CONTROLADORA VUELA COMPANIA DE AVIACION, S.A.B. DE C.V., 20-F filed on 4/26/2018
Annual and Transition Report (foreign private issuer)
v3.8.0.1
Document and Entity Information
12 Months Ended
Dec. 31, 2017
shares
Entity Registrant Name Controladora Vuela Compania de Aviacion, S.A.B. de C.V.
Entity Central Index Key 0001520504
Document Type 20-F
Document Period End Date Dec. 31, 2017
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Well-known Seasoned Issuer Yes
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Filer Category Large Accelerated Filer
Document Fiscal Year Focus 2017
Document Fiscal Period Focus FY
Ordinary Participation Certificates  
Entity Common Stock, Shares Outstanding 756,478,447
Series A shares  
Entity Common Stock, Shares Outstanding 923,824,804
v3.8.0.1
Consolidated Statements of Financial Position
$ in Thousands, $ in Thousands
Dec. 31, 2017
USD ($)
Dec. 31, 2017
MXN ($)
Dec. 31, 2016
MXN ($)
Current assets:      
Cash and cash equivalents $ 352,204 $ 6,950,879 $ 7,071,251
Accounts receivable:      
Other accounts receivable, net 24,244 478,467 427,403
Recoverable value added tax and others 20,292 400,464 342,348
Recoverable income tax 28,900 570,361 192,967
Inventories 14,940 294,850 243,884
Prepaid expenses and other current assets 38,900 767,713 1,562,526
Financial instruments 25,204 497,403 543,528
Guarantee deposits 68,552 1,352,893 1,167,209
Total current assets 573,236 11,313,030 11,551,116
Non-current assets:      
Rotable spare parts, furniture and equipment, net 221,718 4,375,697 2,525,008
Intangible assets, net 9,649 190,420 114,041
Financial instruments     324,281
Deferred income taxes 28,499 562,445 559,083
Guarantee deposits 309,001 6,098,252 6,559,878
Other assets 6,406 126,423 148,364
Total non-current assets 575,273 11,353,237 10,230,655
Total assets 1,148,509 22,666,267 21,781,771
Short-term liabilities:      
Unearned transportation revenue 109,531 2,161,636 2,153,567
Suppliers 54,594 1,077,438 861,805
Related parties 2,074 40,931 65,022
Accrued liabilities 103,924 2,050,973 1,785,439
Other taxes and fees payable 63,097 1,245,247 1,476,242
Income taxes payable 5,639 111,292 196,242
Financial instruments     14,144
Financial debt 121,789 2,403,562 1,051,237
Other liabilities 14,225 280,744 284,200
Total short-term liabilities 474,873 9,371,823 7,887,898
Long-term liabilities:      
Financial debt 54,681 1,079,152 943,046
Accrued liabilities 10,126 199,848 169,808
Other liabilities 10,980 216,702 136,555
Employee benefits 977 19,289 13,438
Deferred income taxes 81,901 1,616,282 1,836,950
Total long-term liabilities 158,665 3,131,273 3,099,797
Total liabilities 633,538 12,503,096 10,987,695
Equity:      
Capital stock 150,671 2,973,559 2,973,559
Treasury shares (4,309) (85,034) (83,365)
Contributions for future capital increases   1 1
Legal reserve 14,754 291,178 38,250
Additional paid-in capital 91,436 1,804,528 1,800,613
Retained earnings 257,408 5,080,049 5,927,576
Accumulated other comprehensive income 5,011 98,890 137,442
Total equity 514,971 10,163,171 10,794,076
Total liabilities and equity $ 1,148,509 $ 22,666,267 $ 21,781,771
v3.8.0.1
Consolidated Statements of Financial Position (Parenthetical)
Apr. 25, 2018
$ / $
Dec. 31, 2017
$ / $
Dec. 31, 2017
Q / $
Dec. 31, 2017
₡ / $
Dec. 31, 2016
$ / $
Dec. 31, 2016
Q / $
Dec. 31, 2016
₡ / $
Consolidated Statements of Financial Position              
Convenience translation to U.S. dollars 18.8628 19.7354 7.3448 572.5600 20.6640 7.5221 561.1000
v3.8.0.1
Consolidated Statements of Operations
$ in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2017
USD ($)
$ / shares
Dec. 31, 2017
MXN ($)
$ / shares
Dec. 31, 2016
MXN ($)
$ / shares
Dec. 31, 2015
MXN ($)
$ / shares
Operating revenues:        
Passenger $ 901,493 $ 17,791,317 $ 17,790,130 $ 14,130,365
Non-ticket 357,431 7,054,058 5,722,321 4,049,339
Total revenues 1,258,924 24,845,375 23,512,451 18,179,704
Other operating income (4,903) (96,765) (496,742) (193,155)
Fuel 367,646 7,255,636 5,741,403 4,721,108
Aircraft and engine rent expenses 307,696 6,072,502 5,590,058 3,525,336
Landing, take-off and navigation expenses 203,184 4,009,915 3,272,051 2,595,413
Salaries and benefits 143,075 2,823,647 2,419,537 1,902,748
Sales, marketing and distribution expenses 85,710 1,691,524 1,413,348 1,088,805
Maintenance expenses 72,618 1,433,147 1,344,110 874,613
Other operating expenses 55,152 1,088,440 952,452 697,786
Depreciation and amortization 27,802 548,687 536,543 456,717
Operating income 944 18,642 2,739,691 2,510,333
Finance income 5,361 105,795 102,591 47,034
Finance cost (4,376) (86,357) (35,116) (21,703)
Foreign exchange (loss) gain, net (40,225) (793,854) 2,169,505 966,554
(Loss) income before income tax (38,296) (755,774) 4,976,671 3,502,218
