rica, their native country, due to the health contingency derived from COVID-19 and the closure of borders, returned home safely. Some of the initiatives we carried out during 2020 were: We transported more than 20 tons of humanitarian aid from the Mexican Red Cross to over 15 states in the country. Besides, we joined forces with the Airbus Foundation and Aviation Sans Frontières to transport, from Toulouse, France, more than 1.5 tons of medical supplies for the Mexican Red Cross. We supported the IMSS for the transportation of mechanical ventilators for patients with COVID-19 from Mexico City to Hermosillo, Sonora. We transported medical supplies for the Secretaría de Salud in Baja California, for the protection of the state’s medical personnel. We joined efforts with the Secretaría de Salud in Baja California and the Secretaría de Economía Sustentable y Turismo to transport assisted ventilation equipment and medicines from Mexico City to Tijuana. We supported the ISSSTE by transporting 1.5 tons of medical supplies for hospitals in Monterrey. In collaboration with the Fundación Mexicana para la Salud (FUNSALUD), we transported intubation, bronchoscopy and protection coverings to the cities of Merida and Cancun for COVID-19 patients. We transported recycled plastic masks that Bonafont made in Guadalajara for their donation to public hospitals of the Secretaría de Salud in Baja California and Mexico City. We transported 3.5 tons of humanitarian aid, in coordination with ARISE MX and AXA Seguros, for the IMSS-Bienestar clinics in the cities of Tijuana, Tuxtla Gutierrez, Tapachula, Monterrey and Oaxaca. Together with Grupo Herdez and the Secretaría de Turismo del Estado de Yucatán, we transported 3 tons of humanitarian aid for those affected by the hurricanes. In coordination with the organizations CADENA and A.C. and Airlink, we transported volunteers and humanitarian aid to attend to the sanitary crisis and to support communities affected by hurricanes DELTA, ETA, ZETA and Genevieve. In collaboration with the FUCAM A.C. association, we transported a patient and her doctor to undergo breast surgery. With the World Vision Humanitarian Aid organization, we transported more than a ton of health kits for those affected by the floods in Tabasco. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 54 Initiatives for the Benefit of Communities Rarámuri face masks initiative One of the most significant consequences for the aero- nautical industry caused by the COVID-19 pandemic was the lack of trust that Customers experienced in the face of possible infections, making it challenging to reactivate tourism. At Volaris, as a company com- mitted to creating value for Mexico, we developed a project to restore trust and guarantee the security of the Customers’ health, reactivate our operations and simultaneously, create economic value and provide empowerment to vulnerable groups of indigenous communities. We took into account the recommendation issued by the World Health Organization, IATA and the Mexican health authorities regarding the use of face masks – mandatory since May– in airports and on-board aircraft as the main protective measure against the spread of COVID-19 in air travel. Considering these factors, we partnered with the Sinibí Jípe association, which aims to create opportunities for the wellbeing and comprehensive development of the Rarámuri community women in the Sierra Tar- ahumara, who create clothing and crafts preserving traditional patterns and colors. Thus, we bought face masks handcrafted by these women, which impacted the airline’s reactivation, improving, at the same time, the situation of the Rarámuri community. “ Working together with Volaris in 2020 has been one of the greatest challenges we have had at Si- nibí Jípe. Volaris has a very creative team that put our inventiveness to the test and pushed us to over- come our barriers. From the bottom of our hearts, we thank them for considering us for this beautiful project.” Luisa Fernanda Martínez Ortega, Sinibí Jípe Director We gifted face masks made by Rarámuri women to our Customers when boarding their flight. Thus, we were able to protect our Customers’ health, com- municate a solidarity, care and empathy message with the community and create revenue for these women. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS 52% increase in interactions of Volaris biosecurity content; 17 more percentage points vs our competitors Achievements 1,500% growth of Sinibí Jípe’s exposure on social media 200% increase of average orders per month of Sinibí Jípe We created jobs for more Rarámuri women; from 4 women working, now 20 produce face masks to meet demand The campaign produced an advertising return on investment of Ps. $849,762 for Sinibí Jípe This partnership increased a positive attitude towards Volaris Market share measured in on-board passengers increased 52% in June Content 55 “ This approach with Sinibí Jípe is very signifi- cant for Volaris, since it allows us to provide our Customers with a fundamental protec- tive piece during the health contingency, as well as to collaborate with the development of a community facing exceptional challen- ges in our country.” Holger Blankenstein, Executive Vice President Airline Commercial and Operations Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content 56 #TogetherWithTablets The #TogetherWithTablets initiative was cre- ated by young Mexican students aiming to re- unite patients hospitalized for COVID-19 with their families through video calls. Through tablet donations, patients can spend a nice time talking with their families, which im- proves their attitude and keeps them close to their loved ones. We donated 50 tablets, normally used by our pilots, to the #TogetherWithTablets ini- tiative through the CIE Foundation, which contributed to reunite more than 1,250 families separated by the COVID-19 pan- demic at the Centro Banamex, INER and the Instituto Nacional de Ciencias Médicas y Nutrición Salvador Zubirán. “Volaris is proud of its mission to contribute to the economic development and wellbe- ing of the communities where it operates in Mexico. Since the health contingency be- gan, we have created alliances with public institutions, NGOs, and private companies to transport humanitarian aid to more than 25 cities throughout the country. Today, we are extremely satisfied with this donation within the framework of our Reuniendo Familias program, a fundamental aspect of the Company’s sustainability strategy.” Enrique Beltranena, President and Chief Executive Officer Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact LA CREACIÓN DE VALOR DE VOLARIS Content Content Volaris Performance Content 3.1. 2020 Financial and Operating Metrics Summary 3.2. 2020 Results 3.3. Corporate Affairs 3.4. Supply Chain 3.5. Environmental Protection and Climate Change Mitigation 3.6. Ambassadors’ Relations, Practices and Wellbeing 3.7. Human Rights and Community Relations 3.8. Customer Wellfare, Privacy and Data Security Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 3 GRI 201-1 TR-AL-000.A, TR-AL-000.B, TR-AL-000.C, TR-AL-000.E 3.1. 2020 Financial and Operating Metrics Summary *Peso amounts were converted to U.S. dollars at end-of-period exchange rate for convenience purposes only. (1) Includes schedule and charter (2) Includes schedule (3) Excludes non-derivative financial instruments Audited* (In thousand of Mexican pesos, except otherwise indicated) 2020 (U.S. dollars)* 2020 2019 Variance (%) Content 58 Total operating revenue (thousands) Total operating expenses (thousands) (Loss) operating income (thousands) Depreciation and amortization Depreciation of assets by right of use Aircraft and engine rent expense Net (loss) income (thousands) (Loss) earnings per share: Basic (pesos) Diluted (pesos) (Loss) earnings per ADS: Basic (pesos) Diluted (pesos) Weighted average shares outstanding: Basic Diluted Available seat miles (ASMs) (thousands) (1) Revenue passenger miles (RPMs) (millions) (1) Load factor (2) Total operating revenue per ASM (TRASM) (cents) (1) (3) Passenger revenue per ASM (RASM) (cents) (1) (3) Operating expenses per ASM (CASM) (cents) (1) (3) CASM ex fuel (cents) (1) Booked passengers (thousands) (1) Departures (1) Block hours (1) Fuel gallons consumed (millions) Average economic fuel cost per gallon (3) Aircraft at end of period Average aircraft utilization (block hours) Average exchange rate End of period exchange rate 1,110,828 1,273,927 (163,099) 45,038 253,098 92,500 (215,242) (0.21) (0.21) (2.11) (2.11) - - - - - 6.2 3.5 7.1 5.1 - - - - 2.0 - - - - 22,159,591 25,413,187 (3,253,596) 898,445 5,048,976 1,845,254 (4,293,791) (4.20) (4.20) (42.03) (42.03) 34,752,672 30,397,249 4,355,423 675,514 4,702,971 961,657 2,639,063 2.61 2.61 26.08 26.08 1,021,560,557 1,011,876,677 1,021,560,557 1,011,876,677 18,274,946 14,596,745 24,498,893 21,032,364 79.9% 123.5 70.4 141.3 102.7 14,712 97,819 248,952 176.6 39.9 86 11.30 21.50 19.95 85.9% 142.2 94.4 124.3 76.6 21,975 138,084 350,572 251.8 46.4 82 12.94 19.26 18.85 (36.2%) (16.4%) n/a 33.0% 7.4% 91.9% n/a n/a n/a n/a n/a 1.0% 1.0% (25.4%) (30.6%) (6.0) pp (13.1%) (25.4%) 13.7% 34.1% (33.1%) (29.2%) (29.0%) (29.8%) (14.0%) 4.9% (12.7%) 11.6% 5.9% Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 59 GRI 201-1 3.2. 2020 Results Aircraft 2016 2017 2018 2019 2020 68 71 77 82 86 Available seat miles (ASMs, millons) Booked passengers (Thousands) 2016 2017 2018 2019 16,692 18,861 21,010 24,499 2016 2017 2018 2019 14,998 16,427 18,396 21,975 2020 18,275 2020 14,712 Revenue passenger miles (RPMs, millons) Total ancillary revenue per booked passenger (MXN) Total operating revenue per available seat mile (TRASM, MXN cents) Operating cost per available seat mile (CASM*, U.S. cents) 2016 2017 2018 2019 14,322 15,917 17,748 21,032 2020 14,597 2016 2017 2018 2019 2020 *Peso amounts were converted to U.S. dollars at end of period exchange rate. 382 426 479 532 2016 2017 2018 2019 140.9 131.4 130.0 142.2 659 2020 123.4 2016 2017 2018 2019 2020 6.67 6.95 6.63 6.45 6.58 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 60 GRI 102-13 3.3. Corporate Affairs Aviation is one of the most regulated sectors in the world. Airlines are constantly faced with a variety of standards and modifications set by government authorities or regulatory agencies to make the industry abide by global operational standards and best practices. In addition, the airline industry is part of a wide-ranging Value Chain, that creates benefits for the stakeholders involved. Therefore, Volaris considers that political, geo- political and social risks and opportunities are a priority, since the strict regulatory requirements may imply high adverse costs for the Company in the short, medium and long terms. Volaris carries out its operations under a conces- sion and permits granted by the Mexican state and other regulatory agencies in the destinations where we operate, so our influence on these stake- holders’ decision-making is essential for the sus- tained profitability of the ultra-low-cost aviation industry and, specially, of Volaris in coming years. Through the Volaris’ Corporate Affairs Depart- ment, we develop and implement strategies to contribute to the decision-making processes of stakeholders, to manage the impact of political and social risks and opportunities, and to man- age Volaris’ corporate reputation. However, by adhering to anticorruption and transparency regulations, the Company does not make any type of economic or other contribution to polit- ical campaigns, political organizations, lobbying organizations, industry organizations for the purpose of intervening in public policy, or to any other organization of this nature. We achieve all this through three pillars: 1. Helping to build public policy Volaris is subject to regulations or changes in public policy in the countries where we operate. Hence, we strive to influence decision-making processes regarding regulations that directly or indirectly impact the industry in general, and Volaris in particular, by: Developing strategic relationships: we de- veloped an agenda to approach and com- municate with key players for Volaris, in or- der to represent the Company’s interests in their decision-making process. This agenda considers the issues that interest the various stakeholders. The players that most influence the processes of Volaris Corporate Affairs are governments, society and its organizations (Ambassadors, Customers and communities); and the airline industry. Maintaining these relationships allows Volaris to be a company with a high capacity to influence the commu- nities where it operates, thereby enabling us to successfully adapt to new regulations, at both local and federal levels. Approaching key players: approaching key players, such as regulators, public policy makers, and government authorities is a pri- ority for the Company’s future sustainability. This approach allows us to define and include in the public agenda the issues that are im- portant for Volaris. Approach and negotia- tion activities with government agencies are carried out within the law and are regulated in our compliance policies, such as the Vo- laris Code of Ethics and the Anticorruption Compliance Policy and the Fraud Prevention and Control Policy, which include compli- ance with the Foreign Corrupt Practices Act (FCPA), through which we promote these relationships’ transparency and honesty, as well as their execution with the best anticor- ruption practices. 2. Influencing decisions in the aviation industry Volaris recognizes the importance of being part of the industry’s decision-making process to pro- vide continuity to the air transportation business, by representing the interests of all airline stake- holders. Consequently, Volaris is a member of IATA (International Air Transport Association), an international association that aims to repre- sent, lead and serve the airline industry, through policy making on relevant issues to the sector. In addition, IATA promotes understanding of air transportation among decision makers, and awareness of the benefits that aviation brings to national and global economies. It also produces significant information for the industry and pro- motes best practices among its members world- wide. Volaris is a member of this association due to its leadership with stakeholders and its goals linked to Volaris’ priorities, such as air transpor- tation efficiency, the environment, security and protection of airline operations, involvement with government agencies, and other similar priorities. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 3. Strengthening corporate reputation The strengthening of Volaris’ corporate repu- tation is based on our actions’ transparency to approach and communicate with our stakehold- ers, aligning our Customers’ interests and setting ourselves apart from our competitors. The im- portance of the proper implementation of cor- porate communication actions is that they allow Volaris to approach and influence stakeholders more effectively, since a good corporate reputa- tion provides confidence and certainty to these groups. Besides, an effective brand-positioning strategy strengthens and contributes to the im- plementation of the Company’s long-term vision. Moreover, a good reputation contributes to a more effective mitigation of the impact from the crises the Company may face in the short, medium and long term. In 2020, the most challenging year for the air- line industry due to the COVID-19 pandemic, we positioned ourselves as one of the airlines with the highest recovery in terms of passenger transport worldwide. One of the actions that we carried out to achieve this and to contribute to the recovery of the domestic tourism and aviation sectors, was maintaining a constant approach, communication and coordination with government authorities, regulators and industry members. Through this approach strategy, we developed the pertinent actions to mitigate neg- ative impacts related to the pandemic effects. Some of these actions were: Collaboration with government authorities for the creation and certification of our biosecu- rity protocols (Tourist Safety stamp of Mexico City, Best Sanitary Practices Certificate from the Government of Yucatan). Collaboration with government authorities and industry regulators to provide them with infor- mation and updates on the industry’s condi- tion in the context of the COVID-19 pandemic for decision-making. Collaboration with government authorities for the development of contingency plans in government offices, in order to speed up the preparation of procedures. We worked together with consumer protection authorities to ensure the best travel experi- ences for our Customers in the context of the COVID-19 pandemic and the new normal. Content 61 We actively collaborated with the airline in- dustry to work with government authorities and our suppliers in support and remediation plans for the Mexican airline industry due to the effects of the pandemic. We supported several federal and local gov- ernment authorities, NGOs and other private companies to transport humanitarian aid to more than 25 states of Mexico, through our Avión Ayuda Volaris program. In addition, we collaborated with the industry and government authorities in the project to redefine Mexican airspace, as well as in the air- port infrastructure needs in Mexico. Communication and coordination with local governments to contribute to tourism, through a collaboration tour with governors of Mex- ico’s different states and discounts on plane tickets to stimulate the demand for travel in the country. With this initiative, we supported different stakeholders in the industry value chain, such as government authorities, state governments, hotels, restaurant owners, tour- ism operators, among others. Together with industry organizations, we worked with the Mexican congress to inform law makers about the situation in the airline industry and tourism in the context of the COVID-19 pandemic. We collaborated with immigration authorities and consulates to support the transportation of migrants affected by the border closure in the context of the COVID-19 pandemic in different destinations where we operate. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-9 3.4. Supply Chain “ At Volaris, we are committed to the sustainable re- activation of the airline industry, creating value for all stakeholders. This is why we establish sound relation- ships with the suppliers that comprise the Company’s value chain, mutually committing to act according to ethical principles, within the legal framework and ac- cording to the business’ sustainable development.” Mauricio Horcasitas Acquisitions Director 1,907suppliers in 2020. Responsible Supply Chain Management Program We strive to be a trustworthy customer and to build solid and lasting relationships with our supply chain, promoting their business development and ensuring the supply of the goods and services we need as an ultra-low-cost airline to satisfy our stakeholders’ demands. We seek to transcend commercial relationships with our suppliers, creating re- lationships of trust, transparency and respect that allow us both to grow and strengthen economic, ethical, social and environmental aspects, in order to comply with the law and create value for society and the communities where we operate. In 2019, we detected the importance of having a Respon- sible Supply Chain Management Program and, as part of our 2020 Sustainability Strategy, we committed to imple- ment this Program. Therefore, we developed the Responsible Supply Chain Management Model, including all the aspects that are part of our virtuous circle, together with our suppliers, to strengthen our sustainable commitment. The 2020 pandemic tested our resilience and adaptability in all operations. One of our greatest challenges was respond- ing to new requests and government changes in a timely manner; as well as ensuring our permanence in the market and increasing sales, guaranteeing that all our Customers travel safely. Hence, it is essential not only to strengthen commercial relationships with suppliers, but to include them in our culture and our commitment to Customers. The Model’s main goal is to strengthen relationships and raise awareness among our suppliers on the im- portance of assuming a real commitment regarding ESG issues (environmental, social and governance) to create competitive value to support society. Content 62 Procurement Política de Policy with ESG Compras con Criteria criterios ESG Estrategia de Procurement Compras con strategy with factores ESG ESG topics Programa de Recognition and reconocimiento Loyalty Program y lealtad Training on Capacitación en sustainability Sustentabilidad for procurement al Equipo team de Compras Volaris Desarrollo de Supplier Proveedores development (planes correctivos, (corrective plans, capacitación...) training) Sistema de monitoreo Monitoring system MODELO DE GESTIÓN Volaris Responsible RESPONSABLE DE LA Supply Chain CADENA DE VALOR VOLARIS Management Model Supplier Mapeo de mapping proveedores Gestión de Risk Riesgos management Supplier Evaluación en sustainability Sustentabilidad assessment a Proveedores Clauses on Claúsulas en sustainability materia de and Human Sustentabilidad Rights y protección de protection los DDHH en in certain contratos contracts Integration Integración of ESG de Factores criteria to ESG en la suppliers’ selección y selection and retención de retention Proveedores Pledge to Firma de comply with compromiso the Volaris de la Política Supplier de Ética de Ethics Policy Proveedores Volaris Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Our procurement strategy has five priorities: 1. Reduce cost and optimize 2. Manage responsible the supply 3. Adopt the best transparency 4. Develop a resilient team resources, as well as maintain the highest operational efficiency standards. We developed the Volaris Supplier Ethics Policy, which defines ESG criteria the supplier must observe. chain. mechanisms in all procurement operations. and supply chain. We created the Responsible Supply Chain Management Model. Carry out a complete supplier mapping, as well as a risk management exercise to channel the Model’s efforts according to their risk rating. Content 63 5. Implement the Responsible Supply Chain Management Program based on international standards and indicators. Apply the Procurement Policy with ESG criteria. In order to achieve these priorities, in 2020 we started the Project’s 1st Phase, which included: We developed the sustainability assessment for suppliers. • We established sustainability clauses that will be included in certain supplier contracts. Apply sustainability assessment to selected suppliers, according to the risk management exercise. Additionally, we defined key ESG goals for the 2nd Phase, which will be executed in 2021. Train our Volaris procurement team on the importance of sustainability throughout the supply chain. We defined sustainability criteria which will be included in the Procurement Policy. Include sustainability clauses in certain contracts and purchase orders. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 301, 302, 304, 305, 306, 307: 103-1, 103-2, 103-3 Content 64 Comprehensive Environmental 3.5. Environmental Protection and Climate Change Mitigation As Mexico’s largest airline in transported passen- gers, Volaris understands its great responsibility when conducting operations. In addition, due to the great challenges we have faced due to the COVID-19 pandemic, we are more committed than ever to the sustainable reactivation of the airline industry. Therefore, we ratify our commit- ment to protect the environment and mitigate climate change by implementing more and better strategies and goals to offset our operations’ en- vironmental footprint and meet our commitment to become the “greenest airline in Mexico.” A few years ago, the aviation sector agreed to establish strategies to reduce CO2 emissions for the coming years and thus, contribute to the industry’s sustainable growth and development. In 2016, the United Nations International Civil Aviation Organization (ICAO) established the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to enable the industry’s shared objective on carbon-neutral growth. Similarly, the IATA set a target to reduce net CO2 emissions in half by 2050, using 2005 emissions as the baseline. Protection Policy Mexico was one of the countries that committed to implementing measures that mitigate green- house gas emissions during the COP21 in Paris, France. Therefore, regulations were established in the country for this purpose, such as the Gen- eral Law on Climate Change, which came into effect in 2012 and establishes the creation of several public policy instruments. Among these instruments is the National Emissions Registry (RENE), which compiles information on emis- sions from the country’s different productive sectors, and through which companies exceed- ing 25,000 t CO2e (tons of CO2 equivalent) must report their direct and indirect greenhouse gas emissions. The Planet Care Focus, which is one of the pil- lars of our Corporate Sustainability Program, establishes the actions that we plan to imple- ment to comply with domestic and international environmental agreements, mitigate the effects of climate change, and to contribute to the Sus- tainable Development Goals. By meeting these goals, we will be able to reduce the negative impact on the environment created by the avia- tion industry, thereby guaranteeing the benefits of air transportation for future generations. Efficient fuel consumption management (Fuel Saving Program) #CielitoLimpio Carbon Emissions Offset Program Environmental initiatives and efforts for biodiversity Regulatory compliance Fleet renewal Other fuel-saving techniques Investment in the best technology Onboard weight reduction initiatives Paper saving and recycling Waste management Reduction in electricity consumption Emissions’ reporting Hazardous waste management Strategic partnerships for the environment Working Group Green Team – ISO 9001 and 14001 Certifications Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact We are committed to promoting a culture where quality, operational safety, emergen- cy response, aviation security, occupational health and safety and environmental protec- tion are essential operating priorities. vehicles driving during a year, more than 880 hectares of preserved forest and more than 351 million pounds of charcoal burned.* We invest in technology to ensure efficient fuel consumption. Airbus A320neo Aircraft We increased the number of Airbus NEO aircraft, which have eco-efficient engines and sharklets. They reduce annual fuel consumption by over 15%, as well as CO2 emissions by 5,000 tons and NOx gases by 50% per aircraft. Furthermore, they decrease sound footprint by 75%, compared with pre- vious units. Content 65 Fleet renewal and investment in the best technology We have one of the youngest and most efficient fleets in the American continent; 86 aircraft with an average age of 5.3 years. In addition, we invest in environmental efficiency state-of- the-art technology. Each aircraft has 188 seats on average and 79% are fitted with sharklets. In accordance with our ultra-low-cost strategy and our commitment to become the greenest airline in Mexico, we have steadily increased the number of Airbus A320neo Family aircraft. In 2020, we acquired seven to our fleet. Volaris was the first NEO aircraft operator in North America. GRI 302: 103-1, 103-2, 103-3 GRI 302-1, 302-3, 302-4, 302-5, 305-5, 305-4, 305-5 TR-AL-110a.2, TR-AL-110a.3 Efficient fuel consumption management (Fuel Saving Program) Volaris closely monitors fuel consumption, not only because of its economic impact, but also because it is through efficient fuel consumption that CO2 emissions can be reduced. In accordance with the goals for environmental protection issued by ICAO, our sustainability strategy considers that six out of ten aircraft will be eco-efficient by 2023. Moreover, this strategy places us as one one of the five airlines with the youngest fleet in North America, due to the changes in the technology of our aircraft. Through efficient fuel consumption management with the Fuel Saving Program, the Company has reduced emissions (gCO2/RPK) by 12.5%, compared to 2015, which is equivalent to 35.8 million gallons of fuel saved and a reduction of 247,278 tons of CO2 emissions. These savings are equivalent to over 69 thousand passenger Pratt & Whitney GTF engines During 2020, we closed a purchase contract with Pratt & Whitney for 171 Geared Turbofan (GTF) engines for the Airbus A320neo Family aircraft that we will receive between 2023 and 2028. With this acquisition, we will further reduce fuel consumption, CO2 and NOx emissions, as well as the sound footprint. We will also in- crease the range of each aircraft to approximately six hours. With this purchase, we are among the three most cost-efficient airlines worldwide. *Equivalences obtained from: https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator GTF Microsite: https://pwgtf.com/ PW1100G-JM Brochure: https://pwgtf.com/wp-content/uploads/2018/07/PW_GTF_PW1100G_JM.pdf P&W’s GTF Website: https://www.pw.utc.com/products-and-services/products/commercial-engines/Pratt-and-Whitney-GTF-Engine/ Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Sharklets Sharklets are aerodynamic devices that re- duce fuel consumption by approximately 4% and prevent around 18,000 tons of CO2 emissions. 79% of our aircraft have sharklets. The new Pratt & Whitney GTF engines Reduce NOx emissions by 50% footprint by 75% Sound Content 66 Achievements and Goals NEO fleet 2019: 28% of our fleet was NEO 2020: 35% of our fleet is NEO 2023: 58% of our fleet will be NEO CO2 emissions 2019: -13.5% gCO2/RPK emissions in 2019 vs 2015* Reduction of 383,280 tons of CO2 emissions in 2019 vs 2015* 2026: -23% gCO2/RPK emissions in 2026 vs 2015* Fuel savings 2019: -11.6% fuel consumption (gal/ASM) in 2019 vs 2015 33 million gallons of fuel saved in 2019 vs 2015 2020: -16.9% fuel consumption (gal/ASM) in 2020 vs 2015 35.8 million gallons of fuel saved in 2020 vs 2015 2026: -22% fuel consumption (gal/ASM) in 2026 vs 2015 126 million gallons of fuel saved in 2026 vs 2015 2020: -12.5% gCO2/RPK emissions in 2020 vs 2015* Reduction of 247,278 tons of CO2 emissions in 2020 vs 2015* Reduction of 1,333,400 tons of CO2 emissions in 2026 vs 2015* *We use 2015 as a baseline, since this year we began to replace our fleet with the Airbus A320neo and A321neo Family aircraft. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact “ Consistent with the goals set by the organizations of the airline industry for climate change mitigation, at Volaris, we are more committed than ever to defining ambitious goals for the reduction of CO2 emissions and the adoption of best practices to reduce the environ- mental footprint of our operations.” In the coming years, Volaris plans to increase its investment in order to implement models that analyze human behavior and other systems that provide real-time recommendations to optimize navigation. Optimization also occurs in air navigation, as Volaris has managed to reduce our routes’ navigation miles by 2.5% in 2020, equivalent to 18 nautical miles on each flight. José Luis Suárez, Senior Vice President and Chief Operating Officer Onboard weight reduction initiatives We seek to reduce the weight onboard the aircraft, aiming to make operations even more efficient and reducing the environmental footprint. Other fuel-saving techniques Furthermore, we apply several fuel saving techniques, such as: Thus, during 2020, we restructured the management and offer of onboard services: we reduced the products with the least sales, we modified the onboard trolleys to reduce their weight and we acquired new, lighter ones. Likewise, our aircraft have no entertainment systems or kitchens. Content 67 Reduced use of Auxiliary Power Unit (APU) In 2020, we used aircraft APU for 43.4 minutes per operation, -11.8% compared to 49.24 minutes per operation in 2019, saving the burning of 718,500 gallons of fuel. Route optimization In 2020, through smart models such as Storkjet’s Fuel Pro, which allow us to mon- itor each consumption parameter, and other systems that allow us to plot more optimal routes, we reduced navigation miles by 1.2% per flight on Volaris’ most important routes; with these shorter routes we saved 1.76 million gallons of fuel. We acquired 140 new onboard lightweight trolleys, which reduced greenhouse gas emissions. In 2020, we saved 1,048,181 ton CO2 vs 766,520 ton CO2 in 2019. Also, in order to reduce onboard weight even further, we signed a contract with premium seat manu- facturer Recaro to supply the seats for 80 new aircraft on order and scheduled for delivery between September 2023 and 2028. These seats weigh 30% less, which will result in fuel savings of nearly 32,000 gallons per year. Additional fuel reduction In 2020, through more efficient flight plans and with a holistic measure of the necessary fuel, flight dispatchers and pilots at Volaris reduced the unnecessary fuel load by 400 kg per flight, which saved us transporting 39 thousand deadweight tons, while maintaining the same safety standards, that would have represented a fuel consumption of 718,500 gallons during the year. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 68 Carbon Emissions Offset Program Volaris is the first Mexican airline to cre- ate a partnership with the Mexican Car- bon Platform (MéxiCO2), which is certified by the United Nations, for the purchase of carbon credits. We invite all of our Customers to purchase the #CielitoLimpio ancillary product and offset part of the environmental footprint caused by their flights. Customers interested in contributing to the environment can buy the #CielitoLimpio product when purchasing their ticket on the website www.volaris.com or in the Volaris app. This contribution is completely voluntary and the footprint can be offset by contributing 22 pesos on short routes, 32 on intermediate routes and 42 on longer ones. The environmental projects that we support through the procurement of carbon credits cre- ate employment and technology implementa- tion in areas with low economic development, contribute to the inclusion of vulnerable groups and promote a culture of environmental protec- tion in the communities where they are devel- oped. In addition, they ensure the viability of the aeronautical industry and the Volaris business in the future. promotes the city’s sustainable development by generating electricity with renewable fuel, while minimizing the harmful effects of waste. Additionally, it avoids the emission of 100,000 tons of CO2 per year, which is equivalent to the environmental impact of 20,000 cars and the electricity used by 3,000 households. In 2020, we purchased 807 certified carbon credits (tCO2), thus offsetting 100% of 26 flights for the Mexico-Guadalajara route, and neutral- izing the carbon footprint of 2,989 Customers. Since 2015, we have purchased 33,274 certified carbon credits (TCO2), offsetting 100% of 797 round trip on the Mexico-Guadalajara route, neutralizing the carbon footprint of 123,189 Customers. We use an internal tool to calculate the number of compensat- ed flights and the carbon footprint of “x” number of Customers who flew the route during the year, considering the tons of CO2 per Customer to fly the route, the total number of flights on the route during the year, the total of Customers who flew on the route during the year and the total of certified carbon credits purchased during the year. One of these is the project of biogas recovery, burning and use in Leon, Guanajuato. This project For more information about how to offset the carbon footprint of flights, visit: https://cms.volaris.com/es/informacion-util/ servicios-opcionales/cielito-limpio/ Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 69 GRI 301, 304, 306: 103-1, 103-2, 103-3 GRI 301-2, 306-4 Environmental initiatives and Efforts Directed to Biodiversity The #CielitoLimpio Comprehensive Envi- ronmental Protection Policy is cross-sec- tional in many areas of the Company. At Volaris, we are committed to contributing to the planet’s protection by reducing waste ge- neration and ensuring its proper management. Some of the initiatives that we have implemented in the Company to fulfill this commitment are: 1. Saving paper through mobile check in, our Paperless Policy, as well as efforts to reduce the use of paper and plastics in our marketing campaigns 2. Paper recycling 3. Waste management in our corporate offices 4. Onboard service 5. Reduction in electricity consumption 6. Strategic partnerships for the environment 1. Paper saving Mobile Check-in Aiming to reduce waste in our operations, we carry out campaigns encouraging Customers to use mobile check-in every time they fly with us. With this initiative, in addition to making the registration process more efficient, we re- duce paper consumption, since our Customers do not print their boarding passes. During 2020, 38% of our Customers check-in via a mobile device, equal to 25.96 ton of paper saved. Paperless Policy In 2019, the Paperless Policy was implemented in our corporate offices with the goal of reducing paper and printing consumption. This policy establishes that only Ambassadors that need to print obligatorily, due to their functions, will have printing permits. Thereby, we seek to re- duce paper consumption in the office, ink use and energy of printers, as well as to contribute to the environment’s protection. a. Paper consumption in corporate offices 2018 2019 2020 5,760 kg 2,592 kg 1,152 kg b. Marketing and market development 2. Paper recycling 95% of the contracts for the Company’s mar- keting strategy are digital services like screens, among others, in order avoid printing materi- al for advertising campaigns. In addition, we seek that all advertising materials –banners, flyers, tents, inflatables, posters, among oth- ers– are increasingly environmentally friendly. We migrated to electronic media and used recyclable materials in physical advertising. In addition, starting in April 2020, we chan- ged our onboard magazine to digital format in order to comply with our biosecurity pro- tocols and contribute to the environment’s protection. With this initiative, we saved 103.68 tons of paper. +144 tons saved trees Every month, we collect confidential and/or sensitive paper from different offices to be weighed and destroyed safely, for which we have a supplier. The supplier collects this paper and takes care of its proper destruction. During 2020, we ensured proper destruction and recycling of: 2,600 kg of paper = 44.2 saved trees +68 thousand liters of water saved *During 2020, paper consumption decreased not only due to the initiatives implemented, but also because of the reduction in operations as a result of confinement caused by the pandemic. 2,460 saved trees +3.8 million liters of water saved Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 70 3. Waste management At our headquarters, we have waste sepa- ration cans for proper waste management. During 2020, we promoted changing their identifiers, so that the Ambassadors could separate their waste correctly. Likewise, we carried out internal communication cam- paigns to raise awareness among administra- tive staff about the correct waste separation processes. We have the 2021 objective of executing the waste separation and recycling management program, where we will seek a supplier to collect waste and ensure its recycling. Thus, we will begin training the cleaning staff, who will have an important role in the proper han- dling of waste to deliver it to the supplier. Proper waste management and cleaning will consist of: Removing caps and labels from PET (plastics) and wash them, so they are completely clean. Removing corks from cans, crush them and wash them, so they are completely clean. Paper that does not have confidential Com- pany information will be stacked and deliv- ered to the supplier. Cardboard will be cleaned, stacked and de- livered to the supplier. 2021 additional goals: The supplier will provide training for Am- bassadors, which will include how to recycle at home and thus, increase this initiative’s scope. Regular training for Volaris cleaning and maintenance staff on waste management. Performing an activity where the money collected from recycling waste is donated for environmental activities, such as refor- estation or social projects that create value for the community. By 2022, we will seek to expand this program to offices located in the International Airport of Mexico City, Tijuana, Cancun, Monterrey and Culiacan. 4. Onboard service We strive to operate with products that are increasingly friendly to the environment in our onboard services. Consequently, we changed 100% of the coffee cup lids and forks that we use in onboard service from plastic to biodegradable materials, and currently all our coffee mixers are made of wood, reducing plastic waste. 2021 goal: changing 100% of plastic cups to biodegradable materials. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 71 5. Reduction in electricity consumption 6. Strategic partnerships for the environment Due to the COVID-19 pandemic, most of the year our Ambassadors worked from home to protect their health. As a result, in 2020 there was a significant reduction in electricity con- sumption in our corporate offices. For several years, we have worked with asso- ciations that perform actions toward biodi- versity. Specifically, we work with the orga- nization Amigos de Sian Ka’an to strengthen the biodiversity project in the Sian Ka’an Bio- sphere Reserve in Quintana Roo, through the donation of plane tickets. 352,422 kWh Electricity consumption in corporate offices; 37% reduction vs 2019. Despite the fact that in 2020 we were unable to carry out voluntary work activities with Amigos de Sian Ka’an due to the COVID-19 pandemic, we maintained this alliance and will seek to reactivate it during 2021, in order to create environmental and social value in the communities where we operate. Through our relationships with airport suppliers and a joint investment of $5 million dollars in land energy generators. 7 plane tickets donated to Amigos de Sian Ka’an, which were used for meetings, researchers’ transport and fieldwork related with this project. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 72 GRI 305, 307: 103-1, 103-2, 103-3 GRI 305-1, 305-2, 305-4, 305-5 TR-AL-110a.1 Regulatory Compliance Emission reporting Greenhouse gas emissions (GHG) are the avia- tion sector’s main environmental impact; there- fore, we focus our efforts on mitigating the en- vironmental footprint. A few years ago, the aviation sector agreed to establish strategies to reduce CO2 emissions for the coming years and thus, contribute to the industry’s sustainable growth and development. In 2016, the International Civil Aviation Orga- nization (ICAO) established the Carbon Offset and Reduction Plan for International Aviation (CORSIA), with the aim of achieving carbon neu- tral growth in international aviation emissions from 2020 ( scope 1). Likewise, IATA established three objectives to reduce carbon emissions: 1) improve fuel use efficiency by 1.5% on an an- nual average, from 2009 to 2020. 2) stabilize emissions with neutral growth from 2020, and 3) reduce net CO2 emissions in half by 2050, using 2005 emissions as a base. In 2020, we successfully completed the first inter- national emissions verification under CORSIA. We present the 2019 international emissions report to the Federal Civil Aviation Agency (AFAC). In the coming years, with the recovery of the industry, we will be attentive to the emission requirements to be offset under the CORSIA scheme. The impact on the air sector due to the COVID-19 pandemic led to a significant reduction in emis- sions,thus, the industry requested ICAO to modify the 2019-2020 baseline established for CORSIA and consider only the year 2019, in order to mit- igate the economic impact. Likewise, to comply with the General Law on Climate Change, of Mexico, we report national emissions (scope 1) resulting from our opera- tion and emissions from other sources (scope 2) through the National Emissions Registry (RENE), which gathers information on GHG emissions from several productive sectors in Mexico. Along with the aeronautic sector, we have developed strategies to reduce CO2 emis- sions and we report them under CORSIA and RENE guidelines. 12.5% reduction in gCO2/RPK emissions vs 2015, which is equivalent to 35.8 million gallons of fuel saved and a re- duction of 247,278 tons of CO2 emissions. These savings are equivalent to more than 69 thousand passenger vehicles circulating during a year, more than 880 hectares of preserved forest and more than 351 million pounds of charcoal burned.* Volaris México Y4 National emissions (RENE) 20195 Scope 1 1,718,212.10 ton CO2 Scope 2 335.09 ton CO2 Volaris Costa Rica Q6 National emissions 2020 Scope 1 9 ton CO2 International emissions (CORSIA) 2020 Scope 1 377,750 ton CO2 International emissions 2020 Scope 1 20,666 ton CO2 5 In 2020, we presented the National Emissions Registry Report (RENE) before the Environment and Natural Resources Ministry (SEMARNAT), in which we reported our operations’ results for 2019. * Equivalences obtained from: https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Participate in reviewing the results of environmental programs, as well as proposing improvements for their implementation. Identify and evaluate significant environmental aspects. The Team’s main goals are: Content 73 Define environmental objectives, goals, and programs that allow us to comply with the Comprehensive Policy. Monitor the degree of progress or performance of monitoring and measurement programs. Find the necessary resources for environmental programs that contribute to improve environmental conditions. We continuously maintain and improve the Integrated Aviation Management System (IAMS). Therefore, in 2020, we renewed our ISO 9001/14001 certifications (which are valid until December 2023), and: We contributed to comply with applicable regulations, standards (IOSA/ISO) and those established by Volaris in manuals and complementary documents. We showed our Volaris culture where quality and continuous improvement is a priority in our operations. We showed our environmental protection culture by managing our waste and emissions. Working Group Green Team – ISO 9001 and 14001 Certifications In 2014, we obtained the ISO 9001 and 14001 Certifications for the first time for some of our operational areas thanks to the creation of the Working Group Green Team. This team is responsible for monitoring and supervis- ing the maintenance and improvement of all systems certified under ISO 9001 and 14001, and for promoting a culture of quality and environmental care. This multidisciplinary group is coordinated by the Operations Engineering area and inte- grated by the areas of Dispatch, Crisis Man- agement, Fuel, Industrial Safety, Corporate Affairs, Flight Operations, Cargo Operations, Flight Operations Engineering, Procedures and Standards Engineering, Real Estate Planning and Crew Control. GRI 306-3, 306-5 Hazardous waste management Besides the RENE emissions report, we disclose hazardous waste management in our operations. In 2019, we ensured the proper disposal of 40 tons of hazardous waste –that had been created from aircraft maintenance and medical service activities– with Ministry of Environment and Nat- ural Resources’ (SEMARNAT) authorized suppli- ers.6 Of these, 34 tons were incinerated, 4 tons were co-processed and 2 tons were confined. We obtained the 2019 Tijuana and Mexico Annual Operation Certificate for Hazard- ous Waste, as they are categorized as a large generators of hazardous waste. 6 In 2020, we presented the National Emissions Registry Report (RENE) before the Environment and Natural Resources Ministry (SEMARNAT), in which we reported our operations’ results for 2019. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 74 ISO 9001/14001 Certifications Scope Comprehensive Policy Due to the excellent management of the car- go operations, crew planning and operations engineering processes, in 2020 we renewed the scope of the ISO9001/14001 certifications, after being evaluated for the third time by the surveillance audit in charge of the Mexican Society of Standardization and Certification (NORMEX). We renewed the certification of the Inte- grated Management System according to ISO 9001:2015 for the processes of the Operations Control Center (OCC) and the Crisis Management Department, as well as the administrative procedures of the flight attendant organization and the fuel saving program. We complied with the ISO 14001:2015 stan- dard in the processes of the fuel saving program and administrative activities at Volaris corporate offices. We maintained the certification’s scope in the processes of Cargo Operations, Crew Planning and Operations Engineer- ing processes, in compliance with the ISO 9001:2015 standard. As an air transportation carrier, Volaris senior management maintains its commitment with all Customers and stakeholders to comply with all applicable regulations to the aviation industry, as well as standards adopted and/or established by the Company, which are an essential priority to guarantee: quality, operational safety, aviation security, Ambassador health promotion, and the prevention of environmental pollution. Volaris is responsible for achieving a culture where quality, operational safety, emergency response, aviation safety, occupational health and safety and environmental protection are fundamental operational priorities; as well for as providing the necessary resources to achieve compliance with this policy and promote con- tinuous improvement. At Volaris, we accept errors as a human con- dition, but under no circumstances we accept negligence. Consequently, we have an immunity policy in place described in our Operational Safety Manual. The regulatory policy for the Working Group Green Team is the IAMS (Integrated Aviation Management System) or Compre- hensive Policy. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 75 3.6. Ambassadors’ Relations, Practices and Wellbeing Women on Boards 2020 and Women Corporate Di- rectors recognized us as one of the Mexican publicly traded companies with the highest percentage of in- dependent female directors on the Board of Directors. We have mechanisms to ensure equal opportunities and prevent any type of discrimination in all our processes and operations, such as: Equal Opportunities and Non-Discrimination At Volaris, we are aware that inclusion and diversity in the avia- tion industry are key factors for the sector’s recovery and sus- tainable development. Therefore, we continued to implement initiatives and made efforts in support of equal opportunities and non-discrimination, promoting inclusive and violence-free workspaces, where the professional and professional growth of all Ambassadors is ensured. 