Income tax benefit (expense) 8,167 161,175 (1,457,182) (1,038,348)
Net (loss) income $ (30,129) $ (594,599) $ 3,519,489 $ 2,463,870
(Loss) Earnings per share basic: | (per share) $ (0.030) $ (0.588) $ 3.478 $ 2.435
(Loss) Earnings per share diluted: | (per share) $ (0.030) $ (0.588) $ 3.478 $ 2.435
v3.8.0.1
Consolidated Statements of Operations (Parenthetical)
Apr. 25, 2018
$ / $
Dec. 31, 2017
$ / $
Dec. 31, 2017
Q / $
Dec. 31, 2017
₡ / $
Dec. 31, 2016
$ / $
Dec. 31, 2016
Q / $
Dec. 31, 2016
₡ / $
Consolidated Statements of Operations              
Convenience translation to U.S. dollars 18.8628 19.7354 7.3448 572.5600 20.6640 7.5221 561.1000
v3.8.0.1
Consolidated Statements of Comprehensive Income
$ in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2017
USD ($)
Dec. 31, 2017
MXN ($)
Dec. 31, 2016
MXN ($)
Dec. 31, 2015
MXN ($)
Consolidated Statements of Comprehensive Income        
Net (loss) income for the year $ (30,129) $ (594,599) $ 3,519,489 $ 2,463,870
Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods:        
Net (loss) gain on cash flow hedges (2,136) (42,148) 624,694 (193,869)
Income tax effect 609 12,017 (187,408) 58,161
Exchange differences on translation of foreign operations (364) (7,178) (4,756)  
Other comprehensive (loss) income not to be reclassified to profit or loss in subsequent periods:        
Remeasurement loss of employee benefits (90) (1,776) (442) (1,174)
Income tax effect 27 533 132 352
Other comprehensive (loss) income for the year, net of tax (1,954) (38,552) 432,220 (136,530)
Total comprehensive (loss) income for the year, net of tax $ (32,083) $ (633,151) $ 3,951,709 $ 2,327,340
v3.8.0.1
Consolidated Statements of Comprehensive Income (Parenthetical)
Apr. 25, 2018
$ / $
Dec. 31, 2017
$ / $
Dec. 31, 2017
Q / $
Dec. 31, 2017
₡ / $
Dec. 31, 2016
$ / $
Dec. 31, 2016
Q / $
Dec. 31, 2016
₡ / $
Consolidated Statements of Comprehensive Income              
Convenience translation to U.S. dollars 18.8628 19.7354 7.3448 572.5600 20.6640 7.5221 561.1000
v3.8.0.1
Consolidated Statements of Changes in Equity
$ in Thousands, $ in Thousands
Capital stock
USD ($)
Capital stock
MXN ($)
Treasury shares
USD ($)
Treasury shares
MXN ($)
Contribution for future capital increases
MXN ($)
Legal reserve
USD ($)
Legal reserve
MXN ($)
Additional paid-in capital
USD ($)
Additional paid-in capital
MXN ($)
Retained earnings (Accumulated losses)
USD ($)
Retained earnings (Accumulated losses)
MXN ($)
Remeasurement of employee benefits
USD ($)
Remeasurement of employee benefits
MXN ($)
Cash flow hedges
USD ($)
Cash flow hedges
MXN ($)
Exchange differences on translation of foreign operations
USD ($)
Exchange differences on translation of foreign operations
MXN ($)
USD ($)
MXN ($)
Balance as of beginning of the year at Dec. 31, 2014   $ 2,973,559   $ (114,789) $ 1   $ 38,250   $ 1,786,790   $ (55,783)   $ (1,482)   $ (156,766)       $ 4,469,780
Exercise of stock options       23,461                             23,461
Long-term incentive plan cost                 4,250                   4,250
Net (loss) income for the period                     2,463,870               2,463,870
Other comprehensive (loss) income items                         (822)   (135,708)       (136,530)
Total comprehensive (loss) income                     2,463,870   (822)   (135,708)       2,327,340
Balance as of end of the year at Dec. 31, 2015   2,973,559   (91,328) 1   38,250   1,791,040   2,408,087   (2,304)   (292,474)       6,824,831
Treasury shares       (17,025)         17,025                    
Exercise of stock options       17,536                             17,536
Forfeited shares from incentive plan       963         (963)                    
Long-term incentive plan cost       6,489         (6,489)                    
Net (loss) income for the period                     3,519,489               3,519,489
Other comprehensive (loss) income items                         (310)   437,286   $ (4,756)   432,220
Total comprehensive (loss) income                     3,519,489   (310)   437,286   (4,756)   3,951,709
Balance as of end of the year at Dec. 31, 2016   2,973,559   (83,365) 1   38,250   1,800,613   5,927,576   (2,614)   144,812   (4,756)   10,794,076
Legal reserve increase             252,928       (252,928)                
Treasury shares       (10,108)         10,108                    
Exercise of stock options       638                             638
Long-term incentive plan cost       7,801         (6,193)                   1,608
Net (loss) income for the period                     (594,599)             $ (30,129) (594,599)
Other comprehensive (loss) income items                         (1,243)   (30,131)   (7,178) (1,954) (38,552)
Total comprehensive (loss) income                     (594,599)   (1,243)   (30,131)   (7,178) (32,083) (633,151)
Balance as of end of the year at Dec. 31, 2017 $ 150,671 $ 2,973,559 $ (4,309) $ (85,034) $ 1 $ 14,754 $ 291,178 $ 91,436 $ 1,804,528 $ 257,408 $ 5,080,049 $ (195) $ (3,857) $ 5,811 $ 114,681 $ (605) $ (11,934) $ 514,971 $ 10,163,171
v3.8.0.1
Consolidated Statements of Changes in Equity (Parenthetical)
Apr. 25, 2018
$ / $
Dec. 31, 2017
$ / $
Dec. 31, 2017
Q / $
Dec. 31, 2017
₡ / $
Dec. 31, 2016
$ / $
Dec. 31, 2016
Q / $
Dec. 31, 2016
₡ / $
Consolidated Statements of Changes in Equity              
Convenience translation to U.S. dollars 18.8628 19.7354 7.3448 572.5600 20.6640 7.5221 561.1000
v3.8.0.1
Consolidated Statements of Cash Flows
$ in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2017
USD ($)
Dec. 31, 2017
MXN ($)
Dec. 31, 2016
MXN ($)
Dec. 31, 2015
MXN ($)
Operating activities        
(Loss) income before income tax $ (38,296) $ (755,774) $ 4,976,671 $ 3,502,218
Non-cash adjustment to reconcile income before tax to net cash flows from operating activities:        
Depreciation and amortization 27,802 548,687 536,543 456,717
Provision for doubtful accounts 239 4,720 9,164 8,825
Finance income (5,361) (105,795) (102,591) (47,034)
Finance cost 4,376 86,357 35,116 21,703
Net foreign exchange differences 25,556 504,366 (1,054,333) (483,329)
Financial instruments 2,534 50,007 353,943 287,550
Net gain on disposal of rotable spare parts, furniture and equipment and gain on sale of aircraft (3,292) (64,978) (483,565) (180,433)
Employee benefits 236 4,657 3,122 2,549
Aircraft and engine lease extension benefit and other benefits from service agreements (5,096) (100,580) (82,178) (62,122)
Management incentive and long-term incentive plans 445 8,783 4,826 4,250
Cash flows from operating activities before changes in working capital 9,143 180,450 4,196,718 3,510,894
Changes in operating assets and liabilities:        
Related parties (1,221) (24,091) 50,706 13,749
Other accounts receivable 7,082 139,774 (157,370) (52,157)
Recoverable and prepaid taxes (22,243) (438,966) (361,377) 63,499
Inventories (2,582) (50,966) (80,811) (23,400)
Prepaid expenses 36,790 726,020 (1,027,040) (353,451)
Other assets 1,112 21,941 19,540 28,758
Guarantee deposits 2,910 57,425 (1,957,350) (1,164,911)
Suppliers 9,936 196,082 136,178 300,447
Accrued liabilities 14,690 289,920 499,584 272,555
Other taxes and fees payable 17,887 353,014 523,524 433,863
Unearned transportation revenue 409 8,069 196,313 536,319
Financial instruments 6,387 126,053 (450,902) (637,879)
Other liabilities 567 11,198 260,437 127,170
Cash flows from operating activities before interest received and income tax paid 80,867 1,595,923 1,848,150 3,055,456
Interest received 5,361 105,795 102,591 47,034
Income tax paid (36,272) (715,849) (972,009) (32,877)
Net cash flows provided by operating activities 49,956 985,869 978,732 3,069,613
Investing activities        
Acquisitions of rotable spare parts, furniture and equipment (127,778) (2,521,752) (2,198,697) (1,403,863)
Acquisitions of intangible assets (6,633) (130,908) (60,792) (52,228)
Pre-delivery payments reimbursements 10,841 213,947 1,733,093 669,718
Proceeds from disposals of rotable spare parts, furniture and equipment 9,033 178,273 498,438 185,096
Net cash flows used in investing activities (114,537) (2,260,440) (27,958) (601,277)
Financing activities        
Proceeds from exercised stock options 32 638 20,186 23,461
Treasury shares purchase (512) (10,108) (17,025)  
Interest paid (5,340) (105,388) (39,350) (41,538)
Other finance interest paid     (137,830) (40,113)
Payments of financial debt (46,864) (924,867) (1,531,460) (801,335)
Proceeds from financial debt 123,535 2,438,025 1,716,244 924,611
Net cash flows provided by financing activities 70,851 1,398,300 10,765 65,086
Increase in cash and cash equivalents 6,270 123,729 961,539 2,533,422
Net foreign exchange differences on cash balance (12,369) (244,101) 952,399 359,034
Cash and cash equivalents at beginning of year 358,303 7,071,251 5,157,313 2,264,857
Cash and cash equivalents at end of year $ 352,204 $ 6,950,879 $ 7,071,251 $ 5,157,313
v3.8.0.1
Consolidated Statements of Cash Flows (Parenthetical)
Apr. 25, 2018
$ / $
Dec. 31, 2017
$ / $
Dec. 31, 2017
Q / $
Dec. 31, 2017
₡ / $
Dec. 31, 2016
$ / $
Dec. 31, 2016
Q / $
Dec. 31, 2016
₡ / $
Consolidated Statements of Cash Flows              
Convenience translation to U.S. dollars 18.8628 19.7354 7.3448 572.5600 20.6640 7.5221 561.1000
v3.8.0.1
Description of the business and summary of significant accounting policies
12 Months Ended
Dec. 31, 2017
Description of the business and summary of significant accounting policies  
Description of the business and summary of significant accounting policies