26% of women in management positions 87% of women in operative positions 1 female pilot for every 2 aircraft 7 Source: https://airlines.iata.org/analysis/diversity-crucial-to-the-industry-restart Person-centered Organizational Culture Code of Ethics and Whistle Blowing Line to report non- compliances Diversity and Equal Opportunities Policy Compensation Policy to ensure equitable compensation between women and men Maternity, Paternity and Use of Breastfeeding Rooms Policy and agreements with daycare centers “ During these 15 years, at Volaris I have seen a remarkable amount of support for women in all areas. I am very proud to witness how more and more women are working in places where they were not before. In hindsight, it is impressive how things have changed in favor of our development. When I started my professional career, there were very few women in key positions, now this is more com- mon and fills me with pride and happiness.” Marta Maldonado, Captain Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 76 Compensation for Volaris Ambassadors Compensation at Volaris is primarily aimed at creating value for its shareholders, its Customers and Ambassadors. Hence, we have a General Compensation Policy closely linked and aligned with the Volaris’ strategy, mission, vision and behaviors. This Policy establishes the guidelines to define and develop the compensation strategy at the Company’s different levels, providing, initially, equitable compensation, without any type of discrimination, according to the obligations, responsibilities, complexity and contribution of each position to the organiza- tion’s results. Subsequently, it ensures a competitive compen- sation through participation in several salary surveys, with the aim of comparing our total compensation levels against the market and, thus, making sure we implement the best practices that create value for our Ambassadors and our shareholders. The General Compensation Policy and related policies are re- viewed by the Compensation and Nominations Committee, as well as by the Audit and Corporate Practices Committee and ultimately approved by the Board of Directors, based on their recommendation. Total compensation as a concept includes not only salary com- pensation, but also benefits, provisions and emotional salary, the latter understood as the growth, development, working environment and conditions and, overall, the Ambassador’s experience at Volaris, which together constitute the strongest bond between the Ambassador and the Company. Our salary and benefits plan is competitive and exceeds the minimum required by law. The position with the lowest com- Ps. $3,453 billion invested in salaries and benefits for Ambassadors in 2020. pensation in Volaris is 165% above the minimum salary and the ratio of total monthly compensation of women vs men is as follows8: Level Executive level Management level Non-management level Pilots Flight Attendants Maintenance Airports Women’s average base salary 244,439 Men’s average base salary 246,416 102,450 33,427 51,336 16,705 18,143 8,470 111,014 33,975 63,336 16,914 20,578 8,479 Ratio 0.99 0.92 0.98 0.81 0.99 0.88 1.00 *Figures in Mexican pesos. *Only the base salary is considered, benefits and variable compensation are not included. Due in part to these efforts, we have been able to attract and retain the best talent and reduce our turnover rates significantly. In addition, we strive for the Volaris Family’s work compensation to allow our Ambassadors to improve their quality of life, produce social mobility and ensure their wellbeing and that of their families. Salaries and benefits: Major medical expense insurance for Ambassadors and immediate family* Life insurance for natural or accidental death Long-term and performance bonus Short-term incentive plan Vacation payment Electronic food coupons for unionized Ambassadors Vehicle allocation plan for vice presidents and directors Preventive medical check-up plan Retention and attraction bonus More vacation days than those established by Law More Christmas bonus than that established by Law Training programs Development and growth programs for Ambassadors December Overnight Program for Crew Members9 Maternity and paternity leave,10 use of breastfeeding rooms, special breastfeeding hours and agreements with daycare centers Administrative or unionized passes11 Home office and flexible schedule scheme for administrative Ambassadors “ During 2020, we preserved the almost 5,000 jobs created by Volaris in order to contribute to the recovery of our business and tou- rism. This allows us to have the necessary human resources for our accelerated growth plans. Thank you to the entire Volaris Family for their continued support and commitment during these difficult times.” Martín González, Human Resources Director 8 This information corresponds to operations in Mexico, which is equivalent to 97% of Ambassadors who are part of the group of companies that comprise Volaris. 9 On December 24 and 31, crew members have the right to travel with a companion on the designated flight where they will spend the night 10 In 2020, 84 women and 42 men used this benefit; 72 women and 42 men returned to their jobs at the end of their leave and 58 women and 41 men were still in their jobs after one year. 11 Airline tickets that do not have a temporality restriction or taxes payment. *All Ambassadors have the right to insurance for the holder, spouse and children under 25 years of age. Traffic agents A and B only have insurance for the holder. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 102-41 TR-AL-310a.1 Freedom of Association and Collective Bargaining At Volaris, we respect the right to freedom of association and collective bargaining, so we continuously work with union representation to improve Ambassadors’ wellbeing. Specifically, our achievements in labor matters were: Ambassadors’ union is the Union of Workers in the Aeronautical Industry, Similar and Related of the Mexican Republic (STIAS). Maintain employment and preserve jobs. Reactivate crew operations by returning to operations in a new normal. 2020 Unionized Ambassadors Content 77 3,937 Unionized Ambassadors 76% 353 Maintenance personnel 89 Land operators 907 Pilots 764 Airport personnel 1,824 Flight Attendants In 2020, we coordinated efforts with the STIAS to continue operating during the COVID-19 pandemic, since air transportation is considered an essential activity, prioritizing Ambassadors’ life and health. Execute leave agreements with reduced salary for up to 90 days. Reactivate the 5x2 workdays in the maintenance area for returning to operations in a new normal. 5x2 workdays refer to 2 days of rest for every 5 worked in a week. Suspend the collection of union dues for a period of 12 months to support our Ambassadors economy. Provide the STIAS with all the documentation and facilities required by Law to execute the legitimation of the collective bargaining agreement, in March 2021. “ I am sincerely grateful with the union representing our Ambassadors, for its support and willingness to collaborate in the business’ reactivation during these uncertain times we expe- rienced derived from the COVID-19 pandemic. The wellbeing of the Volaris Family is invaluable. Together, we will continue to make flying accessible for everyone and to offer the best travel experiences.” Enrique J. Beltranena, President and Chief Executive Officer Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 78 Regarding the actions we carried out due to the COVID-19 pandemic, we informed and coordinated with the STIAS the Ambassador division so they could return to the working centers. Likewise, together with the medical service and the Volaris industrial security area, we sought to prevent disease infections among our Ambassadors. The most important actions were: We have the Federal Government approval for the self-assessment of the health security protocol in all our working centers. We made available to the Ambassadors gel alcohol (70°) and cleaning products for the working areas at different points of the facilities. Training and activation of the biosecurity protocol in all our flights and operations to ensure a safe flight; no Ambassador or Customer has been infected during our service. Periodic sanitation program in all working centers. Management and delivery of personal protective equipment (face masks, safety glasses and gloves), according to each job position. Facilities’ adjustments (signs, social distancing markings, allocation of entrances and exits, as well as distribution of spaces). Participation in daily meetings with the management team. Design and implementation of the COVID-19 online course, which was taught through the Volaris Corporate University, with the aim of complying with the biosecurity protocol and, through which, we imparted the actions to prevent and avoid COVID-19 infection chains. We used the courses’ content from the IMSS educational platform (CLIMSS). 4,873 Ambassadors participated in the course lasting approximately one hour. Implementation of a sanitary filter for the identification of possible cases and their timely isolation. Direct communication with Ambassadors who reported COVID-19 symptoms, or who were positive for the disease, providing timely follow-up to each case. Preparation of the new normal manual, which specifies the rules, healthy coexistence guidelines, as well as infographics allusive to COVID-19, according to each position. Talent Attraction, Development and Retention “ 2020 was a very challenging year for everyone, especially for an industry like ours that was strongly affected worldwide. The key was to be agile, proactive and focus our efforts on supporting and being close to our Ambassadors. With no incremental cost, the best talent and great leadership, we were able to quic- kly create and implement valuable initiatives to maintain our Ambassadors’ professional development, increasing the time invested in development and leadership by 169% vs 2019.” Stephanie Amor Talent Management and Leadership Development Manager Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Volaris Competency Model and Talent Cycle Content 79 Volaris Competency Model Volaris Talent Cycle The Volaris Competency Model is a set of daily behaviors that Volaris expects from all Ambassadors. This Model was developed based on Volaris’ profile and needs to achieve suc- cess and ensure the leadership development of Ambassadors. Together, the Model serves as a framework for standardizing the goals of the Volaris Talent Cycle. On the other hand, the Volaris Talent Cycle is the set of development stages that Ambassadors must go through during their time in the Company; and includes 7 phases: Corporate voluntary work Talent attraction and promotion 7 1 Training 6 5 Leadership development Volaris Talent Cycle 4 Career paths 2 Performance and recognition management 3 Talent review and succession planning Each of the seven phases that make up this Cycle have different processes, initiatives and programs, which are explained throughout this Report. Learning agility Result orientation Decision making Business vision Resilience Teamwork Emotional intelligence Interpersonal skills Assertive communication Growth and development Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 7 1 6 Talent Cycle 5 4 2 3 Talent Attraction and Promotion We strive to attract and retain the most competent and pro- fessional Ambassadors, with the precise abilities and skill set for the position; thus, we provide the best travel experiences and increase the Company’s profitability. Closure 5 Alignment 1 Process to attract administrative talent 2 4 Evaluations Search 3 Interviews Young Talent Attraction At Volaris, we are committed with the professional development of our Ambassadors, creating unique and challenging career ex- periences. Through the Development Galaxy program, we attract and develop future Volaris leaders. Through this program we offer students, recent graduates or professionals with a few years of experience, the opportunity to work on high-impact projects for the Company and, thus, provide them with the tools and plat- forms to develop and boost their career and consolidate their professional and personal success. The programs we continued during 2020 were: Novas. Program for college students Through this program, which lasts one to two years, we attract and develop college students in administrative and operating areas (Aeronautical Engineering). In addition, they have the opportunity to participate in the talent seedbed for future vacancies. 26 interns + 30% VS 2019 12 women 14 men Satellites trainee program Designed to attract and develop Volaris future leaders. It involves three rotations in different areas according to unique profiles and career interests, in which they can meet and learn from Volaris leaders, challenging their capabilities, unlocking their full potential and accelerating their professional development. We closed the 2nd generation of trainees; two out of the three were hired. Despite the complex year in the industry globally, we retained 9 trainees. Content 80 Internal Opportunities System (SOI) Through this program we aim to offer the best internal development that encourages productivity, improves the quality of the service that we provide our Customers, and favors the creation of excellent travel experiences. The SOI program allows Ambassadors to apply for open positions, thus increasing their growth and development opportunities. During 2020, 92 promotions 2020 New hires 538 positions filled 45 women 47 men 234 women 304 men 307 Crew members 139 women 168 men 119 Airport personnel 48 women 71 men 112 Administrative positions 47 women 65 men Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Performance management components Performance management process Content 81 7 1 6 Talent Cycle 5 4 2 3 Performance Management and Recognition “ The definition and measurement of busi- ness goals, aligned with Volaris’ strategy and sustainability, allows us, as Ambassa- dors, to challenge ourselves and improve our performance, while growing and pro- gressing professionally.” Lucrecia Monsalvo. Senior Manager Compensations and Organizational Effectiveness We are convinced that, in order to provide the best travel experiences, we must have the best talent, which includes aligning our short, medium and long-term objectives with the Company’s business and sustainability strate- gy. Therefore, we have a performance review process that measures and assesses essential components to ensure that the Volaris Family is in the best conditions to meet their goals. Business outcome (what) Results are achieved by living our values (how) n o i t a s r e v n o c l i a u n n a b r o y l r e t r a u Q s r e d a e l + s r o d a s s a b m A Definition of goals and objectives Description of strengths and areas for improvement Annual average grade In 2020, 95% of the eligible administrative Ambassadors set up goals and completed performance reviews with their leaders, allowed us to stay focused on the Company’s stra- tegic objectives. Our review process measures and analyzes performance consis- tently and transparently, which helps us identify and recognize those Ambassadors with exemplary achievements. Every quarter, all Ambassador and their leaders hold a conversa- tion and define their objectives and goals. During such meetings, Ambassadors receive feedback on their performance, strengths and achievements, areas for improvement, and if necessary, both parties discuss actions to help achieve better results. Feedback Actions for achieving results Tangible benefits for outstanding Ambassadors In addition, every two years we carry out a 360° performance assessment, which includes the perception of the area leader, direct reports, peers and internal Customers. This assessment makes it possible to identify strengths and improvement areas to create individual development plans. In 2021, we will carry out the assessment from leaders to the senior management. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Performance Alignment with the strategy We are all going in the same direction. Measuring improvement We evaluate, compare and improve. Clear objectives I am clear on what to focus on and how this contributes to Volaris’ success. Development on the way We enjoy the journey and learn and grow along the way. Impeccable execution I ensure the quality and warmth of my activities. I always stick to the Talent Cycle Unbiased assessments We follow the same evaluation standards; we have performance measurements that allow us to be consistent and transparent. Productivity and efficiency We achieve results by finding more efficient ways to reach them. Success and sustainability We guarantee the present and future success of Volaris by achieving results. At Volaris, we use People Analytics* for the following practices: Measure Ambassadors’ performance. Strategic planning of our workforce Identification of workforce skills gaps Identification of notice risks to improve retention Organizational Effectiveness Analysis * People Analytics is a data-based research method whose aim is to study all the processes, functions, challenges and opportu- nities of the people who are part of a company. Recognition Programs At Volaris, we promote a culture of recognition because we believe that the great actions performed daily in our different working centers should not go unnoticed. Recognizing them increases worker satisfaction and motivates the implemen- tation of best practices. With this aim and to guarantee our Ambassadors’ progress and comprehensive growth, we have developed a series of tools that ensure the recognition and satisfaction of the Volaris Family, depending on their performance and contri- bution to Volaris. In 2020, 1,007 recognized Ambassadors 43% women 57% men 234 Ambassadors Ambassador of the Month, for meeting operating metrics. 102 Ambassadors . ULTRA OPS AWARDS “Recognition of service and performance in dispatch, operational logistics and Operations Control Center” Content 82 671 Ambassadors in the corporate recognition programs RECOGNITION “Because our Culture lives through your actions.” SERVICE STARS “Creating extraordinary stories together.” TRANSCENDING “The sum of our efforts makes us fly higher.” Golden Planes We created a remote awards gala to recognize tho- se Ambassadors who showed the greatest com- mitment, resilience and who gave the extra mile to maintain the ongoing pace of operations during the pandemic. 180 recognized Ambassadors 51% women 49% men Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 7 1 6 Talent Cycle 5 4 2 3 Talent Review and Succession Planning 7 1 6 Talent Cycle 5 4 2 3 Career Paths Content 83 We seek the development and retention of our key Ambassadors to have the most prepared talent in the short, medium and long-term, thus ensuring the achievement of Volaris’ objectives and sustainability through organic growth. We believe in the development and growth of our internal talent to give continuity to the mapping and succession benches. Therefore, we carry out the talent review exercise, where Ambassadors are classified into different groups. Through this process we are able to identify specific development and improvement actions for each group and we ensure proper accompaniment and growth for our future leaders, as well as protecting key talent. In this review, we identify: Talent category for each Ambassador Development needs Key Ambassadors to be considered in succession benches for critical positions Our talent review process takes place every two years. During 2020, we continued con- solidating individual development plans derived from Talent Review, considering internal and external development efforts such as: coaching, mentoring, shadowing, functional / technical and soft skills training. This program is focused on operating Ambassadors to show them the different alter- natives they have for growth during their professional career at Volaris. career paths career paths Your career, your development This program offers the necessary information and tools to guide our Ambassadors in defining the professional goals they wish to achieve. 6 areas of the Operating Vice Presidency +225 operating positions considered +1,156 connections within area and among unions +4,300 Ambassadors benefitted with the platform Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 7 1 6 Talent Cycle 5 4 2 3 Leadership Development We continued internally with our develop- ment strategies and strive to protect key talent, in spite of the challenges brought by the pandemic. At Volaris, we believe in developing our talent, ensuring that we have leaders prepared to face daily challenges, ensuring business continuity. In 2020, due to the challenges brought by the COVID-19 pandemic, the performance of our leading Ambassadors was essential to guide the work of the rest of their teams. Therefore, during the year, we carried out a wide array of programs to accompany our leaders in this process. Since we were one of the industries most af- fected by COVID-19, we focused on creating development and accompaniment initiatives with no costs to raise awareness about the role and impact of Ambassadors and provide man- agement tools for the new reality, as well as to continue achieving goals and having humane leaders who protect their teams. Accompaniment Program for New Leaders. We are aware that transitions are key moments in the people’s development and in the Company success. This program focuses on accompa- nying and developing new leaders –whether they just joined or had a another position within Volaris– to ensure that the learning curve for the new position is reduced and that the team dynamics are adequate. Leadership Webinars. Due to the extraordinary circumstances we faced during the year, we de- veloped and implemented two webinars for all leaders, striving to raise awareness about the role and impact that each one has on their teams and at Volaris, as well as to provide them with management tools for the new reality of the job. In 2020, 44 Ambassadors participated 43% women 57% men “Effective remote and humane leadership” Webinar 29% Operative 71% Administrative 246 leaders and higher positions participated 738 hours Individual Leader Accompaniment and Devel- opment Programs. Aimed at those leaders with over six months in their position, focusing ef- forts through individual sessions of leadership development, coaching, team coaching, shad- owing and mentoring, among others. “Personal Leadership” webinar In 2020, 172 Ambassadors participated 43% Operative 102 leaders and higher positions participated 35% women 65% men 57% Administrative 153 hours 36% women 64% men 55% women 45% men Content 84 Connection Fridays. We implemented this pro- gram that offers a personal connection space with a humane and completely confidential ap- proach for Ambassadors. Through individual sessions and with an internal coach, we provide advice and tools to support them in several sit- uations they may be experiencing and, thus, are able to calibrate their route in personal and professional matters. In 2020, 116 Ambassadors participated 56% women 44% men +89 individual coaching hours “ The COVID-19 pandemic allowed us to re- assess our Ambassadors’ priorities and needs. Our efforts to create wellbeing for the Volaris Family, such as accompaniment initiatives, talks on physical and mental health, as well as humanized and remote leadership tools, among others, allowed us to create value for our teams. 2020 taught us that, to restore our flight, we must pro- tect and prioritize our Ambassadors.” Juliana Angarita, Organizational Development Director Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact To reach most of the Volaris Family and pro- vide specific tools for the development needs of each population, we will have two administrative Academies, one for Ambassadors who occupy leadership positions and other aimed at individ- ual contributors, with an administrative profile. The Leadership Academy app will work by send- ing an email to Ambassadors once a month, which will include the activity plan to complete, since there are activities and one-hour live ses- sions within the app to reinforce the monthly topics. In other words, each month a Leadership competence is reinforced and information on Ways of Working and/or Culture is shared. Academy Division (Engagement): Leaders: the competencies that must be com- pleted in the Academy are included into their KPI’s, which are obtained from the 360° as- sessment, i.e., they are asked to carry out the abilities identified as areas for improvement and they encouraged to complete the other modules. Individual contributors: by completing the dif- ferent modules that are in the Academy, they obtain badges, which they can exchange for a wide array of courses at the end of the year. Leadership Academy for Administrative Personnel To supplement our leaders’ development, by early 2021, we aim to launch the app of the Lead- ership Academy for Administrators. It will be distributed through the web and app, since they are more practical and accessible means for our Ambassadors. This app seeks to develop Ambassadors through our three training pillars: Culture, Leadership and Ways of Working, in order to provide them with the necessary tools for their ongoing training. The three training pillars are focused on: Culture: strengthening of our values among Ambassadors, so that they continue to be living agents of our culture. Leadership: development of our leadership competencies, in order to strengthen the Vo- laris profile of our leaders and individual con- tributors. Ways of Working: tools and ways of working that make us unique at Volaris. The Leadership Academy will be focused on developing Ambassadors’ competencies and abilities based on the 70, 20, 10 methodology, which centers on having different types of ac- tivities that help develop each competence in a comprehensive manner; i.e.: 70: activities that produce experiences, evoking learning in practice. 20: feedback activities, that is, learning through others. 10: individual study activities, providing the nec- essary concepts and information for the devel- opment of each competence. Content 85 Leadership Academy Components: We have the goal of launching the Flight At- tendant and Pilot Academy, and to relaunch it in airports during 2021. App and website: here are all the activities to complete every month under the 70, 20, 10 methodology regarding each of our training pillars. Leadership Thursdays: 60-90 minutes live sessions which reinforce monthly topics; thus, we have a hybrid system where users can complete the activities in the app when they can (24/7), as well as sessions where they may ask and delve into key themes with experts. The Academy responds: communication channel for Ambassadors to answer questions related to Leadership, Culture and Ways of Working. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 86 7 1 6 Talent Cycle 5 4 2 3 Training Aviation is one of the most specialized industries. Therefore, it is necessary to constantly train and update our Ambassadors so they perform their functions with the best preparation, professionalism, innovation and alignment with the sector’s best practices. We strive to constantly improve the skills, knowledge and competencies of the Volaris Family to en- sure our business’ sustainability in the future. The training courses we offer involve a variety of topics and are taught in face-to-face modalities and on E-learning platforms. The training is divided into four areas: Volaris Corporate University. Virtual space with access to mandatory online courses to certifications and comply with audits. Non-regulated technical training. Specialized courses for technical areas Ambassadors that aim to reinforce skills. Training Regulated technical training. Specialized mandatory courses for technical areas Ambassadors; regulated by the aeronautical authorities. Leadership Academy. Leadership training program for Ambassadors in charge of a team. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 87 2020 Regulated technical training 2020 Volaris Virtual Corporate University Regulated courses Pilots Flight Attendants Maintenance Dispatch TOTAL Courses offered (face-to-face / remote) 171 (62/109) 125 (40/85) 101 (55/46) 56 (12/44) 453 (169/284) Training hours (face-to-face / remote) 2,537 (832/1,705) 4,250 (1,776/2,474) 2,555 (859/1,696) 1,214 (394/820) 10,556 (3,861/6,695) Participants (face-to-face / remote) 2,053 (655/1,398) 2,118 (609/1,509) 1,052 (596/456) 772 (204/568) 5,995 (2,064/3,931) Men Women 1,936 117 542 1,576 1,034 18 657 115 4,169 1,826 2020 Non-regulated technical training PCV 2019: Key Control Policies SMS: Safety Management System (Type A, B, C*) SMS: Safety Management System (Type D external*) COEV: Volaris Code of Ethics ECPAT: End Child Prostitution, Child Pornography and Trafficking of Children for Sexual Purposes FCPA: Foreign Corrupt Practices Act PDP: Personal Data Protection Non-regulated courses Pilots Flight Attendants Maintenance Airports and Dispatch TOTAL Total Courses offered Training hours Participants Men Women 57 275 644 622 22 5 190 121 23 98 44 1,192 389 379 10 874 10,233 7,148 5,181 1,967 980 11,890 8,302 6,205 2,097 * Some Ambassadors take more than one course during the year. 2020Information security: Operative COVID-19, implications and hygiene measures Emergency brigades Teams Total Trained Ambassadors % that completed the course 2020 Mandatory courses Women Men Training hours 716 94% 291 425 4,400 100% 1,979 2,421 2,031 99% 995 1,036 4,760 100% 2,192 2,568 3,637 98% 1,901 1,736 612 4,724 20,880 98% 98% 230 2,171 9,759 382 2,553 11,121 Non-mandatory courses 4,127 94% 4,873 250 241 9,491 98% 93% 65% 1,889 2,238 2,233 2,640 82 99 168 142 4,303 5,188 477 3,300 1,523 2,777 2,728 408 3,149 14,362 2,064 2,843 238 145 5,288 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact *The SMS course is targeted at four populations: A: Vice Presidents and Operational Directors; B: specialists and operational analysts; C: Pilots and Flight attendants; and D: suppliers. Content 88 Courses offered in the Leadership Academy in 2020 Course Population Participants Courses Hours Women Men Leadership Academy Airport managers Leadership Academy Leads and Volaris Coordinators Leadership Academy Leads Outsourcing Leadership Course to be Promoted to Captain Airports Airports Airports Copilots Training capsules for OCC OCC Total * Some Ambassadors take more than one course during the year. 80 67 87 29 62 325 16 12 12 1 4 45 194 72 93 464 12 835 43 39 59 2 5 148 37 28 28 27 57 177 Regulated technical training (mandatory) Non-regulated technical training (non-mandatory) Organizational Development Training mandatory Organizational Development Training non- mandatory Courses Training hours Participants 453 10,556 980 11,890 7 14,362 49 6,123 5,996 W: 1,826 30.5% M: 4,169 69.5% 8,302 W: 2,097 25.25% M: 6,205 74.75% 20,880 W: 9,759 46.73% M: 11,121 53.27% 9,816 W: 4,451 45.35% M: 5,365 54.65% +5 hours on average of mandatory training per Ambassador 4 hours on average of non-mandatory training per Ambassador Investment per Ambassador in mandatory training: Investment per Ambassador in non-mandatory training: PS. $19,550 PS. $222 42,931 trainning hours Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 7 1 6 Talent Cycle 5 4 2 3 Corporate Voluntary Work The strategy of our #VoluntariosVolaris program is to reinforce the sense of belong- ing and pride in the Volaris Family, in addi- tion to benefiting the communities where we operate. The #VoluntariosVolaris strategy is based on the achievement of four specific objectives aligned with the Company’s contribution to the United Nations Sustainable Development Goals. There- fore, we focus our efforts on specific actions that positively impact the communities where we operate. 1. Offset the environmental footprint from our operation. Through several initiatives, such as refor- estations, beach cleaning and partner- ships with associations like Amigos de Sian Ka’an, we support the improvement of ecosystems. 2. Support the wellbeing of children with chronic and degenerative illnesses. We make the most of our infrastructure to promote health and help the most vul- nerable population. Our volunteers par- ticipate in recreational activities with the children, visit hospitals to play and donate toys on special occasions, and support their families by providing food and sup- port while they wait at the clinics. 3. Contribute to the education of 4. Contribute to gender equality. In 2021, through strategic alliances with NGOs that work for gender equality, non-discrimination and the eradication of violence against women, we will support women in vulnerable situations, in order to contribute to reducing inequalities and driving the SDG 5. members from the foundations with which we collaborate. Our volunteer Ambassadors impart courses, conferences and workshops for our allies. In addition, pilots and flight attendants give talks to high school students on how to achieve a successful career in aviation. Currently, we are developing a strategy to provide a series of trainings and educational courses for girls and boys in vulnerable situations, young people with low access to education and professionals ready to graduate. Likewise, we seek that our leaders can participate in mentoring sessions with owners of small tourism businesses in the country’s southern region to help them acquire new technical and professional skills that will be useful in their business. Content 89 During 2020, we focused on creating partner- ships with new foundations and strengthening our existing ties in order to diversify the support we provide and thus, reach a greater number of populations and increase the activities we carry out, contributing to the wellbeing of more and more people. Due to the pandemic situation we experienced in 2020, voluntary work activities were affected. However, we were able to get 47 Volaris vol- unteers to dedicate their time and resources to four initiatives: 3 volunteers helped fulfill the dream of the boy Anderson Daniel Ortega Lima to see an airplane and live the pre-flight experience of a pilot. 10 volunteers were part of the Dream Train for children of the Marina Guirola orphanage in Guatemala. 19 volunteers helped fulfill dreams in Mexico through flights, together with Dr. Sonrisas. 15 volunteers delivered 700 toys to 700 girls and boys from the Instituto Nacional de Pedi- atría as part of a campaign with Dr. Sonrisas, in which we organized a toy drive within Volaris. Plans for 2021: Developing strategic alliances for 2021 in order to diversify support and meet the 2021 Goals. During 2020, the total monetary value that Vo- laris spent on philanthropic contributions by category was as follows: Monetary donations: Ps. $95,200.00 Time; Ambassadors volunteering work during paid working hours: Ps. $21,808.00 In-kind donations: Ps. $1,903,323.28 Initiative from before the COVID-19 pandemic. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 90 Occupational Health and Safety At Volaris, we have an occupational health management system aimed at maintaining safe workspaces so all Ambassadors can enjoy physical and mental wellbeing. 1,200 COVID-19 tests applied Industrial Safety and Civil Protection We strive to guarantee safe working spaces and ensure our Ambassadors’ wellbeing, as well as to comply with official occupational health and safety regulations and laws. We have 45 safety and hygiene brigades, responsible for making periodic visits to our facilities and verify compliance with all applicable standards. In addition, we collaborate with the National Coordination for Civil Protec- tion and with aeronautical authorities to create synergies in these topics. During the year, we carried out the following safety actions: The health management system includes pro- grams such as health campaigns and fairs, vac- cination, cancer prevention, health and safety training –especially for pilots and flight atten- dants, who have the greatest health risks due to their activities–, hygiene advice, medical evaluations to the personnel of the operational area and accident investigation (along with the industrial safety area). This year, due to the COVID-19 pandemic, we were unable to carry out most of the face- to-face health programs. Hence, we focused on providing training and support specifical- ly for this disease, through the identification and follow-up of cases, as well as training in preventive measures, spread containment and support to vulnerable groups 2,790 vaccines against Influenza applied 147work risks identified 503 monthly fire extinguisher assessments 127 quarterly reviews to electricity installations 85 biannual smoke detector assessments Due to the COVID-19 pandemic, we imparted the first virtual course to the emergency brigade nationwide, training 263 brigade members in first aid, firefighting, evacuation, search, and rescue. In addition, we programed two live events, one on first aid at home to support Ambassadors in the new home office modality and a discussion about myths and realities about COVID-19. We provided support for 883 confirmed COVID-19 cases, 750 suspected and 904 suspicious or confirmed contact cases. 1,422 Ambassadors seen for several illnesses To commemorate the September 19th earthquake, we held a live event alluding to the self-protection that Ambassadors should have in their homes, reaching more than 250 of their families. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 91 Work Accidents and Risks Regulatory Compliance At Volaris, we monitor all operations and work- spaces to avoid possible incidents, accidents and raise awareness among our Ambassadors regarding their work areas. In 2020, we had no deaths from work accidents nor any serious work accidents. Work incident investigation process 1. Accident investigation. The accident / incident investigation form is used to gather informa- tion to identify any event and determine cor- rective measures. 2. Measures to be implemented. Once the in- vestigation is completed, the corresponding area is informed and preventive measures are implemented. Monitoring process for work accidents 1. Inspection and monitoring of occupational accidents by Human Resources. 2. Accident mitigation efforts through the com- pletion and delivery of the ST-7 form to the IMSS. 3. Accident assessment when the information is received and channeled to the occupational health and industrial safety departments for follow-up purposes. At Volaris, we abide by the Mexican Official Stan- dards of the STPS to determine the necessary safety, health and work environment conditions for our Ambassadors, as well as the mechanisms that offer an immediate response when a risk is detected. NOM-030-STPS-2009, Preventive Services of Health and Safety at Work. By complying with the requirements from this standard, we identify dangerous physical conditions that constitute risks; physical, chemical, and biological agents capable of altering the environmental conditions of the workplace and causing harm to Ambassa- dors’ health; latent risks and regulatory require- ments in these matters. NOM-035-STPS-2018, Psychosocial Risk Factors in the Workplace. This standard, which came into effect in 2019, establishes the elements to iden- tify, analyze and prevent psychosocial risk fac- tors, which are defined as those that can cause non-organic anxiety disorders of the sleep-wake cycle and serious and adaptive stress. In order to comply with its requirements, during 2002: We identified 70 Ambassadors who experi- enced traumas and channeled them for further medical treatment.édico. We identified psychosocial risk factors and eval- uated the environment of the entire Company based on five categories defined by the stan- dard: work environment, factors specific to the activity, leadership and relationships at work, working time management and organizational environment. The result of this assessment was low risk; however, we will develop and imple- ment action plans for each category. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 410, 412: 103-, 103-2, 103-3 GRI 410-1, 412-1, 412-2, 412-3 3.7. Human Rights and Community Relations Human Rights Protection Program “ For Volaris, the alliance with The Code-EC- PAT is fundamental in the context for the protection of the rights of girls, boys and adolescents in Mexico. Together with this organization we strive to have a positive impact on the industry in order to maintain a responsible VFR market with society and within the legal framework, which allows the consolidation of sustainable and viable tourism in the long term, always from an ethical and social perspective, focused on the communities where we operate.” Enrique J. Beltranena, President and Chief Executive Officer The Code-ECPAT 2020 was not an easy year due the health crisis caused by COVID-19, particularly for girls, boys and teenagers. According to numerous interna- tional reports, the pandemic made this group more vulnerable than before to human rights abuses, especially due to violence at home. We continued our efforts in alliance with The Code-ECPAT International12 and the membership as Top Member for the 7th consecutive year, in order to prevent pros- titution, pornography and trafficking of girls, boys and adolescents for sexual pur- poses in the context of travel and tourism. In 2020, we aimed to reinforce Ambassador training on the implementation of the protocol that we have developed with The Code-ECPAT and the National Migration Institute to detect possible cases of rights’ violations of our under- age Customers. In addition, we seek to strength- en their accountability regarding the protection of children and adolescents who travel with Vo- laris, following international recommendations, such as those of the United Nations Children’s Fund (UNICEF). Furthermore, we encouraged our Ambassadors’ commitment to apply the ECPAT Code through a recognition program. This program involves recognizing the Ambassadors who have activat- ed the protocol and who have collaborated with the authorities, so that possible cases of minor trafficking on our flights can be discovered. In spite of the adverse conditions due to the COVID-19 pandemic, we trained through re- mote courses 438 new Ambassadors. Ad- ditionally, we reinforced training for 3,637 Ambassadors, through E-learning courses. We acknowledge our responsibility to contribute to the development of an ethical market, within the legal framework, as well as a sustainable tour- ism. Hence, we are committed to establishing a zero-tolerance policy in the Volaris value chain against commercial sexual exploitation of girls, boys and adolescents in travel and tourism. We included the ECPAT clause in rate agree- ments executed with YaVas hotels; we achie- ved approximately 95 agreements. The ECPAT clause that we include in hotel rate agreements, contracts for tourist services’ provi- sion and land transportation of YaVas establishes that the supplier or commercial partner must comply with the guidelines of The Code and pro- mote a responsible tourism. If YaVas becomes aware of possible practices of rights’ violation of girls, boys and adolescents by the provider, the agreement may be terminated. 12 EECPAT: End Child Prostitution, Child Pornography and Trafficking of Children for Sexual Purposes. Content 92 At Volaris, we activate this protocol during flight operations in the event that a situation is de- tected that violates or could violate the rights of girls, boys and adolescents. In 2021, we will include this clause in agreements and contracts with other business partners in the Volaris tourism sector, in order to expand our contribution to the development of sustain- able tourism. Volaris is the first airline in Mexico and in Latin America, and the second worldwide, to implement The Code. National Immigration Institute In coordination with the National Immigration In- stitute of Mexico, we implemented a protocol for the Identity Validation of Unaccompanied Minors, to preserve their safety when travelling unaccom- panied, especially in the context of the migratory phenomenon experienced in Mexico and in other countries throughout the region. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 93 3.8. Customer Welfare, Privacy and Data Security GRI 419: 103-1, 103-2, 103-3 TR-AL-540a.1, TR-AL-540a.2 At Volaris, we are aware that the most important issue for our Customers is their safety. Therefore, one of our priorities is to maintain an optimal safety standard in all stages of our operations, in order to continue generating value for our passengers. We have two pillars to guarantee their safety: Aviation Security and Safety (op- erational safety). Aviation Security Aviation Security guarantees the transportation of our Customers free of any illicit interference. During 2020, we faced the challenge of estab- lishing remote training protocols and submitting them for approval to the different authorities in Mexico, the United States of America and Central America. We were able to develop protocols for remote instruction endorsed by the authorities and begin training under this modality. We constantly train all Ambassadors and personnel who provides us with services on security measures, such as: Terrorism and illegal interference of bomb threats Kidnapping threats Contingencies or emergencies We also address topics such as: Domestic and international Human Rights Customer treatment Baggage and Customer check Security events report and confidentiality of sensitive security information We trained 6,734 persons on operational security topics 4,288 Ambassadors 2,446 suppliers In response to the sanitary crisis, we stan- dardized aviation security processes to allow the interaction of security personnel with Customers and Ambassadors in a more effi- cient way, always complying with our biose- curity protocol. As a result of the rigorous protocols defined in the Operational Safety Management Sys- tem, we mitigated 100% of the operational safety risks identified that affect the aviation industry. We were recognized for the 14th consecutive year as an Addiction-Free Company. Safety (operational safety) Safety (operational safety) guarantees the safe- ty of our Customers in all operations, including methods that allow us to identify, anticipate and mitigate the causes of aviation accidents. At Volaris, we strive to provide our Customers with welfare and safety at all stages of the flight. We have a Safety Management System (SMS), which complies with the SMS regulatory frame- work from the ICAO, IATA and national and inter- national regulations, through which we identify hazards and safety risks to prevent and mitigate their occurrence. We have defined several safety performance indicators. These are periodically reviewed, both at the corporate and local levels, by the Operational Safety Review Board and the Volaris Operational Safety Committee. The indi- cators are classified into high impact indicators and low impact ones, so we can assess efficiently if our goals meet the operational safety stan- dards. In addition, we continuously follow-up on their performance to identify any safety risks and guarantee their mitigation. In 2020, our operational safety department main- ly focused on the prevention and mitigation of different risks identified from the situations of the COVID-19 pandemic, such as reduced operations, as well as their reactivation. We continued with thorough follow-up and monitoring to unstable approaches, events that could induce loss of control in-flight and runway excursions, as well as human errors and injuries in the cabin. In 2020, the harmonized accident rate (per million sectors) was zero. Mitigation actions for the main risks identified by the SMS The performance of operational safety at Volaris is defined in terms of achieving the safety goals associated with its Safety Performance Indica- tors. These indicators are reviewed periodically, both at a corporate and local level by the Safety Review Board (SRB) and Volaris Safety Commit- tee. In 2020, Volaris, through its internal Safety Department, focused mainly in proactively and predictively preventing and monitoring the fol- lowing cases: Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 94 Unstable approaches, Loss of control in flight (LOC-I) Runway safety (RS) –including runway excur- sion, hard landing and undershoot– Controlled Flight into Terrain (CFIT) Other in-flight areas not necessarily confined to the cockpit were also considered, such as: Accidental deployment of evacuation slides (typically caused by human error) Cabin injuries (turbulence is regarded as the leading cause of injuries onboard aircraft in non-fatal accidents) Volaris has defined a series of safety high-con- sequence indicators and low-consequence indi- cators, which are an effective method for eval- uating if safety objectives and goals reflect the standards defined by the Company. Monitoring these indicators allows us to focus our attention on the performance of the Company’s safe- ty in terms of identifying and mitigating risks, in addition to ensuring regulatory compliance and the highest industry standards in terms of operational safety. Each indicator is monitored monthly, it is estab- lished based on the measured performance as an average of the last 36 months and a realistic and challenging goal is defined. Through this target, it is possible to measure any standard deviation indices in order to adopt relevant countermeasures depending on the appropriate alert level (there are 3 alert levels, depending on the deviation). Key management tools for risk mitigation Flight Data Analysis: Volaris has a Flight Data Analysis program (FDA), that allows us to com- pare actual flight parameters against standard operating procedures (SOPs). This critical safe- ty program is a key element of our SMS and is crucial for identifying where safety may have been breached or for improvement. It therefore provides very useful information to mitigate risk and prevent future case recurrences. Operational Safety Line Operation Audits (LOSA): this program involves a structured system that allows auditing nontechnical skills during routine flight deck responsibilities. When threats and human errors are detected, these are then recorded and used for implementing countermeasures to minimize risks in the future. Operational safety culture survey: Volaris has implemented operational safety culture sur- veys in line with the objectives, procedures and policies of the Operational Safety Man- agement System, through which it is possi- ble to measure the operational safety culture through of the Ambassadors’ perception in the following areas: - General perception of operational safety in the Company - Involvement of the areas with operational safety - Distribution of operational safety information - Ambassadors’ initiative on operational safety - Trainings and procedures - Reporting culture of deficiencies and hazards - Action against incidents and accidents The Safety Culture Survey consists of 25 questions with a 5-point scale of agreement and disagreement. Complete disagreement is coded with number 1, while the rest of the options remain correlative until the number 5, which marks absolute agreement with a phrase. Based on the above, a weighting of the results is carried out at a general level to obtain the conclusions at the Company level and later they are analyzed at the local level to identify areas for improvement and implement corrective actions. SMS Report and Audit Control: the Aviation Quality Database (AQD), currently named Rolls- Royce SMS solution, is a comprehensive and integrated tool that supports the need for op- erational safety reporting and quality assurance. It allows users to report any situation where safety margins have or could be breached, as well as serving as a platform to record internal and external quality / safety audits. Through this database, corrective and preventive ac- tions can be taken to further mitigate risk. We comply with all regulation and have adopt- ed several certifications that meet the highest operational safety standards, under Article 17 of the Civil Aviation Law, which states that airlines must implement the necessary measures to en- sure maximum safety of their operations, and therefore, their Customers and crews. These are: Mexican Official Standard NOM-064-SCT3-2012, which established the specifications that the Operational Safety Management System must meet (since2015). Policy Letter CP AV-01/20, which establishes the guidelines to be followed by concession- aires, permit holders and air and airport opera- tors, to reactivate their operations derived from the health contingency caused by COVID-19 (2020) Volaris Mexico IOSA Certification. In 2021 we will renew the IOSA Certification, which is IATA system that assesses operational management, control systems and the Operational Safety Management System of airline carriers. Volaris Costa Rica IOSA Certification. In 2021, we will renew this Certification to ratify that our op- erational safety standards are among the highest in the industry. SMS Certification. In 2020, Volaris renewed its Safety Management System certification, which guarantees the implementation of reac- tive, proactive and predictive methods of hazard identification to avoid aviation accidents. This certification requires the approval of the AFAC (Federal Civil Aviation Agency) in Mexico. WEFA. Wireless Extension for Aircraft Condition Monitoring System. In 2020, Volaris increased its 3G wireless flight data transmission technology to 53 aircraft. With this, we ensure a more effi- cient performance monitoring of pilots, which makes the predictive hazard identification sys- tem of the Safety Management System more effective and efficient. We are part of the Flight Safety Founda- tion, an association that seeks the partici- pation of several businesses in the industry in order to anticipate, analyze and identify operational safety problems to implement the best practices. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI 419: 103-1, 103-2, 103-3 Personal Data Privacy At Volaris, we strive to provide the best travel experience in every way, so it is essential to protect the Customers’ rights, including their right to privacy and protection of their personal data. Thus, we are able to maintain their trust and loyalty, increase our good reputation and avoid any sanction that could affect Volaris. Strengthen technological security controls to protect personal data from threats. Update our privacy notices. Improve our internal policies for the protection of personal data to strengthen action rules for those in charge of personal data. Content 95 We constantly review all updates of the applicable official provisions on the matter. Additionally, we carry out numerous analyzes of our tools and technological advances, in order to reinforce and modernize our internal processes and policies. This allows us to effectively respond to requests from Customers regarding their rights of access, rectification, cancellation and opposition, appli- cable by the regulation. Furthermore, annually we train all Ambassadors on information security, cybersecurity and person- al data protection issues, we publish cybersecurity and information protection communications, we impart specialized talks to the personal data protection department and we carry out internal simulations of phishing at least twice a year, to strengthen preventive controls to protect identities and detect cyber-attacks. We have security measures in place to safeguard our Customers’ information and to comply with existing national regulations. Currently, we adhere to the Federal Law on Protection of Personal Data Held by Private Parties (LFPDP) of Mexico, the General Data Protection Regulation (GDPR) of the European Union and the California Consumer Privacy Law (CCPA), that became effective in July 2011, May 2018, and January 2020, respectively. The LFPDP, the GDPR and the CCPA enforce security and privacy requirements for personal data abroad. Additionally, we have several corporate policies, such as: General Policy for the Protection of Personal Data Attention to Holders’ Rights Policy Policies of Blocking and Cancellation of Personal Data Personal Data Violation Policies Information Classification Policy During 2020, we carried out numerous actions to consolidate and strengthen the personal data protection processes. Some are: Identify, analyze and prioritize risks based on emerging threats in home office schemes, including an analysis of third parties that provide services to Volaris. Establish strategies to strengthen existing controls or implement additional controls that mitigate the identified risks of personal data. Strengthen internal processes regarding personal data to standardize activities that involve the processing of personal data to achieve an adequate level of protection with those in charge of personal data. Increase awareness and training campaigns on the protection of personal data and cybersecurity with Company’s Ambassadors and managers. During 2020, we had no cases related to losses, leaks or violations of the privacy of Customers’ personal data. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 96 CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated financial statements Years ended december 31, 2020, 2019 and 2018 with independent auditor’s report Contents: 97 Independent auditor’s report Audited consolidated financial statements: 99 100 101 102 103 104 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 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact 4Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Content 97 based on our audits. We are a public accounting firm registered with the PCAOB as a result it does not benefit the Company. The amounts accrued are considered and are required to be independent with respect to the Company in accordance variable payments under IFRS 16 and recognized in profit or loss based on the air- with the ethical requirements that are relevant to our audit of the consolidated craft utilization over the period starting upon the completion of the major mainte- financial statements in Mexico according to the “Codigo de Etica Profesional del nance event occurring prior to aircraft and engines lease return. Instituto Mexicano de Contadores Publicos” (“IMCP Code”), and the U.S. federal securities laws and the applicable rules and regulations of the Securities and The maintenance provision covers the cost to fulfill return condition that must be Exchange Commission and the PCAOB. satisfied at the expiration of the related leases primarily related to airframe, engine overhaul and limited life parts using certain assumptions including the projected We conducted our audits in accordance with the standards of the PCAOB. Those usage of the aircraft and the expected costs of maintenance tasks to be performed standards require that we plan and perform the audit to obtain reasonable assurance at the return of the lease. The maintenance return condition provision for aircraft about whether the financial statements are free of material misstatement, whether and engines also considers deposits paid to the lessor considered as supplemental due to error or fraud. Our audits included performing procedures to assess the risks rental. At December 31, 2020, the Company’s provision for return condition of of material misstatement of the financial statements, whether due to error or fraud, leased aircraft and engines amounted Ps.2,504,484. and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Auditing management’s lease return condition provision was complex as it is based financial statements. Our audits also included evaluating the accounting principles on management’s judgement in estimating the amount and timing of the costs and used and significant estimates made by management, as well as evaluating the the discount rate to be used, therefore we have determined this to be a critical To the Shareholders and the Board of Directors of overall presentation of the financial statements. We believe that our audits provide audit matter. Controladora Vuela Compañía de Aviación, S.A.B. de C.V. a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current We obtained an understanding and evaluated the design and operating effecti- veness of the Company’s internal controls over the return condition provision for How We Addressed the Matter in Our Audit Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial position period audit of the financial statements that were communicated or required to be leased aircraft and engines. We tested controls over management´s review of the communicated to the audit committee and that: (1) relate to accounts or disclo- return cost, the discount rate calculation, timing of recognition, the significant of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries (the sures that are material to the financial statements and (2) involved our especially assumptions and the data inputs used in the calculation. Company) as of December 31, 2020 and 2019, the related consolidated statements challenging, subjective or complex judgments. The communication of critical audit of operations, comprehensive income, changes in equity and cash flows for each matters does not alter in any way our opinion on the consolidated financial sta- To test the provision for return condition, our procedures included, among others, of the three years in the period ended December 31, 2020, and the related notes tements, taken as a whole, and we are not, by communicating the critical audit reviewing the accuracy and completeness of the lease agreements and under- (collectively referred to as the “consolidated financial statements”). In our opinion, matters below, providing separate opinions on the critical audit matters or on the lying data, assessing the methodology applied in the calculation of the provision the consolidated financial statements present fairly, in all material respects, the accounts or disclosures to which they relate. consolidated financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the Lease return condition provision three years in the period ended December 31, 2020, in conformity with International and testing the period in which the event or condition that triggers the payments occurs and critical assumptions, as the projected costs of maintenance for which we compared to historical trends and actual costs incurred in connection with aircraft returned to the lessor or maintenance costs paid at lease return as specified in the Financial Reporting Standards as issued by the International Accounting Standards Description of the Matter lease agreements. Board. As described in Note 1 p) to the consolidated financial statements, the Company’s lease agreements require that the underlying aircraft and engines be returned to Additionally, we involved our valuation specialists to assist in the evaluation of the We also have audited, in accordance with the standards of the Public Company lessors either in a specific condition or to make a payment in lieu of performance of discount rate used by the Company. Accounting Oversight Board (United States) (PCAOB), the Company's internal the maintenance and repair activities necessary to meet these conditions. control over financial reporting as of December 31, 2020, based on criteria esta- Impairment of long-lived assets blished in Internal Control-Integrated Framework issued by the Committee of The Company performed an assessment of the return condition provision for leased Sponsoring Organizations of the Treadway Commission (2013 framework) and our aircraft and engines, which required management to estimate the cost of those Description of the Matter report dated April 29, 2021 expressed an unqualified opinión thereon. maintenance obligations to be included in connection with aircraft and engines As discussed in Note 2iv to the consolidated financial statements, the Company Basis for Opinion These financial statements are the responsibility of the Company's management. lease return. assesses at each reporting date whether there is objective evidence that a long- lived asset or its cash-generating unit (CGU) may be impaired. If any such indication The Company accounts for the lease return condition provision in accordance with exists, or when annual impairment testing for an asset is required, the Company esti- Our responsibility is to express an opinión on the Company’s financial statements IFRS 16 because the maintenance event is performed at the end of the lease and mates the asset’s or CGU’s recoverable amount. The Company records impairment Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 98 charges when events and circumstances indicate that the assets may be impaired paid for which a maintenance event is not expected to be performed during the or when the carrying amount of a long-lived asset or related cash generating unit term of the aircraft lease, then such deposits are considered as not recoverable by exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell the Company since will be kept by the lessor to cover future maintenance costs. and (ii) its value in use. In 2020 the Company performed a quantitative impairment test and estimated the recoverable amount of the CGU by calculating the CGU value Maintenance deposits are recorded as recoverable to the extent qualifying mainte- in use. As a result of this analysis, the Company determined the recoverable amount nance costs are expected to be incurred during the lease term. Any excess is recog- was in excess of the CGU book value and, therefore, no impairment was recorded. nized as additional lease expense in the consolidated statements of operations as Auditing management’s long-lived asset impairment test was complex and highly supplemental rental. judgmental due to the significant estimation required to determine the value in Auditing management’s aircraft and engines maintenance deposits was complex as use. In particular, the value in use estimate was sensitive to significant assumptions, it is based on significant management’s judgements and assumptions; for example, such as changes in the discount rate and revenue growth rate, which are affected in estimating the recoverability of these deposits, the estimated time between the by expectations about the impact on future market and economic conditions on the maintenance events, the costs of future maintenance and the number of flight hours Company, therefore we have determined this to be a critical audit matter. the aircraft is estimated to be flown before it is returned to the lessor, among others, therefore we have determined this to be a critical audit matter. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating How We Addressed the Matter in Our Audit effectiveness of controls over the Company’s impairment review process, including We obtained an understanding, evaluated the design and tested the operating effec- controls over management’s review of the significant assumptions described above. tiveness of controls over the process of aircraft and engines maintenance deposits, including controls over management’s review of the significant assumptions des- To test the impairment analysis our audit procedures included, evaluating the cribed above and the data inputs used by management in the determination of the Company’s methodology, assumptions and completeness and accuracy of the recoverability of maintenance deposits for aircraft and engines. data used. We compared the discount rate and revenue growth rate significant assumptions used to current industry and economic trends. We also involved our To test the recoverability of the maintenance deposits, we performed audit proce- valuation specialists to assist in the evaluation of the Company’s methodology, sig- dures that included, among others, inspecting the lease agreements and testing nificant assumptions including the discount rate and performed sensitivity analysis the analysis of the estimates prepared by management to determine the recove- to evaluate the effect in the recoverable amount of the CGU that would result from rability of the maintenance deposits. We tested the recognition of the unrecove- changes in the underlying assumptions. Aircraft maintenance deposits paid to lessors Description of the Matter rable amounts as part of supplemental rental by assessing the estimation of the major maintenance costs expected to be incurred by comparing them to historical amounts and/or costs of aircraft and engines maintenance specified in agreements with vendors; we also evaluated the usage projections applied to determine the timing of the maintenance by comparing them with the Company’s scheduled flight Certain of the Company’s lease agreements require the payment of maintenance plans and the term of the lease agreement. deposits to lessors during the lease term for the underlying aircraft and engines leased. The Company has booked aircraft maintenance deposits to lessors of Ps.7,920,934 as of December 31, 2020. Related disclosure is included in Note 11 of the consolidated financial statements. Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft and engines lessors to be held as collateral in advance of the Company’s performance of the related major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company Mancera, S.C. A member practice of Ernst & Young Global Limited upon completion of the maintenance event in an amount equal to the lesser of (i) We have served as the Company’s auditor since 2005. the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs of the specific maintenance event. The Company considers as supplemental rental those maintenance deposits Mexico City, Mexico April 29, 2021 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated Statements of Financial Position (In thousands of Mexican pesos) Content 99 (Thousands of U.S. dollars*) 2020 At December 31, 2020 2019 (Thousands of U.S. dollars*) 2020 At December 31, 2020 2019 Assets Current assets: Cash and cash equivalents (Note 6) US$ 506,468 Ps. 10,103,385 Ps. 7,979,972 Liabilities and equity Current liabilities: Unearned transportation revenue (Note 1d) US$ 293,298 Ps. 5,850,917 Ps. 3,679,926 Accounts receivable: Related parties (Note 7) Other accounts receivable, net (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) Total current assets Non–current assets: Rotable spare parts, furniture and equipment, net (Note 12) Right–of–use assets (Note 14) 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 Total non–current assets 721,968 14,402,310 12,117,239 600,327 Non–current liabilities: 3,641 28,104 46,242 23,643 13,984 42,631 10 57,245 72,629 560,640 922,458 471,652 278,959 850,425 206 1,141,956 364,994 1,720,223 9,603 16 156,830 422,320 5,975 16,294 7,281,157 34,316,217 191,562 326 3,128,555 8,424,738 119,202 325,046 23,442 923,000 938,532 435,360 301,908 781,131 133,567 7,385,334 34,128,766 167,397 2,695 1,542,536 7,644,421 165,546 Suppliers Related parties (Note 7) Accrued liabilities (Note 15a) Lease liabilities (Note 14) 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 current liabilities Financial debt (Note 5) Accrued liabilities (Note 15b) Lease liabilities (Note 14) Other liabilities (Note 15c) Employee benefits (Note 16) Deferred income taxes (Note 19) Total non–current liabilities Total liabilities Equity (Note 18): Capital stock Treasury shares Contributions for future capital increases 2,696,255 53,786,803 51,177,888 Additional paid–in capital Retained (losses) earnings Accumulated other comprehensive (loss) income Total equity 141,193 Legal reserve 112,275 6,266 118,118 325,038 112,096 201 484 78,144 5,074 2,239,736 124,993 2,356,287 6,484,092 2,236,161 4,005 9,657 1,558,884 101,218 1,050,994 20,965,950 190,276 3,343 1,887,163 133,727 2,538 10,014 2,227,061 3,278,055 171,761 (11,216) – 14,596 236,618 (193,265) (78,326) 140,168 3,795,749 66,698 37,646,450 2,667,683 50,627 199,771 44,426,978 65,392,928 3,426,406 (223,744) 1 291,178 4,720,221 (3,855,379) (1,562,498) 2,796,185 1,597,099 58,554 2,531,861 4,720,505 2,102,455 140,609 – 2,086,017 407,190 17,324,216 2,889,952 90,796 35,796,540 1,469,595 38,206 156,139 40,441,228 57,765,444 2,973,559 (169,714) 1 291,178 1,880,007 438,412 116,240 5,529,683 Total assets US$ 3,418,223 Ps. 68,189,113 Ps. 63,295,127 Total liabilities and equity US$ 3,418,223 Ps. 68,189,113 Ps. 63,295,127 * Convenience translation to U.S. dollars (Ps.19.9487) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated Statements of Operations (In thousands of Mexican pesos, except for earnings per share expressed in Mexican pesos) Content 100 (Thousands of U.S. dollars*, except for earnings per share) 2020 For the years ended December 31, 2020 2019 2018 (Thousands of U.S. dollars*, except for earnings per share) 2020 For the years ended December 31, 2020 2019 2018 Operating revenues (Notes 1d and 24): Passenger revenues: Fare revenues Other passenger revenues Non– passenger revenues Other non–passenger revenues (Note 1d) Cargo US$ 645,314 Ps. 12,873,174 Ps. 23,129,991 Ps. 18,487,858 Aircraft and engine variable lease expenses 431,777 8,613,398 10,569,208 7,892,497 Other operating expenses (Note 20) 1,077,091 21,486,572 33,699,199 26,380,355 Depreciation and amortization (Notes 12 and 13) Maintenance expenses Sales, marketing and distribution expenses 58,536 92,278 92,500 58,011 45,038 1,167,720 1,840,819 1,845,254 1,157,240 898,445 Operating (loss) income (163,099) (3,253,596) 4,355,423 1,488,431 1,497,989 1,447,637 1,501,203 961,657 956,010 1,112,927 1,059,098 675,514 500,641 534,797 Non–derivatives financial instruments (20,614) (411,222) (72,949) 44,231 10,120 882,360 201,881 897,586 228,836 697,357 227,438 – Finance income (Note 21) Finance cost (Note 21) 5,089 101,511 207,799 152,603 (151,313) (3,018,484) (2,269,829) (1,876,312) Foreign exchange gain (loss), net 23,591 470,594 1,440,501 (103,790) Other operating income (Note 20) (36,611) (730,333) (327,208) (621,973) Income tax benefit (expense) (Note 19) 70,490 1,406,184 (1,094,831) 349,820 (Loss) income before income tax (285,732) (5,699,975) 3,733,894 (1,292,702) 1,110,828 22,159,591 34,752,672 27,305,150 6,640,820 11,626,069 10,134,982 Net (loss) income US$ (215,242) Ps. (4,293,791) Ps. 2,639,063 Ps. (942,882) Fuel expense, net Landing, take–off and navigation expenses Depreciation of right of use assets (Note 14) 332,895 205,069 253,098 4,090,864 5,108,489 4,573,319 5,048,976 4,702,971 4,043,691 (Loss) earnings per share basic: Salaries and benefits 173,113 3,453,382 3,600,762 3,125,393 (Loss) earnings per share diluted: * Convenience translation to U.S. dollars (Ps.19.9487) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. US$ US$ (0.211) Ps. (4.203) Ps. 2.608 Ps. (0.932) (0.211) Ps. (4.203) Ps. 2.608 Ps. (0.932) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 101 CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated Statements of Comprehensive Income (In thousands of Mexican pesos) 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 (loss) gain of employee benefits (Note 16) Income tax effect (Note 19) Other comprehensive (loss) income for the year, net of tax Total comprehensive (loss) income for the year, net of tax * Convenience translation to U.S. dollars (Ps.19.9487) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. (Thousands of U.S. dollars*) 2020 For the years ended December 31, 2020 2019 2018 US$ (215,242) Ps. (4,293,791) Ps. 2,639,063 Ps. (942,882) (87,609) (1,747,686) 2,348 1,202 (133) 40 46,835 23,970 (2,651) 794 US$ US$ (84,152) (299,394) Ps. Ps. (1,678,738) (5,972,529) Ps. Ps. 263,495 (74,820) 8,045 (10,192) 3,058 189,586 2,828,649 Ps. Ps. (283,691) 85,107 22,156 5,989 (1,797) (172,236) (1,115,118) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated Statements of Changes in Equity For the years ended December 31, 2020, 2019 and 2018 (In thousands of Mexican pesos) Balance as of December 31, 2017 Treasury shares Exercise of stock options (Note 17) Long–term incentive plan cost (Note 17) Net loss for the period IFRS 16 adoption Other comprehensive loss items Total comprehensive loss Balance as of December 31, 2018 Treasury shares Exercise of stock options (Note 17) Long–term incentive plan cost (Note 17) Net income for the period Other comprehensive income items Total comprehensive income Balance as of December 31, 2019 Capital stock increase (Note 18) Treasury shares Long–term incentive plan cost (Note 17) Net loss for the period Other comprehensive income loss items Total comprehensive loss Balance as of December 31, 2020 Convenience translation to U.S. dollars 19.9487) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. Content 102 Capital stock Treasury Shares Contributions for future capital increases Legal reserve Additional paid–in capital Retained (losses) earnings Other comprehensive (loss) income Total equity Ps. 2,973,559 Ps. (85,034) Ps. – – – – – – – 2,973,559 – – – – – – 2,973,559 452,847 – – – – – (57,320) 10,648 9,045 – – – – (122,661) (75,375) 14,773 13,549 – – – (169,714) – (94,564) 40,534 – – – Ps. 3,426,406 US$ 171,761 Ps. US$ (223,744) Ps. (11,216) US$ 1 – – – – – – – 1 – – – – – – 1 – – – – – – 1 – Ps. 291,178 Ps. 1,804,528 Ps. (1,257,769) Ps. 98,890 Ps. 3,825,353 – – – – – – – 291,178 – – – – – – 291,178 – – – – – – 41,590 – (9,045) – – – 1,837,073 56,483 – (13,549) – – – 1,880,007 2,819,985 60,763 (40,534) – – – – – – (682,500) (260,382) – (942,882) (2,200,651) – – – 2,639,063 – 2,639,063 438,412 – – – (4,293,791) – (4,293,791) – – – – – (172,236) (172,236) (73,346) – – – – 189,586 189,586 116,240 – – – – (1,678,738) (1,678,738) (15,730) 10,648 – (682,500) (260,382) (172,236) (1,115,118) 2,705,153 (18,892) 14,773 – 2,639,063 189,586 2,828,649 5,529,683 3,272,832 (33,801) – (4,293,791) (1,678,738) (5,972,529) Ps. US$ 291,178 Ps. 4,720,221 Ps. (3,855,379) Ps. (1,562,498) Ps. 2,796,185 14,596 US$ 236,618 US$ (193,265) US$ (78,326) US$ 140,168 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Consolidated Statements of Cash Flows (In thousands of Mexican pesos) Content 103 (Thousands of U.S. dollars*) 2020 For the years ended December 31, 2020 2019 2018 (Thousands of U.S. dollars*) 2020 For the years ended December 31, 2020 2019 2018 Operating activities (Loss) income before income tax US$ (285,732) Ps. (5,699,975) Ps. 3,733,894 Ps. (1,292,702) Other taxes and fees payable Unearned transportation revenue Financial instruments Other liabilities 298,136 5,947,421 5,378,485 4,544,332 Interest received Income tax paid 685 (5,089) 13,664 (101,511) 40,393 10,621 Net cash flows provided by operating activities (207,799) (152,603) 128,406 2,561,526 2,265,242 1,876,312 Investing activities Net gain on disposal of rotable spare parts, furniture and equipment and gain on sale of aircraft (Note 20) (35,487) (707,918) (275,805) (606,812) Employee benefits (Note 16) 555 11,079 10,086 6,401 Net cash flows used in investing activities Acquisitions of intangible assets (Note 13) Pre–delivery payments reimbursements Proceeds from disposals of rotable spare parts, furniture and equipment (28,753) 65,496 347 (573,591) (1,722,985) 171,874 1,306,557 6,930 67,629 3,306 (455,009) – Acquisitions of rotable spare parts, furniture and equipment (Note 12) (169,263) (3,376,576) (3,483,368) (2,743,155) in working capital 140,476 2,802,321 9,314,069 4,102,640 (533) 2,445 (10,633) 48,772 (10,634) 32,257 (12,693) 12,919 Financing activities Net proceeds from public offering (Note 18) 164,062 3,272,832 25,603 (31,422) Payments of principal portion of lease liabilities (Note 14) Proceeds from exercised stock options (Note 17) Treasury shares purchase Interest paid Other finance interest paid Payments of financial debt Proceeds from financial debt 864 39,754 (1,103) 1,150 3,670 2,843 17,252 793,045 (22,010) 22,949 73,220 56,717 (367,603) (425,410) (4,637) (369,860) (10,789) (70,036) (1,397,131) (1,168,537) 44,726 (28,131) 892,232 (561,229) 518,189 352,475 1,711 19,168 (2,421) (6,001) (11,228) 232,019 14,022 540,471 Net cash flows used in financing activities (152,432) (3,040,840) (5,238,840) (5,946,059) Increase (decrease) in cash and cash equivalents Net foreign exchange differences on cash balance Cash and cash equivalents at beginning of year 62,706 43,737 400,025 1,250,848 872,565 7,979,972 2,391,462 (1,058,747) (274,432) (29,190) 5,862,942 6,950,879 Cash and cash equivalents at end of year US$ 506,468 Ps. 10,103,385 Ps. 7,979,972 Ps. 5,862,942 * Convenience translation to U.S. dollars (19.9487) – Note 1y. The accompanying notes are an integral part of these consolidated financial statements. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Non–cash adjustment to reconcile (loss) income before income tax to net cash flows from operating activities: Depreciation and amortization (including right–of–use–assets) (Notes 12, 13 and 14) Allowance for credit losses (Note 8) Finance income (Note 21) Finance cost (Note 21) Net foreign exchange differences Financial instruments (Notes 3 and 4) Amortized Cost (CEBUR) Aircraft and engine lease extension benefit and other benefits from service agreements Management incentive and long–term incentive plans Cash flows from operating activities before changes 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 8,260 108,829 (63,759) 38,661 226,204 5,089 (12,759) 218,534 164,777 2,170,991 (1,271,904) 771,229 4,512,459 101,511 (254,525) 119,700 1,241,410 (18,943) 191,099 9,396,766 207,799 (94,922) 558,174 145,207 807,644 (38,875) 6,331,109 152,602 (207,004) 4,359,445 9,509,643 6,276,707 (6,252) 85,737 86,382 (3,396) (124,724) 1,710,338 (77,325) 704,852 (71,007) 668,365 1,723,205 976,500 756,402 (67,757) (1,879,341) (1,389,395) – (4,740) (14,007) (612) (306,314) (107,285) 116,464 – (94,564) (279,423) (12,214) – 14,773 (75,375) (217,018) (60,824) – 10,648 (57,320) (175,170) (28,567) (6,110,569) (6,499,802) (5,710,907) (2,140,194) 2,323,292 (1,181,726) (1,193,589) 2,781,132 1,208,846 Consolidated Financial Statements CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES (d.b.a. VOLARIS) Notes to Consolidated Financial Statements For the years ended December 31, 2020, 2019 and 2018 (In thousands of Mexican pesos and thousands of U.S. dollars, except when indicated otherwise) Content 104 1. Description of the business and summary of significant accounting policies and mail, in scheduled and non-scheduled flights for an initial period of five years. On December 1, 2016, Volaris Costa Rica started operations. Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Controladora” or the “Company”) was incorporated in Mexico in accordance with Mexican Corporate laws on October 27, 2005. The accompanying consolidated financial statements and notes were approved by the Company´s Board of Directors and by the Shareholders on April 26, 2021. These consolidated financial statements were also approved for issuance in the Company´s Controladora is domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, annual report on Form 20-F by the Company´s President and Chief Executive Officer, Enrique Beltranena, and the Senior Mexico City. Vice-president and Chief Financial Officer, Jaime E. Pous, on April 29, 2021 and subsequent events were considered through 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. that date (Note 25). a) Relevant events Upsized Offering of ADSs Concesionaria’s concession was granted by the Mexican federal government through the Mexican Communications and On December 11, 2020, Controladora Vuela Compañía de Aviación, S.A.B. de C.V announced the closing of an upsized primary Transportation Ministry (Secretaría de Comunicaciones y Transportes) on May 9, 2005 initially for a period of five years and follow-on equity offering in which the Company offered 134,000,000 of its Ordinary Participation Certificates (Certificados de was extended on February 17, 2010 for an additional period of ten years. On February 24, 2020, Concesionaria’s concession Participación Ordinarios), or CPOs, in the form of American Depositary Shares, or ADSs, at a price to the public of USD11.25 was extended for a 20-year term starting on May 9, 2020. per ADS in the United States and other countries outside of Mexico, pursuant to the Company’s shelf registration statement filed with the Securities and Exchange Commission (the “SEC”). In connection with the offering, the underwriters exercised Concesionaria made its first commercial flight as a low-cost airline on March 13, 2006. The Company operates under the trade their option to purchase up to 20,100,000 additional CPOs in the form of ADSs. Each ADS represents 10 CPOs and each CPO name of “Volaris”. On June 11, 2013, Controladora Vuela Compañía de Aviación, S.A.P.I. de C.V. changed its corporate name to represents a financial interest in one Series A share of common stock of the Company (Note 18). Controladora Vuela Compañía de Aviación, S.A.B. de C.V. Covid-19 commentary On September 23, 2013, the Company completed its dual listing Initial Public Offering (“IPO”) on the New York Stock The ongoing outbreak of COVID-19 was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the Exchange (“NYSE”) and on the Mexican Stock Exchange (Bolsa Mexicana de Valores, or “BMV”), and on September 18, 2013 disease spread rapidly to other parts of China as well as other countries, including Mexico and the United States. its shares started trading under the ticker symbol “VLRS” and “VOLAR”, respectively. On November 16, 2015, certain shareholders of the Company completed a secondary follow-on equity offering on the NYSE. took various measures in order to prepare the country for a mass contagion, including declaring a national health emergency, asking the public to stay home, closing schools and imposing restrictions on non-essential activities in the public, private and On November 10, 2016, the Company, through its subsidiary Vuela Aviación, S.A. (“Volaris Costa Rica”), obtained from the social sectors. As a result of the national health emergency and health security measures imposed by the Mexican government Costa Rican civil aviation authorities an air operator certificate to provide air transportation services for passengers, cargo in the spring of 2020, the Company´s capacity as measured by available seat miles (“ASMs”) was reduced. In April and May of The first case of COVID-19 in Mexico was confirmed on February 28, 2020. In the following weeks, the Mexican government Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 105 2020, the Company´s capacity as measured by ASMs was reduced by up to 80% and 90%, respectively, and remained reduced will further decrease demand for air travel, which could continue to materially and negatively affect our business, results of from June to November of 2020. Additionally, the Company suspended service on certain routes. Costa Rica, Guatemala and operations and financial condition. El Salvador imposed operational and migratory restrictions that made it impossible to operate international passenger flights to those countries. A gradual opening of the economy and easing of lockdown measures in Mexico and the other countries in Issuance asset backed trust notes which the Company operates led to a recovery in the ASMs and route operation during the second half of the year, with the On June 20, 2019, the Company, through its subsidiary Concesionaria, issued 15,000,000 asset backed trust notes (certificados Company´s capacity returning to over 100% of 2019 levels for the month of December. bursátiles fiduciarios; the “ Trust Notes ”), under the ticker symbol VOLARCB 19 for the amount of Ps.1.5 billion Mexican pesos The Company has taken actions to preserve liquidity and sustain its operations during the period, establishing vendor and Concesionaria in the first issuance under a program approved by the Mexican National Banking and Securities Commission supplier’s payment deferral, reducing management’s compensations and other salaries and deferring capital expenditures and (Comisión Nacional Bancaria y de Valores) for an amount of up to Ps.3.0 billion Mexican pesos. The Trust Notes are backed by by CIBanco, S.A., Institución de Banca Multiple, acting as Trustee under the Irrevocable Trust number CIB/3249 created by certain other measures. Liquidity and cash future receivables under agreements entered into with credit card processors with respect to funds received from the sale of airplane tickets and ancillaries denominated in Mexican pesos, through credit cards VISA and Mastercard, via the Company’s website, mobile app and travel agencies. The Trust Notes were listed on the Mexican Stock Exchange, have a maturity of five The Company implemented a strict liquidity preservation program, which resulted in approximately U.S. $200 million of years and will pay an interest rate of TIIE 28 plus 175 basis points (Note 5b). savings as of December 31, 2020 through items such as cost reductions and deferral agreements with suppliers. In addition, the Company negotiated cost reductions with more than 360 suppliers and cut non-essential expenses. The Company also Shares conversion implemented online training and leave of absence programs in order to reduce costs. As of December 31, 2020, our cash and On February 16, 2018, one of the Company´s shareholders concluded the conversion of 45,968,598 Series B Shares for the cash equivalents were Ps.10,103,385. equivalent number of Series A Shares. This conversion has no impact either on the total number of outstanding shares nor on Fleet plan The new contractual fleet plan with Airbus allows to the Company to maintain a “cautiously” sized fleet, that will remain at b) Basis of preparation approximately 85 aircraft, net of new deliveries and redeliveries, until 2023. Statement of compliance the earnings-per-share calculation. Customers and employees These consolidated financial statements comprise the financial statements of the Company and its subsidiaries at December 31, 2020 and 2019 and for each of the three years ended December 31, 2020, and were prepared in accordance with International Additionally, the Company launched a new biosecurity and cleaning protocol and are communicating proactively with all staff, Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). especially with crews and airport staff, regarding health and COVID-19 developments. Commercial and network growth opportunities. Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The presentation currency of the Company’s The Company is closely monitoring capacity reductions from competitors for possible opportunities, testing new ancillary consolidated financial statements is the Mexican peso, which is used also for compliance with its legal and tax obligations. All products and running targeted promotions to test potential stimulation of air travel. values in the consolidated financial statements are rounded to the nearest thousand (Ps.000), except when otherwise indicated. The Company remained focused on price sensitive visiting friends and relatives, leisure and small and medium sized enterprises The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements segments, which continued to show the strongest demand for air travel in Mexico as the market recovers from COVID-19. As and provide comparative information in respect of the previous period. of December 31, 2020, Volaris was positioned as the domestic market leader in 2020. Basis of measurement and presentation In addition, the Company considered the impact of Covid-19 in preparing their financial statements. 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 Since the Company business and the airline industry have experienced material adverse impacts due to the COVID-19 pandemic, through profit and loss (“FVTPL”). the Company cannot offer any assurance that these impacts will not intensify to the extent that COVID-19 persists throughout Mexico. Further, additional government COVID-19 response measures remain unknown and depend on future developments The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and with respect to COVID-19, including the scope and duration of the pandemic, which are highly fluid, uncertain and cannot be assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results predicted. It is not yet possible to determine when the adverse effects of COVID-19 will abate and the extent to which they could differ from those estimates. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 106 c) Basis of consolidation The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting period as the parent Company, using consistent At December 31, 2020 and 2019, for accounting purposes the companies included in the consolidated financial statements are accounting policies. as follows: Name Principal Activities Country % Equity interest 2020 2019 Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if, and only if, the Company has: Concesionaria Vuela Aviación, S.A. Vuela, S.A. (“Vuela”)* Vuela El Salvador, S.A. de C.V.* Air transportation services for passengers, cargo and mail throughout Mexico and abroad Air transportation services for passengers, cargo and mail in Costa Rica and abroad Air transportation services for passengers, cargo and mail in Guatemala and abroad Air transportation services for passengers, cargo and mail in El Salvador and abroad Mexico 100% 100% (i) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee). Costa Rica 100% 100% (iii) The ability to use its power over the investee to affect its returns. (ii) Exposure, or rights, to variable returns from its involvement with the investee. Guatemala 100% 100% When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: El Salvador 100% 100% Comercializadora Volaris, S.A. de C.V. Merchandising of services Mexico 100% 100% Servicios Earhart, S.A.* Recruitment and payroll Guatemala 100% 100% (i) The contractual arrangement with the other vote holders of the investee. (ii) Rights arising from other contractual arrangements. (iii) The Company’s voting rights and potential voting rights. 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”) ** Recruitment and payroll Mexico 100% 100% The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to Recruitment and payroll Mexico 100% 100% 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 the Company gains Loyalty Program Mexico 100% 100% control until the date the Company ceases to control the subsidiary. one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the Viajes Vuela, S.A. de C.V. (“Viajes Vuela”) Travel agency Mexico 100% 100% All intercompany balances, transactions, unrealized gains and losses resulting from intercompany transactions are eliminated Deutsche Bank México, S.A., Trust 1710 Pre-delivery payments financing (Note 5) Mexico 100% 100% in full on consolidation. Deutsche Bank México, S.A., Trust 1711 Pre-delivery payments financing (Note 5) Mexico 100% 100% Irrevocable Administrative Trust number F/307750 “Administrative Trust” Irrevocable Administrative Trust number F/745291 “Administrative Trust” Irrevocable Administrative Trust number CIB/3081 “Administrative Trust” Share administration trust (Note 17) Mexico 100% 100% Share administration trust (Note 17) Mexico 100% 100% Share administration trust (Note 17) Mexico 100% 100% recognized in profit or loss. d) Revenue recognition Passenger revenues On consolidation, the assets and liabilities of foreign operations are translated into Mexican pesos at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is Irrevocable Administrative Trust number CIB/3249 “Administrative Trust” Asset backed securities trustor & administrator (Note 5) Mexico 100% 100% non-refundable ticket expires at the date of the scheduled travel. Revenues from the air transportation of passengers are recognized at the earlier of when the service is provided or when the *The Companies have not started operations yet in Guatemala and El Salvador. **The Company has not started operations yet Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 107 Ticket sales for future flights are initially recognized as contract liabilities under the caption “unearned transportation revenue” Code-share agreement and, once the transportation service is provided by the Company or when the non-refundable ticket expires at the date of the On January 16, 2018, the Company and Frontier Airlines (herein after Frontier) entered into a code-share operations agreement, scheduled travel, the earned revenue is recognized as passenger ticket revenues and the unearned transportation revenue is which started operations in September 2018. reduced by the same amount. All the Company’s 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. Through this alliance, the Company´s customers gain access to additional cities in the U.S. beyond the current available destinations The most significant passenger revenue includes revenues generated from: (i) fare revenue and (ii) other passenger revenues. gain first-time access to new destinations in Mexico through Volaris presence in Mexican airports. Tickets from Frontier can be as the Company’s customers are able to buy a ticket throughout any of Frontier’s actual destinations; and Frontier customers Other passenger services include but are not limited to fees charged for excess baggage, bookings through the call center purchased directly from the Volaris’ website. or third-party agencies, advanced seat selection, itinerary changes 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 Other considerations analyzed as part of revenue from contracts with customers date of the scheduled travel. All revenues offered by the Company including sales of tickets for future flights, other passenger related services and non-pass- enger revenue must be paid through a full cash settlement. The payment of the transaction price is equal to the cash settlement The Company also classifies as other passenger revenue “V Club” and other similar services, which are recognized as revenue from the client at the sales time (using different payment options like credit or debit cards, paying through a third party or over time when the service is provided, as a modification of the tickets sold to V Club members. directly at the counter in cash). There is little or no judgment to determine the point in time of the revenue recognition, and the amount of it. Even if mainly all the sales of services are initially recognized as contract liabilities, there is no financing Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue when the component in these transactions. service is provided. The Company sells certain tickets with connecting flights with one or more segments operated by its other airline partner. by the financial institutions for processing electronic transactions (Note 10). The Company does not incur any additional costs The cost to obtain a contract is represented by the commissions paid to the travel agencies and the bank commissions charged For segments operated by its other airline partners, the Company has determined that it is acting as an agent on behalf of to obtain and fulfill a contract that is eligible for capitalization. the other airlines as they are responsible for their portion of the contract (i.e. transportation of the passenger). The Company, as the agent, recognizes revenue within Other operating revenue at the time of the travel for the net amount retained by the Trade receivables are mainly with financial institutions due to transactions with credit and debit cards, and therefore they are Company for any segments flown by other airlines. 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 Non-passenger revenues purchase that could modify the amount of the transaction price. The most significant non-passenger revenues include revenues generated from: (i) revenues from other non-passenger services described below and (ii) cargo services. The Company´s tickets are non-refundable. However, if the Company cancels a flight for causes attributable to the airline, including as a result of the COVID-19 pandemic, then the passenger is entitled to either move their flight at no cost, receive Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for a refund or a voucher. No revenue is recognized until either the voucher is redeemed, and the associate flight occurs, or the the sale of hotel reservations, trip insurance, rental cars and advertising spaces to third parties. They are recognized as revenue voucher expires. When vouchers issued exceed the amount of the original amount paid by the passenger the excess is recorded at the time the service is provided. as reduction of the operating revenues. All of the Company´s revenues related to future services are rendered through an The Company also evaluated the principal versus agent considerations as it relates to certain non-air travel services arrangements approximate period of 12 months. with third party providers. No changes were identified under this analysis as the Company is agent for those services provided As of December 31, 2020, the Company recorded an amount of Ps.1,720,939 related to vouchers to be redeemed by passengers, by third parties. which were presented as part of the unearned transportation revenues. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 108 2020 2019 Ps. 3,679,926 Ps. 2,438,516 23,657,563 34,940,609 (21,486,572) (33,699,199) Ps. 5,850,917 Ps. 3,679,926 Breakdown of revenues: Transactions from unearned transportation revenues. As of December 31, 2020, 2019 and 2018, the revenues from customers of contracts is described as follows: Revenue recognition as of December 31, 2020 Domestic International Domestic International At the flight time At the sale Total Revenues January 1, Deferred Recognized in revenue during the year December 31, Revenue recognition as of December 31, 2019 Domestic International Domestic International At the flight time At the sale Passenger Revenues Fare Revenues Other Passenger Revenues Non-Passenger Revenues Other Non-Passenger revenues Cargo Total Non-derivative financial instruments Passenger Revenues Fare Revenues Other Passenger Revenues Non-Passenger Revenues Other Non-Passenger revenues Cargo Total Non-derivative financial instruments Passenger Revenues Fare Revenues Other Passenger Revenues Non-Passenger Revenues Other Non-Passenger revenues Cargo Total Ps. 8,455,647 Ps. 4,417,527 Ps. – Ps. – Ps. 12,873,174 6,920,141 15,375,788 1,536,206 5,953,733 124,450 124,450 32,601 32,601 8,613,398 21,486,572 The performance obligations related to contract liability are recognized over the following 12 months and are related to the scheduled flights and other passenger services purchased by the client in advance. 875,610 196,349 6,750 5,532 – – – – 882,360 201,881 e) Cash and cash equivalents Ps. 16,447,747 Ps. 5,966,015 Ps. 124,450 Ps. 32,601 Ps. 22,570,813 (411,222) Ps. 22,159,591 Total Revenues Cash and cash equivalents are represented by bank deposits and highly liquid investments with maturities of 90 days or less at the original purchase date. For the purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash and short-term investments as defined above. The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. These credit card processing agreements doesn’t have significant cash reserve requirements. Ps. 15,833,878 Ps. 7,296,113 Ps. – Ps. – Ps. 23,129,991 A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument f) Financial instruments -initial recognition and subsequent measurement 7,531,725 23,365,603 2,865,555 10,161,668 119,466 119,466 52,462 52,462 10,569,208 33,699,199 for another entity. 888,353 221,375 9,233 7,461 – – – – 897,586 228,836 Ps. 24,475,331 Ps. 10,178,362 Ps. 119,466 Ps. 52,462 Ps. 34,825,621 i) Financial assets Initial recognition (72,949) Ps. 34,752,672 Total Revenues Classification of financial assets and initial recognition The Company determines the classification and measurement of financial assets, in accordance with the categories 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 investments), or at amortized cost, for accounts receivables held to collect the contractual cash flows, which are characterized by solely Ps. 12,336,095 Ps. 6,151,763 Ps. – Ps. – Ps. 18,487,858 payments of principal and interest (“SPPI”). Derivative financial instruments are also considered financial assets when these 5,182,572 17,518,667 2,598,375 8,750,138 68,264 68,264 43,286 43,286 7,892,497 26,380,355 685,219 221,324 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 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. Subsequent measurement The subsequent measurement of financial assets depends on their initial classification, as is described below: Revenue recognition as of December 31, 2018 Domestic International Domestic International At the flight time At the sale Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 109 1. Financial assets at FVTPL which include financial assets held for trading. iii) Financial liabilities 2. Financial assets at amortized cost, whose characteristics meet the SPPI criterion and were originated to be held to collect principal and interest in accordance with the Company’s business model. 3. Financial assets at fair value through OCI with recycling of cumulative gains and losses. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: a) The rights to receive cash flows from the asset have expired; Initial recognition and measurement 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. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. Subsequent measurement b) The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Company The measurement of financial liabilities depends on their classification as described below: has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained Financial liabilities at amortized cost substantially all the risks and rewards of the asset, but has transferred control of the asset; or Accounts payable, are subsequently measured at amortized cost and do not bear interest or result in gains and losses due to When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, their short-term nature. it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained Loans and borrowings are the category most relevant to the Company. After initial recognition at fair value (consideration substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of received), interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains the Company’s continuing involvement in the asset. and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. ii) Impairment of financial assets The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. 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 cash flows of the financial asset or the group of financial assets that can be reliably estimated. Amortized cost is calculated by taking into account any discount or premium on issuance and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statements of operations. This amortized cost category generally applies to interest-bearing loans and borrowings (Note 5). Financial liabilities at FVTPL Financial liabilities at FVTPL include financial liabilities under the fair value option, which are classified as held for trading, if they are acquired for the purpose of selling them in the near future. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. During the years ended December 31, 2020 and 2019 the Company has not designated any financial liability as at FVTPL. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial Derecognition difficulty, default or delinquency in receivable, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated cash flows, such as changes in arrears or economic conditions that correlate with defaults. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original Further disclosures related to impairment of financial assets are also provided in Note 8. liability and the recognition of a new liability. For trade receivables, the Company applies a simplified approach in calculating expected credit losses (ECLs). Therefore, The difference in the respective carrying amounts is recognized in the consolidated statements of operations. the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. Offsetting of financial instruments Financial assets and financial liabilities are offset, and the net amount is reported in the consolidated statement of financial Based on this evaluation, allowances are taken into account for the expected losses of these receivables. For the years ended December 31, 2020 y 2019 the Company recorded expected credit losses on accounts receivable of Ps.13,664 and Ps.40,393, respectively (Note 8). position if there is: (i) A currently enforceable legal right to offset the recognized amounts, and (ii) An intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 110 g) Other accounts receivable the foreign currency changes at each reported period. The Company makes certain assumptions at the inception of the lease Other accounts receivables are due primarily from major credit card processors associated with the sales of tickets and are and at each consolidated statement of financial position date to determine the recoverability of maintenance deposits. These stated at cost less allowances made for credit losses, which approximates fair value given their short-term nature. assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft and engines is estimated to be utilized before it h) Inventories is returned to the lessor. Inventories consist primarily of flight equipment expendable parts, materials and supplies, and are initially recorded at acquisition cost. Inventories are carried at the lower of cost and their net realization value. The cost is determined on the basis of the Some other aircraft lease agreements do not require the obligation to pay maintenance deposits to lessors in advance in order method of specific identification and expensed when used in operations. to ensure major maintenance activities, so the Company does not record guarantee deposits regarding these aircraft. However, i) Intangible assets certain of these lease agreements include the obligation to make a maintenance adjustment payment to the lessors at the end of the lease period. These maintenance adjustments cover maintenance events that are not expected to be made before the Cost related to the purchase or development of computer software that is separable from an item of related hardware is termination of the lease; for such agreements the Company accrues a liability related to the amount of the costs to be incurred capitalized separately measured at cost and amortized over the period in which it will generate benefits not exceeding five at the lease term, since no maintenance deposits had been made, Note 15c). The portion of prepaid maintenance deposits that years on a straight-line basis. The Company annually reviews the estimated useful lives and salvage values of intangible assets is deemed unlikely to be recovered and accruals in lien of maintenance deposits, are recorded as a variable lease payment and and any changes are accounted for prospectively. is presented as supplemental rent in the consolidated statements of operations. For the years ended December 31, 2020, 2019 The Company records impairment charges on intangible assets used in operations when events and circumstances indicate that the assets or related cash generating unit may be impaired and the carrying amount of a long-lived asset or cash generating During the year ended December 31, 2020, 2019 and 2018, the Company added seven, seven and ten new net leases aircraft unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) its value in use. to its fleet, respectively (Note 14). and 2018, the Company expensed as supplemental rent Ps.421,030, Ps.295,720 and Ps.299,601, respectively. 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, 2020, the Company did not extend the lease term of aircraft and engines agreements. future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections During the years ended December 31, 2019 and 2018, the Company extended the lease term of one and two aircraft agreements, and the discount rate used in the calculation. For the years ended December 31, 2020 and 2019, the Company did not record respectively. Additionally, the Company extended the lease term of one spare engine in 2019 and two spare engines in 2018. The any impairment loss in the value of its intangible assets. maintenance event for which the maintenance deposits were previously expensed was scheduled to occur after the original lease j) Guarantee deposits Guarantee deposits consist primarily of aircraft maintenance deposits paid to lessors, deposits for rent of flight equipment and 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 longer lease term and as such they are being recognized as an asset. other guarantee deposits. Aircraft and engine deposits are held by lessors in U.S. dollars and are presented as current assets The effect of these lease extensions was recognized as a lease incentive reducing the right of use asset (Note 14). and non-current assets, based on the recovery dates of each deposit established in the related agreements (Note 11). k) Aircraft and engine maintenance Aircraft maintenance deposits paid to lessors The Company is required to conduct various levels of aircraft maintenance. Maintenance requirements depend on the type of Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as aircraft, age and the route network over which it operates. collateral in advance of the Company’s performance of major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) annual airframe checks and periodic major maintenance and engine checks. the qualifying costs related to the specific maintenance event. Substantially all these maintenance deposits are calculated based on a utilization measure of the leased aircrafts and engines, maintenance, (ii) major maintenance and (iii) component service. 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. (i) Routine maintenance requirements consist of scheduled maintenance checks on the Company’s aircraft, including pre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled tasks performed as required. These Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying conso- type of maintenance events are currently serviced by Company mechanics and are primarily completed at the main airports lidated statement of financial position. These deposits are recorded as a monetary asset and are revaluated in order to record that the Company currently serves. Aircraft maintenance and repair consists of routine and non-routine works, divided into three general categories: (i) routine Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements All other maintenance activities are sub-contracted to qualified maintenance business partner, repair and overhaul organizations. Pre-delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and typically are required the aircraft. The borrowing costs related to the acquisition or construction of a qualifying asset are capitalized as part of the approximately every 22 months. All routine maintenance costs are expensed as incurred. cost of that asset. (ii) Major maintenance consists of a series of more complex tasks that can take up to six weeks to accomplish and typically are During the years ended December 31, 2020, 2019 and 2018, the Company capitalized borrowing costs which amounted to required approximately every five to six years. Ps.384,038, Ps.456,313 and Ps.357,920, respectively (Note 21). The rate used to determine the amount of borrowing cost was 3.58%, 5.10% and 4.41%, for the years ended December 31, 2020, 2019 and 2018, respectively. Content 111 Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized (leasehold improvements to flight equipment) and amortized over the shorter of the period to the next Depreciation rates are as follows: major maintenance event or the remaining contractual lease term. The next major maintenance event is estimated based on assumptions including estimated usage. The United States Federal Aviation Administration (“FAA”) and the Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil) mandate maintenance intervals and average removal times as suggested by the manufacturer. These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and sug- gested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a heavy maintenance event prior to a scheduled Flight equipment Constructions and improvements Computer equipment Workshop tools Electric power equipment Communications equipment Workshop machinery and equipment maintenance event. To the extent the planned usage increases, the estimated life would decrease before the next maintenance Motorized transport equipment platform event, resulting in additional expense over a shorter period. During the years ended December 31, 2020 and 2019, the Company capitalized major maintenance events as part of leasehold improvements to flight equipment for an amount of Ps.646,219 and Ps.659,082, respectively. For the years ended December 31, 2020 and 2019, the amortization of major maintenance leasehold improvement costs was Ps.652,091 and Ps.450,371, respectively. The amortization of deferred maintenance costs is recorded as part of depreciation and amortization in the consolidated statements of operations. Service carts on board Office furniture and equipment Leasehold improvements to flight equipment Annual depreciation rate 4.0-16.7% Remaining contractual lease term 25% 33.3% 10% 10% 10% 25% 20% 10% The shorter of: (i) remaining contractual lease term, or (ii) the next major maintenance event The Company reviews annually the useful lives of these assets and any changes are accounted for prospectively. The Company identified one Cash Generating Unit (CGU), which includes the entire aircraft fleet and flight equipment. The Company assesses, at each reporting date, whether there is an objective evidence that rotable spare parts, furniture and (iii) The Company has a power-by-the hour agreement for component services, which guarantees the availability of aircraft equipment and right of use asset are impaired in the CGU. The Company records impairment charges on rotable spare parts, parts for the Company’s fleet when they are required. It also provides aircraft parts that are included in the redelivery conditions furniture and equipment and right of use assets used in operations when events and circumstances indicate that the assets of the contract (hard time) without constituting an additional cost at the time of redelivery. The monthly maintenance cost may be impaired or when the carrying amount of a long-lived asset or related cash generating unit exceeds its recoverable associated with this agreement is recognized as incurred in the consolidated statements of operations. amount, which is the higher of (i) its fair value less cost to sell and (ii) its value in use. The Company has an engine flight hour agreement (component repair agreement), that guarantees a cost per overhaul, The value in use calculation is based on a discounted cash flow model, using projections of operating results for the near future. provides miscellaneous engines coverage, caps the cost of foreign objects damage events, ensures there is protection from The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscellaneous engines’ discount rate used in the calculation. coverage is recorded monthly as incurred in the consolidated statements of operations. l) Rotable spare parts, furniture and equipment, net Rotable spare parts, furniture and equipment, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method. During 2020, the Company performed its annual impairment test. The recoverable amount of the CGU 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 carrying amount of the CGU did not exceed the value in use. Consequently, for the years ended December 31, 2020, 2019 and 2018, there were no impairment charges recorded in respect of the Company’s cash generating unit. 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 12e). For the years ended December 31, 2020, there was no impairment charges recorded in respect of the Company’s cash generating unit despite of the consequence of decreased operations as a result of Covid-19. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 112 m) Foreign currency transactions and exchange differences discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is The Company’s consolidated financial statements are presented in Mexican peso, which is the reporting and functional currency used, the increase in the provision due to the passage of time is recognized as a finance cost. of the parent Company. For each subsidiary, the Company determines the functional currency and items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates o) Employee benefits (“the functional currency”). i) Personnel vacations The Company and its subsidiaries in Mexico and Central America recognize a reserve for the costs of paid absences, such as The financial statements of foreign subsidiaries prepared under IFRS and denominated in their respective local currencies, are vacation time, based on the accrual method. translated into the functional currency as follows: ii) Termination benefits Transactions in foreign currencies are translated into the respective functional currencies at the exchange rates at the dates The Company recognizes a liability and expense for termination benefits at the earlier of the following dates: of the transactions. All monetary assets and liabilities were translated at the exchange rate at the consolidated statement of financial position a) When it can no longer withdraw the offer of those benefits; and date. b) When it recognizes costs for a restructuring that is within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent All non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange Assets, and involves the payment of termination benefits. 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 is demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination profits were generated. Revenues, costs and expenses are translated at the average exchange rate during the applicable period. and is without realistic possibility of withdrawal. Any differences resulting from the currency translation are recognized in the consolidated statements of operations and the OCI. For the year ended December 31, 2020, 2019 and 2018, the exchange rates of local currencies translated to functional currencies are as follows: For the years ended December 31, 2020 and 2019, no termination benefits provision has been recognized. iii) Seniority premiums In accordance with Mexican Labor Law, the Company provides seniority premium benefits to the employees which rendered services to its Mexican subsidiaries under certain circumstances. These benefits consist of a one-time payment equivalent to 12 days’ wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), Country Local currency Functional currency Average exchange rate for 2020 Exchange rate as of 2020 Average exchange rate for 2019 Exchange rate as of 2019 Average exchange rate for 2018 Exchange rate as of 2018 vesting of their seniority premium benefit. Exchange rates of local currencies translated to functional currencies payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the Costa Rica Colon U.S. dollar ¢. 588.4240 ¢. 615.7800 ¢. 590.9574 ¢. 573.4400 ¢. 580.8534 ¢. 609.6100 Obligations relating to seniority premiums other than those arising from restructurings, are recognized based upon actuarial Guatemala Quetzal U.S. dollar Q. 7.7292 Q. 7.8095 Q. 7.7066 Q. 7.6988 Q. 7.5337 Q. 7.7440 calculations and are determined using the projected unit credit method. El Salvador U.S Dollar U.S. dollar $. 21.4961 $. 19.9487 $. 19.2618 $. 18.8452 $. – $. – The latest actuarial computation was prepared as of December 31, 2020. Remeasurement gains and losses are recognized in full in the period in which they occur in OCI. Such remeasurement gains and losses are not reclassified to profit or loss in The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2020, 2019 and 2018, were Ps.19.9487, subsequent periods. Ps.18.8452 and Ps.19.6829, respectively, per U.S. dollar. Foreign currency differences arising on translation into the presentation currency are recognized in OCI. Exchange differences on government bonds, less the fair value of plan assets out of which the obligations are to be settled. on translation of foreign entities for the year ended December 31, 2020, 2019 and 2018, were Ps.23,970, Ps.8,045 and Ps.22,156, The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate based respectively. n) Liabilities and provisions For entities in Costa Rica, Guatemala and El Salvador there is no obligation to pay seniority premium, these countries have Post- Employee Benefits. Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is iv) Incentives probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are performance targets. These incentives are payable shortly after the end of each quarter and are accounted for as a short-term Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 113 benefit under IAS 19, Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment. b) Management incentive plan (“MIP”) During the years ended December 31, 2020, 2019 and 2018 the Company expensed Ps.25,918, Ps.62,825 and Ps.67,680, respectively, – MIP I as quarterly incentive bonuses, recorded under the caption salaries and benefits. Certain key employees of the Company receive additional benefits through a share purchase plan, which has been classified as an equity-settled share-based payment. The equity-settled compensation cost is recognized in the consolidated statement The Company has a short-term benefit plan for certain key personnel whereby cash bonuses are awarded when certain Company’s of operations under the caption of salaries and benefits, over the requisite service period (Note 17). The total cost of this performance targets are met. These incentives are payable shortly after the end of each year and also are accounted for as a plan has been totally recognized during the required service period. short-term benefit under IAS 19. A provision is recognized based on the estimated amount of the incentive payment. During the years ended December 31, 2020, 2019 and 2018 the Company recorded an expense for an amount of Ps.0, Ps.80,634 and – MIP II Ps.50,000, respectively, under the caption salaries and benefits. On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees, this plan was named MIP II. In accordance with this plan, the Company granted SARs to key employees, which entitle them v) Long-term incentive plan (“LTIP”) and long-term retention plan (LTRP) to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share The Company has adopted a Long-term incentive plan (“LTIP”). This plan consists of a share purchase plan (equity-settled) and price of the Company between the grant date and the time of exercise. The liability for the SARs is measured initially and a share appreciation rights “SARs” plan (cash settled), and therefore accounted under IFRS 2 “Shared based payments”. This at the end of each reporting period until settled at the fair value of the SARs, taking into account the terms and conditions incentive plan has been granting annual extensions in the same terms from the original granted in 2014. on which the SARs were granted. The compensation cost is recognized in the consolidated statement of operations under During 2020, 2019 and 2018, the Company approved a new long-term retention plan (“LTRP”), which consisted in a purchase plan (equity-settled). This plan does not include cash compensations granted through appreciation rights on the Company’s During the years ended December 31, 2020, 2019 and 2018, the Company recorded an expense (benefit) for Ps.107,204, shares. The retention plans granted in previous periods will continue in full force and effect until their respective due dates and Ps.37,760 and Ps.(5,052), respectively, related to MIP II into the consolidated statement of operations. the cash compensation derived from them will be settled according to the conditions established in each plan. the caption of salaries and benefits, over the requisite service period (Note 17). vi) Share-based payments a) LTIP – Share purchase plan (equity-settled) c) 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 payments”. In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit Certain key employees of the Company receive additional benefits through a share purchase plan denominated in Restricted of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during a four year period Stock Units (“RSUs”), which has been classified as an equity-settled share-based payment. The cost of the equity-settled with an exercise price share at Ps.16.12, which was determined on the grant date. Under this plan, no service or performance share purchase plan is measured at grant date, taking into account the terms and conditions on which the share options conditions are required to the board members for exercise the option to acquire shares, and therefore, they have the right were granted. The equity-settled compensation cost is recognized in the consolidated statement of operations under the to request the delivery of those shares at the time they pay for them. caption of salaries and benefits, over the requisite service period (Note 17). vii) Employee profit sharing During the years ended December 31, 2020, 2019 and 2018, the Company expensed Ps.75,040, Ps.49,659 and Ps.19,980, The Mexican Income Tax Law (“MITL”), establishes that the base for computing current year employee profit sharing shall be respectively, related to RSUs granted under the LTIP and LTRP. The expenses were recorded under the caption salaries and the taxpayer’s taxable income of the year for income tax purposes, including certain adjustments established in the Income Tax benefits. – SARs plan (cash settled) Law, at the rate of 10%. For the years ended December 2020, 2019 and 2018, the employee profit sharing is Ps.13,458, Ps.22,134 and Ps.14,106, respectively, and is presented as an expense in the consolidated statements of operations. Subsidiaries in Central America do not have such profit-sharing benefit, as it is not required by local regulation. The Company granted SARs to key employees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share price of the Company between the grant date and the p) Leases time of exercise. The liability for the SARs is measured, initially and at the end of each reporting period until settled, at the The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation to control the use of an identified asset for a period of time in exchange for consideration. cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). During the years ended December 31, 2020, 2019 and 2018, the Company recorded an expense The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases (benefit) expense for Ps.(1,901), Ps.2,964 and Ps.(186), respectively, related to the SARs included in the LTIP. These amounts of low-value assets. The Company recognizes lease liabilities to make lease payments and right-of-use assets representing the were recorded under the caption salaries and benefits. right to use the underlying assets. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 114 i) Right-of-use assets iv) Return obligations The Company recognize right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under specific cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The conditions of maintenance. The costs of return, which in no case are related to scheduled major maintenance, are estimated and cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, an estimate of costs recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These to be incurred by the Company in dismantling and removing the underlying asset to the condition required by the terms and return costs are recognized on a straight-line basis as a component of variable lease expenses and the provision is included conditions of the lease, and lease payments made at or before the commencement date less any lease incentives received. as part of other liabilities, through the remaining lease term. The Company estimates the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs Components of the right-of-use assets are depreciated on a straight-line basis over the shorter of the remining lease term and of maintenance tasks to be performed. For the years ended December 31, 2020, 2019 and 2018, the Company expensed as the estimated useful lives of the assets, as follows: variable rent of Ps.1,428,179, Ps.680,964 and Ps.659,106, respectively. Aircraft and engines Spare engines Buildings leases Maintenance component up to 18 years up to 14 years one to ten years up to eight years ii) Lease Liabilities q) Other taxes and fees payable The Company is required to collect certain taxes and fees from customers on behalf of government agencies and airports and to remit these to the applicable governmental entity or airport on a periodic basis. These taxes and fees include federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure fees. These charges are collected from customers at the time they purchase their tickets but are not included in passenger revenue. The Company records a liability upon collection from the customer and discharges the liability when payments are remitted to the At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease applicable governmental entity or airport. payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying r) Income taxes Current income tax Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Current income tax relating to items recognized directly in equity is recognized in equity. Mana- gement periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments Deferred tax or a change in the assessment of an option to purchase the underlying asset. The short-term leases and leases of low value assets are recognized as expense on a straight-line basis over the lease term. During the years ended December 31, 2020, 2019 and 2018, there were no impairment charges recorded in respect of the Company right-of-use asset. iii) Sale and leaseback The Company enters into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to the Company. The Company measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognized for all taxable temporary differences, except, in respect of taxable temporary differences associated with investments in subsidiaries when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any available tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and available tax losses can be utilized, except, in respect of deductible temporary differences associated with investments in subsidiaries deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against the asset that relates to the right of use retained by the seller-lessee. Accordingly, the Company recognizes in the Statement which the temporary differences can be utilized. of Operations only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. The rest of the gain is amortized over the lease term. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 115 The Company considers the following criteria in assessing the probability that taxable profit will be available against which Under the cash flow hedge (CFH) accounting model, the effective portion of the hedging instrument’s changes in fair value is the unused tax losses or unused tax credits can be utilized: (a) whether the entity has sufficient taxable temporary differences recognized in OCI, while the ineffective portion is recognized in current year earnings in the statement of profit or loss. The relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative unused tax losses or unused tax credits can be utilized before they expire; (b) whether it is probable that the Company will change in fair value of the hedged item. During the years ended December 31, 2019 and 2018, there was no ineffectiveness with have taxable profits before the unused tax losses or unused tax credits expire; (c) whether the unused tax losses result from respect to derivative financial instruments. The amounts recognized in OCI are transferred to earnings in the period in which identifiable causes which are unlikely to recur; and (d) whether tax planning opportunities are available to the Company that the hedged transaction affects earnings. During the year ended December 31, 2020, the Company recorded the ineffective will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilized. portion of Ps.448.6 million with respect to derivative financial instruments. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer The realized gain or loss of derivative financial instruments and non-derivative financial instruments that qualify as CFH are probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized recorded in the same caption of the hedged item in the consolidated statement of operations. 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. Accounting for the time value of options Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized to be initially recognized at fair value. Subsequent measurement for options purchased and designated as CFH requires that the or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. option’s changes in fair value be segregated into its intrinsic value (which will be considered the hedging instrument’s effective Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are considered as a cost of hedging (recognized in OCI in a separate component of equity) and accounted for in income when the recognized in correlation to the underlying transaction in OCI. hedged items also are recognized in income. portion in OCI) and its correspondent changes in extrinsic value (time value and volatility). The extrinsic value changes will be The Company accounts for the time value of options in accordance with IFRS 9, which requires all derivative financial instruments Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against t) Financial instruments – Disclosures current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. IFRS 7 requires a three-level hierarchy for fair value measurement disclosures and requires entities to provide additional disclosures about the relative reliability of fair value measurements (Notes 4 and 5). The charge for income taxes incurred is computed based on tax laws approved in Mexico, Costa Rica, Guatemala and El Salvador at the date of the consolidated statement of financial position. u) Treasury shares s) Derivative and non-derivative financial instruments and hedge accounting gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of treasury shares. Any difference between The Company mitigates certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and the carrying amount and the consideration received, if reissued, is recognized in additional paid in capital. Share-based payment exchange rate fluctuations, through a risk management program that includes the use of derivative financial instruments and options exercised during the reporting period are settled with treasury shares (Note 17). The Company’s equity instruments that are reacquired (treasury shares), are recognized at cost and deducted from equity. No non-derivative financial instrument. v) Operating segments In accordance with IFRS 9, derivative financial instruments and non-derivative financial instruments are recognized in the Management of Controladora monitors the Company as a single business unit that provides air transportation and related consolidated statement of financial position at fair value. At inception of a hedge relationship, the Company formally designates services, accordingly it has only one operating segment. and documents the hedge relationship to which it wishes to apply hedge accounting, as well as the risk management objective and strategy for undertaking the hedge. The documentation includes the hedging strategy and objective, identification of the The Company has two geographic areas identified as domestic (Mexico) and international (United States of America and Central hedging instrument, the hedged item or transaction, the nature of the risks being hedged and how the entity will assess the America) Note 24. effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk(s). w) Current versus non-current classification Only if such hedges are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge item(s) classification. An asset is current when it is: (i) expected to be realized or intended to be sold or consumed in normal operating and are assessed on an ongoing basis to determine that they have been effective throughout the financial reporting periods cycle, (ii) expected to be realized within twelve months after the reporting period, or, (iii) cash or cash equivalent unless restricted for which they were designated, hedge accounting treatment can be used. from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are The Company presents assets and liabilities in the consolidated statement of financial position based on current/non-current Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 116 classified as non-current. A liability is current when: (i) it is expected to be settled in normal operating cycle, (ii) it is due to be Amendments to IFRS 16 Covid-19 Related Rent Concessions settled within twelve months after the reporting period, or, (iii) there is no unconditional right to defer the settlement of the On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases The amendments provide liability for at least twelve months after the reporting period. The Company classifies all other liabilities as non-current. Deferred relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct con- tax assets and liabilities are classified as noncurrent assets and liabilities. sequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent x) Impact of new International Financial Reporting Standards New and amended standards and interpretations already effective concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. This amendment had impact on the consolidated financial statements of the Company (Note 14). The Company applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2020. The Company has not early adopted any other standard interpretation or amendment that has Amendments to IFRS 9 Prepayment Features with Negative Compensation been issued but is not yet effective. The nature and the effect of these changes are disclosed below: Amendments to IFRS 3: Definition of a Business Under IFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and of the contract. assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments did not have an impact on consolidated financial statements of the Company. Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform The amendments to IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments had no impact on the consolidated financial statements of the Company. Amendments to IAS 1 and IAS 8 Definition of Material The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Company. Conceptual Framework for Financial Reporting issued on March 29, 2018 These amendments had no impact on the consolidated financial statements of the Company. y) Convenience translation U.S. dollar amounts at December 31, 2020 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.19.9487 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, 2020. Such translation should not be construed as a representation that the peso amounts have been or could be converted into U.S. dollars at this or any other rate. The referred information in U.S. dollars is solely for information purposes and does not represent 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 can be translated or realized. 2. Significant accounting judgments, estimates and assumptions The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Note 1 to the Company’s consolidated financial statements provides a detailed discussion of the significant accounting policies. Certain of the Company’s accounting policies reflect significant judgments, assumptions or estimates about matters that are both inherently uncertain and material to the Company’s The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers financial position or results of operations. develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand Actual results could differ from these estimates. Revisions to accounting estimates are recognized in the period in which the and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for amounts of assets and liabilities within the next financial year are discussed below. assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Company. For Leases significant accounting judgments, estimates and assumptions refer to Note 1p (iv). Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 117 i) LTIP, LTRP and MIP (equity settled) iii) Fair value measurement of financial instruments The Company measures the cost of its equity-settled transactions at fair value at the date the equity benefits are conditionally Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position granted to employees. The cost of equity-settled transactions is recognized in earnings, together with a corresponding increase cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows in treasury shares, over the period in which the performance and/or service conditions are fulfilled. For grants that vest on model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree meeting performance conditions, compensation cost is recognized when it becomes probable that the performance condition of judgment is required in establishing fair values. will be met. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions that will ultimately vest. 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 iv) Impairment of long-lived assets instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires de- The Company assesses whether there are indicators of impairment for long-lived assets and right of use assets, annually and termining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate at other times when such indicators exist in the related CGU. Impairment exists when the carrying amount of a long-lived asset also requires determining the most appropriate inputs to the valuation model, including the expected life of the share option, 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. volatility and dividend yield, and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in (Note 17). In making these determinations, the Company uses certain assumptions, including, but not limited to estimated, undiscounted SARs plan (cash settled) The cost of the SARs plan is measured initially at fair value at the grant date, further details of which are given in (Note 17). future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations, excluding additions and extensions. This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is The Company's assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, remeasured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognized including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to in salaries and benefits expense together with the grant date fair value. As with the equity settled awards described above, the monitor these conditions in future periods as new information becomes available, and will updated its analyses accordingly. valuation of cash settled award also requires using similar inputs, as appropriate. ii) Deferred taxes The Company has assessed whether any impairment of its long-lived assets existed and has determined that no charges were deemed necessary under applicable accounting standards as of December 31, 2020. Deferred tax assets are recognized for all available tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management’s judgment is required to determine the amount of deferred tax assets v) Allowance for expected credit loss that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning An allowance for expected credit loss on accounts receivables is established in accordance with the information mentioned in opportunities to advance taxable profit before expiration of available tax losses. Note 1f) ii). Tax losses relate to operations of the Company on a stand-alone basis, in conformity with current Tax Law and may be carried vi) Leases - Estimating the incremental borrowing rate forward against taxable income generated in the succeeding years at each country and may not be used to offset taxable The Company cannot readily determine the interest rate implicit in its leases, therefore, it uses its incremental borrowing rate income elsewhere in the Company’s consolidated group (Note 19). (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar During the years ended December 31, 2020, 2019 and 2018, the Company used Ps.0, Ps.214,460 and Ps.154,353, respectively, economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no of the available tax loss carry-forwards. observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 118 3. Financial instruments and risk management For the year ended December 31, 2020, the Company recognized an unwind of the Zero cost collar of Ps.42,644 which was recognized as part of finance cost. Financial risk management The Company’s activities are exposed to different financial risks stemmed from exogenous variables which are not under their In accordance with IFRS 9 the Company separates the intrinsic value from the extrinsic value of an option contract; as such, control but whose effects might be potentially adverse such as: (i) market risk, (ii) credit risk, and (iii) liquidity risk. 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 accounted for as The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the a cost of hedging in OCI and accrued as a separate component of stockholders’ equity until the related hedged item matures potential adverse effects on net earnings and working capital requirements. The Company uses derivative financial instruments and therefore impacts profit and loss. to hedge part of such risks. The Company does not enter into derivatives for trading or speculative purposes. The sources of these financial risks exposures are included in both “on balance sheet” exposures, such as recognized financial assets and The underlying (US Gulf Coast Jet Fuel 54) of the options held by the Company is a consumption asset (energy commodity), liabilities, as well as in “off-balance sheet” contractual agreements and on highly expected forecasted transactions. These on which is not in the Company’s inventory. Instead, it is directly consumed by the Company’s fleet at different airport terminals. and off-balance sheet exposures, depending on their profiles, do represent potential cash flow variability exposure, in terms Therefore, although a non-financial asset is involved, its initial recognition does not generate a book adjustment in the Company’s of receiving less inflows or facing the need to meet outflows which are higher than expected, therefore increase the working inventories. capital requirements. Since adverse movements erode the value of recognized financial assets and liabilities, as well some other off-balance sheet recognized in the same period or periods in which the hedged item is expected to be allocated to profit and loss. Furthermore, financial exposures, there is a need for value preservation, by transforming the profiles of these fair value exposures. The the Company hedges its forecasted jet fuel consumption month after month, which is congruent with the maturity date of the Rather, it is initially accounted for in the Company’s OCI and a reclassification adjustment is made from OCI to profit and loss and Company has a Finance and Risk Management department, which identifies and measures financial risk exposures, in order to monthly serial Asian call options and Zero-Cost Collars. design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the corporate governance level for approval. Market risk a) Jet fuel price risk The Company has a hedging policy in place to stablish guidelines to hedge fuel consumption; nevertheless, with COVID-19 outbreak, capacity was considerably reduced, thereby, ineffectiveness arose in the hedging relationship. As of December 31, 2020 and 2019, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was Ps.206 and Ps.0, respectively. As of December 31, 2020 and 2019 the Zero-Cost Collars outstanding balance was of Ps.(9,657) and Since the contractual agreements with jet fuel suppliers include reference to jet fuel index, the Company is exposed to fuel Ps.133,567, respectively and are presented as part of the financial assets and financial liabilities in the consolidated statement price risk which might have an impact on the forecasted consumption volumes. The Company’s jet fuel risk management of financial position. (See Note 4). policy aims to provide the Company with protection against increases in jet fuel prices. In an effort to achieve the aforesaid, the risk management policy allows the use of derivative financial instruments available on over the counter (“OTC”) markets During the year ended December 31, 2020, the intrinsic value of the Asian call options recycled to the fuel cost was an expense with approved counterparties and within approved limits. Aircraft jet fuel consumed in the years ended December 31, 2020, of Ps.33,627 (Ps.20,646 which was recognized in the fuel cost and an expense of Ps.12,981 in finance cost). 2019 and 2018 represented 28%, 38% and 38%, of the Company’s operating expenses, respectively. The foreign currency risk is disclosed within subsection b) in this note. During the year ended December 31, 2019, the intrinsic value of the Asian call options recycled to the fuel cost was an expense of Ps.61,069. During the year ended December 31, 2020 and 2019, the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 23,967 and 13,492 thousand gallons respectively. Such hedges represented a portion of the projected During the year ended December 31, 2018, the intrinsic value of the Asian call options recycled to the fuel cost was a benefit consumption for the 2Q 2020, 3Q 2020 & 1Q 2021 and for the 4Q 2019, respectively. Additionally, during the same period, the of Ps.402,493. Company entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 81,646 thousand gallons and 70,136 thousand gallons, respectively. Such hedges represent a portion of the projected consumption for the 2Q 2020, 2H During the year ended December 31, 2020, the intrinsic value of the Zero-Cost Collars recycled to the fuel cost was an expense 2020 & 2Q 2021 and the year 2020, respectively. of Ps.1,271,462. (Ps.835,884 which was recognized in the fuel cost and an expense of Ps.435,578 in finance cost) and for the year ended December 2019 and 2018 the intrinsic value of the Zero-Cost Collars recycled to the fuel cost was an expense of Furthermore, the Company restructured part of its hedging portfolio by unwinding put legs on two Zero-Cost Collars Ps.9,477. As of December 31, 2018, the Company did not have intrinsic value recycled to the fuel cost as settlements started instruments with maturity dates of June & July to reduce crude market exposure, in line with capacity adjustments due to taking place on 2019. COVID-19 outbreak. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements The cost of hedging derived from the extrinsic value changes of the jet fuel hedged position as of December 31, 2020 recognized The following table illustrates the sensitivity of US Gulf Coast Jet Fuel 54 Zero Cost Collars to a reasonably possible change in in other comprehensive income totals Ps.21,650. The (benefit) cost of hedging in December 2019 and 2018 totals (Ps.133,567) fuel prices, with all other variables held constant, on the caption of accumulated other comprehensive income. and Ps.134,096, and will be recycled to the fuel cost during 2021, as these options expire on a monthly basis and the jet fuel is consumed. The calculations were made considering a parallel movement of +/-5% in the spot price of the US Gulf Coast Jet 54 as of The following table includes the notional amounts and strike prices of the derivative financial instruments outstanding as of the end of the year: December 31, 2020: Content 119 Position as of December 31, 2020 Jet fuel Asian call and Zero-Cost collars option contracts maturities 1 Half 2021 2 Half 2021 2021 Total Sensitivity of position as of December 31, 2020 effect on equity (U.S. dollars) US Gulf Coast Jet Fuel 54 spot level +5% –5% +0.16M –0.16M Jet fuel risk Asian Calls Notional volume in gallons (thousands)* Strike price agreed rate per gallon (U.S. dollars) ** US$ Approximate percentage of hedge (of expected consumption value) Jet fuel risk Zero-Cost collars Notional volume in gallons (thousands)* 7,280 1.90 6% 7,556 Strike price agreed rate per gallon (U.S. dollars) ** US$ 1.23/1.93 US$ Approximate percentage of hedge (of expected consumption value) All-in Approximate percentage of hedge (of expected consumption value) 6% 12% – – –% – – –% –% * US Gulf Coast Jet 54 as underlying asset ** Weighted average US$ 7,280 1.90 3% 7,556 Please note this sensitivity was calculated with the net position delta of the portfolio, as change on the underlying price is small enough to be a good proxy. US$ 1.23/1.93 b) Foreign currency risk 3% 6% Though the Mexican peso is the functional currency of the Company, a significant portion of its operating expenses are denominated in U.S. dollar; thus, Volaris relies on sustained U.S. dollar cash flows coming from operations in the United States of America and Central America to support part of its commitments in such currency, however there’s still a mismatch. Position as of December 31, 2019 Jet fuel Zero-Cost Collar collars option contracts maturities 1 Half 2020 2 Half 2020 2020 Total Foreign currency risk arises from possible unfavorable movements in the exchange rate which could have a negative impact in the Company’s cash flows. To mitigate this risk, the Company may use foreign exchange derivative financial instruments and non-derivative financial instruments. While most of the Company’s revenue is generated in Mexican pesos, 27% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2020, (29% at December 31, 2019 and 32% at December 31, 2018) and U.S. dollar denominated collections accounted for 44%, 43% and 38%, of the Company’s total collections Jet fuel risk Zero-Cost collars Notional volume in gallons (thousands)* 34,480 22,164 56,644 in 2020, 2019 and 2018, respectively. Strike price agreed rate per gallon (U.S. dollars)** US$ 1.63/1.82 US$ 1.65/1.81 US$ 1.64/1.82 Approximate percentage of hedge (of expected consumption value) All-in Approximate percentage of hedge (of expected consumption value) 25% 25% 15% 15% 20% 20% 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. * US Gulf Coast Jet 54 as underlying asset ** Weighted average Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements The Company’s foreign exchange on and off-balance sheet exposure as of December 31, 2020 and 2019 is as set forth below: excluding the assets and liabilities associated with non-derivative financial instruments. The Company’s exposure to foreign currency changes for all other currencies is not material. Content 120 Assets: Cash and cash equivalents Other accounts receivable, net Guarantee deposits Derivative financial instruments Total assets Liabilities: Financial debt (Note 5) Lease liabilities Suppliers Other taxes and fees payable Derivative financial instruments Total liabilities Net foreign currency position Thousands of U.S. dollars 2020 2019 US$ 495,612 US$ 373,099 39,997 479,566 10 US$ 1,015,185 23,620 437,499 7,088 841,306 2020 2019 Change in USD rate Effect on profit before tax +5% –5% +5% –5% Ps. (253,763) 253,763 Ps. (155,593) 155,593 US$ 183,806 US$ 176,927 The movement in the pre-tax effect is a result of a change in the fair value of assets and liabilities denominated in US dollars, 2,334,153 174,553 16,105 484 2,263,849 76,471 22,486 – 2,709,101 2,539,733 US$ (1,693,916) US$ (1,698,427) where the functional currency of the entity is a currency other than US dollars. i) Hedging relationships designating non-derivative financial instruments as hedging instruments for Foreign Exchange (FX) risk Regarding the foreign currency risk effective since January 1st, 2019, the Company implemented two hedging strategies associated to forecasted FX exposures, by using non-derivatives financial assets and liabilities denominated in a non-functional currency (the USD in this case) as hedging instruments. At April 29, 2021, date of issuance of these financial statements, the exchange rate was Ps.19.9785 per U.S. dollar. In the first FX hedging strategy, the Company designated a hedge to mitigate the variability in FX fluctuation denominated in USD associated to forecasted revenues by using a portion of USD denominated financial liabilities associated to a portfolio of In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the leasing liabilities up until the terms of the remaining leasing arrangements. The lease liability amount designated as a hedging derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is item during 2019 was USD$2.1 billion. the date on which the Company initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Company determines the transaction date for each The outstanding USD balance designated under this hedging strategy as of December 31, 2020 and 2019 amount to US$1.5 payment or receipt of advance consideration. billion and USD$1.7 billion respectively, represented by recognized leasing liabilities, which have been designated as hedging instruments tagged to USD denominated forecasted revenues over the remaining lease term. As of December 31, 2020, the Company did not enter foreign exchange rate derivatives financial instruments. As of December 31, 2019, the Company did not enter foreign exchange rate derivatives financial instruments. All the Company’s remaining position The second FX strategy consists on designating a hedging relationship by using a portion of USD denominated non-derivative in FX plain vanilla forwards matured throughout the first quarter of 2019 (January). financial assets as hedging instruments, to mitigate the FX variability (MXN/USD) contractually included as a component in the purchase of a portion of future Jet Fuel consumption. For this strategy designated in 2019, a portion of the Jet Fuel During the year ended December 31, 2018, the Company entered into foreign currency forward contracts in U.S. dollars to hedge consumption over the two following years has been designated as hedged item; while the hedging instrument is represented approximately, 20% of its future 12 and 6 months of aircraft rental expenses. A portion of the Company’s foreign currency by USD denominated recognized assets, including guaranteed deposits and cash and cash equivalents equivalent to USD$410 forwards position matured throughout the fourth quarter of 2018 (November & December). As of December 31, 2018, the million, which represent a portion of the financial assets denominated in USD. unrealized gains of Ps.14,241, respectively relating to the foreign currency forward contracts is included in OCI. The outstanding USD balance designated under this hedging strategy as of December 31, 2020 and 2019 amount to US$60.5 For the years ended December 31, 2019 and 2018, the net gains (loss) on the foreign currency forward contracts were Ps.4,199 million and USD$166.7 million respectively, which does represent a portion of the recognized financial assets. and Ps.52,516, respectively, which were recognized as part of rental expense in the consolidated statements of operations. Foreign currency sensitivity Since the hedged items on for both hedging strategies are targeted at mitigating the cash flow variability of highly expected forecasted transactions, these are represented by multiple hedging relationships which do follow the Cash Flow Hedge The following tables demonstrate the sensitivity to a reasonably possible change in USD exchange rates, with all other variables Accounting Model. held constant. The impact on the Company’s profit before tax is due to changes in the fair value of monetary assets and liabilities Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 121 The effective portion of the hedging instrument’s changes in fair value, are taken to the hedge reserve within the OCI, presented d) Liquidity risk as a separate caption within the Company’s Stakeholders Equity, which is in accordance with IFRS 9 criteria. Liquidity risk represents the risk that the Company has insufficient funds to meet its obligations. Because of the cyclical nature of the business, the operations, and its investment and financing needs related to the acquisition of new aircraft and renewal The amounts recorded in OCI are recycled to profit and loss on a time basis as corresponding USD denominated Income and/ of its fleet, the Company requires liquid funds to meet its obligations. or Jet Fuel consumptions do also impact the Company’s operating margin and are presented as adjustments to both operating income and expense, with respect to each FX hedging strategy in a timely matter, as USD denominated income and jet fuel The Company attempts to manage its cash and cash equivalents and its financial assets, relating the term of investments with consumption are recognized within operating earnings, hence reflecting a portion of both operating income and expenses those of its obligations. Its policy is that the average term of its investments may not exceed the average term of its obligations. amounts, net of both FX Hedging activities. This cash and cash equivalents position is invested in highly liquid short-term instruments through financial entities. During the year ended December 31, 2020, the Company determined that a portion of its non-derivative financial instruments The Company has future obligations related to maturities of bank borrowings, lease liabilities and derivative contracts. The designated as hedge accounting were no longer effective, since the jet fuel consumption was lower than anticipated as a result Company’s off-balance sheet exposure represents the future obligations related to aircraft purchase contracts. The Company of the adverse effect of COVID-19. The impact of this adjustment in 2020 was a benefit of Ps.111 million in the Company´s net concluded that it has a low concentration of risk since it has access to alternate sources of funding. The table below presents the loss for the period. This amount was reclassified from other comprehensive income to comprehensive financial result. Further, Company’s contractual principal payments required on its financial liabilities and the derivative financial instruments fair value: Ps.94 million were also reclassified from other comprehensive income to operating expenses during 2020 as a result of the completion of a forecasted transaction designated in a hedge relationship. c) Interest rate risk Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Interest-bearing borrowings: December 31, 2020 Within one year One to five years Total The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt Pre-delivery payments facilities (Note 5) Ps. 1,096,543 Ps. 2,554,069 Ps. 3,650,612 obligations and flight equipment lease agreements with floating interest rates. The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such changes may have on operational lease payments indexed to the London Inter Bank Offered Rate (“LIBOR”). The Company uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these instruments as an accounting hedge. In most cases, when a derivative can be tailored within the terms and it perfectly matches cash flows of a leasing agreement, it may be designated as a CFH and the effective portion of fair value variations are recorded in equity until the date the cash flow of the hedged lease payment is recognized in the consolidated statements of operations. Short-term working capital facilities (Note 5) Asset backed trust note (Note 5) Derivative financial instruments: 200,000 250,000 – 1,250,000 200,000 1,500,000 Jet fuel Asian Zero-Cost collars options contracts 9,657 – 9,657 Lease liabilities: Aircraft, engines, land and buildings leases Aircraft and engine lease return obligation Total 6,484,092 86,801 37,646,450 2,417,683 44,130,542 2,504,484 Ps. 8,127,093 Ps. 43,868,202 Ps. 51,995,295 December 31, 2019 Within one year One to five years Total The Irrevocable Trust number CIB/3249, whose trustor is the Company, entered a cap to mitigate the risk due to interest rate Interest-bearing borrowings: increases on the CEBUR coupon payments. The floating rate coupons reference to TIIE 28 are limited under the cap to 10% on Pre-delivery payments facilities (Note 5) Ps. 1,855,956 Ps. 1,452,553 Ps. 3,308,509 the reference rate for the life of the CEBUR and have the same amortization schedule. Thus, the cash flows of the CEBUR are Short-term working capital facilities (Note 5) perfectly matched by the hedging instrument. The cap start date was July 19, 2019, and the maturity date is June 20, 2024; consisting of 59 caplets with the same specifications as the CEBUR coupons for reference rate determination, coupon term, and fair value. At December 31, 2020 and December 31, 2019, the Company’s outstanding hedging contracts in the form of interest rate caps with notional amount of Ps.1.5 billion had fair values of Ps.326 and Ps.2,695, respectively, recorded in assets. During the years ended December 31, 2018, the Company did not have any outstanding interest rate derivatives. Asset backed trust note (Note 5) Lease liabilities: Aircraft, engines, land and buildings leases Aircraft and engine lease return obligation Total 200,000 – – 1,500,000 4,720,505 383,093 35,796,540 1,469,595 200,000 1,500,000 40,517,045 1,852,688 Ps. 7,159,554 Ps. 40,218,688 Ps. 47,378,242 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 122 e) Credit risk i) In the principal market for the asset or liability, or Credit risk is the risk that any counterparty will not meet its obligations under a financial instrument or customer contract, (ii) In the absence of a principal market, in the most advantageous market for the asset or liability. 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 The principal or the most advantageous market must be accessible to the Company. other financial instruments including derivatives. Financial instruments that expose the Company to credit risk involve mainly cash equivalents and accounts receivable. Credit the asset or liability, assuming that market participants act in their economic best interest. risk on cash equivalents relate to amounts invested with major financial institutions. Credit risk on accounts receivable relates primarily to amounts receivable from the major international credit card companies. The using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest The assessment of a non-financial asset’s fair value considers the market participant’s ability to generate economic benefits by The fair value of an asset or a liability is assessed using the course of thought which market participants would use when pricing Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, and best use. which have a large portion of their sales settled in credit cards. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available 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 value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: 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. Level 1 – Quoted (unadjusted) prices in active markets for identical assets or liabilities. To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any single indirectly observable. counterparty and monitors the market position with each counterparty. The Company does not purchase or hold derivative Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or financial instruments for trading purposes. At December 31, 2020, the Company concluded that its credit risk related to its outstanding derivative financial instruments is low, since it has no significant concentration with any single counterparty and it For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether only enters into derivative financial instruments with banks with high credit-rating assigned by international credit-rating agencies. transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair significant to the fair value measurement as a whole) at the end of each reporting period. g) Capital management Management believes that the resources available to the Company are enough for its present requirements and will be sufficient For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, to meet its anticipated requirements for capital expenditures and other cash requirements for the 2020 fiscal year. characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios to support its Set out below, is a comparison by class of the carrying amounts and fair values of the Company’s financial instruments, other business and maximize the shareholder’s value. No changes were made in the objectives, policies or processes for managing than those for which carrying amounts are reasonable approximations of fair values: capital during the years ended December 31, 2020 and 2019. The Company is not subject to any externally imposed capital requirement, other than the legal reserve (Note 18). 4. Fair value measurements The only financial assets and liabilities measured at fair value after initial recognition are the derivative financial instruments. Fair value is the price that would be received from sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: Carrying amount Fair value 2020 2019 2020 2019 Assets Derivative financial instruments Ps. 532 Ps. 136,262 Ps. 532 Ps. 136,262 Liabilities Financial debt (5,350,612) (5,008,509) (5,527,332) (5,194,316) Derivative financial instruments (9,657) – (9,657) – Total Ps. (5,359,737) Ps. (4,872,247) Ps. (5,536,457) Ps. (5,058,054) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 123 The following table summarizes the fair value measurements at December 31, 2020: The following table summarizes the (loss) gain from derivatives financial instruments recognized in the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018: 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. Interest rate Caps 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. Ps. 206 326 (9,657) (5,527,332) Ps. (5,536,457) Ps. – – – – – Ps. 206 326 (9,657) (5,527,332) Ps. (5,536,457) * 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. Instrument Financial statements line 2020 2019 2018 Jet fuel Asian call options contracts Jet fuel Zero-Cost collars contracts Jet fuel Asian call options contracts Jet fuel Zero-Cost collars contracts Fuel Fuel Finance cost Finance cost Foreign currency forward Aircraft and engine Interest rate cap Total rent expenses Finance cost Ps. (20,646) Ps. (61,069) Ps. 402,493 (835,884) (12,981) (435,578) – (1,468) (9,477) – – 4,199 (1,282) – – – 52,516 – Ps. (1,306,557) Ps. (67,629) Ps. 455,009 The following table summarizes the net gain (loss) on CFH before taxes recognized in the consolidated statements of compre- hensive income for the years ended December 31, 2020, 2019 and 2018: Consolidated statements of other comprehensive (loss) income The following table summarizes the fair value measurements at December 31, 2019: Instrument Financial statements line 2020 2019 2018 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 Zero-Cost collar options contracts* Ps. Interest rate Caps Liabilities for which fair values are disclosed: Interest-bearing loans and borrowings** Net Ps. – – – – Ps. 133,567 Ps. 2,695 (5,194,316) Ps. (5,058,054) Ps. – – – – Ps. 133,567 2,695 (5,194,316) Ps. (5,058,054) * 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. Jet fuel Asian call options contracts Jet fuel Zero cost collars Foreign currency contracts Interest rate cap Non derivative financial instruments Total OCI OCI OCI OCI OCI Ps. (11,993) Ps. 11,148 Ps. (174,984) (143,224) 256,515 – (900) (1,591,569) (14,241) (4,023) 14,096 (122,948) 14,241 – – Ps. (1,747,686) Ps. 263,495 Ps. (283,691) The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2020, 2019 and 2018 were Ps.19.9487, Ps.18.8452 and Ps.19.6829, respectively, per U.S. dollar. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 124 5. Financial assets and liabilities (ii) The following table provides a summary of the Company’s scheduled principal payments of financial debt and accrued interest at December 31, 2020: At December 31, 2020 and 2019, the Company’s financial assets are represented by cash and cash equivalents, trade and other accounts receivable, accounts receivable with carrying amounts that approximate their fair value. a) Financial assets Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI) Jet fuel Asian call options Jet fuel Zero-Cost collars Interest rate cap Total financial assets Presented on the consolidated statements of financial position as follows: Current Non-current b) Financial debt 2020 2019 Ps. 206 Ps. – – 326 532 133,567 2,695 Ps. 136,262 206 326 Ps. Ps. 133,567 2,695 Ps. Ps. Ps. Santander/Bancomext CEBUR Banco Sabadell Total 2021 2022 2023 2024 Total 1,112,629 252,605 200,872 2,554,069 – – Ps. 3,666,698 500,000 500,000 250,000 – – – 1,502,605 200,872 1,566,106 3,054,069 500,000 250,000 Ps. 5,370,175 (iii) Since 2011, the Company has financed the pre-delivery payments with Santander/Bancomext for the acquisition of its aircraft through a revolving financing facility. The “Santander/Bancomext” loan agreement provides for certain covenants, including limits to the ability to, among others: i) Incur debt above a specified debt basket unless certain financial ratios are met. ii) Create liens. iii) Merge with or acquire any other entity without the previous authorization of the Banks. iv) Dispose of certain assets. v) Declare and pay dividends or make any distribution on the Company’s share capital unless certain financial ratios are met. (i) At December 31, 2020 and 2019, the Company’s short-term and long-term debt consists of the following: I. Revolving line of credit with Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander (“Santander”) and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”), in U.S. dollars, to finance pre-delivery payments, maturing on October 31, 2022, bearing annual interest rate at the three-month LIBOR 2020 2019 At December 31, 2020, the Company was not in compliance with the financial ratio, therefore, the Company requested a waiver to the banks. The company received a waiver dated October 23, 2020, for the covenant regarding the financial ratio for the PDP financing facility that included the third and fourth quarter of 2020 and the first and second quarter of 2021. The waiver was provided by both banks, Santander and Bancomext. At December 31, 2019, the Company was in compliance with the covenants under the above-mentioned loan agreement. plus a spread of 260 basis points. Ps. 3,650,612 Ps. 3,308,509 II. The Company issued in the Mexico market Asset backed trust notes (“CEBUR”), in Mexican pesos, maturing on June 20th, 2024 bearing annual interest rate at TIIE 28 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 S.A.S. (“Airbus”), including its obligation to make pre-deli- very payments to the Mexican trusts, and the Company guaranteed the obligations of the Mexican trusts under the financing days plus 175 basis points. 1,500,000 1,459,871 agreement (CI Banco, S.A. (previously Deutsche Bank México, S.A. Trust 1710 and 1711)). III. In December 2019, the Company entered into a short-term working capital facility with Banco Sabadell S.A., Institución de Banca Multiple (“Sabadell”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a 300 basis points. 200,000 200,000 (15,542) 19,563 5,354,633 1,558,884 (22,472) 30,061 4,975,969 2,086,017 At December 31, 2020, the Company has available credit lines totaling Ps.9,256,978 of which Ps.6,851,338 were related to financial debt (Ps.1,500,726 were undrawn) and Ps.2,405,640 were related to letters of credit (Ps.214,012 were undrawn). At December 31, 2019, the Company has available credit lines totaling Ps.9,005,008, of which Ps.6,649,358 were related to financial debt (Ps.1,640,849 were undrawn) and Ps.2,355,650 were related to letters of credit (Ps.86,066 were undrawn). On June 20, 2019, the Company, through its subsidiary Concesionaria issued 15,000,000 asset backed trust notes under the Ps. 3,795,749 Ps. 2,889,952 ticket VOLARCB 19 for the amount of Ps.1.5 billion Mexican pesos through the Irrevocable Trust number CIB/3249 created by Concesionaria. The issuance amount is part of a program approved by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) for an amount of up to Ps.3.0 billion Mexican pesos. IV. Amortized transaction costs V. Accrued interest and other financial cost Less: Short-term maturities Long-term TIIE: Mexican interbank rate Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 125 The notes have a five year maturity annual reductions of Ps.250,000, Ps.500,000, Ps.500,000 and Ps.250,000 in 2021, 2022, 2023 and 2024, respectively, with a floating one-month coupon rate referenced to TIIE 28 plus with a 175 basis point spread. The notes start amortizing at the end of the second year. Current interest-bearing January 1, 2019 Net cash Flows Accrued Interest Foreign exchange movement Current vs non-current reclassification Other December 31, 2019 The asset backed trust notes structure operate on specific rules and provide a DSCR “Debt Service Coverage Ratio” which is loans and borrowings Ps. 1,212,259 Ps. (633,609) Ps. 13,698 Ps. (41,173) Ps. 1,534,842 Ps. – Ps. 2,086,017 computed by comparing the Mexican Peso collections over the previous six months to the next 6 months of debt service. In Non-current interest - bearing general, not retention of funds exists if the ratio exceeds 2.5 times. Amortization on the asset backed trust notes begins in July loans and borrowings 2,310,939 2,273,143 – (122,466) (1,534,842) (36,822) 2,889,952 of 2021. In addition, early amortization applies if: i) An event of retention is not cover in a period of 90 consecutive days. Total liabilities from financing activities Ps. 3,523,198 Ps. 1,639,534 Ps. 13,698 Ps. (163,639) Ps. – Ps. (36,822) Ps. 4,975,969 ii) The debt service reserve account of any series maintains on deposit an amount less than the required balance of the debt service reserve account for a period that includes two or more consecutive payment methods. c) Other financial liabilities iii) Insolvency event of Concesionaria. In December 2019, the Company entered into a short-term working capital facility with Banco Sabadell S.A., Institución de Banca Multiple (“Sabadell”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a 300 basis points. The “Sabadell” working capital facility has the following covenant: Derivative financial instruments designated as CFH (effective portion recognized within OCI): Zero-Cost Collar options Total financial liabilities i) Joint obligor (Concesionaria) must represent 85% of EBITDA of the holding Presented on the consolidated statements of financial position as follows: During the years ended on December 31, 2020 and 2019, we were in compliance with the covenants under the terms and conditions of the asset backed trusted notes and short-term working capital facilities. Changes in liabilities arising from financing activities At December 31, 2020 and 2019, the changes in liabilities from financing activities from the Company are summarized in the following table: Current interest-bearing January 1, 2020 Net cash Flows Accrued Interest Foreign exchange movement Current vs non-current reclassification Other December 31, 2020 loans and borrowings Ps. 2,086,017 Ps. (1,231,695) Ps. (10,498) Ps. (32,491) Ps. 747,551 Ps. – Ps. 1,558,884 Non-current interest - bearing loans and borrowings 2,889,952 1,374,678 – 231,612 (747,551) 47,058 3,795,749 Total liabilities from financing activities Ps. 4,975,969 Ps. 142,983 Ps. (10,498) Ps. 199,121 Ps. – Ps. 47,058 Ps. 5,354,633 Current Non-current 6. Cash and cash equivalents An analysis of this caption is as follows: Cash in banks Short-term investments Cash on hand Restricted funds held in trust related to debt service reserves Total cash and cash equivalents 2020 2019 Ps. Ps. Ps. Ps. 9,657 9,657 9,657 – Ps. Ps. Ps. Ps. – – – – 2020 2019 Ps. 6,907,295 Ps. 4,612,927 3,068,618 36,432 91,040 3,231,125 44,880 91,040 Ps. 10,103,385 Ps. 7,979,972 As of December 31, 2020 and 2019, the Company recorded a portion of advance ticket sales by an amount of Ps.91,040 and Ps.91,040, respectively, as a restricted fund (Note 1e). The restricted funds held in Trust are used to constitute the debt service reserves and cannot be used for purposes other than those established in the contract of the Trust. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 126 7. Related parties Frontier started having transactions with the Company in September 2018. As of December 31, 2020 and 2019, there have been no guarantees provided or received for any related party receivables or payables. For the years ended December 31, 2020 and a) An analysis of balances due from/to related parties at December 31, 2020 and 2019 is provided below. 2019, no provision for expected credit losses had been recognized. All companies are considered affiliates, since the Company’s primary shareholders or directors are also direct or indirect c) Servprot shareholders of the related parties: Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, the Company’s President and Chief Executive Officer, and Rodolfo Montemayor, who served as an alternate member of our board of directors until April 19, 2018, are share- Type of transaction Country of origin 2020 2019 Terms holders of such company. Servprot provides security services for Mr. Beltranena and his family, as well as for Mr. Montemayor. Due from: Frontier Airlines Inc. (“Frontier”) Code-share USA Ps. Ps. 72,629 72,629 Ps. Ps. 23,442 30 days 23,442 As of December 31, 2020 and 2019 Servprot did not have net balance under this agreement. During the years ended December 31, 2020, 2019 and 2018 the Company expensed Ps.3,464, Ps.3,120 and Ps.2,804, respectively for this concept. Due to: d) Aeroman Grupo Aeroportuario del Centro Norte (“OMA”) Airport Services Mexico Ps. 80,681 Ps. – 30 days Aeromantenimiento, S.A. (“Aeroman”) Aircraft and engine Mexico/ Chevez, Ruiz, Zamarripa y Cía., S.C. Professional fees Mijares, Angoitia, Cortés y Fuentes, S.C. Professional fees Frontier Airlines Inc. (“Frontier”) Code-share Mexico Mexico USA One Link, S.A. de C.V. (“One Link”) Call center fees El Salvador maintenance El Salvador 39,284 4,823 166 39 – 1,474 30 days – 30 days 996 30 days 16,246 30 days 39,838 30 days Ps. 124,993 Ps. 58,554 Aeroman is a related party, because Marco Baldocchi a member of the board of the Company’s board of directors is an alternate director 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 must use Aeroman, exclusively for aircraft repair and maintenance services, subject to availability. Under this agreement, Aeroman provides inspection, maintenance, repair and overhaul services for aircraft. The Company makes payments under this agreement depending on the services performed. This agreement is for a 5-year term. As of December 31, 2020 and 2019, the balances due under the agreement with Aeroman were Ps.39,284 and Ps.1,474, respectively. The Company incurred expenses in aircraft, engine maintenance and technical support under this agreement of Ps.243,063, Ps.207,439 and Ps.346,522 for the years ended December 31, 2020, 2019 and 2018, respectively. b) During the years ended December 31, 2020, 2019 and 2018, the Company had the following transactions with related parties: Related party transactions Country of origin 2020 2019 2018 e) Human Capital International Human Capital International HCI, S.A. de C.V. (“Human Capital International”), was a related party until April 19, 2018, because Rodolfo Montemayor Garza, a former member of the Company’s board of directors, is founder and chairman of the board of directors of Human Capital International. Human Capital International provided the Company with services regarding the selection and hiring of executives. As of December 31, 2018, Human Capital International did not have net balance under this agreement. For the year ended December 31, 2018, the Company recognized an expense under this agreement of Ps.324. Revenues: Transactions with affiliates Frontier Airlines Inc Code-share Expenses: Transactions with affiliates Aeromantenimiento, S.A. Technical support Onelink, S.A. de C.V. Call center fees Grupo Aeroportuario del Centro Norte Airport services Mijares, Angoitia, Cortés y Fuentes, S.C. Professional fees Chevez, Ruiz, Zamarripa y Cía, S.C. Professional fees Servprot, S.A. de C.V. Security services Human Capital International HCI, S.A. de C.V. Professional fees Aircraft and engine maintenance Mexico/El Salvador Ps. 239,118 Ps. 201,624 Ps. 341,726 USA Ps. 148,964 Ps. 208,968 Ps. 8,358 f) OneLink Onelink, S.A. de C.V. (“Onelink”) was a related party until December 31, 2017, because Marco Baldocchi, a member of the board, was a director of Onelink. As of October 24, 2019 and until June 30,2020 Onelink, Holdings, S.A. (“Onelink Holdings”) and its subsidiary Onelink were related parties, because Mr. Rodrigo Antonio Escobar Nottebohm, a former alternate board member Mexico/El Salvador 3,945 5,815 4,796 of Onelink Holdings, became an alternate Director of the Company. Pursuant to this agreement, Onelink received calls from the customers to book flights and provides customers with information about fares, schedules and availability. Mexico/El Salvador 73,167 37,026 32,193 – – – As of December 31, 2020 and 2019, the account payable under this agreement was Ps.0 and Ps.39,838, respectively. For the years ended December 31, 2020, 2019 and 2018, Company recognized an expense under this agreement of Ps.73,167, Ps.37,026 5,582 1,321 1,672 4,823 – – 3,464 3,120 2,804 – – 324 and Ps.0, respectively. g) Mijares, Angoitia, Cortés y Fuentes Mijares, Angoitia, Cortés y Fuentes, S.C. (“MACF”) 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 the Company. As of December 31, 2020 and 2019, MACF, the balance due under the agreement was Ps.166 and Ps.996, respectively. For the years ended December 31, 2020, 2019 and 2018, the Company expensed Ps.5,582, Ps.1,321 and Ps.1,672, respectively, for this concept. Mexico Mexico Mexico Mexico Mexico Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements h) Frontier 8. Other accounts receivable, net 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, 2020 and 2019, the An analysis of other accounts receivable at December 31, 2020 and 2019, is detailed below: Content 127 account receivable under this agreement was Ps.72,629 and Ps.23,442, respectively. Additionally, as of December 31, 2020 and 2019, the account payable under this agreement was Ps.39 and Ps.16,246, respectively. For the year ended December 31, 2020, 2019 and 2018 the Company recognized revenue under this agreement of Ps.148,964, Ps.208,968 and Ps.8,358, respectively. i) Grupo Aeroportuario del Centro Norte (OMA) In April 22, 2020, Grupo Aeroportuario del Centro Norte (OMA) became a related party because Mrs. Guadalupe Phillips Margain is an independent member of the board of directors the Company and OMA. Mr. Ricardo Maldonado Yañez is also an independent member of the board of directors the Company and OMA. As of December 31, 2020, the account payable under this agreement was Ps.80,681. For the year ended December 31, 2020, the Company expensed Ps.32,193 for this concept. j) Chevez, Ruiz, Zamarripa y Cia, S.C. (Chevez) Chevez, Ruiz, Zamarripa y Cia, S.C. (Chevez) is a related party because Mr. José Luis Fernández Fernández is an independent member of the Board of Directors, as well as the chairman of the Audit and Corporate Governance Committee of the Company and non-managing partner of Chevez. Chevez provides tax advisory services to us. As of December 31, 2020, the balances due to Chevez under the tax advisory services provided to the Company were Ps.4,823. For the year ended December 31, 2020, the Company expensed Ps.4,823 for this concept. k) Directors and officers Current: Credit cards Benefits from suppliers Other accounts receivable Other points of sales Cargo clients Employees Travel agencies and insurance commissions Marketing services receivable Airport services Affinity credit card Settlement receivable Insurance claims Allowance for credit losses During the year ended December 31, 2020, 2019 and 2018, the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.5,762, Ps.8,085 and Ps.7,178, respectively, and the rest of the directors received a compensation of Ps.3,692, Ps.4,367 and Ps.5,217, respectively. Accounts receivable have the following aging: 2020 2019 Ps. 231,260 Ps. 389,634 105,947 87,204 67,315 45,201 36,287 16,099 4,020 15 – – – 593,348 (32,708) 26,989 189,904 102,002 46,600 29,681 76,975 7,024 42,894 49,040 2,422 143 963,308 (40,308) Ps. 560,640 Ps. 923,000 During the years ended December 31, 2020, 2019 and 2018, all the Company’s senior managers received an aggregate compen- sation of short and long-term benefits of Ps.253,681, Ps.237,846 and Ps.180,001, respectively, these amounts were recognized in salaries and benefits in the consolidated statement of operations. For the years ended December 31, 2020, 2019 and 2018 the cost of the share-based payments transactions (MIP and LTIP) were Ps.75,040, Ps.49,659 and Ps.19,980, respectively. The cost (benefit) of the cash-settled payments transactions MIP II and SARs were Ps.105,303, Ps.40,724 and Ps.(5,238), respectively (Note 17). The Company has a short-term benefit plan for certain personnel whereby cash bonuses are awarded for meeting certain Company’s performance target. During the years ended December 31, 2020, 2019 and 2018, the Company recorded a provision in the amount of Ps.0, Ps.80,634 and Ps.50,000, respectively. Days 0 – 30 31 – 60 61 – 90 91 – 120 2020 Impaired 2020 Not impaired Total 2020 2019 Impaired 2019 Not impaired Total 2019 Ps. 4,090 Ps. 486,001 Ps. 490,091 Ps. 5,804 Ps. 722,651 Ps. 728,455 – – 28,618 13,872 6,081 54,686 13,872 6,081 83,304 – – 34,504 64,983 19,274 116,092 64,983 19,274 150,596 Ps. 32,708 Ps. 560,640 Ps. 593,348 Ps. 40,308 Ps. 923,000 Ps. 963,308 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 128 2020 2019 Ps. 829,918 – 279,390 Ps. 576,505 23,584 9,064 1,141,956 7,641,544 741,871 41,323 8,424,738 – 23,822 600,327 7,047,360 557,530 39,531 7,644,421 Ps. 9,566,694 Ps. 8,244,748 The movement in the allowance for credit losses from January 1, 2018 to December 31, 2020 is as follows: 11. Guarantee deposits Balance as of January 1st, 2018 Write-offs Increase in allowance Balance as of December 31, 2018 Write-offs Increase in allowance Balance as of December 31, 2019 Write-offs Increase in allowance Balance as of December 31, 2020 9. Inventories Ps. (17,809) 17,126 (10,621) (11,304) 11,389 (40,393) (40,308) 21,264 (13,664) Ps. (32,708) An analysis of this caption on December 31, 2020 and 2019 is as follows: Current asset: Credit letters deposits Aircraft maintenance deposits paid to lessors (Note 1j) 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 An analysis of inventories on December 31, 2020 and 2019 is as follows: Spare parts and accessories of flight equipment Miscellaneous supplies 2020 2019 Ps. 271,454 Ps. 294,390 7,505 7,518 Ps. 278,959 Ps. 301,908 The inventory items are consumed during or used mainly in delivery of in-flight services and for maintenance services by the Leasehold improvements Company and are valued at the lower of cost or replacement value. During the years ended as of December 31, 2020, 2019 and 2018, the amount of consumption of inventories, recorded as an operating expense as part of maintenance expense was Ps.234,691, Ps.284,687 and Ps.290,206, respectively. 10. Prepaid expenses and other current assets An analysis of prepaid expenses and other current assets at December 31, 2020 and 2019 is as follows: Flight credits Advances to suppliers Sales commission to travel agencies (Note 1d) Other prepaid expenses Prepaid insurance Advances to components suppliers Ps. 389,927 Ps. – 163,044 151,342 81,803 64,309 – 283,340 84,239 115,054 88,941 209,557 Ps. 850,425 Ps. 781,131 2020 2019 Workshop machinery and equipment 20,574 12. Rotable spare parts, furniture and equipment, net Gross value At December 31, Accumulated depreciation At December 31, Net carrying value At December 31, 2020 2019 2020 2019 2020 2019 to flight equipment Ps. 5,092,049 Ps. 4,220,672 Ps. (3,354,166) Ps. (2,679,884) Ps. 1,737,883 Ps. 1,540,788 Pre-delivery payments* Flight equipment Construction and improvements in process Constructions and improvements Computer equipment Workshop tools Electric power equipment Communications equipment 4,920,126 1,689,473 53,545 175,407 49,945 27,727 20,448 14,803 Motorized transport equipment platform Service carts on board Office furniture and equipment Allowance for obsolescence 15,247 9,216 67,035 (3,000) 4,507,770 – – 4,920,126 4,507,770 1,287,102 (1,223,560) (553,852) 465,913 733,250 474,240 172,460 47,566 26,875 20,412 14,099 16,301 15,026 7,675 70,709 (3,000) – (148,391) (42,126) (24,398) (12,773) (9,038) (7,641) (7,924) (6,112) – (131,510) (34,495) (22,023) (11,400) (8,322) (6,092) (5,392) (5,554) (35,309) (34,049) 53,545 27,016 7,819 3,329 7,675 5,765 12,933 7,323 3,104 31,726 – – (3,000) 474,240 40,950 13,071 4,852 9,012 5,777 10,209 9,634 2,121 36,660 (3,000) Total Ps. 12,152,595 Ps. 10,877,907 Ps. (4,871,438) Ps. (3,492,573) Ps. 7,281,157 Ps. 7,385,334 * During the years ended December 31, 2020, 2019 and 2018, the Company capitalized borrowing costs of Ps.384,038, Ps.456,313 and Ps.357,920, respectively. The amount of this line is net of disposals of capitalized borrowing costs related to sale and leaseback transac- tions of Ps.401,862, Ps.328,571 and Ps.242,678, respectively. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Flight equipment Constructions and improvements 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 Allowance for obsolescence Pre-delivery payments Construction and improvements in process Leasehold improvements to flight equipment Total Net book amount as of December 31, 2018 Ps. 664,322 Ps. 15,235 Ps. 16,547 Ps. 38,306 Ps. 5,122 Ps. 3,369 Ps. 446 Ps. 4,911 Ps. 4,481 Ps. 126 Ps. – Ps. 3,672,090 Ps. 142,738 Ps. 1,214,589 Ps. 5,782,282 Content 129 Additions Disposals and transfers Borrowing costs, net* Other movements Depreciation As of December 31, 2019 Cost 692,186 5,596 1,730 1,461 2,487 3,137 (538,370) – – – – (131) – (10) – 34,840 1,999 2,757 (84,888) (14,721) (7,074) (5,854) 733,250 40,950 1,287,102 172,460 13,071 47,566 36,660 70,709 – – 2,487 (1,084) 9,012 20,412 – – 284 (1,938) 4,852 26,875 – – – 9,529 (341) 9,634 15,026 355 4,278 2,273 (3,000) 1,412,790 525,556 661,954 3,310,803 (2) – 1,446 (933) 5,777 14,099 (35) – 2,529 (1,044) 10,209 16,301 – – – (278) 2,121 7,675 (704,852) (3,957) 127,742 – – – (190,097) 133,939 (1,247,357) 127,742 (287) – (469,694) (587,849) (3,000) 4,507,770 474,240 1,540,788 7,385,334 (3,000) 4,507,770 474,240 4,220,672 10,877,907 Accumulated depreciation (553,852) (131,510) (34,495) (34,049) (11,400) (22,023) (5,392) (8,322) (6,092) (5,554) – – – (2,679,884) (3,492,573) Net book amount as of December 31, 2019 Additions Disposals and transfers Borrowing costs, net* Other movements Depreciation As of December 31, 2020 Cost 733,250 668,376 (861,761) – – 40,950 128 – – 2,317 (73,952) (16,379) 465,913 27,016 13,071 1,648 – – 713 (7,613) 7,819 1,689,473 175,407 49,945 36,660 9,012 733 – – 101 (5,768) 31,726 67,035 – – – 36 (1,373) 7,675 20,448 4,852 851 – – – – – – 222 (2,374) (2,533) 3,329 27,727 7,323 15,247 – – – 1,083 (1,095) 5,765 14,803 – – – 4,273 (1,549) 12,933 20,574 Accumulated depreciation (1,223,560) (148,391) (42,126) (35,309) (12,773) (24,398) (7,924) (9,038) (7,641) 2,121 1,541 – – – (558) 3,104 9,216 (6,112) 2,185,902 176,607 646,219 3,682,005 (1,755,724) (354,146) (17,822) – – – (243,156) 235,509 (2,971,631) (17,822) 1,098 – (684,633) (797,827) (3,000) 4,920,126 53,545 1,737,883 7,281,157 (3,000) 4,920,126 53,545 5,092,049 12,152,595 – – – (3,354,166) (4,871,438) 9,634 5,777 10,209 (3,000) 4,507,770 474,240 1,540,788 7,385,334 – – – – – – – – – – – – – Net book amount as of December 31, 2020 Ps. 465,913 Ps. 27,016 Ps. 7,819 Ps. 31,726 Ps. 7,675 Ps. 3,329 Ps. 7,323 Ps. 5,765 Ps. 12,933 Ps. 3,104 Ps. (3,000) Ps. 4,920,126 Ps. 53,545 Ps. 1,737,883 Ps. 7,281,157 a) Depreciation expense for the years ended December 31, 2020, 2019 and 2018, was Ps.797,827, Ps.587,849 and Ps.427,756, In November 2018, the Company amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries between respectively. Depreciation charges for the year are recognized as a component of operating expenses in the consolidated 2019 and 2022. Also, in this amendment Volaris used its rights on the Airbus Purchase Agreement to convert six A320NEO into statements of operations. A321NEO. In July 2020, we amended the agreement with Airbus to reschedule the 80 aircraft deliveries between 2023 and 2028. In October 2020, we amended the agreement with Airbus to reschedule the remaining 18 fleet deliveries between 2020 b) In October 2005 and December 2006, the Company entered into purchase agreements with Airbus and International Aero and 2022. Engines AG (“IAE”) for the purchase of aircraft and engines, respectively. Under such agreements and prior to the delivery of each aircraft and engine, the Company agreed to make pre-delivery payments, which were calculated based on the reference On August 16, 2013, the Company entered into certain agreements with IAE and United Technologies Corporation Pratt & Whitney price of each aircraft and engine, and following a formula established for such purpose in the agreements. Division (“P&W”), which included the purchase of the engines for 14 A320CEO and 30 A320NEO respectively, to be delivered between 2014 and 2022. This agreement also included the purchase of one spare engine for the A320CEO fleet (which was In 2011, the Company amended the agreement with Airbus for the purchase of 44 A320 family aircraft to be delivered from received during the fourth quarter of 2016) and six spare engines for the A320NEO fleet to be received from 2017 to 2022. In 2015 to 2020. The new order includes 14 A320CEO (“Current Engine Option Aircraft”) and 30 A320NEO. Additionally, during November 2015, the Company amended the agreement with the engine supplier to provide major maintenance services for the December 2017, the Company amended the agreement with Airbus for the purchase of 80 A320 family aircraft to be delivered engines of sixteen aircrafts (10 A320NEO and 6 A321NEO). This agreement also includes the purchase of three spare engines, from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement and prior to the delivery of two of them for the A320NEO fleet, and one for the A321NEO fleet. each aircraft, the Company agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. The Company received credit notes from P&W in December 2017 of Ps.58,530 (US$3.06 million), which are being amortized on a straight-line basis, prospectively during the term of the agreement. As of December 31, 2020, and 2019, the Company Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 130 amortized a corresponding benefit from these credit notes of Ps.4,878 and Ps.4,878, respectively, which is recognized as an 13. Intangible assets, net offset to maintenance expenses in the consolidated statements of operations. The composition and movement of intangible assets is as follows: During the years ended December 31, 2020 and 2019, the amounts paid for aircraft and spare engine pre-delivery payments were of Ps.2,185,902 (US$102.7 million) and Ps.1,412,790 (US$75.0 million), respectively. The current purchase agreement with Airbus requires the Company to accept delivery of 96 Airbus A320 family aircraft during the following eight years (from January 2021 to October 2028). The agreement provides for the addition of 96 Aircraft to its fleet as follows: four in 2021, twelve in 2022, three in 2023, thirteen in 2024, fifteen in 2025, twenty-five in 2026, eleven in 2027 and thirteen in 2028. Commitments to acquisitions of property and equipment are disclosed in Note 23. During the years ended December 31, 2020, 2019 and 2018 the Company entered into aircraft and spare engines sale and leaseback transactions, resulting in a gain of Ps.710,522, Ps.284,759 and Ps.609,168, respectively, that was recorded under the caption other operating income in the consolidated statement of operations, only the amount of gains that relates to the rights transferred to the buyer-lessor. The rest of the gains are amortized under the lease term (Note 20). c) During December 2017, the Company entered into an updated total support agreement with Lufthansa for 66 months, with an effective date on July 1, 2018. This agreement includes similar terms and conditions as the original agreement. As part of this agreement, the Company received credit notes of Ps.28,110 (US$1.5 million), which are being amortized on a straight-line basis, prospectively during the term of the agreement. As of December 31, 2020, 2019 and 2018, the Company amortized a corresponding benefit from these credit notes of Ps.5,230, Ps.5,230 and Ps.7,191, respectively, recognized as an offset to maintenance expenses in the consolidated statements of operations. Gross value Accumulated amortization Net carrying amount At December 31, Useful Life years 2020 2019 2020 2019 2020 2019 Software 1 – 4 Ps. 704,257 Ps. 579,360 Ps. (512,695) Ps. (411,963) Ps. 191,562 Ps. 167,397 Balance as of January 1st, 2019 Ps. 179,124 Additions Disposals Amortization Exchange differences Balance as of December 31, 2019 Additions Disposals Amortization Exchange differences Balance as of December 31, 2020 77,325 – (87,667) (1,385) 167,397 124,724 – (100,618) 59 Ps. 191,562 Software amortization expense for the years ended December 31, 2020, 2019 and 2018 was Ps.100,618, Ps.87,667 and Ps.72,885, respectively. These amounts were recognized in depreciation and amortization in the consolidated statements of operations. d) On September 5, 2019, the Company acquired one previously leased A319 aircraft from the lessor, which was accounted for a cost for a total amount of Ps.392,076 (US$19,600). This transaction did not generate any gain or loses in our consolidated statements of operations. 14. Leases The Company identified the major components as separate parts at their respective cost. These major components of the The most significant leases are as follows: aircraft are presented as part of the aircraft and depreciated over their useful life. During the month of December 2019, the Company sold the recently acquired aircraft engines in a sale and lease back transaction. As of December 31, 2020, the carry amount of the remaining owned aircraft and the depreciation was Ps.52,984 and Ps.5,946, respectively. As of December 31, 2019, the carry amount of the remaining owned aircraft and the depreciation was Ps.54,771 and Ps.1,787, respectively. a) Aircraft and engine represent the Company´s most significant lease agreements. At December 31, 2020, the Company leases 85 aircraft (81 as of December 31, 2019) and 18 spare engines under lease agreements (14 as of December 31, 2019) that have maximum terms through 2033. These leases are generally guaranteed by either deposit in cash or letters of credits. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 131 Composition of the fleet and spare engines, leases*: During the year ended December 31, 2019, the Company also leased two NEO spare engines (based on the terms of the Pratt & Whitney purchase agreement FMP) and two CEO spare engines to its fleet. These four engines incorporated were subject to Aircraft Type A319 A319 A320 A320 A320NEO A321 A321NEO Model 132 133 233 232 271N 231 271N At December 31, 2020 At December 31, 2019 sale and leaseback transactions and their respective lease agreements were accounted as leases. Additionally, during 2019 the 3 2 39 1 24 10 6 85 3 4 39 2 17 10 6 81 Company extended the lease term of one spare engine (effective from November 2019). During the year ended December 31, 2018, the Company added ten new leased aircraft to its fleet (acquired three A320 NEO’s through sale leaseback transactions under our existing Airbus purchase agreement and seven obtained directly from the lessors). Also, the Company extended the lease term of Aircraft (effective from 2019) and two spare engines (effective from February and April 2018), and returned four aircraft to their respective lessors. During the year ended December 31, 2018, the Company also added two NEO spare engines to its fleet based on the terms of the Pratt & Whitney purchase agreement (FMP). These two engines incorporated were subject to sale and leaseback transactions. Engine spare Type Model At December 31, 2020 At December 31, 2019 Set out below are the carrying amounts of right-of-use assets recognized and the movements during the period: V2500 V2500 V2500 V2500 PW1100 PW1100 V2524–A5 V2527M–A5 V2527E–A5 V2527–A5 PW1127G–JM PW1133G–JM 2 3 5 2 5 1 18 2 3 3 2 3 1 14 * Certain of the Company’s aircraft and engine lease agreements include an option to extend the lease term period. Terms and conditions are subject to market conditions at the time of renewal. As at January 1st, 2019 Additions Depreciation on right of use assets As at December 31, 2019 Additions Disposals Foreign exchange effect Aircraft leases Spare engine leases Land and building leases Total Ps. 31,126,169 Ps. 579,696 Ps. 176,188 Ps. 31,882,053 6,676,492 (4,490,572) 33,312,089 4,876,071 (17,742) – 230,200 (132,698) 677,198 362,081 – – 42,992 (79,701) 139,479 15,222 – 795 6,949,684 (4,702,971) 34,128,766 5,253,374 (17,742) 795 During the year ended December 31, 2020, the Company added seven new leased aircraft to its fleet (seven A320 NEO´s As at December 31, 2020 Ps. 33,406,490 Ps. 829,200 Ps. 80,527 Ps. 34,316,217 Depreciation on right of use assets (4,763,928) (210,079) (74,969) (5,048,976) acquired through sale and leaseback transactions under our existing Airbus purchase agreement). Also, the Company returned three aircraft to their respective lessors. During the year ended December 31, 2020, the Company also leased two NEO spare engines (based on the terms of the Pratt & Whitney purchase agreement FMP) and two CEO spare engines to its fleet. These four engines incorporated were subject to sale and leaseback transactions and their respective lease agreements were accounted as leases. During the year ended December 31, 2019, the Company added seven new leased aircraft to its fleet (three A320 NEO´s acquired through sale and leaseback transactions under our existing Airbus purchase agreement and four obtained directly from the lessor´s). Also, the Company extended the lease term of one spare engine (effective from 2019) and returned two aircraft to their respective lessors. All the aircraft incorporated through the lessor´s aircraft order book was not subject to sale and leaseback transactions. Set out below are the carrying amounts of lease liabilities and the movements during the period: As at January 1st Additions Disposals Accretion of interest Foreign exchange effect Payments As at 31 December Current Non-current 2020 2019 Ps. 40,517,045 Ps. 39,565,146 5,572,764 (231,566) 2,218,982 2,163,886 7,186,613 2,037,540 (1,772,452) (6,110,569) (6,499,802) Ps. 44,130,542 Ps. 40,517,045 Ps. 6,484,092 Ps. 4,720,505 Ps. 37,646,450 Ps. 35,796,540 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements The Company applied practical expedients to leases from applying IFRS 16 guidance on lease modification accounting for rent 15. Accrued liabilities concessions for those lease modifications arising as a direct result of COVID-19. The net impact on the consolidated statements of operations for 2020 was Ps.190,811, which reflects the changes to lease payments that arose from such concessions. a) An analysis of current accrued liabilities at December 31, 2020 and 2019 is as follows: The following are the amounts recognized in profit or loss: Depreciation of right-of-use assets Ps. (5,048,976) Ps. (4,702,971) Ps. (4,043,691) As of December 31, 2020 2019 2018 Interest expense on lease liabilities and aircraft and engine lease return obligation (Note 21) Aircraft and engine variable expenses Total amount recognized in profit or loss (2,350,250) (1,845,254) (2,128,162) (961,657) (1,755,978) (956,010) Ps. (9,244,480) Ps. (7,792,790) Ps. (6,755,679) Deferred revenue from V Club membership The Company had total cash outflows for leases of Ps.6,110,569 in 2020 (Ps.6,499,802 in 2019 and Ps.5,710,907 in 2018). i) Return obligations The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which no case are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of variable lease expenses and the provision is included as part of other liabilities, through the remaining lease term. The Company estimates the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2020, 2019 and 2018, the Company expensed as supplemental rent Ps.1,428,179, Ps.680,964 and Ps.659,106, respectively. Purchase of 80 A320 New Engine Option (“NEO”) aircraft On December 28, 2017, the Company amended the agreement with Airbus, S.A.S. (“Airbus”) for the purchase of additional 80 A320NEO family aircraft to be delivered from 2022 to 2026, to support the Company’s targeted growth markets in Mexico, United States and Central America. The related commitments for the acquisitions of such aircraft are disclosed in Note 23. Content 132 2020 2019 Ps. 1,285,931 Ps. 1,507,659 337,467 179,342 174,549 122,729 98,942 86,374 35,359 20,830 10,634 3,888 242 296,829 230,935 132,085 81,124 120,254 48,526 67,808 35,465 10,634 – 542 Ps. 2,356,287 Ps. 2,531,861 2020 2019 Ps. 45,270 Ps. 55,905 16,847 4,581 19,439 15,452 Ps. 66,698 Ps. 90,796 Fuel and traffic accrued expenses Salaries and benefits Sales, marketing and distribution accrued expenses Maintenance deposits Accrued administrative expenses Maintenance and aircraft parts accrued expenses Others Information and communication accrued expenses Supplier services agreement Benefits from suppliers Advances from travel agencies b) Non-current accrued liabilities at December 31, 2020 and 2019 is as follows: Supplier services agreement Benefits from suppliers Other c) An analysis of other liabilities is as follows: Balance as of January 1, 2020 Increase for the year Payments December 31, 2020 Balance as of Aircraft and engine lease return obligation Ps. 1,852,688 Ps. 2,126,401 Ps. (1,474,605) Ps. 2,504,484 Guarantee deposit Employee profit sharing (Note 16) Current maturities Non-current – 24,097 250,000 20,810 – (30,490) 250,000 14,417 Ps. 1,876,785 Ps. 2,397,211 Ps. (1,505,095) Ps. 2,768,901 Ps. 101,218 Ps. 2,667,683 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Balance as of January 1, 2019 Increase for the year Payments December 31, 2019 Balance as of Changes in the defined benefit obligation are as follows: Aircraft and engine lease return obligation Ps. 1,831,045 Ps. 725,506 Ps. 703,863 Ps. 1,852,688 Employee profit sharing (Note 16) 14,984 22,134 13,021 24,097 Ps. 1,846,029 Ps. 747,640 Ps. 716,884 Ps. 1,876,785 Current maturities Non-current Ps. 407,190 Ps. 1,469,595 During the years ended December 31, 2020 and 2019 no cancellations or write-offs related to these liabilities were recorded. Defined benefit obligation at January 1, Net period cost charged to profit or loss: Current service cost Interest cost on benefit obligation Remeasurement losses in other comprehensive income: Actuarial changes arising from changes in assumptions Payments made Defined benefit obligation at December 31, Content 133 2020 2019 Ps. 38,151 Ps. 18,153 8,449 2,630 2,651 (1,254) 8,214 1,872 10,192 (225) Ps. 50,627 Ps. 38,206 On September 12, 2012, the Company entered into a cobrand credit card agreement with Banco Invex, S.A., Institución de Banca Múltiple, Invex, Grupo Financiero Invex “Invex”. The significant assumptions used in the computation of the seniority premium obligations are shown below: On June 26, 2020, the Company signed a new amendment with Invex. Through this agreement, Invex pays certain commissions to Volaris related to the cobrand credit card and Invex’s clients receive vouchers to be redeemed in different Volaris services under certain conditions. A portion of the voucher cost is paid by Volaris and the remaining amount by Invex. During the year ended December 31, 2020, Invex prepaid certain commissions to Volaris, which were recorded as part of other liabilities. 