 

 

1.  Description of the business and summary of significant accounting policies

 

Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Controladora” or the “Company”) was incorporated in Mexico in accordance with Mexican Corporate laws on October 27, 2005.

 

Controladora is domiciled in Mexico City at Av. Antonio Dovali Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, Mexico City.

 

The Company, through its subsidiary Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V. (“Concesionaria”), has a concession to provide air transportation services for passengers, cargo and mail throughout Mexico and abroad.

 

Concesionaria’s concession was granted by the Mexican federal government through the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes) on May 9, 2005 initially for a period of five years and was extended on February 17, 2010 for an additional period of ten years.

 

Concesionaria made its first commercial flight as a low-cost airline on March 13, 2006. The Company operates under the trade name of “Volaris”. On June 11, 2013, Controladora Vuela Compañía de Aviación, S.A.P.I. de C.V. changed its corporate name to Controladora Vuela Compañía de Aviación, S.A.B. de C.V.

 

On September 23, 2013, the Company completed its dual listing Initial Public Offering (“IPO”) on the New York Stock Exchange (“NYSE”) and on the Mexican Stock Exchange (Bolsa Mexicana de Valores, or “BMV”), and on September 18, 2013 its shares started trading under the ticker symbol “VLRS” and “VOLAR”, respectively.

 

On November 16, 2015, certain shareholders of the Company completed a secondary follow-on equity offering on the NYSE (Note 18a).

 

On November 10, 2016, the Company, through its subsidiary Vuela Aviación, S.A. (“Volaris Costa Rica”), obtained from the Costa Rican civil aviation authorities an air operator certificate to provide air transportation services for passengers, cargo and mail, in scheduled and non-scheduled flights for an initial period of five years. On December 1, 2016, Volaris Costa Rica started operations.

 

The accompanying consolidated financial statements and notes were authorized for issuance by the Company’s Chief Executive Officer, Enrique Beltranena, and Chief Financial Officer, Fernando Suárez, on April 6, 2018. Those consolidated financial statements and notes were approved by the Company´s Board of Directors and by the Shareholders on April 19, 2018. The accompanying consolidated financial statements were approved for issuance in the Company´s annual report on Form 20-F by the Company´s Chief Executive Officer and Chief Financial Officer on April 25, and subsequent events were considered through that date (Note 25).

 

a)Relevant events

 

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 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.

 

Operations in Central America

 

On December 1, 2016, the Company’s subsidiary Vuela Aviación, started operations in Costa Rica.

 

Secondary follow-on equity offering

 

On November 16, 2015, the Company completed a secondary follow-on equity offering, in which certain shareholders sold 108,900,000 of the Company’s Ordinary Participation Certificates (Certificados de Participación Ordinarios or “CPOs”), in the form of American Depositary Shares or “ADSs”, in the United States and other countries outside Mexico. No CPOs or ADSs were sold by the Company and the selling shareholders received all of the proceeds from this offering.

 

b)  Basis of preparation

 

Statement of compliance

 

These consolidated financial statements comprise the financial statements of the Company and its subsidiaries at December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017, and were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

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 consolidated financial statements is the Mexican peso, which is used also for compliance with its legal and tax obligations. All values in the consolidated financial statements are rounded to the nearest thousand (Ps.000), except when otherwise indicated.

 

The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements. The consolidated financial statements provide comparative information in respect of the previous period.

 

Basis of measurement and presentation

 

The accompanying consolidated financial statements have been prepared under the historical-cost convention, except for derivative financial instruments that are measured at fair value and investments in marketable securities measured at fair value through profit and loss (“FVTPL”). The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.