16. Employee benefits The components of net period cost recognized in the consolidated statement of operations and the obligations for seniority premium for the years ended December 31, 2020, 2019 and 2018, are as follows: Analysis of net period cost: Current service cost Interest cost on benefit obligation Net period cost 2020 2019 2018 Ps. Ps. 8,449 2,630 11,079 Ps. Ps. 8,214 1,872 Ps. 10,086 Ps. 4,977 1,424 6,401 Financial: Discount rate Expected rate of salary increases Annual increase in minimum salary Biometric: Mortality (1) Disability (2) 2020 7.04% 5.50% 4.00% 2019 7.18% 5.50% 4.00% 2018 9.91% 5.65% 4.15% EMSSA 09, CEPAL* 2010 EMSSA 09, CEPAL* 2010 EL SALVADOR, CEPAL*2010 COSTA RICA IMSS–97 EL SALVADOR, CEPAL*2010 COSTA RICA IMSS–97 EMSSA 09 IMSS–97 Mexican Experience of social security (EMSSA), Economic Commission for Latin America and the Caribbean (CEPAL for its Spanish acronym). (1) (2) Mexican Experience of Instituto Mexicano del Seguro Social (IMSS). Accruals for short-term employee benefits at December 31, 2020 and 2019, respectively, are as follows: Employee profit-sharing (Note 15c) Ps. 14,417 Ps. 24,097 2020 2019 The key management personnel of the Company include the members of the Board of Directors (Note 7). Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 134 17. Share-based payments a) LTRP In November 2020, 2019 and 2018, the extensions to the LTIP were approved by the Company’s shareholder’s and Company’s Board of Directors, respectively. The total cost of the extensions approved were Ps.92,132 (Ps.59,899 net of withheld taxes), Ps.86,772 (Ps.56,407 net of withheld taxes) and Ps.63,961 (Ps.41,590 net of withheld taxes), respectively. Under the terms of the On November 6, 2014, the shareholders of the Company and the shareholders of its subsidiary Servicios Corporativos, approved incentive plan, certain key employees of the Company were granted a special bonus that was transferred to the Administrative an amendment to the current LTRP for the benefit of certain key employees, based on the recommendations of the Board of Trust for the acquisition of Series A shares of the Company. Directors of the Company at its meetings held on July 24 and August 29, 2014. For such purposes on November 10, 2014 an irrevocable Administrative Trust was created by Servicios Corporativos and the key employees. The new plan was restructured As of December 31, 2020, 2019 and 2018, the number of shares into the Administrative Trust associated with the Company’s and named LTIP, which consists of a share purchase plan (equity-settled transaction) and SARs plan (cash settled). share purchase payment plans is as follows: On October 18, 2018, the Board of Directors of the Company approved a new long-term retention plan LTRP for certain executives of the Company, through which the beneficiaries of the plan, will receive shares of the Company once the service 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 through an intermediary authorized by the BMV based on the Administration Trust’s Technical Committee instructions; (iii) Subject to specified terms and conditions set forth in the Administrative Trust, the acquired shares were in escrow under the Administrative Trust for its administration until the vesting period date for each key executive, date as of which the key executive can fully dispose of the shares and instruct as desired. Outstanding as of January 1st, 2018 Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year Outstanding as of December 31, 2018 Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year Outstanding as of December 31, 2019 Purchased during the year Granted during the year Exercised/vested during the year Forfeited during the year Outstanding as of December 31, 2020 Number of Series A shares 820,088 * 3,208,115 – (353,457) (121,451) 3,553,295 * 2,694,600 – (959,614) (173,090) 5,115,191 3,159,763 – (2,142,426) (327,217) 5,805,311 * (iv) The share purchase plan provides that if the terms and conditions are not met by the vesting period date, then the shares * These shares are presented as treasury shares in the consolidated statement of financial position as of December 31, 2020, 2019 and 2018. would be sold in the BMV, and Servicios Corporativos would be entitled to receive the proceeds of the sale of shares. (v) The key employees’ account balance will be tracked by the Administrative Trust. The Administrative Trust’s objectives are to acquire Series A shares on behalf of the key employees and to manage the shares granted to such key executive based on instructions set forth by the Technical Committee. As the Administrative Trust is controlled and therefore consolidated by Controladora, shares purchased in the market and held within the Administrative Trust are presented for accounting purposes as treasury stock in the consolidated statement of changes in equity. The vesting period of the shares granted under the Company’s share purchase plans is as follows: Number of Series A shares 2,979,412 1,819,440 1,006,459 5,805,311 Vesting period November 2020 – 2021 November 2021 – 2022 November 2022 – 2023 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 135 In accordance with IFRS 2, the share purchase plans are classified as equity-settled transactions on the grant date. This valuation of the Company or CPOs having shares as underlying securities for which, as long as certain conditions occur, the employees is the result of multiplying the total number of Series A shares deposited in the Administrative Trust and the price per share, will have the right to request the delivery of those shares (iii) the creation of an Administrative Trust to deposit such shares plus the balance in cash deposited in the Administrative Trust. in escrow until they are delivered to the officers or returned to the Company in the case that certain conditions do not occur; and (iv) the execution of share sale agreements setting forth the terms and conditions upon which the officers may exercise For the years ended December 31, 2020, 2019 and 2018, the compensation expense recorded in the consolidated statement its shares at Ps.5.31 (five Mexican pesos 31/100) per share. of operations amounted to Ps.75,040, Ps.49,659 and Ps.19,980, respectively. All shares held in the Administrative Trust are considered outstanding for both basic and diluted (loss) earnings per share purposes, since the shares are entitled to dividend On December 24, 2012, the Administrative Trust was created, and the share sale agreements were executed. On December 27, if and when declared by the Company. 2012, the trust borrowed Ps.133,723 from the Company and immediately after; the trust paid the Company the same amount During 2020, 2019 and 2018, some key employees left the Company; therefore, the vesting conditions were not fulfilled. In borrowed as purchase price for the shares. accordance with the terms of the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares, The share sale agreements provide that the officers may pay for the shares at the same price upon the occurrence of the number of forfeited shares as of December 31, 2020, 2019 and 2018, were (327,217), (173,090) and (121,451), respectively. either an initial public offering of the Company’s capital stock or a change of control and as long as they remain employees – SARs (cash settled) until the options are exercised, with a maximum term of ten years. Upon payment of the shares by the officers to the Management Trust, it must pay such amount back to the Company as repayment of the loan, for which the Company On November 6, 2014, the Company granted 4,315,264 SARs to key employees that entitle them to a cash payment and vest as charges no interest. long as the employee continues to be employed by the Company at the end of each anniversary, during a 3 years period. The total amount of the appreciation rights granted under this plan at the grant date was Ps.10,831 at such date. The MIP has been classified as equity-settled, by which, the grant date, fair value is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. Equity-settled transactions are measured at fair value at the date the equity Fair value of the SARs was measured at each reporting date. The carrying amount of the liability relating to the SARs as of benefits are conditionally granted to employees. The total cost of the MIP determined by the Company was Ps.2,722 to be December 31, 2019 and 2018 were Ps.1,901 and Ps.537, respectively. The retention plan granted in previous periods expired in recognized from the time it becomes probable the performance condition will be met over the vesting period. Total cost November 2020. of the MIP related to the vested shares has been fully recognized in the consolidated statements of operations during the The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits vesting years. over the service period. During the years ended December 31, 2020, 2019 and 2018, the Company recorded a expense (benefit) This cost was determined by using the improved Binomial valuation model from Hull and White, on the date in which the plan of Ps.(1,901), Ps.2,964 and Ps.(186), respectively, in the consolidated statement of operations. had already been approved by the shareholders and a shared understanding of the terms and conditions of the plan was reached with the employees (December 24, 2012, defined as the grant date), with the following assumptions: The fair value of these SARs was 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. During the years ended December 31, 2019, the Company made a cash payment to key employees related to the SARs plan in the amount of Ps.2,395. Such payments were determined based on the increase in the share price of the Company from the grant date to the exercisable date. c) MIP – MIP I 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 The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future In April 2012, the Board of Directors authorized a MIP for the benefit of certain key employees, subject to shareholders’ approval. trends, which may not necessarily be the actual outcome. 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 to acquire shares Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Under the methodology followed by the Company, at the grant date and December 31, 2012, the granted shares had no positive The carrying amount of the liability relating to the SARs as of December 31, 2020 and 2019 was Ps.177,770 and Ps.70,567, intrinsic value. respectively. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries In 2019, the key employees exercised 2,780,000 Series A shares. As a result, the key employees paid to the Management Trust and benefits over the service period. Ps.14,773 corresponding to the exercised shares for the year ended December 31, 2019. During 2020, there were no exercised During the years ended December 31, 2020 and 2019, the Company recorded a (benefit) expense of Ps.107,204 and Ps.37,760, shares under the MIP. respectively, in the consolidated statement of operations. No SARs were exercised during 2020. Thereafter, the Company received from the Management Trust the payment related to the exercised shares by the key employees The vesting schedule is summarized in the table below: as a repayment of the loan between the Company and the Management Trust. Movements in share options The following table illustrates the number of shares options and fixed exercise prices during the year: Number of SARs 3,391,020 3,391,020 * Vesting date February 2021 Number of share Exercise price Total in thousands options in Mexican pesos of Mexican pesos * Includes forfeited SARs of 0, 0 and 1,563,520, for the years ended December 31, 2020, 2019 and 2018, respectively. Content 136 Outstanding as of December 31, 2018 Ps. 10,433,981 Ps. 5.31 Ps. 55,441 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2019 Granted during the year Forfeited during the year Exercised during the year – – (2,780,000) 7,653,981 Ps. – – – – – 5.31 5.31 – – – – – (14,773) Ps. 40,668 – – – The expense (benefit) recognized for the Company’s retention plans during the year is shown in the following table: Expense (benefit) arising from cash-settled share-based payments transactions Ps. 105,303 Ps. 40,724 Ps. (5,238) 2020 2019 2018 Expense arising from equity-settled share-based payments transactions 75,040 49,659 19,980 14,742 Outstanding as of December 31, 2020 Ps. 7,653,981 Ps. 5.31 Ps. 40,668 Total expense arising from share-based payments transactions Ps. 180,343 Ps. 90,383 Ps. At December 31, 2020 and 2019, 7,653,981 and 7,653,981 share options pending to exercise were considered as treasury shares, d) Board of Directors Incentive Plan (BoDIP) respectively. – MIP II 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 payments”. On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees. In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit Such extension was modified as of November 6, 2016. Under MIP II, 13,536,960 share appreciation rights of our Series A of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during a four years period shares were granted to be settled annually in cash in a period of five years in accordance with the established service with an exercise price share at Ps.9.74, Ps.16.80 and Ps.16.12 for the years ended 2020, 2019 and 2018, respectively, which was conditions. In addition, a five-year extension to the period in which the employees can exercise MIP II once the SARs are determined on the grant date. Under this plan, no service or performance conditions are required to the board members for vested was approved. exercise the option to acquire shares, and therefore, they have the right to request the delivery of those shares at the time Fair value of the SARs is measured at each reporting period using a Black-Scholes option pricing model, taking into consideration they pay for them. the terms and conditions granted to the employees. The amount of the cash payment is determined based on the increase in For such purposes on August 29, 2018 the Trust Agreement number CIB/3081 was created by Controladora Vuela, Compañia our share price between the grant date and the settlement date. 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, 2020 and 2019 available to be exercised is 5,233,693 and 2,072,344, respectively. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements 18. Equity All shares representing the Company’s capital stock, either Series A shares or Series B shares, grant the holders the same economic rights and there are no preferences and/or restrictions attaching to any class of shares on the distribution of dividends As of December 31, 2020, the total number of the Company’s authorized shares was 1,165,976,677; represented by common and the repayment of capital. Holders of the Company’s Series A common stock and Series B common stock are entitled to registered shares, issued and with no par value, fully subscribed and paid, comprised as follows: dividends when, and if, declared by a shareholders’ resolution. The Company’s revolving line of credit with Santander and Content 137 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. Shares Variable Class II Total shares During the years ended December 31, 2020 and 2019, the Company did not declare any dividends. 1,077,914,326 1,077,924,804 a) Earnings (loss) per share Series A shares (1) Series B shares (1) Treasury shares (Note 17) Fixed Class I 10,478 13,702 24,180 – 24,180 88,038,171 88,051,873 1,165,952,497 1,165,976,677 (19,020,202) (19,020,202) (1) 1,146,932,295 1,146,956,475 (1) The number of forfeited shares as of December 31, 2020 were 327,217, which are include in treasury shares. On December 11, 2020, Controladora Vuela Compañía de Aviación, S.A.B. de C.V announced the closing of an upsized primary follow-on equity offering in which the Company offered 134,000,000 of its Ordinary Participation Certificates (Certificados de Participación Ordinarios), or CPOs, in the form of American Depositary Shares, or ADSs, at a price to the public of USD11.25 per ADS in the United States and other countries outside of Mexico, pursuant to the Company’s shelf registration statement filed with the Securities and Exchange Commission (the “SEC”). In connection with the offering, the underwriters exercised their option to purchase up to 20,100,000 additional CPOs in the form of ADSs. Each ADS represents 10 CPOs and each CPO represents a financial interest in one Series A share of common stock of the Company. The Company currently intends to use the net proceeds of approximately USD164,419,000 (after the deduction of the underwriters´ commission and expenses payable Basic earnings (loss) per share (“EPS or LPS”) amounts are calculated by dividing the net income (loss) for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted EPS or LPS amounts are calculated by dividing the profit (loss) attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares, if any), by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares (to the extent that their effect is dilutive). The following table shows the calculations of the basic and diluted earnings (loss) income per share for the years ended December 31, 2020, 2019 and 2018. Net (loss) income for the period Ps. (4,293,791) Ps. 2,639,063 Ps. (942,882) At December 31, 2020 2019 2018 (Adjusted) by the Company) from the offering for general corporate purposes. The increase in capital stock amounts of Ps.3,272,832. Weighted average number of shares outstanding (in thousands): As of December 31, 2019, the total number of the Company’s 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: Series A shares (1) Series B shares (1) Treasury shares (Note 17) Shares Variable Class II Total shares 923,814,326 923,824,804 88,038,171 88,051,873 1,011,852,497 1,011,876,677 (15,136,057) (15,136,057) (1) 996,716,440 996,740,620 Fixed Class I 10,478 13,702 24,180 – 24,180 Basic Diluted EPS - LPS: Basic Diluted 1,021,561 1,021,561 1,011,877 1,011,877 1,011,877 1,011,877 (4.203) (4.203) 2.608 2.608 (0.932) (0.932) There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorization of these financial statements. 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 of December 31, 2020, 2019 and 2018, the Company’s legal reserve was Ps.291,178 or 8.5%, 9.8% and 9.8% respectively of our capital stock. For (1) The number of forfeited shares as of December 31, 2019 were 294,541, which are include in treasury shares. the years ended December 31, 2020, 2019 and 2018, we did not allocate any amount to our legal reserve fund. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 138 At an ordinary general shareholders’ meeting held on April 19, 2017 the shareholders approved to increase legal reserve in the (v) A 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders from earnings generated amount of Ps.252,928. As of December 31, 2020, 2019 and 2018 the Company’s legal reserve has not reached the 20% of its starting January 1, 2014. capital stock. c) Any distribution of earnings in excess of the net tax profit account (Cuenta de utilidad fiscal neta or “CUFIN”) balance will be subject to corporate income tax, payable by the Company, at the enacted income tax rate at that time. A 10% withholding tax b) For the years ended December 31, 2020, 2019 and 2018, the Company reported on a consolidated basis taxable income of is imposed on dividends distributions to individuals and foreign shareholders from earnings generated starting January 1, 2014. Ps.302,029, Ps.938,304 and Ps.777,513, respectively, which was partially offset by tax losses from prior years. The income tax rates for 2020, 2019 and 2018 in Guatemala, Costa Rica and El Salvador are 25%, 30% and 30% respectively. d) Shareholders may contribute certain amounts for future increases in capital stock, either in the fixed or variable capital. Said In accordance with the MITL and Costa Rican Income Tax Law (CRITL), tax losses may be carried forward against taxable contributions will be kept in a special account until the shareholders meeting authorizes an increase in the capital stock of the income generated in the succeeding ten and three years, respectively. Carryforward tax losses are Adjusted based on inflation. Company, at which time each shareholder will have a preferential right to subscribe and pay the increase with the contributions previously made. As it is not strictly regulated in Mexican law, the shareholders meeting may agree to return the contributions c) An analysis of consolidated income tax expense for the years ended December 31, 2020, 2019 and 2018 is as follows: to the shareholders or even set a term in which the increase in the capital stock has to be authorized. 19. Income tax a) In accordance with 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 Adjusted 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 2020 and thereafter is 30%. Consolidated statements of operations Current year income tax expense Deferred income tax benefit (expense) Total income tax benefit (expense) (1) Includes translation effect by Ps.2,035 (2) Includes translation effect by Ps.(2,278) (3) Includes translation effect by Ps.2,680 2020 2019 2018 Ps. (90,609) Ps. (281,491) Ps. (232,824) 1,496,793 (1) (813,340) (2) 582,644 (3) Ps. 1,406,184 Ps. (1,094,831) Ps. 349,820 (ii) The tax rules include limits in the deductions of the exempt compensation amount certain items, as follows: Wages and Consolidated statements of comprehensive income benefits paid to workers 47% of income paid to workers and in certain cases up to 53% (holiday bonus, savings fund, employee profit sharing, seniority premiums) will be deductible for employers. As a result, certain wage and salary provisions have difference between tax and book values 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 Deferred income tax related to items recognized in OCI during the year Net gain (loss) cash flow hedges exempt income for workers, contributions for creating or increasing provisions for pension funds, contributions to the Mexican Remeasurement (loss) gain of employee benefits 2020 2019 2018 Ps. 46,835 Ps. (74,820) Ps. 85,107 794 3,058 (1,797) Institute of Social Security payable by the worker that are paid by the employer, as well as the possible non-deduction of Deferred income tax charged to OCI Ps. 47,629 Ps. (71,762) Ps. 83,310 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. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements d) A reconciliation of the statutory corporate income tax rate to the Company’s effective tax rate for financial reporting purposes e) An analysis of consolidated deferred taxes is as follows: Content 139 is as follows: Statutory income tax rate Amendment tax return effects and other tax adjustments Inflation on furniture, intangible and equipment Inflation of tax losses Foreign countries difference with Mexican statutory rate Annual inflation adjustment Unrecorded deferred taxes on tax losses Non-deductible expenses Mexican income tax matters 2020 2019 2018 30.00% 0.92% 0.29% 0.23% (0.06%) (0.91%) (1.29%) (4.51%) 24.67% 30.00% (0.51%) (0.48%) (0.21%) 0.11% (0.05%) 0.27% 0.19% 29.32% 30.00% 0.05% 2.08% 1.16% (0.02%) 0.26% (3.96%) (2.51%) 27.06% Activos por impuestos diferidos: Deferred income tax assets: Lease liability Unearned transportation revenue Extension lease agreement Tax losses available for offsetting against future taxable income Intangible Allowance for doubtful accounts Employee benefits Financial instruments For Mexican purposes, corporate income tax is computed on accrued basis. MITL requires taxable profit to be determined by Employee profit sharing considering revenue net of tax deductions. Prior years' tax losses can be utilized to offset current year taxable income. Income Provisions tax is determined by applying the 30% rate on the net amount after tax losses utilization. Non derivative 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. Central America (Guatemala, Costa Rica and El Salvador) 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, 2020, 2019 and 2018, the Company obtained a net operating (loss) income of Ps.(1,835), Ps.(1,085) and Ps.8,549, respectively. Deferred income tax liabilities: Right of use asset Supplemental rent Rotable spare parts, furniture and equipment, net Inventories Other prepayments Prepaid expenses and other assets 2020 2019 Consolidated statement Consolidated statement Consolidated statement Consolidated statement of financial position of operations of financial position of operations Ps. 13,239,254 Ps. 1,084,140 Ps. 12,155,114 Ps. 1,233,661 773,443 576,422 420,908 61,565 15,191 7,948 4,323 (91,253) (473,242) 15,768,220 10,292,753 1,878,865 707,092 83,402 9,786 (132,462) 12,839,436 436,598 314,100 272,452 (25,941) 47,476 2,934 (22) (2,904) (442,598) (477,471) 1,208,764 797,063 459,343 303,970 446,849 14,089 11,463 (38,865) 7,227 351,345 4,229 14,511,827 55,824 171,916 10,236,929 1,706,949 (177,384) (6,885) (17,942) (311,523) 884,476 90,287 27,728 179,061 313,137 61,708 (137,639) (5,350) (13,741) 9,187 2,958 – 2,734 60,655 4,229 297,878 672,311 111,430 239,452 1,392 (4,329) 88,683 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, 2020, 2019 and 2018, the Company generated net operating losses for an amount of Ps.55,751, Ps.50,246 and Ps.170,731, respectively, for which no deferred tax Reflected in the consolidated statement of financial position as follows: asset has been recognized. Ps. 2,928,784 Ps. 1,494,758 Ps. 1,386,397 Ps. (811,061) According to El Salvador 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, 2020 and 2019, the Company obtained a net operating loss of Ps.16,619 and Ps.32,494. Deferred tax assets Deferred tax liabilities Deferred tax assets, net 2020 2019 Ps. 3,128,555 Ps. 1,542,536 (199,771) (156,139) Ps. 2,928,784 Ps. 1,386,397 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact (285,994) 13,125,430 1,108,939 Consolidated Financial Statements A reconciliation of deferred tax asset, net is as follows: An analysis of the available tax losses carry-forward of the Company at December 31, 2020 is as follows: Opening balance as of January 1, Ps. 1,386,397 Ps. 2,269,220 2020 2019 Deferred income tax (expense) benefit during the current year recorded on profits Deferred income tax (expense) benefit during the current year recorded in accumulated other comprehensive income (loss) Closing balance as of December 31, 1,494,758 (811,061) 47,629 (71,762) Ps. 2,928,784 Ps. 1,386,397 Year of loss 2017 2018 2019 2020 2020 Historical loss Adjusted tax loss Utilized Total remaining amount Year of expiration Ps. 1,067,836 Ps. 1,206,232 Ps. 217,393 Ps. 988,839 92,604 4,922 863,847 55,751 92,604 5,186 878,533 55,751 78,849 – – – 13,755 5,186 878,533 55,751 Ps. 2,084,960 Ps. 2,238,306 Ps. 296,242 Ps. 1,942,064 2027 2021 2029 2030 2023 Content 140 At December 31, 2020, 2019 and 2018, the table shown above includes deferred income tax asset recognized by Concesionaria (2020 and 2017), Comercializadora (2019 and 2020) and Vuela Aviación (2020) for tax losses carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority. According to IAS 12, Income Taxes, a deferred tax asset should be recognized for the carry-forward of available tax losses to the extent that it is probable that future taxable income will be available against which the available tax losses can be utilized. In these regards, the Company has recognized at December 31, 2020, 2019 and 2018 a deferred tax asset for tax losses of Ps.576,422, Ps.303,970 and Ps.309,320 respectively. During 2020, the Company recognized a deferred tax asset for the carry-forward of available tax losses of Concesionaria and Comercializadora, based on the positive evidence of the Company to generate taxable profit related 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; Unrecognized NOLs Tax rate Deferred income tax A breakdown of available tax loss carry-forward of Controladora and its subsidiaries at December 31, 2020 is as follows: Historical loss Adjusted tax loss Utilized remaining amount Total Comercializadora Ps. 42,777 Ps. 43,685 Ps. – Ps. 43,685 Concesionaria Operaciones Volaris Vuela Aviación 1,875,180 18,648 148,355 2,027,302 18,965 148,354 217,393 – 78,849 1,809,909 18,965 69,505 Ps. 2,084,960 Ps. 2,238,306 Ps. 296,242 Ps. 1,942,064 the profit of Comercializadora, is derived directly from Concesionaria’s operations. f) At December 31, 2020 the Company had the following tax balances: The temporary differences associated with investments in the Company’s subsidiaries, for which a deferred tax liability has not been recognized in the periods presented, aggregate to Ps.150,683 (2019: Ps.276,393). The Company has determined that the undistributed profits of its subsidiaries will not be distributed in the foreseeable future. The Company has an agreement with Adjusted contributed capital account (Cuenta de capital de aportación or “CUCA”) Ps. 4,607,752 its associate that the profits of the associate will not be distributed until it obtains the consent of the Company. The Company CUFIN* 3,241,275 does not anticipate giving such consent at the reporting date. Furthermore, the Group’s joint venture will not distribute its profits until it obtains the consent of all venture partners. * The calculation comprises all the subsidiaries of the Company. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact 20,657 Ps. 1,921,407 Ps. 30% 576,422 2020 Consolidated Financial Statements 20. Other operating income and expenses An analysis of finance cost is as follows: An analysis of other operating income is as follows: Gain on sale and leaseback (Note 12) Ps. 710,522 Ps. 284,759 Ps. 609,168 Loss on sale of rotable spare parts furniture and equipment Other income (2,604) 22,415 (8,954) 51,403 (2,356) 15,161 Ps. 730,333 Ps. 327,208 Ps. 621,973 2020 2019 2018 An analysis of other operating expenses is as follows: Interest expense on lease liabilities and aircraft and engine lease return obligation Financial instruments loss Interest on asset backed trust notes Cost of letter credit notes Bank fees and others Interest on debts and borrowings* Other finance costs Content 141 2020 2019 2018 Ps. 2,350,250 Ps. 2,128,162 Ps. 1,755,978 448,559 116,240 73,141 3,707 16,368 10,219 – 80,314 49,856 3,607 1,660 6,230 – – 57,277 6,141 56,916 – Ps. 3,018,484 Ps. 2,269,829 Ps. 1,876,312 2020 2019 2018 12). Interest expense not capitalized is related to the short-term working capital facility from Citibanamex. * The borrowing costs related to the acquisition or construction of qualifying assets are capitalized as part of the cost of the asset (Note Administrative and operational support expenses Ps. 632,041 Ps. 581,181 Ps. 536,079 Technology and communications Passenger services Insurance Others 383,648 87,850 53,507 194 381,055 65,477 74,661 10,553 385,841 70,337 60,892 5,949 Interest on debts and borrowings Capitalized interest (Note 12) Ps. 1,157,240 Ps. 1,112,927 Ps. 1,059,098 Net interest on debts and borrowing 2020 2019 2018 Ps. 400,406 Ps. 457,973 Ps. 414,836 (384,038) (456,313) (357,920) in the consolidated statements of operations Ps. 16,368 Ps. 1,660 Ps. 56,916 21. Finance income and cost An analysis of finance income is as follows: Interest on cash and equivalents Interest on asset backed trust notes Interest on recovery of guarantee deposits 22. Components of other comprehensive (loss) income An analysis of the other comprehensive (loss) income for the years ended December 31, 2020, 2019 and 2018 is as follows: 2020 2019 2018 Ps. 93,122 Ps. 201,191 Ps. 152,437 6,342 2,047 6,525 83 – 166 Derivative financial instruments: Reclassification of call options and forwards during the year 2020 2019 2018 Ps. 101,511 Ps. 207,799 Ps. 152,603 to profit or loss Ps. – Ps. – Ps. (455,009) Extrinsic value of changes on jet fuel Asian call options Extrinsic value of changes on jet fuel Zero cost collars (Loss) gain of the matured foreign currency forward contracts Loss of the interest rate Cap Non derivative financial instruments Total (11,993) (143,224) – (900) (1,591,569) 11,148 256,515 (14,241) (4,023) 14,096 227,509 (122,948) 66,757 – – Ps. (1,747,686) Ps. 263,495 Ps. (283,691) Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content 142 23. Commitments and contingencies Litigation Aircraft related commitments and financing arrangements The Company is a party to legal proceedings and claims that arise during the ordinary course of business. The Company believes the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of Committed expenditures for aircraft purchase and related flight equipment related to the Airbus purchase agreement, including operations, or cash flows. estimated amounts for contractual prices escalations and pre-delivery payments, will be as follows: Commitment expenditures in U.S. dollars Commitment expenditures equivalent in Mexican pesos (1) 24. Operating segments 2021 2022 2023 2024 2025 and thereafter US$ Ps. 40,213 138,919 265,836 705,331 3,221,596 US$ 4,371,895 Ps. 802,197 2,771,253 5,303,083 14,070,437 64,266,652 87,213,622 (1) Using the exchange rate as of December 31, 2020 of Ps.19.9487. The Company is managed as a single business unit that provides air transportation services. The Company has two geographic segments identified below: Operating revenues: Domestic (Mexico) International: 2020 2019 2018 Ps. 16,572,198 Ps. 24,594,797 Ps. 18,493,476 All aircraft acquired by the Company through the Airbus purchase agreement through December 31, 2020 have been executed through sale and leaseback transactions. United States of America and Central America* Non-derivative financial instruments Total operating revenues 5,998,615 (411,222) 10,230,824 8,811,674 (72,949) – Ps. 22,159,591 Ps. 34,752,672 Ps. 27,305,150 In addition, we have commitments to execute sale and leaseback over the next two years. The estimated proceeds from these * United States of America represents approximately 27%, 29% and 31% of total revenues from external customers in 2020, 2019 and 2018, commitments are as follows: respectively. 2021 2022 Aircraft sale prices estimated in U.S. dollars in Mexican pesos (1) US$ US$ 209,500 Ps. 547,328 756,828 Ps. 4,179,253 10,918,482 15,097,735 (1) Using the exchange rate as of December 31, 2020 of Ps.19.9487. The future lease payments for these non-cancellable sale and leaseback contracts are as follows: 2021 2022 2023 2024 2025 and thereafter in U.S. dollars in Mexican pesos (1) Aircraft leases US$ US$ 9,720 47,972 63,222 63,222 574,529 758,665 Ps. Ps. 193,901 956,979 1,261,197 1,261,197 11,461,107 15,134,381 (1) Using the exchange rate as of December 31, 2020 of Ps.19.9487. 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, 2020 and through April 29, 2021: During the first quarter of 2021, the Company demonstrated flexibility focusing on capacity management in the face of a volatile demand environment. The Company finished the quarter operating 88.3% of the Available Seat Miles flown in the first quarter of the prior year. On April 16, 2021, the Company received the Famous Brand Declaration from the Mexican Institute of Industrial Property ("IMPI") for the "Volaris" brand, which is the first trademark within the Mexican aviation industry declared as a Famous Brand by IMPI. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Operating and Financial Review and Prospects About this Report Contact Consolidated Financial Statements Content Content 143 Operating and Financial Review and Prospects Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact 5Operating and Financial Review and Prospects A. Operating Results You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report. The following discussion contains forward-loo- king 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.” revenues are based upon our capacity, load factor and the average ticket revenue per booked passenger. Our capacity is measured in terms of ASMs, which represents the number of seats we make available on our aircraft multiplied by the number of miles the seats are flown. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by di- viding RPMs by ASMs. The average ticket revenue per booked passenger represents the total passenger revenue divided by booked passengers. Description of Our Principal Line Items Operating Revenues As of January 1, 2018, we adopted IFRS 15 “Revenue from Con- tracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of re- cognition of certain air travel-related ancillary services. Under 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 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. 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. Other passenger revenues include but are not limited to fees charged for excess baggage, bookings through our call center or third-party agencies, advanced seat selection, itinerary chan- ges, V-Club memberships and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by us or when the non-refundable ticket expires at the date of the scheduled travel. Approximately 3% of our total operating revenues were derived from other passenger revenues in 2020. Non-Passenger Revenues Our non-passenger revenues include income generated from (i) other non-passenger revenues and (ii) cargo services. In 2020, we derived approximately Ps. 0.7 billion, or 3% of our total operating revenues from these sources. 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. Passenger Revenues Our passenger revenue includes income generated from: (i) fare revenue and (ii) other passenger revenue. Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination). We derive our operating revenues primarily from transporting passengers on our aircraft and some tickets sold by other airli- nes such as Frontier. Approximately 58% of our total operating revenues were derived from passenger fares in 2020. Passenger The following table shows each of the line items in our conso- lidated statements of operations for the periods indicated as a percentage of our total operating revenues for that period: Content 144 For the Years ended December 31, 2018 Adjusted (1) 2019 2020 Operating revenues: Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Other non-passenger revenues Cargo Non-derivative financial instruments: Total operating revenues Other operating income Fuel expense, net Landing, take-off and navigation expenses Depreciation of right of use assets Salaries and benefits Maintenance expenses Sales, marketing and distribution expenses Aircraft and engine variable lease expenses Other operating expenses Depreciation and amortization 68% 29% 67% 30% 3% 0% 0% 3% 0% 0% 58% 39% 4% 1% (2)% 100% 100% 100% (3)% (1)% (2)% 37% 33% 30% 17% 15% 11% 5% 5% 4% 4% 2% 15% 14% 10% 4% 4% 3% 3% 2% 18% 23% 16% 5% 8% 8% 5% 4% Total operating expenses, net 98% 87% 115% Operating income Finance income Finance cost Exchange gain, net Income (loss) before income tax Income tax (expense) benefit Net income (loss) 2% 1% (7)% 0% (5)% 13% (15)% 0% 1% (7)% (14)% 4% 2% 11% (26)% 1% (3)% 6% (3)% 8% (19)% (1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, 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, 2017. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Revenues from our international operations represented 32%, 29% and 27% of our total revenues in 2018, 2019 and 2020, respec- tively, and revenues from our domestic operations represented 68%, 71% and 73% of our total revenues in 2018, 2019 and 2020, respectively. Revenue Recognition General As of January 1, 2018, we adopted IFRS 15 “Revenue from Con- tracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of re- cognition of certain air travel-related ancillary services. Under 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 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. 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 statements as of January 1, 2016 and 2017 for comparability purposes. Passenger revenues 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 liabilities 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 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. We also classify as other passenger revenue “V-Club” and other similar services, which are recognized as revenue over time when the service is provided, as a modification of the tickets sold to V-Club members. Tickets sold by other airlines such as Frontier where we provide the transportation are recognized as passenger revenue when the service is provided. We sell certain tickets with connecting flights with one or more segments operated by other airline partners. For segments operated by other airline partners, we have determined that we are acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract (i.e. transportation of the passenger). We, as the agent, recognize revenue within other operating revenue at the time of the travel for the net amount retained by us for any segments flown by other airlines. Our tickets are non-refundable. However, if we cancel a flight for causes attributable to us, including as a result of the COVID-19 pandemic, then the passenger is entitled to either reschedule their flight at no cost or receive a refund or a voucher. No reve- nue is recognized until either the voucher is redeemed and the associated flight occurs, or the voucher expires. When vouchers issued exceed the original amount paid by the passenger, the excess is recorded as a decrease of operating revenues. All of our revenues related to future services are rendered through a period of approximately 12 months. Content 145 Non-passenger revenues Non-passenger revenues include revenues generated from: (i) other non-passenger revenues and (ii) cargo services. Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and adver- tising spaces to third parties. They are recognized as revenue at the time the service is provided. We concluded that the timing of satisfaction of revenue from advertising spaces is to be recognized over time because the customer simultaneously receives and consumes the benefits we provide. Additionally, we recognize as revenue the air transportation faci- lity 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 remit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include value added tax, federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. We record a liability upon collection from the customer and discharge the liability when payments are remitted to the applicable governmental entity or airport. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 146 Operating Expenses, net Our operating expenses consist of the following line items. Other Operating Income. Other operating income primarily includes the gains from sale and lease back operations of our aircraft and engines. Fuel expense, net. Fuel expense is our single largest opera- ting expense. It includes the cost of fuel, related taxes, fueling into-plane fees and transportation fees. It also includes reali- zed gains and losses that arise from any fuel price derivative activity qualifying for hedge accounting and gains and losses that arise from non-derivative financial instruments. 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. Depreciation of right–of–use assets. Depreciation of right-of-use assets use includes the depreciation of all aircraft and engine leases and some land and building leases that qualify under IFRS 16. With respect to this line item, IFRS 16 was issued in January 2016 and replaces IAS 17 “Leases,” IFRIC 4 “Determining Whe- ther an Arrangement Contains a Lease,” SIC-15 “Operating 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, presentation 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. Un- der IFRS 16, at the commencement date of a lease, a lessee recognizes a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the under- lying asset during the lease term (i.e., the right-of-use asset). Lessees are required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees are also required to reme- asure the lease liability upon the occurrence of certain events (e.g., a change in the lease term or a change in future lease payments). The lessee generally recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. In addition, for leases 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 pe- riod. We adopted IFRS 16 on the mandatory date, January 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. 23.5 billion of right-of-use assets and Ps. 32.7 billion as lease liabilities as of January 1, 2017. Our financial results as of and for the years ended De- cember 31, 2017 and 2018 as presented in our annual report for the year ended December 31, 2018 filed with the SEC on April 26, 2019 have been adjusted in our Audited Consolidated Financial Statements presented in this annual report to take into account this application of IFRS 16. See note 1x to our Audited Consolidated Financial Statements for more details. Salaries and Benefits. Salaries and benefits expense include 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. 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 ordinary main- tenance expenses. Major maintenance expenses are capitalized and subsequently amortized as described in “—Depreciation and Amortization—” below. Sales, Marketing and Distribution Expenses. Sales, marketing and distribution expenses consist of advertising and promotional expenses directly related to our services, including the cost of web support, our outsourced call center, travel agent commis- sions, and credit card discount fees that are associated with the sale of tickets and other products and services. Aircraft and Engine Variable Lease Expenses. Aircraft and en- gine variable expenses consist of the maintenance deposits we pay to the lessor as maintenance deposits when we determine that we will probably not recover such deposits in whole or in part. In these cases, we record these amounts in the results of operations as additional aircraft rent (supplemental rent) from the time we make the determination over the remaining term of the lease. Aircraft and engine variable lease expense also includes 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 supplemental rent. 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 ope- rational overhead expenses; (ii) costs for technological support, communication systems, cell phones, and internal and operatio- nal telephone lines; (iii) premiums and all expenses related to the aviation insurance policy (hull and liability); and (iv) outsourced ground services and the cost of snacks and beverages that we serve on board to our passengers. Depreciation and Amortization. Depreciation and amortiza- tion expense include the depreciation of all flight equipment, 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. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects 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: Other operating income Fuel expense, net Landing, take-off and navigation expenses Depreciation of right of use assets Salaries and benefits Maintenance expenses Sales, marketing and distribution expenses Aircraft and engine variable lease expenses Other operating expenses Depreciation and amortization Total operating expenses, net For the years ended December 31, 2018 Adjusted (2) 2019 2020 2020 (In Ps. cents) (In U.S. $ cents) (1) (3.0) 48.2 21.8 19.2 14.9 7.2 7.1 4.6 5.0 2.4 (1.3) 47.7 20.9 19.2 14.7 6.0 5.9 3.9 4.5 2.8 (4.0) 36.3 22.4 27.6 18.9 6.4 10.1 10.1 6.3 4.9 Ps.127.4 Ps.124.3 Ps.139.0 (0.2) 1.8 1.1 1.4 0.9 0.3 0.5 0.5 0.3 0.2 6.8 (1) Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps. 19.9487 per U.S. $1.00 as the rate for the payment of obligations deno- minated in foreign currency payable in Mexico in effect on December 31, 2020. 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. (2) On adoption of IFRS 16 we apply the new standard described elsewhere in this annual report as of the effective date of January 1, 2019, 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, 2017. Recent Developments The outbreak of COVID-19 that has since grown into a global pan- demic was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China as well as other countries, including Mexico and the United States. Since the pandemic began, countries around the world have responded by taking various containment mea- sures, including imposing quarantines and medical screenings, restricting domestic and international travel, closing borders, restricting or prohibiting public gatherings and widely suspending previously scheduled activities and events. In addition, concerns related to COVID-19 have drastically reduced demand for air tra- vel and caused major disruptions and volatility in global financial markets, resulting in the fall of stock prices (including the price of our stock), both trends which may continue. There are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including supply chain dis- ruptions and export levels), travel, restrictions on our ability to access our facilities or aircraft, requirements to collect additional passenger data, employee productivity, employee illness, increa- sed unemployment levels, securities markets, and other economic activities, particularly for airlines, that may have a destabilizing effect on financial markets and economic activity. Please refer to “Risk Factors—Risks related to the airline industry—Public health Content 147 threats, such as the H1N1 flu virus, the bird flu, Severe Acute Res- piratory Syndrome (SARS), the Zika virus, COVID-19 and other highly communicable diseases, affect travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial condition” for a discussion of the ways COVID-19 may impact our business and the Mexican economy. As a result of the national health emergency and health security measures imposed by the Mexican government in the spring of 2020, we reduced our capacity as measured by available seat mi- les (“ASMs”). In April and May of 2020, our capacity as measured by ASMs was reduced by up to 80% and 90%, respectively, and remained reduced from June to November of 2020. Additionally, we suspended service on certain routes. Costa Rica, Guatemala and El Salvador imposed operational and migratory restrictions that made it impossible to operate international passenger flights to those countries. While a gradual opening of the economy and easing of lockdown measures in Mexico and the other countries in which we operate led to a recovery in our ASMs and route operation during the second half of the year, with our capacity returning to over 100% of 2019 levels for the month of December, we can offer no assurance that additional travel restrictions, re- quirements or border closures will not be enacted or reenacted in the countries where we operate, which could result in reduced passenger demand, revenue, and further capacity reductions. For example, on January 26, 2021, an order issued by the United States Center for Disease Control came into effect requiring all international air passengers arriving to the United States to be tested for COVID-19 no more than three days prior to departure, which may have an adverse effect on demand for travel to the United States. Our business and the airline industry have experienced material adverse impacts due to COVID-19. particularly in terms of pas- senger traffic. The following chart sets forth passenger traffic for the Mexican airline industry in each of the four quarters of 2020 as compared to the each of the four quarters of 2019, as reported by AFAC: 2019 2020 Variation Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects (In thousands, except for %) First Quarter 15,753.9 15,229.4 (3.3)% Second Quarter 17,966.2 1,868.5 (89.6)% Third Quarter Fourth Quarter Total 18,427.2 6,983.7 (62.1)% 18,157.6 10,232.3 (43.6)% 70,304.9 34,313.9 (51.2)% We cannot offer any assurance that these impacts will not inten- sify to the extent that the pandemic persists. Further, additional government COVID-19 response measures remain unknown and depend on future developments with respect to COVID-19, inclu- ding the scope and duration of the pandemic, which are highly fluid, uncertain and cannot be predicted. It is not yet possible to determine when the adverse effects of COVID-19 will abate and the extent to which they will further decrease demand for air tra- vel, which could continue to materially and negatively affect our business, results of operations and financial condition. In order to mitigate the impact of the COVID-19 pandemic on us, we took the following measures: Preserving liquidity and cash. We implemented a strict liquidity preservation program, which has resulted in approximately U.S. $200.0 million of savings as of December 31, 2020 through items such as cost reductions and deferral agreements with suppliers. In addition, we negotiated cost reductions with more than 360 suppliers and cut non-essential expenses. We also implemented online training and leave of absence programs in order to redu- ce costs. We expect to continue reducing costs with the aim of reaching a CASM ex-fuel (calculated based on total operating expenses, net excluding fuel expense divided by ASMs) similar to 2019 levels by the end of 2021. As of December 31, 2020, our cash and cash equivalents were approximately Ps. 10.1 billion. Additionally, as of December 31, 2020 our credit lines totaled Ps. 9.3 billion, of which Ps. 6.9 billion were related to financial debt and Ps. 2.4 billion were related to letters of credit (and of which Ps. 1.7 billion were undisbursed). Defending ourselves against sales declines. We decreased scheduled capacity in order to protect our profitability. We also strengthened our relationships with customers by revamping our website and maintaining close communications via social media and email. Developing commercial and network growth opportunities. We are closely monitoring capacity reductions from competitors for possible opportunities, testing new ancillary products and running targeted promotions to test potential stimulation of air travel. Cer- tain of our competitors are facing financial difficulties which has led them to stop utilizing certain slots at the Mexico City Airport. We have been allowed to use some of these slots to open new destinations and increase operations at this airport, and by the end of 2020 we held 25% of the market share by ASMs. However, since the Mexico City Airport has issued a waiver to the minimum usage requirement due to the COVID-19 pandemic, we will not be granted historical priority of such slots unless (i) the waiver is terminated, (ii) the slots are not reclaimed by their prior holders and (iii) we continue operating the slots in accordance with certain conditions, including usage at least 85% of the time and conducting on time operations at least 85% of the time (operations are considered on time if they fall within 15 minutes of the assigned slot time). We can offer no assurance that our competitors will not reclaim the use of such slots prior to the expiration of the waiver, or that the waiver will not be extended. If our competitors do reclaim the slots prior to the expiration of the waiver, we may lose the preferential use of such slots almost immediately. Since the start of the COVID-19 pandemic, we have launched six new domestic routes and eight new international routes, now operating 105 domestic and 65 in- ternational routes in total. Reviewing our fleet plan. Our new contractual fleet plan with Airbus allows us to maintain a “cautiously” sized fleet that will remain at approximately 85 aircraft, net of new deliveries and redeliveries, until 2023. Protecting our customers and employees. We launched a new biosecurity and cleaning protocol and are communicating proacti- vely with all staff, especially with crews and airport staff, regarding health and COVID-19 developments. For employees who are able to work remotely, we have activated home office technologies and protocols. For additional information see “—Trends and Uncertainties Affec- ting Our Business—Impact of COVID-19” below. Content 148 Trends and Uncertainties Affecting Our Business We believe our operating and business performance is driven by various factors that affect airlines and their markets, trends affecting the broader travel industry, and trends affecting the specific markets and customer base that we target. The following key factors may affect our future performance. Impact of COVID-19. COVID-19 has drastically reduced demand for air travel and caused major disruptions and volatility in global financial markets, resulting in the fall of stock prices (including the price of our stock), both trends which may continue. There are other broad and continuing concerns related to the poten- tial effects of COVID-19 on international trade (including supply chain disruptions and export levels), travel, restrictions on our ability to access our facilities or aircraft, requirements to collect additional passenger data, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities, particularly for airlines, that may have a destabilizing effect on financial markets and economic activity. From a macroeconomic point of view, the impact of COVID-19 in Mexico is uncertain. Mexico’s GDP, previously predicted to grow between 0.5% and 1.5% in 2020, contracted by 8.2% as a result of the pandemic. Initial estimates indicate that Mexico’s GDP, previously predicted to grow between 1.1% and 2.1% in 2021, could grow 4.5% mainly as a result of the COVID-19 pandemic’s adverse impact on GDP in 2020 and recent news regarding the slow pro- duction and distribution of COVID-19 vaccines. However, as the full effects of the pandemic have yet to be realized, Mexican GDP may contract in an amount that is not yet possible to estimate. Economic stagnation, the depreciation of the peso, contraction and decreased income levels and increased unemployment levels could result in decreased passenger demand and lower net inco- me in the long term, even after any potential COVID-19-related travel restrictions and border closures are lifted. For example, for the period from March 31, 2020 to December 31, 2020, 709,211 jobs were lost in Mexico. Furthermore, the COVID-19 pandemic has also resulted in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 149 Despite the gradual recovery we have seen in ASMs and route operation, the ongoing COVID-19 pandemic is likely to continue to have a negative impact on our financial condition and results of operations, as a result of the following indicators: • a resurgence of COVID-19 infection rates could lead Mexico and the countries in which we operate to return to partial or total lockdowns, which would most likely result in a decrease in demand for our flights (which in turn may require reductions to our ASMs at levels similar to the early months of the pande- mic) and aircraft utilization rate and consequently a decrease in our total operating revenue; • any further downward volatility in the international capital markets could result in (i) the fall of stock prices, including the price of our stock and (ii) financial losses associated with our financial portfolio, which may cause a deterioration of our financial condition or limitations on our ability to meet our liabilities; • if our revenues decrease for a significant portion of time, we may have less cash available to meet our obligations under our aircraft and engine lease agreements and additional sources of financing may be difficult to obtain at favorable rates; • even after the COVID-19 pandemic eases, there is a risk that we will experience reduced demand in the near to mid-term due to the potential economic impact of the pandemic on the travel industry (business and leisure) and on our customers, as well as customer health concerns about the safety of air travel. Economic Conditions in Mexico. Mexico’s GDP is expected to grow by 2.23% per year for the next ten years according to the Mexican Central Bank, which is in line with the expected annual growth for the United States during the same period as reported by the U.S. Federal Reserve. See “Key Information—Risk Factors—Risks Related to the Airline Industry—Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, COVID-19 and other highly communicable diseases, could affect suspension of domestic and international flights, travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial con- dition” for more recent information on the impact of COVID-19 on Mexico’s future macroeconomic condition. Regarding population dynamics as of 2015, according to the INEGI intercensal survey, around 36% of the Mexican population was under 20 years of age, which benefits us by providing a strong base of potential customer growth. Inflation in Mexico during 2020 was 3.15% according to the INEGI. As of December 31, 2020, international reserves were at U.S. $195.7 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, customer service, safety record and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network air- lines, low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and other low-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liqui- dity 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. 141.3 cents (U.S. $6.60 cents) we believe was the lowest CASM in Latin America in 2020, compared to Avianca at U.S. $26.11 cents, Azul at U.S. $10.75 cents, Copa at U.S. $17.29 cents, Gol at U.S. $8.78 cents, Grupo Aeroméxico at U.S. $17.98 cents and LATAM at U.S. $17.33 cents. We also have lower costs than our publicly traded target market competitors in the United States, including Alaska Air at U.S. $14.33 cents, Frontier at U.S. $9.53, Spirit at U.S. $8.36 cents, American at U.S. $19.39 cents, Delta at U.S. $22.01 cents, Jet Blue at U.S. $14.29 cents, Southwest Airlines at U.S. $12.44 cents and United at U.S. $17.68 cents. Our competitors and the Mexican airline industry as a whole have also been significantly impacted by the COVID-19 pandemic. Our principal competitors for the domestic market are Grupo Aeroméxico, Interjet and VivaAerobus. Interjet and VivaAerobus are low-cost carriers in Mexico. In 2020, the Mexican low-cost carriers (including us) combined had 71.5% of the domestic mar- ket based on passenger flight segments. We had 38.3% of the domestic market which placed us first, according to the AFAC. According to information published by AFAC, as of December 31, 2020, the number of commercial aircraft in service in Mexi- co had decreased to 275, as compared to 355 as of December 31, 2019. This 23% reduction was comprised mainly of narrow body aircraft, including 70 Airbus A320s, 47 Boeing 737s, and 19 Airbus A321s. On June 30, 2020, Grupo Aeroméxico, our largest competitor by domestic and international market share in 2019, announced that it was filing for Chapter 11 bankruptcy protection in the United States. According to its public filings with the CNBV, Grupo Aeroméxico has maintained regular ope- rations during the restructuring process but has received court approval to return at least 19 aircraft to lessors, which would reduce its fleet size by around 15%. As of December 31, 2020, AFAC reports indicate that Grupo Aeroméxico’s subsidiaries Aeroméxico and Aeroméxico Connect had fleets of 58 and 44 aircraft, respectively, as compared to 69 and 56, respectively, as of December 30, 2019. In addition, Interjet, our second largest competitor by international market share in 2019, has been una- ble to resume international flights since suspending the routes in March 2020. Interjet’s fleet decreased by almost 96% in 2020, from 67 aircraft as of December 30, 2019 to 3 as of December 31, 2020, according to information published by the AFAC. In- terjet has not operated any domestic flights since December 2020. According to media reports, on April 26, 2021, Interjet announced that an extraordinary shareholders meeting appro- ved the filing of a reorganization process (concurso mercantil) in Mexico. While VivaAerobus, our second largest competitor by domestic market share in 2019, has increased their fleet from 37 as of December 30, 2019 to 43 as of December 31, 2020, this increase does not compensate for the reductions observed in the market. In addition to these changes in fleet size, our market share has also increased. As of December 2020, our domestic market share had increased 9 percentage points to 40% and our international market share had increased 6 percentage points to 14%, in each case as compared to our market shares as of December 2019. 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 in- dustry in Mexico, with total passenger segments of approximately 3.07 billion in 2019 (the latest year for which data is available as of the date of this annual report), of which approximately 82.9 million were executive and luxury passenger segments, Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects according to the Mexican Authority of Ground Transportation (Dirección General de Autotransporte Federal) and which could include both long- and short-distance travel. We set certain of our promotional fares at prices lower than bus fares for similar routes in order to stimulate demand for air travel among pass- engers who in the past have traveled long distances primarily by bus. We believe a small shift of bus passengers to air travel would dramatically increase the number of airline passengers and bring the air trips per capita figures in Mexico closer to those of other countries in the Americas. Our principal competitors for the international routes between Mexico and the United States are Grupo Aeroméxico, Alaska Air, American, Delta and United. We reached 11% market share on the routes that we operate and 15% market share considering all routes between Mexico and the United States in 2020, according to the AFAC. Seasonality and Volatility. Our results of operations for any inte- rim 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 eco- nomic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, health outbreaks, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, weather and other factors have resulted in signi- ficant 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 primary markets we serve. Donald Trump became president of the United States on January 20, 2017, and implemented a number of immigration policies that have adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets. President Trump was not elected to a second term, and on January 20, 2021, Joseph Biden became the president of the United States. While Presi- dent Biden is expected to reverse many of President Trump’s immigration policies, we can offer no assurance of the extent to which his administration will do so. President Trump’s immigration policies had a negative impact on our results of operations during 2018, 2019 and 2020 and this negative impact can be expected to continue as long as these immigration policies are in force. Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours, accounting for 38%, 38% and 26% (including non-derivative financial instruments) of our total operating expenses for 2018, 2019 and 2020, respectively. Fuel availability and pricing are also subject to refining capacity, pe- riods of market surplus and shortage, and demand for heating oil, gasoline and other petroleum products, as well as economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining sources located in Mexico. During the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 23,967 thousand gallons of fuel. Such hedges represented a portion of our projected consumption for third quarter 2020 and the first quarter of 2021. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 81,646 thousand gallons of fuel. The latter hedges represented a portion of our projected consumption for the second half of 2020 and 2021. During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 13,492 thousand gallons of fuel. Such hedges represented a portion of our fourth quarter 2019 projected consumption. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons of fuel. The latter hedges represented a portion of our projected third quarter 2019 and our 2020 consumption. During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Call options designated to hedge 45.6 million gallons of fuel. Content 150 As of December 31, 2020, we purchased our domestic fuel under the ASA fuel service contract, and international fuel under the WFS, Shell, Uno Petrol, Uno El Salvador, BP Products North Ame- rica, Chevron and Associated Energy Group fuel service contracts. The cost and future availability of fuel cannot be predicted with any degree of certainty. Foreign Exchange Gains and Losses. While most of our revenue is generated in pesos, 32%, 29% and 27% of our revenues came from our operations in the United States and Central America during the years ended December 31, 2018, 2019 and 2020, res- pectively, and U.S. dollar denominated collections accounted for 38%, 43% and 44% of our total collections in 2018, 2019 and 2020, respectively. In addition, the majority of our operating costs are denominated in or indexed to U.S. dollars, constituting 73%, 72% and 69% of our total operating costs in 2018, 2019 and 2020. Our key U.S. dollar-denominated operating 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 conver- ted 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, 2018, 2019 and 2020, our net monetary liability position denominated in U.S. dollars was U.S. $1.7 billion, U.S. $1.7 billion and U.S. $1.7 billion, respectively. As a result of either the appreciation or depreciation of the peso against the U.S. dollar in 2018, 2019 and 2020, as the case may be, and our net U.S. dollar liability position, we recorded a foreign exchange gain (loss), net of Ps. (0.1) billion, Ps. 1.4 billion and Ps. 0.5 billion, respectively. In order to mitigate the foreign exchange risk, we also entered into hedge relationships through non-derivative financial instruments. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 151 Maintenance Expenses. We are required to conduct varying levels of aircraft and engine maintenance, which involve significantly different labor and materials inputs. Maintenance requirements depend on the age and type of aircraft and the route network over which they operate. Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks. Aircraft maintenance and repair costs for routine and non-routine maintenance are divided into three general categories: (i) Routine maintenance requirements consist of daily and wee- kly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, diagnostic and routine repairs and any necessary unscheduled tasks perfor- med. These types of line maintenance are currently serviced by our mechanics and are primarily completed at the main airports that we currently serve. All other maintenance activities are sub-contracted to quali- fied maintenance, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and are required approximately every 22 months. All routine maintenance costs are expensed as incurred. (ii) Major maintenance consists of a series of more complex tasks that can take from one to six weeks to accomplish and are generally required approximately every five to six years. Ma- jor maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized as improvements to leased assets and amortized over the shorter period of the next major mainte- nance event or the remaining lease term. (iii) Engine services are provided pursuant to an engine flight hour agreement that guarantees a cost per overhaul, provi- des miscellaneous engine coverage, caps the cost of foreign objects damage events, ensures protection from annual esca- lations and grants an annual credit for scrapped components. We also have a power-by-hour agreement for component services, which guarantees the availability of aircraft parts for our fleet when they are required and provides aircraft parts that are not included in the redelivery conditions of the contract without constituting an additional cost at the time of redelivery. The costs associated with the miscellaneous engine coverage and the component services agreements are recorded in the consolidated statements of operations. continue to grow, we would expect to continue to experience a lag between when new routes are put into service and when they reach their full profit potential. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorganizations could adver- sely affect the industry.” Due to the young age of our fleet (approximately 5.3 years on average as of December 31, 2020), maintenance expense in 2018, 2019 and 2020 remained relatively low. For the years ended De- cember 31, 2018, 2019 and 2020 we capitalized major maintenance events as part of leasehold improvements to the flight equipment in the amount of Ps. 676.5 million, Ps. 659.1 million and Ps. 646.2 million, respectively. For the years ended December 31, 2018, 2019 and 2020 the amortization of these deferred major maintenan- ce expenses was Ps. 313.5 million, Ps. 450.4 million and Ps. 652.1 million, respectively. The amortization of deferred maintenance expenses is included in depreciation and amortization rather than total maintenance costs as described in “—Critical Accounting Polices and Estimates.” In 2018, 2019 and 2020, total maintenance costs amounted to Ps. 1.5 billion, Ps. 1.5 billion and Ps. 1.2 billion, respectively. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance expenses for any significant period of time. However, we estimate that based on our scheduled maintenance events, current main- tenance expense and maintenance-related amortization expense will be approximately Ps. 2.3 billion (U.S. $110 million) in 2021. 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 ma- jor maintenance activities, resulting in our recording significant prepaid deposits on our consolidated statements of financial position. As a result, the cash costs of scheduled major mainte- nance 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 2018 we opened 35 new routes, added 30 more in 2019 and 13 more in 2020. As we Critical Accounting Policies and Estimates The following discussion and analysis of our consolidated financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the re- ported amount of assets and liabilities, revenues and expenses, and related disclosure of supplemental assets and liabilities at the date of our consolidated financial statements. Note 1 to our con- solidated financial statements included herein provides a detailed discussion of our significant accounting policies. Critical accounting policies are defined as those policies that re- flect 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 agree- ments provide that we pay maintenance deposits or supplement rent to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. Maintenance de- posits 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. Subs- tantially all of these maintenance deposits are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft and engines. We paid Ps. 454 million, Ps. 64.6 million and Ps. 702 million in maintenance deposits, net of reimbursements, to our lessors for the years ended December 31, 2018, 2019 and 2020, respectively. At lease inception and at each consolidated statement of financial position date, we assess whether the maintenance deposit payments Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 152 required by the lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance deposit payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as maintenan- ce deposits. Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position. The portion of prepaid maintenance deposits that are deemed unlikely to be recovered, primarily relate to the rate differential between the maintenance 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 de- posit with a lessor, such amounts are expensed as supplemental rent. We expensed Ps. 299.6 million in 2018, Ps. 295.7 million in 2019 and Ps. 421.0 million in 2020 of maintenance deposits as supplemental rent. As of December 31, 2018, 2019 and 2020 we had prepaid mainte- nance deposits of Ps. 6.5 billion, Ps. 6.4 billion and Ps. 7.1 billion, respectively, recorded in our consolidated statements of financial position. We currently expect that these prepaid maintenance 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 maintenance event that the deposits serve to collateralize. During the years ended December 31, 2018 and 2019, we exten- ded the lease term of two aircraft agreements and one aircraft agreement, respectively, but made no such extensions in 2020. Additionally, we extended the lease term of one spare engine agreement in 2019 and two spare engine agreements in 2018 but made no such extensions in 2020. Because the lease extension benefits are considered lease in- centives, the effect of these extensions are recorded reducing the right of use asset. See note 14 to our audited consolidated financial statements included elsewhere in this annual report. During the year ended December 31, 2020, we added seven new net aircraft to our fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance depo- sits 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 supple- mental rent during the lease term of the related aircraft, in the consolidated statements of operations. For the years ended December 31, 2018, 2019 and 2020, we ex- pensed as supplemental rent Ps. 299.6 million, Ps. 295.7 million and Ps. 421.0 million, respectively. Aircraft and Engine Maintenance. We account for major mainte- nance under the deferral method. Under the deferral method, the cost of major maintenance is capitalized (leasehold improvements to flight equipment) and amortized as a component of deprecia- tion 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 AFAC in Mexico and average removal times suggested by the manufacturer. These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and changes in su- ggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a major maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated useful life would decrease before the next main- tenance event, resulting in additional amortization expense over a shorter period. In 2018, 2019 and 2020, we capitalized costs of major maintenance events of Ps. 676.5 million, Ps. 659.1 million and Ps. 646.2 million, respectively and we recognized amortization expenses of Ps. 313.5 million, Ps. 450.4 million and Ps. 650.1 million, respectively. The amortization of deferred maintenance expenses 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. 1.8 billion, Ps. 1.9 billion and Ps. 1.8 billion for the years ended December 31, 2018, 2019 and 2020, respectively. In August 2012, we entered into a total support agreement with Lufthansa Technik AG (LHT), as amended in December 2016, that expires June 30, 2023, which includes a total component support agreement (power-by-hour) and ensures the availability of air- craft 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 agree- ment, we received credit notes of Ps. 46.5 million and of Ps. 28.1 million, which was deferred on the consolidated statements of financial position and is being amortized on a straight line basis, prospectively during the term of the agreement. During 2018, 2019 and 2020, we amortized a corresponding bene- fit from these credit notes of, Ps. 7.2 million, Ps. 5.2 million and Ps. 5.2 million, respectively, which is recognized in the consolidated statements of operations as a reduction of maintenance expenses. Return obligations. The aircraft and engine lease agreements also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in most cases are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of variable rent expenses and the provision is included as part of other liabilities, through the remaining lease term. We estimate the provision related to airframe, engine over- haul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of mainte- nance tasks to be performed. For the years ended December 31, 2018, 2019 and 2020, the Company expensed as variable rent Ps. 659.1 million, Ps. 681.0 million and Ps. 1,428.2 million, respectively. Fair Value. The fair value of our financial assets and financial liabi- lities recorded in the consolidated statements of financial position cannot be derived from active markets. They are determined using Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects valuation techniques such as the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include consi- derations 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. Starting January 1, 2019, we measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, we recognize in the Statement of Operations only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. The rest of the gain is amortized over the lease term. During the year ended December 31, 2018, 2019 and 2020 we sold and transferred aircraft and engines to third parties, giving rise to a gain of approximately Ps. 609.2 million, Ps. 284.8 million and Ps. 710.5 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 aircraft and spare engine sale and leaseback transactions, which resulted in a loss of Ps. 30.7 million. This loss was deferred on the conso- lidated statements of financial position and is being amortized over the contractual lease term. For the years ended December 31, 2018, 2019 and 2020, we amortized a loss of Ps. 3.0 million, Ps. 3.0 million and Ps. 3.0 million, respectively, as additional aircraft rental expense. Equity-settled Transactions Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. Our Equity-settled Transactions include long-term retention plans comprised of: (i) a management incentive plan; (ii) long-term incentive plan; and (iii) a board of directors incentive plan. Long-Term Retention Plans Management Incentive Plan The management incentive plan has been classified as an equi- ty-settled transaction because as of the grant date the fair value of the transaction is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. The total cost of the management incentive plan is Ps. 2.7 million. This amount is being expensed over the vesting period, which commenced retroactively upon consummation of our initial pu- blic 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 management incentive plan included a volatility assumption estimated from historical returns on common stock of comparable companies and other inputs obtained from independent and observable sources, such as Bloomberg. The share spot price fair value was determi- ned using the market approach valuation methodology, with the following assumptions: Dividend yield (%) Volatility (%) Risk—free interest rate (%) Expected life of share options (years) Exercise share price (in 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 Content 153 U.S. and Latin American publicly traded airlines. The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome. The risk-free interest rate is the interbank interest rate in Mexico, continuously expressed, accordingly to the corresponding term. The expected life of the share options is an output of the valuation model and represents the average time the option is expected to remain viable, assuming the employee does not leave during the vesting period. The management incentive plan explicitly incorporates expecta- tions 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 incorpo- rates 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 Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. On November 16, 2015, as part of the secondary follow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps. 23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. The dividend yield was set at zero because at the time the ma- nagement 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 During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key emplo- yees paid Ps. 17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Mana- gement Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects and the Management Trust. During 2017, the key employees participating in the management incentive plan exercised 120,000 Series A shares. The key emplo- yees paid Ps. 0.6 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Mana- gement 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 2018, the key employees participating in the management incentive plan exercised 2,003,876 Series A shares. The key emplo- yees paid Ps. 10.7 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Mana- gement 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 2019, the key employees participating in the management incentive plan exercised 2,780,000 Series A shares. The key emplo- yees paid Ps. 14.8 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Mana- gement 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 2020, the key employees participating in the management incentive plan did not exercise any Series A shares. Thus, the key employees did not pay any amounts to the Management Trust corresponding to any exercised shares. As of December 31, 2020, 2019 and 2018, the 7,653,981, 7,653,981 and 10,433,981 share options pending to be exercised, respectively, were considered as treasury shares. Movements during the year The following table illustrates the number of share options and fixed exercise prices during the year: Outstanding as of December 31, 2012 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2013 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2014 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2015 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 Granted during the year Forfeited during the year Exercised during the year Outstanding as of December 31, 2019 Granted during the year Forfeited during the year Exercised during the year Content 154 Number Exercise price in pesos Total in thousands of pesos 25,164,126 — — (4,891,410) 20,272,716 — — — 20,272,716 — — (4,414,860) 15,857,856 — — (3,299,999) 12,557,857 — — (120,000) 12,437,857 — — (2,003,876) 10,433,981 — — (2,780,000) 7,653,981 — — — Ps.5.31 — — 5.31 Ps.5.31 — — — Ps.5.31 — — 5.31 Ps.5.31 — — 5.31 Ps.5.31 — — 5.31 Ps.5.31 — — 5.31 Ps.5.31 — — 5.31 Ps.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.66,095 — — (10,654) Ps.55,441 — — (14,773) Ps.40,668 — — — Outstanding as of December 31, 2020 7,653,981 Ps.5.31 Ps.40,668 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 155 At December 31, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 and 2020, the shares held in trust to satisfy the management options were considered as treasury shares. At December 31, 2018, 2019 and 2020, 10,433,981, 7,653,981 and 7.653,981 share options pending to be exercised were considered as treasury shares, respectively. Long-term Incentive Plan (equity-settled) In November 2014, we established an equity-settled long-term in- centive plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps. 10.8 million to be used to purchase our shares. On April 21, 2016, an amendment to this plan was approved at our annual ordinary shareholders’ meeting. The key components of the plan are as follows: (i) Servicios Corporativos granted a bonus to each key executive. (ii) Pursuant to the instructions of such key executives, on 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 sha- res through an intermediary authorized by the Mexican stock market, based on the instructions of the administration trust’s technical committee. An amount equal to Ps. 7.5 million (the fair value of the bonus net of withheld taxes) was approved in April 2016 as an extension of this plan for the acquisition of our Series A shares, following the same mechanism. (iii) Subject to the terms and conditions set forth in the admi- nistrative trust agreement signed in connection thereto, the acquired shares are to be held in escrow in the administra- tive trust until the applicable vesting period date for each key executive, which is the date as of which each such key executive can fully dispose of the shares as desired. (iv) If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale. (v) Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee. The vesting period of the shares granted under the Company’s equity-settled long-term incentive plan is as follows: The total cost of this plan is Ps. 10.8 million. This valuation is the result of multiplying the total number of our Series A shares de- posited in the administrative trust and the price per share, plus the balance in cash deposited in the administrative trust. This amount is being expensed over the vesting period, which commenced on November 11, 2014 and ended in November 2019. In November 2020, 2019 and 2018, extensions to this plan were approved by our board of directors. The total cost of each of the extensions approved was Ps. 92.1 million (or Ps. 59.9 million, net of withheld taxes), Ps. 86.8 million (or Ps. 56.4 million, net of withheld taxes) and Ps. 64.0 million (or Ps. 41.6 million, net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares. During 2018, 2019 and 2020, we recognized Ps. 20.0 million, Ps. 49.7 million and Ps. 75.0 million, respectively, as compensation expense associated with the long-term incentive plan in our consolidated statements of operations. Movements during the year The following table illustrates the number of shares associated with our long-term incentive plan during the year: Outstanding as of December 31, 2019 Purchased during the year Granted during the year Exercised during the year Forfeited during the year Outstanding as of December 31, 2020 Number of Series A shares *5,115,191 3,159,763 — (2,142,426 (327,217 *5,805,311 * These shares were presented as treasury shares in the consolidated statements of financial position as of December 31, 2019 and 2020 and all are considered outs- tanding for basic and diluted earnings per share purposes because the holders are entitled to dividends if and when distributed. Number of Series A shares 2,979,412 1,819,440 1,006,459 5,805,311 Vesting period November 2020-2021 November 2021-2022 November 2022-2023 During the year ended December 31, 2020, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2020, 327,217 shares were forfeited. Board of Directors Incentive Plan (BoDIP) In April 2018, our shareholders at the annual shareholders meeting authorized a stock plan for the benefit of certain independent members of our board of directors (the “BoDIP”). The BoDIP was implemented through the execution of: (i) trust agreement number CIB/3081 created by us, as trustor, and CIBanco, S.A., Institucion de Banco Multiple, as trustee, 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 transferring 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, 2020 was 5,233,693, of which 3,161,349 shares were priced at Ps. 9.74, 968,706 shares were priced at Ps. 16.80, 977,105 shares were priced at Ps. 16.12 and 126,533 shares were priced at Ps. 26.29. As of December 31, 2020, there were no exercises under the BoDIP. Cash-settled Transactions Cash-settled transactions include share appreciation rights (“SARs”). Our cash-settled transactions include long-term re- tention plans comprised of: (i) management incentive plan II and (ii) a cash-settled long-term incentive plan. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 156 Long-term Retention Plans Management Incentive Plan II On November 6, 2016, our board of directors approved an exten- sion of the management incentive plan to certain key employees, known as MIP II. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested was also approved. the 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 respec- tively, 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 long-term incentive plan (equity-settled) and long-term incentive plan (cash-settled). 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. 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, 2020, 2019 and 2018 was Ps. 177.8 million, Ps. 70.6 million and Ps. 32.9 million, respectively. The compensation cost is recognized in our consolidated statements of operations under the caption salaries and benefits over the service period. During the years ended December 31, 2020, 2019 and 2018 we recorded a expense (benefit) of Ps. 107.2 million, Ps. 37.8 million and Ps. (5.1) million, respectively, associated with these SARs in our consolidated statements of operations. No SARs were exer- cised during 2020. Number of SARs (Grant date: November 6, 2016) 3,391,020 3,391,020* Exercisable date February 2021 * Includes forfeited SARs of 1,563,520, 0 and 0 for the years ended December 31, 2018, 2019 and 2020 respectively. Cash-settled Long-term Incentive Plan During 2010, we adopted an employee long-term incentive plan, 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 plan program extensions described above, no SARs were granted to any of our key executives for the years ended December 31, 2018, 2019 and 2020. 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. The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date. The carrying amount of the liability relating to the SARs as of December 31, 2018, 2019 and 2020 was Ps. 0.5 million, Ps. 1.9 million and Ps. 0.0 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, 2018, 2019 and 2020, we recorded an expense (benefit) of Ps. (0.2) million, Ps. 3.0 million and Ps. (1.9) million, respectively, in respect of these SARs in our consolidated statements of operations. Derivative Financial Instruments and Hedge Accounting. We mitigate certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctua- tions, through a controlled risk management policy that includes the use of derivative financial instruments. The derivative financial instruments are recognized in the consolidated statement of fi- nancial 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 recog- nized at fair value with changes in fair value recorded in current year earnings. Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in guarantee, which is presented as part of “Guarantee deposits,” is reviewed and adjusted on a daily basis, based on the fair value of the de- rivative position. As of December 31, 2020, we did not have any collateral recorded as a guarantee deposits. (i) Aircraft Fuel Price Risk. We account for derivative financial instruments at fair value and recognize them in the consoli- dated statements of financial position as an asset or liability. The cost of aircraft fuel consumed in 2018, 2019 and 2020 represented 38%, 38% and 26% (including non-derivative fi- nancial instruments) of our operating expenses, respectively. To manage aircraft fuel price risk, we periodically enter into derivatives financial instruments. During the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 23,967 thousand gallons of fuel. Such hedges repre- sented a portion of our projected consumption for the second quarter of 2020, third quarter of 2020 and first quarter of 2021. Additionally, during the year ended December 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 81,646 thousand gallons of fuel. The latter hedges represented a portion of our pro- jected consumption for the second quarter of 2020, second half of 2020 and second quarter of 2021. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 13,492 thousand gallons of fuel. Such hedges re- presented a portion of our fourth quarter 2019 projected consumption. Additionally, during the year ended Decem- ber 31, 2020, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons of fuel. The latter hedges represented a portion of our projected third quarter 2019 and our 2020 consumption. During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Call options designated to hedge 45.6 million gallons of fuel. Additionally, as of Decem- ber 31, 2017, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 61.1 million gallons of fuel. During the year ended December 31, 2020, the US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options were designated to hedge approximately 3% of our 2021 fuel consumption, as well as US Gulf Coast fuel 54 Asian call options to hedge approximately 3% of projected fuel consumption for 2021. During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge approximately 20% of our 2020 fuel consumption, as well as US Gulf Coast fuel 54 Asian call options that expired by the end of 2019 to hedge approxi- mately 5% of projected fuel consumption for 2019. During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options and US Gulf Coast fuel 54 Asian call options designated to hedge approximately 18% of our 2019 projected fuel consumption. We utilize IFRS 9, which comprises aspects related to classi- fications and measurement of financial assets and financial liabilities, 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 value of the option. As further required in paragraph 6.5.15 therein, because the external value (time value) of the Jet fuel 54 Asian call options are related to a “transaction related hedged item,” it is required to be segregated and accounted for as a “cost of hedging” in other comprehensive income (“OCI”) and accrued as a separate component of stockholders’ equity until the related hedged item affects profit and loss. Since monthly forecasted jet fuel consumption is considered the hedged item of the “related to a transaction” type, then the time value included as accrued changes on external value in capital is considered as a “cost of hedging” under IFRS 9. 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-financial asset is involved, its initial recognition does not generate a book adjustment in our inventories. Rather, it is initially accounted for in our OCI and a reclassification adjustment is made from OCI toward the profit and loss and recognized in the same period or periods during which the hedged item is expected to be allocated to profit and loss (in accordance with IFRS 9.6.5.15, B6.5.29 (a), B6.5.34 (a) and B6.5.39). As of January 2015, we began to reclassify these amounts (previously re- cognized as a component of equity) to our statement of operations in the same period in which our expected jet fuel volume consumed affects our jet fuel purchase line item therein. As of December 31, 2018, 2019 and 2020 the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian call op- tions was Ps. 48.2 million, Ps. 0.0 million and Ps. 0.2 mi- llion, respectively. During the year ended December 31, 2020, the Company entered into US Gulf Coast Jet Fuel 54 Asian call options with 2020 and 2021 maturities. During the years ended December 31, 2018, 2019 and 2020, the net negative (positive) cost of these options recycled to our fuel cost totaled (Ps. 402.5) million, Ps. 61.1 million and Ps. 20.6 million, respectively. As of December 31, 2019 and 2020, the fair value of our outstanding US Gulf Coast Jet Fuel 54 Zero-Cost collar op- tions was Ps. 134 million and Ps. (9.7) million, respectively, Content 157 and these were presented as part of the financial assets and financial liabilities line items in our consolidated statements of financial position. During the years ended December 31, 2019 and 2020, the net cost of these options recycled to our fuel cost totaled Ps. 9.4 million and Ps. 835.9 million, respectively. The amount of (negative) positive cost of hedging derived from the extrinsic value changes of these options as of De- cember 31, 2018, 2019 and 2020 recognized in other com- prehensive income totaled Ps. (134.1) million, Ps. 133.6 million and Ps. 21.7 million, respectively, the latter will be recycled to our fuel cost during 2021, as these options expire on a monthly basis and as jet fuel is consumed. (ii) Foreign Currency Risk. Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities (when revenue or expense is denominated in a different currency than pesos). Exchange exposure rela- tes to amounts payable arising from U.S. dollar-denominated and U.S. dollar-linked expenses and payments. To mitigate this risk, we may use foreign exchange derivative financial instruments and non-derivative financial instruments. During the years ended December 31, 2018, the Company entered into foreign currency forward contracts in U.S. do- llars to hedge approximately 20% of its next 12 months of aircraft rental expenses. A portion of the Company’s foreign currency forwards matured during the fourth quarter of 2018 (November and December), and the remainder of the Com- pany’s outstanding position matured during the first quarter of 2019 (January). During the year ended December 31, 2020, the Company did not enter into foreign currency forward contracts. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Our foreign exchange exposure as of December 31, 2018, 2019 and 2020 was a net liability position of U.S. $1.7 billion, U.S. $1.7 billion and U.S. $1.7 billion, respectively. Hedging relationships with non-derivative financial ins- truments. We mitigate certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchan- ge rate fluctuations, through risk management that includes the use of derivative financial instruments and non-derivative financial instruments. In accordance with IFRS 9, derivative financial instruments and non-derivative financial instruments are recognized in the consolidated statement of financial position at fair value. At the inception of a hedge relationship, we formally desig- nate and document the hedge relationship to which we wish to apply hedge accounting, as well as the risk management objective and strategy for undertaking the hedge. The do- cumentation includes the hedging strategy and objective, identification of the hedging instrument, the hedged item or transaction, the nature of the risks being hedged and how we will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risks. Only if such hedges (i) are expected to be effective in achie- ving offsetting changes in fair value or cash flows of the hedge items and (ii) are assessed on an ongoing basis to determine that they have been effective throughout the financial reporting periods for which they were designated, can hedge accounting treatment be used. 