 

c)  Basis of consolidation

 

The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiaries. At December 31, 2017 and 2016, for accounting purposes the companies included in the consolidated financial statements are as follows:

 

 

 

Principal

 

 

 

% Equity interest

 

Name

 

Activities

 

Country

 

2017

 

2016

 

Concesionaria

 

Air transportation services for passengers, cargo and mail throughout Mexico and abroad

 

Mexico

 

100

%

100

%

Volaris Costa Rica

 

Air transportation services for passengers, cargo and mail in Costa Rica and abroad

 

Costa Rica

 

100

%

100

%

Vuela, S.A. (“Vuela”)*

 

Air transportation services for passengers, cargo and mail in Guatemala and abroad

 

Guatemala

 

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

%

Servicios Corporativos Volaris, S.A. de C.V. (“Servicios Corporativos”)

 

Recruitment and payroll

 

Mexico

 

100

%

100

%

Servicios Administrativos Volaris, S.A. de C.V (“Servicios Administrativos”)

 

Recruitment and payroll

 

Mexico

 

100

%

100

%

Operaciones Volaris, S.A. de C.V (“Operaciones Volaris”)(1)

 

Recruitment and payroll

 

Mexico

 

100

%

100

%

Deutsche Bank México, S.A., Trust 1710

 

Pre-delivery payments financing (Note 5)

 

Mexico

 

100

%

100

%

Deutsche Bank México, S.A., Trust 1711

 

Pre-delivery payments financing (Note 5)

 

Mexico

 

100

%

100

%

Irrevocable Administrative Trust number F/307750 “Administrative Trust”

 

Share administration trust (Note 17)

 

Mexico

 

100

%

100

%

Irrevocable Administrative Trust number F/745291

 

Share administration trust (Note 17)

 

Mexico

 

100

%

100

%

 

*The Company has not started operations in Guatemala.

(1)

With effect from August 3, 2016, the name of the Company was changed from Servicios Operativos Terrestres Volaris, S.A. de C.V. to Operaciones Volaris, S.A. de C.V.

 

The financial statements of the subsidiaries are prepared for the same reporting period as the parent Company, using consistent accounting policies.

 

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:

 

(i)

Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee).

(ii)

Exposure, or rights, to variable returns from its involvement with the investee.

(iii)

The ability to use its power over the investee to affect its returns.

 

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:

 

(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.

 

The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary.

 

All intercompany balances, transactions, unrealized gains and losses resulting from intercompany transactions are eliminated in full.

 

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 recognized in profit or loss.

 

d)  Revenue recognition

 

Passenger revenues:

 

Revenues from the air transportation of passengers are recognized 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 liabilities under the caption unearned transportation revenue and, once the transportation service is provided by the Company or when the non-refundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as passenger ticket revenues and the unearned transportation revenue is reduced by the same amount. All of 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.

 

Non-ticket revenues:

 

The most significant non-ticket revenues include revenues generated from: (i) air travel-related services (ii) revenues from non-air travel-related services and (iii) cargo services.

 

Air travel-related services include but are not limited to fees charged for excess baggage, bookings through the call center or third-party agencies, advanced seat selection, itinerary changes, charters and airport passenger facility charges for no-show tickets. They are recognized as revenue when the related service is provided by the Company.

 

Revenues from non-air travel-related services include commissions charged to third parties for the sale of hotel rooms, trip insurance and rental cars. They are recognized as revenue at the time the service is provided. Additionally, services not directly related to air transportation include VClub membership fees and the sale of advertising to third parties. VClub membership fees are recognized as revenues over the term of the membership. Revenue from the sale of advertising is recognized over the period in which the service is provided.

 

Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination).

 

The breakdown of the Company’s non-ticket revenues for the years ended December 31, 2017, 2016 and 2015 is as follows:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2016

 

2015

 

Air travel-related services

 

Ps.

6,293,747

 

Ps.

5,055,836

 

Ps.

3,418,654

 

Non-air travel-related services

 

589,338

 

494,864

 

441,393

 

Cargo

 

170,973

 

171,621

 

189,292

 

 

 

 

 

 

 

 

 

Total non-ticket revenues

 

Ps.

7,054,058

 

Ps.

5,722,321

 

Ps.

4,049,339

 

 

 

 

 

 

 

 

 

 

 

 

 

e)  Cash and cash equivalents

 

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 purpose of the consolidated statements of cash flows, cash and cash equivalents consist of cash and short-term investments as defined above.

 

f)  Financial instruments

 

A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity. The Company early adopted IFRS 9.

 

Under IFRS 9 (2013), the FVTPL category used under IAS 39 remains permissible, although new categories of financial assets are introduced. These new categories are based on the characteristics of the instruments and the business model under which these are held, to either be measured at fair value or at amortized cost.

 

For financial liabilities, categories provided under IAS 39 are maintened. As a result, there was no difference in valuation and recognition of the financial assets under IFRS 9 (2013), since those financial assets categorized under IAS 39 as FVTPL remain in that same category under IFRS 9 (2013). In the case of trade receivables, these were not affected in terms of the valuation model under this version of IFRS 9 (2013), since they are carried at amortized cost and continued to be accounted for as such.

 

Also, the hedge accounting section of IFRS 9 (2013) requires, for options that qualify and are formally designated as hedging instruments, the intrinsic value of the option to be defined as the hedging instrument, thus allowing for the exclusion of changes in fair value attributable to extrinsic value (time value and volatility), to be accounted, under the transaction-related method, separately as a cost of hedging that needs to be initially recognized in OCI and accumulated in a separate component of equity, since the hedged item is a portion of the forecasted jet fuel consumption. The extrinsic value is recognized in the consolidated statement of operations when the hedged item is recognized in income.

 

IFRS 9 requires the Company to record expected credit losses on all trade receivables, either on a 12 month or lifetime basis. The Company recorded lifetime expected losses on all trade receivables.

 

i)  Financial assets

 

Classification of financial assets

 

The Company determines the classification and measurement of financial assets, in accordance with the categories in IFRS 9 (2013), 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 payments of principal and interest (“SPPI”). Derivative financial instruments are also considered financial assets when these represent contractual rights to receive cash or another financial asset.

 

Initial recognition

 

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:

 

1.

Financial assets at FVTPL, which include financial assets held for trading.

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.

Derivative financial instruments are designated for hedging purposes under the cash flow hedge (“CFH”) accounting model and are measured at fair value.

 

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;

 

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 has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset; or

 

c)

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

 

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.  Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in receivables, 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.

 

Further disclosures related to impairment of financial assets are also provided in Note 2(vi) and Note 8.

 

For trade receivables, the Company records allowance for credit losses in accordance with the objective evidence of the incurred losses. Based on this evaluation, allowances are taken into account for the expected losses of these receivables.

 

For the years ended December 31, 2017, 2016 and 2015, the Company recorded an impairment on accounts receivable of Ps.4,720, Ps.9,164 and Ps.8,825, respectively (Note 8).

 

iii) Financial liabilities

 

Classification of financial liabilities

 

Financial liabilities under IFRS 9 (2013) are classified at amortized cost or at FVTPL.

 

Derivative financial instruments are also considered financial liabilities when these represent contractual obligations to deliver cash or another financial asset.

 

Initial recognition

 

The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value.

 

The Company’s financial liabilities include accounts payable to suppliers, unearned transportation revenue, other accounts payable, financial debt and financial instruments.

 

Subsequent measurement

 

The measurement of financial liabilities depends on their classification as described below:

 

Financial liabilities at amortized cost

 

Accounts payable are subsequently measured at amortized cost and do not bear interest or result in gains and losses due to their short-term nature.

 

After initial recognition at fair value (consideration received), interest bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.

 

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

 

FVTPL include financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities under the fair value option 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 (2013). During the years ended December 31, 2017, 2016 and 2015 the Company has not designated any financial liability as at FVTPL.

 

Derecognition

 

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 liability and the recognition of a new liability.

 

The difference in the respective carrying amounts is recognized in the consolidated statements of operations.

 

Offsetting of financial instruments

 

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial 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.

 

g)  Other accounts receivable

 

Other accounts receivables are due primarily from major credit card processors associated with the sales of tickets and are stated at cost less allowances made for credit losses, which approximates fair value given their short-term nature.

 

h)  Inventories

 

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 their cost and their net realization value. The cost is determined on the basis of the method of specific identification, and expensed when used in operations.

 

i)  Intangible assets

 

Cost related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over the period in which it will generate benefits not exceeding five years on a straight-line basis. The Company annually reviews the estimated useful lives and salvage values of intangible assets and any changes are accounted for prospectively.

 

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 unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) 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, 2017, 2016 and 2015, there were no indicators of impairment. No impairment charges were recorded in respect of the Company’s value of intangible assets.

 

j)  Guarantee deposits

 

Guarantee deposits consist primarily of aircraft maintenance deposits paid to lessors, deposits for rent of flight equipment and other guarantee deposits. Aircraft and engine deposits are held by lessors in U.S. dollars and are presented as current assets and non-current assets, based on the recovery dates of each deposit established in the related agreements (Note 11).

 

Aircraft maintenance deposits paid to lessors

 

Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as 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 lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs related to the specific maintenance event.

 

Substantially all of these maintenance deposits are calculated based on a utilization measure of the leased aircrafts and engines, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft and engines until the completion of the maintenance of the aircraft and engines.

 

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 is deemed unlikely to be recovered, primarily relating to the rate differential between the maintenance deposits and the expected cost for the next related maintenance event that the deposits serve to collateralize, is recognized as supplemental rent in the consolidated statements of operations. Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent in the consolidated statements of operations starting from the period the determination is made.

 

For the years ended December 31, 2017, 2016 and 2015, the Company expensed as supplemental rent Ps.103,648, Ps.143,923 and Ps.73,258, respectively.

 

Any usage-based maintenance deposits to be paid to the lessor, related with a major maintenance event that (i) is not expected to be performed before the expiration of the lease agreement, (ii) is nonrefundable to the Company and (iii) is not substantively related to the maintenance of the leased asset, is accounted for as contingent rent in the consolidated statements of operations. The Company records lease payment as contingent rent when it becomes probable and reasonably estimable that the maintenance deposits payments will not be refunded.