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 re- cognized in current year earnings in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. Content 158 The realized gain or loss of derivative financial instruments and non-derivative financial instruments that qualify as CFH are recorded in the same caption as the hedged item in the consolidated statement of operations. (iii) Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and lease obligations with floating interest rates. As of December 31, 2018, the Company did not have any interest rate derivatives. As of December 31, 2019, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps. 1.5 billion and a fair value of Ps. 2.7 million. As of December 31, 2020, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps. 1.5 billion and a fair value of Ps. 0.3 million. These instruments are included as assets in our consolidated statements of financial position. All the Company’s positions in the form of interest rate swaps ma- tured on March 31 and April 30, 2017. Consequently, there was no outstanding balance as of December 31, 2018. Deferred Taxes. We account for income taxes using the liability method. Deferred taxes are recorded based on differences be- tween the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry-forwards. In as- sessing our ability to realize deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. At December 31, 2018, 2019 and 2020, we had tax loss carry-forwards amounting to Ps. 1.6 billion, Ps. 1.3 billion and Ps. 1.9 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 years in each country and may not be used to offset taxable income elsewhere in our consolidated group. During the years ended December 31, 2018 and 2019, we used tax-loss ca- rry-forwards of Ps. 154.4 million and Ps. 214.5 million, respectively. During the year ended December 31, 2020, we did not use any tax-loss carry-forwards. The table below presents the payments required by our financial liabilities: Interest-bearing borrowings: Pre-delivery payment facilities Short-term working capital facilities Asset backed trust note Total Within one Year One to five Years Total Ps.1,096,543 Ps.2,554,069 Ps.3,650,612 200,000 250,000 — 1,250,000 200,000 1,500,000 Ps.1,546,543 Ps.3,804,069 Ps.5,350,612 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 159 Central America (Guatemala, Costa Rica and El Salvador) 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 years ended December 31, 2018, 2019 and 2020, we generated a net operating income (loss) of Ps. 8.5 million, Ps. (1.1) million and Ps. (1.8) million, respectively. According to Costa Rica corporate income tax law, the tax is based on the net income earned from traffic whose origin or final destination is Costa Rica and net operating losses can offset taxable income in a term of three years. For the years ended December 31, 2018, 2019 and 2020, we obtained net operating losses of Ps. 170.7 million, Ps. 50.2 million and Ps. 55.8 million, respectively, which have not been recognized as deferred tax assets. According to El Salvador corporate income tax law, under the regime on profits from business activities, net operating los- ses cannot offset taxable income in prior or future years. For the years ended December 31, 2020 and 2019, we obtained a net operating loss of Ps. 16.6 million and Ps. 32.5 million, res- pectively. Impairment of Long-Lived Assets. The carrying value of flight equipment, furniture and equipment and right of use assets is reviewed for impairment when events or changes in circum- stances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduc- tion in the carrying value of flight equipment, furniture and equipment and right of use assets. We record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or cash generating unit exceeds its recove- rable amount, which is the higher of its fair value less cost to sell and its value in use. The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation. For the years ended December 31, 2018, 2019 and 2020, no impairment charges were recorded in respect of our long-li- ved assets. Allowance for Credit Losses. An allowance for credit los- ses 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, 2018, 2019 and 2020, the allowance for credit losses was Ps. 11.3 million, Ps. 40.3 million and Ps. 32.7 million, respectively. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Operating Revenues 2019 compared to 2020 Operating Revenues Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Other non-passenger revenues Cargo Non-derivative financial instruments 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 Revenue passenger miles (RPMs in thousands) Content 160 For the years ended December 31, 2019 2020 Variation (In thousands of pesos, except for % and operating data) Ps.23,129,991 10,569,208 Ps.12,873,174 8,613,398 Ps.(10,256,817) (1,955,810) 897,586 228,836 (72,949) 882,360 201,881 (411,222) (15,226) (26,955) (338,273) Ps.34,752,672 Ps.22,159,591 Ps.(12,593,081) 24,498,893 18,274,946 (6,223,947) 86% 21,975 1,054 481 532 80% 14,712 875 585 659 (6pp) (7,263) (179) 104 127 21,032,364 14,596,745 (6,435,619) (44.3%) (18.5%) (1.7%) (11.8%) >100.0% (36.2%) (25.4%) – (33.1%) (17.0%) 21.7% 23.9% (30.6%) Fare revenues. The decrease in fare revenues in 2020 was pri- marily due to the significant reduction in our ASM capacity by 25.4% resulting from a substantial decrease in customer demand as a result of the impact of the COVID-19 pandemic. As a conse- quence, our booked passengers also decreased 33.1%, and our average ticket revenue per booked passenger decreased 17.0% year over year. Other passenger revenues. The decrease in other passenger re- venues in 2020 was primarily due to lower volume of passengers electing to purchase additional services as a result of a substantial decrease in customer demand, which in turn was a result of the impact of the COVID-19 pandemic. Other non-passenger revenues. The decrease in other non-pass- enger revenues was primarily due to lower revenues from airport incentives recorded during 2020. Cargo. The decrease in cargo revenues in 2020 was primarily due to a lower volume of cargo operations recorded during 2020. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects 2018 compared to 2019 Operating Revenues Passenger revenues: Fare revenues Other passenger revenues Non-passenger revenues: Other non-passenger revenues Cargo Non-derivative financial instruments 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 Revenue passenger miles (RPMs in thousands) Content 161 For the years ended December 31, 2018 Adjusted (1) 2019 Variation (In thousands of pesos, except for % and operating data) Ps.18,487,858 7,892,497 Ps.23,129,991 10,569,208 697,357 227,438 – 897,586 228,836 (72,949) Ps.4,642,133 2,676,711 200,229 1,398 (72,949) Ps.27,305,150 Ps.34,752,672 Ps.7,447,522 21,009,545 24,498,893 3,489,348 85% 18,396 1,006 429 479 86% 21,975 1,054 481 532 – 3,579 48 52 53 17,748,408 21,032,364 3,283,956 25.1% 33.9% 28.7% 0.6% 100% 27.3% 16.6% 1.0pp 19.5% 4.8% 12.1% 11.1% 18.5% (1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, 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, 2017. Fare revenues. The increase in fare revenues in 2019 was primarily due to growth in our ASM capacity by 16.6% resulting from the incorporation of five new net aircraft. Additionally, our booked passengers increased 19.5%, and our average ticket revenue per booked passenger increased 4.8% year over year. Other passenger revenues. The increase in other passenger revenues in 2019 was primarily due to higher volume of pass- engers electing to purchase additional services. We continue executing our fare unbundling and demand stimulation strategy. In particular, during 2019, our total ancillary revenues increased due to improved revenue from fees charged for excess baggage, advanced seat selection and itinerary changes. Other non-passenger revenues. The increase in other non-pass- enger revenues was primarily due to higher revenues from airport incentives recorded during 2019. Cargo. The increase in cargo revenues in 2019 was primarily due to a higher volume of cargo operations recorded during 2019. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Operating Expenses, net 2019 compared to 2020 Other operating income Fuel expense, net Landing, take-off and navigation expenses Depreciation of right of use assets Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Aircraft and engine variable lease expenses Other operating expenses Depreciation and amortization Total operating expenses, net Content 162 For the years ended December 31, 2019 2020 Variation (In thousands of pesos, except for )% Ps.(327,208) Ps.(730,333) 11,626,069 5,108,489 4,702,971 3,600,762 1,447,637 1,488,431 961,657 1,112,927 675,514 6,640,820 4,090,864 5,048,976 3,453,382 1,840,819 1,167,720 1,845,254 1,157,240 898,445 Ps.(403,125) (4,985,249) (1,017,625) 346,005 (147,380) 393,182 (320,711) 883,597 44,313 222,931 Ps.30,397,249 Ps.25,413,187 Ps.(4,984,062) >100.0% (42.9%) (19.9%) 7.4% (4.1%) 27.2% (21.5%) 91.9% 4.0% 33.0% (16.4%) Total operating expenses, net decreased 16.4% in 2020 primarily as a result of decrease of operations and other factors described below. Other Operating Income. Other operating income increased Ps. 403.1 million or more than 100.0% in 2020, primarily due to higher sale and leaseback gains recorded during 2020 compared to the previous year as a result of the adoption of IFRS 16. Fuel expense, net. The 42.9% decrease in fuel expense was primarily as a result of a decrease in the average fuel cost per gallon of 14.0% and a decrease in fuel gallons consumed of 29.8% which, in turn, was primarily due to the significant 29.2% decrease in departures as a result of the substantial decrease in customer demand due to the impact of the COVID-19 pandemic. During the years ended December 31, 2020 and 2019, we entered into US Gulf Coast Jet Fuel 54 Asian Zero Cost collar options and Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2020, their intrinsic value loss of Ps. 856.5 million was recycled to the cost of fuel. Landing, Take-off and Navigation Expenses. The 19.9% decrease in landing, take-off and navigation expenses in 2020 was prima- rily due to a decrease in our operations as measured by number of departures by 29.2%, as a result of the substantial decrease in customer demand, which in turn was a result of the impact of the COVID-19 pandemic. Depreciation of right of use assets. The 7.4% increase in de- preciation of right of use assets in 2020 was primarily due to an increase in our fleet (lease agreements), as we incorporated four new net aircraft leases and eight new net engine leases during 2020. Salaries and Benefits. The 4.1% decrease in salaries and benefits in 2020 was primarily the result of a decrease in employee salaries as result of reduced flight operations and cost-cutting measures in response to the COVID-19 pandemic. Additionally, the variable compensation of our workforce decreased also due to lower ope- rations recorded during 2020, as well as the accounting accrual impact related to our management retention plans. See Item 6: “Directors, Senior Management and Employees—Employees.” Sales, Marketing and Distribution Expenses. The 27.2% increase in sales, marketing and distribution expenses was mainly due to a one-time VAT expense of Ps. 746 million resulting from an adjustment on the northern border VAT rate, which was partially Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects offset by a decrease in our marketing and distribution expenses as a result of the COVID-19 pandemic and the related decrease in customer demand. Maintenance Expenses. The 21.5% decrease in maintenance ex- penses in 2020 was mainly due to lower maintenance expenses as result of reduced operations due to the COVID-19 pandemic, which was partially offset by the depreciation of approximately 11.6% in the average exchange rate of the peso against the U.S. dollar during 2020 since some of these maintenance expenses are denominated in U.S. dollars. Aircraft and engine variable lease expenses. The 91.9% increase in aircraft and engine variable expenses in 2020 was primarily due to an increase in redelivery expenses and the depreciation of approximately 11.6% in the average exchange rate of the peso against the U.S. dollar, since the majority of these expenses are denominated in U.S. dollars. Other Operating Expenses. The 4.0% increase in other operating expenses in 2020 was primarily the result of our purchase of ad- ditional insurance to cover flight equipment. Additionally, during 2020, other operating expenses on a dollar basis increased due to the depreciation of approximately 11.6% in the average exchange rate of the peso against the U.S. dollar during 2020, since some Content 163 of these expenses are denominated in U.S. dollars. Depreciation and Amortization. The 33.0% increase in depre- ciation and amortization in 2020 was primarily due to higher 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 2019 and 2020, we recorded amortization of major maintenance leasehold im- provements of Ps. 450.4 million and Ps. 652.1 million, respectively. 2018 compared to 2019 Other operating income Fuel expense, net Landing, take-off and navigation expenses Depreciation of right of use assets Salaries and benefits Sales, marketing and distribution expenses Maintenance expenses Aircraft and engine variable lease expenses Other operating expenses Depreciation and amortization Total operating expenses, net For the years ended December 31, 2018 (1) 2019 Variation Ps.(621,973) Ps.(327,208) Ps.294,765 (In thousands of pesos, except for%) 10,134,982 4,573,319 4,043,691 3,125,393 1,501,203 1,497,989 956,010 1,059,098 500,641 11,626,069 5,108,489 4,702,971 3,600,762 1,447,637 1,488,431 961,657 1,112,927 675,514 1,491,087 535,170 659,280 475,369 (53,566) (9,558) 5,647 53,829 174,873 Ps.26,770,353 Ps.30,397,249 Ps.3,626,896 (47.4)% 14.7% 11.7% 16.3% 15.2% (3.6)% (0.6)% 0.6% 5.1% 34.9% 13.5% (1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Total operating expenses, net increased 13.5% in 2019 primarily as a result of growth of operations and other factors described below. Other Operating Income. Other operating income decreased Ps. 294.8 million or 47.4% in 2019, primarily due to lower sale and leaseback gains recorded during 2019 compared to the previous year as a result of the adoption of IFRS 16. Fuel expense, net. The 14.7% increase in fuel expense was prima- rily as a result of an increase in the average fuel cost per gallon of 4.1% and an increase in fuel gallons consumed of 10.7% which, in turn, was primarily due to more aircraft in operation and a 17.1% increase in our departures. During the years ended December 31, 2019 and 2018, we entered into Asian Zero-Cost collar options and Asian call options con- tracts. These instruments also qualify for hedge accounting. As a result, during 2019, their intrinsic value loss of Ps. 70.5 million was recycled to the cost of fuel. Landing, Take-off and Navigation Expenses. The 11.7% increase in landing, take-off and navigation expenses in 2019 was prima- rily due to an increase in our operations as measured by number of departures by 17.1%. These increases were partially offset by a decrease in the number of airports where we operated during the year and incentives received from certain airport groups as a result of the growth of our operations. Depreciation of right of use assets. The 16.3% increase in de- preciation of right of use assets in 2019 was primarily due to an increase in our fleet, as we incorporated five new net aircraft and four new net engine leases during 2019. Salaries and Benefits. The 15.2% increase in salaries and benefits in 2019 was primarily the result of the annual salary increase and an increase of 7.6% in our total number of employees during the year. Additionally, the variable compensation of our workforce increased also due to higher operations recorded during 2019, as well as the accounting accrual impact related to our management retention plans. See Item 6: “Directors, Senior Management and Employees—Employees.” Sales, Marketing and Distribution Expenses. The 3.6% decrease 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. Maintenance Expenses. The 0.6% decrease in maintenance ex- penses in 2019 was mainly due to the receipt of credit notes from some maintenance suppliers. This decrease was partially offset by the 6.5% increase in our fleet size as a result of the addition of five new net aircraft received during the year and the depre- ciation of approximately 0.1% in the average exchange rate of the peso against the U.S. dollar during 2019 since some of these maintenance expenses are denominated in U.S. dollars. Content 164 Aircraft and engine variable lease expenses. The 0.6% increase in aircraft and engine variable expenses in 2019 was primarily due to the depreciation in the average exchange rate of the peso against the U.S. dollar, since the majority of these expenses are denominated in U.S. dollars. Other Operating Expenses. The 5.1% increase in other operating expenses in 2019 was primarily the result of our purchase of ad- ditional insurance to cover flight equipment and an increase in other administrative expenses. Additionally, during 2019, other operating expenses on a dollar basis increased due to the de- preciation of approximately 0.1% in the average exchange rate of the peso against the U.S. dollar during 2019, since some of these expenses are denominated in U.S. dollars. Depreciation and Amortization. The 34.9% increase in depre- ciation and amortization in 2019 was primarily due to higher 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 2018 and 2019, we recorded amortization of major maintenance leasehold im- provements of Ps .313.5 million and Ps. 450.4 million, respectively. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Operating Results 2019 compared to 2020 Operating Results Total operating revenues Total operating expenses, net Operating income Content 165 For the years ended December 31, 2019 2020 Variation (In thousands of pesos, except for%) Ps.34,752,672 30,397,249 Ps.4,355,423 Ps.22,159,591 25,413,187 Ps.(3,253,596) Ps.(12,593,081) (4,984,062) Ps.(7,609,019) 36.2% (16.4)% (100)% Operating Income (loss). As a result of the factors outlined above, our operating loss was Ps. (3,254) million in 2020, as compared to our operating income of Ps. 4,355 million in 2019. 2018 compared to 2019 Operating Results Total operating revenues Total operating expenses, net Operating income For the years ended December 31, 2018 Adjusted (1) 2019 Variation (In thousands of pesos, except for%) Ps.27,305,150 26,770,353 Ps.534,797 Ps.34,752,672 30,397,249 Ps.4,355,423 Ps.7,447,522 3,626,896 Ps.3,820,626 27.3% 13.5% >100% (1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. Operating Income. As a result of the factors outlined above, our operating income was Ps. 4,355 million in 2019, a greater than 100% increase compared to our operating income of Ps. 534.8 million in 2018. As a consequence of the adoption of IFRS 16, operating expenses decreased and our operating income increased. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Financial Results 2019 compared to 2020 Financing Results Finance income Finance cost Exchange gain, net Total financing results Content 166 For the years ended December 31, 2019 2020 Variation (In thousands of pesos, except for%) Ps.207,799 (2,269,829) 1,440,501 Ps.(621,529) Ps.101,511 (3,018,484) 470,594 Ps.(106,288) (748,655) (969,907) Ps.(2,446,379) Ps.(1,824,850) (51.1%) (33.0%) (67.3%) >100% Total Financing Results. The greater than 100% increase in our total financing loss in 2020 was primarily due to the increase in our finance cost, year over year. During 2020, we recorded a net exchange loss of Ps. (1.1) billion, which resulted from the 5.8% depreciation of the peso against the U.S. dollar at year-end, since we maintained a net monetary liability position of U.S. $1.7 billion in 2020. Our U.S. dollar net monetary liability position mainly resulted from the value of our lease liabilities and financial debt. This net exchange loss was partially offset by the Ps. 1.6 billion gain on our non-derivative financial instruments recorded during 2020. Additionally, our finance income decreased by Ps. 106.3 million, mainly due to a decrease in our short-term investments. Our finance cost increased by Ps. 748.7 million, mainly due to our lease finance costs and interest paid on our asset backed trust notes. 2018 compared to 2019 Financing Results Finance income Finance cost Exchange (loss) gain, net Total financing results 2018 (Adjusted) (1) 2019 Variation For the years ended December 31, (In thousands of pesos, except for%) Ps.152,603 (1,876,312) (103,790) Ps.(1,827,499) Ps.207,799 (2,269,829) 1,440,501 Ps.(621,529) Ps.55,196 (393,517) 1,544,291 Ps.1,205,970 36.2% 21.0% n.a. (66.0)% (1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Total Financing Results. The 66.0% decrease in our total finan- cing loss in 2019 was primarily due to the increase in our foreign exchange gain, year over year. During 2019, we recorded an exchange gain of Ps. 1.4 billion, which resulted from the 4.3% appreciation of the peso against the U.S. dollar at year-end, since we maintained a net monetary liability position of U.S. $1.7 billion in 2019. Our U.S. dollar net monetary liability position mainly resulted from the value of our lease liabilities and financial debt. Additionally, our finance income increased by Ps. 55.2 million, mainly due to an increase in our short-term investments as a result of a higher level of Cash during 2019. Our finance cost increased by Ps. 393.5 million, mainly due to an increase in our lease financial cost related to the recognition of IFRS 16 and interest paid on our asset backed trust notes. Content 167 Income Tax Expense and Net Income 2019 compared to 2020 Net (loss) income (Loss) income before income tax Income tax benefit (expense) Net (loss) income For the years ended December 31, 2019 2020 Variation (In thousands of pesos, except for%) Ps.3,733,894 (1,094,831) Ps.2,639,063 Ps.(5,699,975) Ps.(9,433,869) 1,406,184 2,501,015 Ps.(4,293,791) Ps.(6,932,854) >100% >100% >100% We recorded a net loss of Ps. 4.3 billion in 2020 com- pared to a net gain of Ps. 2.6 billion in 2019. During the years ended December 31, 2020 and 2019, we recorded a tax benefit (expense) of Ps. 1.4 billion and Ps. (1.1 billion), respectively. At December 31, 2020, our tax loss ca- rry-forwards amounted to Ps. 1.9 billion (Ps. 1.3 billion of December 31, 2019). During the year ended December 31, 2020, we did not use any available tax loss carry-forwards, whereas during the year ended December 31, 2019, we used Ps. 214.5 mi- llion in available tax loss carry-forwards. The effective tax rate during 2020 and 2019 was of 24.7% and 29.3%, respectively. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects 2018 compared to 2019 Net (loss) income (Loss) income before income tax Income tax benefit (expense) Net (loss) income Content 168 2018 (Adjusted) (1) 2019 Variation For the years ended December 31, (In thousands of pesos, except for%) Ps.(1,292,702) 349,820 Ps.(942,882) Ps.3,733,894 (1,094,831) Ps.2,639,063 Ps.5,026,596 (1,444,651) Ps.3,581,945 n.a n.a n.a (1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. We recorded net gain of Ps. 2.6 billion in 2019 compared to a net loss of Ps. 942.9 million in 2018. During the years ended December 31, 2019 and 2018, we recorded a tax (expense) benefit of Ps. (1.1 billion) and Ps. 349.8 million, respectively. At December 31, 2019, our tax loss carry-forwards amounted to Ps. 1.3 billion (Ps. 1.6 billion of December 31, 2018). tax rate during 2019 and 2018 was of 29.3% and 27.1% respectively. During the years ended December 31, 2019 and 2018, we used Ps. 214.5 million and Ps. 154.4 million, in available tax loss carry-forwards, respectively. The effective Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 169 B. Liquidity and Capital Resources Liquidity Our primary source of liquidity is cash provided by operations, with our primary uses of liquidity being working capital and capital expenditures. Net cash flows provided by operating activities Net cash flows used in investing activities Net cash flows used in financing activities For the years ended December 31, 2018 (Adjusted) (1) 2019 2019 6,276,707 (1,389,395) (5,946,059) (In thousands of pesos) 9,509,643 (1,879,341) (5,238,840) 4,359,445 (67,757) (3,040,840) (1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, 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, 2017. In recent years, we have been able to meet our working capital requirements through cash from our operations. Our capital expenditures consist primarily of the acquisition of flight equipment, including pre-delivery payments for aircraft acqui- sitions. From time to time, we finance pre-delivery payments related to our aircraft with revolving lines of credit with the commercial banks. We have obtained committed financing for pre-delivery payments in respect of all the aircraft to be delivered through 2022. Our cash and cash equivalents increased by Ps. 2.1 billion, from Ps. 8.0 billion at December 31, 2019 to Ps. 10.1 billion at Decem- ber 31, 2020. At December 31, 2020 our credit lines totaled Ps. 9.3 billion, of which Ps. 6.9 billion were related to financial debt and Ps. 2.4 billion were related to letters of credit (and of which Ps. 1.7 billion were undisbursed). At December 31, 2019, we had available credit lines totaling Ps. 9.0 billion, of which Ps. 6.6 billion were related to financial debt and Ps. 2.4 billion were related 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, 2020, 98% of our cash, cash equivalents and short-term investments were denominated in U.S. dollars and 2% were denominated in pesos. See note 3 to our audited consolidated financial statements included elsewhere in this annual report. Net cash flows provided by operating activities. We rely pri- marily on cash flows from operating activities to provide wor- king capital for current and future operations. Net cash flows provided by operating activities totaled Ps. 4.4 billion and Ps. 9.5 billion in 2020 and 2019, respectively. Our net operating cash flows decreased primarily due to the negative impact of the COVID-19 pandemic on our operating activities as des- cribed above. Net cash flows provided by operating activities totaled Ps. 9.5 billion and Ps. 6.3 billion in 2019 and 2018, respectively. Our net cash flows increased primarily due to a significant increase in unearned transportation revenue as compared to 2018. Net cash flows used in investing activities. During 2020, net cash flow used in investing activities totaled Ps. 0.1 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps. 2.2 billion, partially offset by pre-delivery payments reimbursements totaling Ps. 1.7 billion. Additionally, we recorded other capital expenditures relating to engine, aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, which were offset by the receipt of net proceeds from disposals. The net amount of proceeds was Ps. 0.4 billion. During 2019, net cash flow used in investing activities totaled Ps. 1.9 billion, which consisted primarily of pre-delivery pay- ments for aircraft and engine acquisitions, partially offset by pre-delivery payments reimbursements totaling Ps. 0.7 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangi- ble assets and major maintenance costs, net of disposals of Ps. 1.2 billion. During 2018, net cash flow used in investing activities totaled Ps. 1.4 billion, which consisted primarily of pre-delivery pay- ments for aircraft and engine acquisitions totaling Ps. 1.2 bi- llion, 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 assets and major maintenance costs, net of disposals of Ps. 0.8 billion. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 170 Net cash flow used in financing activities. During 2020, net cash flows used in financing activities totaled Ps. 3.0 billion, which consisted primarily of payments of the principal por- tion of lease liabilities of Ps. 6.1 billion (aircraft and spare engine rent payment), payments of financial debt related to the aircraft financing pre-delivery payments for a net amount of Ps. 1.9 billion, payments of working capital credit lines of Ps. 0.2 billion, payments of treasury shares of Ps. 0.1 billion and interest paid of Ps. 0.3 billion, which were partially off- set by proceeds from our SEC-registered follow-on equity offering of Ps. 3.3 billion, proceeds from disbursements un- der our revolving credit facility with Banco Santander and Bancomext of Ps. 2.1 billion and proceeds from additional short-term working capital facilities with Banco Sabadell, S.A. of Ps. 0.2 billion. During 2019, net cash flows used in financing activities to- taled Ps. 5.2 billion, which consisted primarily of payments of the principal portion of lease liabilities of Ps. 6.4 billion (aircraft and spare engine rent payment), payments of fi- nancial debt related to the aircraft financing pre-delivery payments for a net amount of Ps. 0.7 billion, payments of working capital credit lines of Ps. 0.5 billion and interest paid of Ps. 0.3 billion, which were partially offset by proceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps. 1.1 billion, proceeds from our asset backed trust notes (CEBUR) of Ps. 1.4 billion, which take into account amortized transaction costs, and proceeds from additional short-term working capital facilities with Banco Sabadell, S.A. of Ps. 0.2 billion. During 2018, net cash flows used in financing activities to- taled Ps. 5.9 billion, which consisted primarily of payments of the principal portion of lease liabilities of Ps. 5.7 billion (aircraft and spare engine rent payments), payments of fi- nancial debt related to the aircraft financing pre-delivery payments for a net amount of Ps. 0.7 billion, payments of working capital credit lines 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. Loan Agreements 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 entered into an additional amendment to such loan agree- ment to finance pre-delivery payments of eight additional A320 aircraft. In 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 purchase agreement. In December 2017, we ente- red an additional amendment to extend the term of the loan agreement to November 2021. In November 2018, we entered an amendment to extend the term of the loan agreement to May 2022. Finally, we entered into one further amendment to this loan agreement in October 2020 to extend the term to October 2022. pital facility with Banco Sabadell, S.A., Institución de Banca Multiple (“Sabadell”) with Concesionaria as our obligor in the amount of Ps. 200 million and bearing annual interest at TIIE 28 days plus 300 basis points. As of December 31, 2020, 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. C. Research and Development, Patents and Licenses, Etc. We have registered the trademark “Volaris” with the trade- mark 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 operate in Central America. On April 16, 2021, the Mexican authorities recognized the trademark “Volaris” in the category of famous brand. 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 Ban- comext. This revolving credit facility bears annual interest at three-month LIBOR plus 260 basis points. The maturity is on October 31, 2022, but it could be extended to November 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. We operate software products under licenses from our ven- dors, including Jeppesen Systems AB, Navitaire LLC and Juniper Technologies Corporation. Under our agreements with Airbus, we use Airbus’ proprietary information to main- tain our aircraft. D. Trend Information See Item 5: “Operating and Financial Review and Prospects— Operating Results—Trends and Uncertainties Affecting our Business.” On June 20, 2019, our subsidiary Volaris Opco issued 15,000,000 asset backed trust notes under the ticker VO- LARCB 19 in the amount of Ps. 1.5 billion through Irrevocable Trust number CIB/3249 created by Volaris Opco. This issuance is part of a program approved by the CNBV for an amount of up to Ps. 3.0 billion. The notes mature in five years, have prin- cipal amortizations of Ps. 250,000, Ps. 500,000, Ps. 500,000 and Ps. 250,000 in 2021, 2022, 2023 and 2024, respectively, and bear annual interest at TIIE 28 days plus 175 basis points. In December 2019, we entered into a short-term working ca- E. Off-Balance Sheet Arrangements None of our operating lease obligations are reflected on our statements of financial position. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value guarantee to our lessors. F. Tabular Disclosure of Contractual Obligations Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content 171 The following table sets forth certain contractual obligations as of December 31, 2020: Debt(1) Lease liabilities(2) Future lease liabilities(3) Flight equipment, spare engines and spare parts purchase obligations(4) 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, except for%) Ps.5,370,175 44,130,542 15,134,381 87,213,622 Ps.1,566,106 6,484,092 193,901 802,197 Ps.3,554,069 11,235,142 2,218,176 8,074,336 Ps.250,000 8,677,232 2,522,394 30,971,314 Ps. – 17,734,076 10,199,910 47,365,775 future payments on contractual obligations Ps.151,848,720 Ps.9,046,296 Ps.25,081,723 Ps.42,420,940 Ps.75,299,761 Includes scheduled interest payments. (1) (2) Does not include maintenance deposit payments because they depend on the utilization of the aircraft. (3) Our sale and leaseback agreements consist primarily of future lease payments with the lessors. (4) Our contractual purchase obligations consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. In December 2017, we signed an amendment to our purchase agreement with Airbus to purchase 80 aircraft which we are committed to receive from 2022 to 2026. * Disclosure of contractual obligations does not include obligations relating to our post-employment benefits which totaled Ps. 50.6 million at December 31, 2020. Committed expenditures for these aircraft, spare engines, spare parts and related flight equipment, including estima- ted amounts for contractual price escalations of pre-delivery payments, will be approximately Ps. 18.6 billion from 2021 to 2026 and thereafter. In 2021, we expect our capital expenditures, excluding pre-de- livery payments, to be Ps. 87.2 billion, consisting primarily of aircraft parts and rotable spare parts, construction and improve- ments to leased assets, and major maintenance costs (leasehold improvements to flight equipment recorded into rotable spare parts furniture and equipment, net). G. Safe Harbor Not applicable. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements About this Report Contact Operating and Financial Review and Prospects Content Content About this Report Content 6.1. Materiality Assessment 6.2. GRI and SASB Content Index Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 6 Content 173 About this Report GRI 102-12, 102-45, 102-46, 102-48, 102-49, 102-50, 102-54 Through our 2020 Annual Integrated Report we share with our stakeholders the economic, cor- porate governance, labor, social, environmental and financial results, as well as the actions im- plemented to respond to the health crisis caused by COVID-19, for the period from January 1st to December 31, 2020. We compiled the information reported based on the data analyzed from our operations in the countries and regions where we are present, i.e., Mexico, the United States of America and Central America. This report was prepared in accordance with the Global Reporting Initiative (GRI) Standards: Essential option. The contents used were defined based on our 2018 Materiality Assessment. The information provided has not been restated in any manner. Likewise, we maintain our commitment to con- tribute to the Sustainable Development Goals (SDG) of the United Nations 2030 Agenda. Our Corporate Sustainability Program contributes directly to the goals of 11 SDG related to the industry. Striving to improve how we manage ESG issues, in addition to the GRI contents and our contri- butions to the Sustainable Development Goals, for the first time we include information to meet the Sustainability Accounting Standards Board (SASB) standards applicable to Airlines. The Sustainability Accounting Standards Board (SASB) is an independent body that develops specific standards for numerous sectors, and whose mission is to inform businesses and inves- tors about the financial impacts of sustainabil- ity by promoting the reporting of material ESG issues (environmental, social and governance). Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 174 In 2021, we will update our materiality assessment and stakeholder engagement to identify risks, opportunities, performance indicators and strategic goals regarding our impact within the airline industry, especially in the current context due to the COVID-19 pandemic. Consolidated Risk (X) J. Research, development and innovation A. Corporate social responsibility (CSR) management F. Brand management H. Operations Ñ. Biodiversity IV WIDESPREAD R G T Y X KC E B I Z V U H O D S A F L N M P W Q Ñ % 0 0 1 Y T I R U T A M T E K R A M 6.1. Materiality Assessment GRI 102-46, 102-47 The materiality assessment and the stakeholder engagement that we conducted in 2018, as well as the True Value exercise conducted with KPMG in 2019, were essential for our restatement of the Volaris Corporate Sustainability Program and the Volaris Value Creation Model defined in 2019 and submitted in this report. We supplemented this methodology in order to obtain comparable results on significant issues according to the updates made under the Global Reporting Initiative (GRI) Standards, and taking into account the Dow Jones Sustainability Index (DJSI) items addressed to the aviation industry. O. Climate change and other atmospheric emissions III NECESSARY D. Ethics and integrity S. Employee satisfaction Q. Waste management N. Energy L. Environmental policies/management J W. Human rights M. Materials R. Talent attraction and retention Y. Stakeholder relations K. Customer relation management C. Risk management X. Social impacts on Communities T. Human capital development P. Water resource management E. Corruption/transparency V. Occupational health and safety Z. Standards with Suppliers B. Corporate governance % 0 I EMERGING 0% CONSOLIDATED RISK 100% I. Service Responsibility II URGENT U. Labor practices G. Financial issues High Medium Low Adjusted to 100% 100% 80% 72% 67% 66% 65% 64% 63% 61% 60% 57% 55% 54% 50% 50% 49% 48% 48% 47% 45% 44% 42% 42% 41% 41% 40% 32% Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI or SASB Standard Disclosure Description Page / Answer Content 175 GRI 102-55 6.2. GRI and SASB Content Index GRI 102: General disclosures 2016 102-1 102-2 102-3 102-4 102-5 102-6 102-7 102-8 102-9 102-10 102-11 102-12 102-13 102-14 102-15 102-16 102-17 102-18 102-19 102-20 102-21 102-22 102-23 Name of the organization Activities, brands, products, and services 1. Organizational profile Location of headquarters Location of operations Ownership and legal form Markets served Scale of the organization Information on employees and other workers Supply chain 9 31, 34 182 34 9 9, 31, 34, 36 28, 31, 34, 36 28 62 Significant changes to the organization and its supply chain 30, 34 Precautionary principle or approach External initiatives Membership of associations 2. Strategy Statement from senior decision-maker Key impacts, risks, and opportunities 3. Ethics and integrity Values, principles, standards, and norms of behavior Mechanisms for advice and concerns about ethics 4. Governance Governance structure Delegating authority Executive-level responsibility for economic, environmental, and social topics Consulting stakeholders on economic, environmental, and social topics Composition of the highest governance body and its committees Chair of the highest governance body 21, 24 10, 40, 173 21, 60 4 4, 21, 24 25, 27 25 12 17 10, 17 17, 40 12 12 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI or SASB Standard Disclosure 102-24 GRI 102: General disclosures 2016 102-25 102-26 102-27 102-28 102-29 102-30 102-31 102-32 102-33 102-35 102-36 102-40 102-41 102-42 102-43 102-44 102-45 102-46 102-47 102-48 102-49 102-50 102-51 102-52 102-53 Description Page / Answer Content 176 Nominating and selecting the highest governance body Conflicts of interest Role of highest governance body in setting purpose, values, and strategy Collective knowledge of highest governance body Evaluating the highest governance body’s performance 12 12, 25 12, 17 12 12 Identifying and managing economic, environmental, and social impacts 17, 21 Effectiveness of risk management processes Review of economic, environmental, and social topics Highest governance body’s role in sustainability reporting Communicating critical concerns Remuneration policies Process for determining remuneration 5. Stakeholder engagement List of stakeholder groups Collective bargaining agreements Identifying and selecting stakeholders Approach to stakeholder engagement Key topics and concerns raised 21 17 17 12 12 12 40 77 40 40, 43 40, 43 Entities included in the consolidated financial statements 173 Defining report content and topic boundaries 173, 174 6. Reporting practices List of material topics Restatements of information Changes in reporting Reporting period Date of most recent report Reporting cycle Contact point for questions regarding the report 174 173 173 173 2019 Annual 182 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 177 GRI or SASB Standard GRI 102: General disclosures 2016 Disclosure 102-54 102-55 102-56 Description Page / Answer Claims of reporting in accordance with the GRI Standards GRI content index External assurance 173 175 This report has no external assurance. TR-AL-000.A Available seat kilometers (ASK) TR-AL-000.B Passenger load factor SASB Airlines: Activity metrics TR-AL-000.C Revenue passenger kilometers (RPK) TR-AL-000.D Revenue ton kilometers (RTK) TR-AL-000.E Number of departures TR-AL-000.F Average age of fleet 58 58 58 58 30 GRI 103: Management approach 2016 GRI 201: Economic performance 2016 103-1 103-2 103-3 201-1 201-2 201-3 GRI 200: Economic Standards Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Direct economic value generated and distributed Financial implications and other risks and opportunities due to climate change Defined benefit plan obligations and other retirement plans 201-4 Financial assistance received from government “SASB Competitive behavior” TR-AL-520a.1 Total amount of monetary losses as a result of legal proceedings associated with anticompetitive behavior regulation 4, 21, 24, 30 4, 21, 24, 30 4, 21, 24, 30 45, 48 Volaris plans to use the TCFD framework for managing risks and opportunities related to climate change in the next two years. Retirement plans are granted in accordance with the law's guidelines and through the IMSS. We collaborate with the Tourism Departments from all states to promote the destinations of the new routes, through several means of advertising such as the website, social networks and the advertising spaces in the aircraft. 25 In 2020, we had no fines or sanctions related to anticompetitive behavior. " Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI or SASB Standard Disclosure Description Page / Answer Content 178 GRI 103: Management approach 2016 GRI 301: Materials 2016 GRI 103: Management approach 2016 GRI 302: Energy 2016 GRI 103: Management approach 2016 103-1 103-2 103-3 301-2 103-1 103-2 103-3 302-1 302-3 302-4 302-5 103-1 103-2 103-3 GRI 300: Environmental Standards Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Recycled input materials used Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Energy consumption within the organization Energy intensity Reduction of energy consumption Reductions in energy requirements of products and services Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach GRI 304: Biodiversity 2016 304-3 Habitats protected or restored GRI 103: Management approach 2016 GRI 305: Emissions 2016 103-1 103-2 103-3 305-1 305-2 305-4 305-5 Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Direct (Scope 1) GHG emissions Energy indirect (Scope 2) GHG emissions GHG emissions intensity Reduction of GHG emissions 64, 69 64, 69 64, 69 69 64, 65 64, 65 64, 65 65 65 65 65 64, 69 64, 69 64, 69 We do not directly restore habitats; however, we support initiatives and associations that are responsible for protecting natural areas and endangered species, as well as raising awareness about their preservation. 64, 72 64, 72 64, 72 72 72 65, 72 65, 72 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI or SASB Standard Disclosure Description Page / Answer GRI 300: Environmental Standards Content 179 GRI 305: Emissions 2016 305-7 Nitrogen oxides (NOX), sulfur oxides (SOX), and other significant air emissions TR-AL-110a.1 Gross global Scope 1 emissions “SASB Greenhouse gas emissions” TR-AL-110a.2 Discussion of long-term and short-term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets TR-AL-110a.3 Total fuel consumed, percentage alternative, percentage sustainable 103-1 103-2 103-3 306-3 306-4 306-5 103-1 103-2 103-3 Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Waste generated Waste diverted from disposal Waste directed to disposal Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach 307-1 Non-compliance with environmental laws and regulations This specific type of gas (NOx) is not monitored, as it is considered the equivalent emission factor for aviation established through the International Civil Aviation Organization (ICAO), according to Annex VI, volume IV, of the Chicago Convention. 72 65 Volaris plans to use the TCFD framework for managing risks and opportunities related to climate change in the next two years. 58 Volaris does not use alternative fuel in its aircraft. 64, 69 64, 69 64, 69 73 69 73 64, 72 64, 72 64, 72 During 2020, we had no fines or sanctions related to environmental non-compliances. 103-1 103-2 103-3 402-1 GRI 400: Social Standards Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach 28 28 28 Minimum notice periods regarding operational changes All notice periods established by the Federal Labor Law are respected. GRI 103: Management approach 2016 GRI 306: Waste 2020 GRI 103: Management approach 2016 GRI 307: Environmental compliance 2016 GRI 103: Management approach 2016 GRI 402: Labor / management relations 2016 Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact GRI or SASB Standard Disclosure Description GRI 400: Social Standards Content 180 Page / Answer SASB Labor practices GRI 103: Management approach 2016 GRI 410: Security practices 2016 SASB Accident & safety management GRI 103: Management approach 2016 GRI 412: Human rights assessment 2016 GRI 103: Management approach 2016 GRI 419: Socioeconomic compliance 2016 TR-AL-310a.1 Percentage of active workforce covered under collective bargaining agreements 77 TR-AL-310a.2 Number of work stoppages and total days idle 103-1 103-2 103-3 410-1 TR-AL-540a.1 TR-AL-540a.2 TR-AL-540a.3 Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Security personnel trained in human rights policies or procedures Description of implementation and outcomes of a Safety Management System Number of aviation accidents Number of governmental enforcement actions of aviation safety regulations 103-1 103-2 103-3 412-1 412-2 412-3 103-1 103-2 103-3 419-1 Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Operations that have been subject to human rights reviews or impact assessments Employee training on human rights policies or procedures Significant investment agreements and contracts that include human rights clauses or that underwent human rights screening Explanation of the material topic and its boundary The management approach and its components Evaluation of the management approach Non-compliance with laws and regulations in the social and economic area In 2020, there were no work stoppages or days of inactivity due to strikes or labor disputes. 92 92 92 92 93-94 93 In 2020, the competent authorities did not impose any measures against Volaris related to aviation security. 92 92 92 92 25, 92 92 93, 95 93, 95 93, 95 Derived from the case we have with Profeco, we have pending resolution and in litigation the defense means filed against a fine amounting Ps. $200,000.00. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content 181 Except otherwise stated, all figures in this document are as of December, 31, 2020. This integrated annual report contains various forward-looking statements, which represent the Company’s expectations, beliefs or projections concerning future events and financial trends affecting the financial con- dition of our business. When used in this annual report, the words “expects,” “intends,” “estimates,” “predicts,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “potential,” “outlook,” “may,” “continue,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s objectives, plans or goals, or actions the Company may take in the future, are forward-looking statements. Forward-looking statements include, without limitation, statements regarding the Company’s intentions and expectations regarding the delivery schedule of aircraft on order, announced new service routes and customer savings programs. Forward-looking statements should not be read as a guarantee or assurance of future performance or results and will not necessarily be accu- rate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Forward-looking statements are subject to a number of factors that could cause the Company’s actual results to differ materially from the Company’s expectations, including the competi- tive environment in the airline industry; the Company’s ability to keep costs low; changes in fuel costs; the impact of worldwide economic conditions on customer travel behavior; the Company’s ability to generate non-ticket revenues; and government regulation. Additional information concerning these and other factors is contained in the Company’s Securities and Exchange Commission filings. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Any investor should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional up- dates with respect to those or other forward-looking statements. Important factors that could cause such differences include, but are not limited to: the competitive environment in our industry ability to keep costs low changes in our fuel cost, the effectiveness of our fuel cost hedges and our ability to hedge fuel costs the impact of worldwide economic conditions, including the impact of the economic recession on customer travel behavior actual or threatened terrorist attacks, global instability, geopolitical risks and potential U.S. military actions or activities ability to generate non-ticket revenues external conditions, including air traffic congestion, weather conditions and outbreak of disease and pandemics ability to maintain slots in the airports that we operate and service provided by airport operators ability to operate through new airports that match our operative criteria; air travel substitutes labor disputes, employee strikes and other labor-related disruptions, including in connection with our negotiations with our union ability to attract and retain qualified personnel loss of key personnel aircraft-related fixed obligations dependence on cash balances and operating cash flows; our aircraft utilization rate maintenance costs our reliance on automated systems and the risks associated with changes made to those systems use of personal data lack of marketing alliances government regulation, changes in law and interpretation and supervision of compliance with applicable law maintaining and renewing our permits and concessions our ability to execute our growth strategy operational disruptions our indebtedness currency fluctuations or the devaluation and depreciation of the peso our liquidity our reliance on third-party vendors and partners our reliance on a single fuel provider in Mexico an aircraft accident or incident our aircraft and engine suppliers changes in the Mexican and VFR (passengers who are visiting friends and relatives) markets insurance costs environmental regulations cyber-attacks our ability to respond to global health crises, such as the ongoing COVID-19 pandemic Readers are encouraged to jointly review this integrated annual report with our 2020 Annual Report presented to the National Banking and Securities Commission and the Mexican Stock Exchange S.A.B. de C.V., on April 30, 2021, as well as our future reports presented to said institutions. The information in this report is subject to change without notice, and we are not obligated to publish updates or revise statements about future acts after the date of this report or to reflect the anticipated or unanticipated occurrence of certain events or circumstances. Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact Content Content 182 GRI 102-3, 102-53 Contact Av. Antonio Dovalí Jaime No. 70 13th floor, Tower B Colonia Zedec Santa Fe C.P. 01210, Mexico City Corporate Affairs Director José Alfonso Lozano +5255 52616400 volaris.corporativo@volaris.com Investor Relations Director María Elena Rodríguez +5255 52616444 ir@volaris.com @viajaVolaris @viajavolaris @viajavolaris Volaris, the Lowest Cost Publicly Traded Airline in the Americas Volaris Value Creation Volaris Performance Consolidated Financial Statements Operating and Financial Review and Prospects About this Report Contact 7 2 0 2 0 I n t e g r a t e d A n n u a l R e p o r t Publication date: August 5, 2021
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