 

During the year ended December 31 2017 and, 2016, the Company added five and 17 new net aircraft to its fleet, respectively. Some lease agreements of these aircraft do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so the Company does not record guarantee deposits regarding these aircraft. However, some lease agreements provide the obligation to make a maintenance adjustment payment to the 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.

 

The Company recognizes this cost as a contingent rent during the lease term of the related aircraft, in the consolidated statement of operations.

 

For the years ended December 31, 2017, 2016 and 2015, the Company expensed as contingent rent Ps.162,108, Ps.201,434 and Ps.290,857, respectively.

 

The Company makes certain assumptions at the inception of the lease and at each consolidated statement of financial position date to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft and engines is estimated to be utilized before it is returned to the lessor.

 

In the event that lease extensions are negotiated, any extension benefit is recognized as a deferred lease incentive. The aggregate benefit of extension is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

 

During the years ended December 31, 2017 and 2016, the Company extended the lease term of three and two aircraft agreements, respectively, and two engine agreements in 2017. These extensions made available to the Company maintenance deposits that were recognized in prior periods in the consolidated statements of operations as contingent rent of Ps.65,716 and Ps.92,528 during 2017 and 2016, respectively. The maintenance event for which the maintenance deposits were previously expensed was scheduled to occur after the original lease term and as such the contingent 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.

 

The effect of these lease extensions were recognized as a guarantee deposit and a deferred aircraft and engine lease extension benefit in the consolidated statements of financial position at the time of lease extension.

 

Because the lease extension benefits are considered lease incentives, the benefits are deferred in the statement of financial position and are being recognized on a straight-line basis over the remaining revised lease terms. For the years ended December 31, 2017, 2016 and 2015, the Company amortized Ps.88,224, Ps.74,748 and Ps.45,313, respectively, of lease incentives which was recognized as a reduction of rent expenses in the consolidated statements of operations.

 

k)  Aircraft and engine maintenance

 

The Company is required to conduct diverse levels of aircraft maintenance. Maintenance requirements depend on the type of aircraft, age and the route network over which it operates.

 

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 consists of routine and non-routine works, divided into three general categories: (i) routine maintenance, (ii) major maintenance and (iii) component service.

 

(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. This type of maintenance events is currently serviced by the Company mechanics and are primarily completed at the main airports that the Company currently serves. All other maintenance activities are sub-contracted to qualified maintenance business partner, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and typically 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 up to six weeks to accomplish and typically are required approximately every five to six years.

 

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 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 Civil Aeronautic Authority (Dirección General de Aeronáutica Civil, or “DGAC”) 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 suggested 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 maintenance event. To the extent the planned usage increases, the estimated life would decrease before the next maintenance event, resulting in additional expense over a shorter period.

 

During the years ended December 31, 2017 and 2016, the Company capitalized major maintenance events as part of leasehold improvements to flight equipment for an amount of Ps.529,331 and Ps.226,526, respectively (Note 12).

 

For the years ended December 31, 2017, 2016 and 2015, the amortization of major maintenance leasehold improvement costs was Ps.382,745, Ps.404,659 and Ps.352,932, respectively (Note 12). The amortization of deferred maintenance costs is recorded as part of depreciation and amortization in the consolidated statements of operations.

 

(iii) The Company has a power-by-the hour agreement for component services, which guarantees the availability of aircraft parts for the Company’s fleet when they are required. It also provides aircraft parts that are included in the redelivery conditions of the contract (hard time) without constituting an additional cost at the time of redelivery. The monthly maintenance cost associated with this agreement is recognized as incurred in the consolidated statements of operations.

 

The Company has an engine flight hour agreement that guarantees a cost per overhaul, provides miscellaneous engines coverage, caps the cost of foreign objects damage events, ensures there is protection from annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscellaneous engines 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.

 

Aircraft spare engines have significant parts with different useful lives; therefore, they are accounted for as separate items (major components) of rotable spare parts (Note 12d).

 

Pre-delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of the aircraft.

 

The borrowing costs related to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset.

 

During the years ended December 31, 2017, 2016 and 2015, the Company capitalized borrowing costs which amounted to Ps.193,389, Ps.95,445 and Ps.90,057, respectively (Note 21). The rate used to determine the amount of borrowing cost was 3.30%, 2.88% and 2.80%, for the years ended December 31, 2017, 2016 and 2015, respectively.

 

Depreciation rates are as follows:

 

 

 

Annual
depreciation rate

 

Aircraft parts and rotable spare parts

 

8.3-16.7%

 

Aircraft spare engines

 

4.0-8.3%

 

Standardization

 

Remaining contractual lease term

 

Computer equipment

 

25%

 

Communications equipment

 

10%

 

Office furniture and equipment

 

10%

 

Electric power equipment

 

10%

 

Workshop machinery and equipment

 

10%

 

Service carts on board

 

20%

 

Leasehold improvements to flight equipment

 

The shorter of: (i) remaining contractual lease term, or (ii) the next major maintenance event

 

 

The Company reviews annually the useful lives and salvage values of these assets and any changes are accounted for prospectively.

 

The Company records impairment charges on rotable spare parts, furniture and equipment 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 related cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell and (ii) its value in use.

 

The value in use calculation is based on a discounted cash flow model, using projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.

 

For the years ended December 31, 2017, 2016 and 2015, there were no indicators of impairment. No impairment charges were recorded in respect of the Company’s rotable spare parts, furniture and equipment.

 

m)  Foreign currency transactions and exchange differences

 

The Company’s consolidated financial statements are presented in Mexican peso, which is the reporting and functional currency of the parent company. For each subsidiary, the Company determines the functional currency and items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”).

 

The financial statements of foreign subsidiaries prepared under IFRS and denominated in their respective local currencies, are translated into the functional currency as follows:

 

·

Transactions in foreign currencies are translated into the respective functional currencies at the exchange rates at the dates of the transactions.

 

·

All monetary assets and liabilities were translated at the exchange rate at the consolidated statement of financial position date.

 

·

All non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.

 

·

Equity accounts are translated at the prevailing exchange rate at the time the capital contributions were made and the profits were generated.

 

·

Revenues, costs and expenses are translated at the average exchange rate during the applicable period.

 

Any differences resulting from the currency translation are recognized in the consolidated statements of operations.

 

For the year ended December 31, 2017 and 2016 the exchange rates of local currencies translated to functional currencies are as follows:

 

 

 

 

 

 

 

Exchange rates of local currencies
translated to functional currencies

 

Exchange rates of local currencies
translated to functional currencies

 

Country

 

Local
currency

 

Functional
currency

 

Average exchange
rate for 2017

 

Exchange rate
as of 2017

 

Average exchange
rate for 2016

 

Exchange rate
as of 2016

 

Costa Rica

 

Colon

 

U.S. dollar

 

₵.

572.2000

 

₵.

572.5600

 

₵.

564.3332

 

₵.

561.1000

 

Guatemala

 

Quetzal

 

U.S. dollar

 

Q.

7.3509

 

Q.

7.3448

 

Q.

7.4931

 

Q.

7.5221

 

 

The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2017 and 2016 were Ps.19.7354 and Ps.20.6640, respectively, per U.S. dollar.

 

Foreign currency differences arising on translation into the presentation currency are recognized in OCI. Exchange differences on translation of foreign entities for the year ended December 31, 2017 and 2016 were Ps.7,178 and Ps.4,756, respectively. For the year ended December 31, 2015 exchange differences on translation of foreign entities were immaterial

 

n)  Liabilities and provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

 

For the operating leases, the Company is contractually obligated to return the leased aircraft in a specific condition. The Company accrues for restitution costs related to aircraft held under operating leases throughout the term of the lease, based upon the estimated cost of satisfying the return condition criteria for each aircraft. These return obligations are related to the costs to be incurred in the reconfiguration of aircraft (interior and exterior), painting, carpeting and other costs, which are estimated based on current cost adjusted for inflation. The return obligation is estimated at the inception of each leasing arrangement and recognized over the term of the lease (Note 15c).

 

The Company records aircraft lease return obligation reserves based on the best estimate of the return obligation costs under each aircraft lease agreement.

 

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 in no case are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of supplemental rent 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, 2017, 2016 and 2015, the Company expensed as supplemental rent Ps.851,410, Ps.933,730 and Ps.91,698, respectively.

 

o) Employee benefits

 

i)  Personnel vacations

 

The Company and its subsidiaries in Mexico and Central America recognize a reserve for the costs of paid absences, such as vacation time, based on the accrual method.

 

ii)  Termination benefits

 

The Company recognizes a liability and expense for termination benefits at the earlier of the following dates:

 

a)  When it can no longer withdraw the offer of those benefits; and

 

b)  When it recognizes costs for a restructuring that is within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and involves the payment of termination benefits.

 

The Company is demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and is without realistic possibility of withdrawal.

 

For the years ended December 31, 2017, 2016 and 2015, 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 who 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), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit.

 

Obligations relating to seniority premiums other than those arising from restructurings, are recognized based upon actuarial calculations and are determined using the projected unit credit method.

 

The latest actuarial computation was prepared as of December 31, 2017.

 

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 subsequent periods.

 

The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate based on government bonds (Certificados de la Tesorería de la Federación, or “CETES” in Mexico), less the fair value of plan assets out of which the obligations are to be settled.

 

For entities in Costa Rica and Guatemala there is no obligation to pay seniority premium or other retirement benefits.

 

iv)  Incentives

 

The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain performance targets. These incentives are payable shortly after the end of each quarter and are accounted for as a short-term benefit under IAS 19, Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment.

 

During the years ended December 31, 2017, 2016 and 2015 the Company expensed Ps.48,384, Ps.40,829 and Ps.50,558, respectively, as quarterly incentive bonuses, recorded under the caption salaries and benefits.

 

During the year ended December 31, 2015, the Company adopted a new short-term benefit plan for certain key personnel whereby cash bonuses are awarded when certain of the Company’s performance targets are met. These incentives are payable shortly after the end of each year and also are accounted for as a 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, 2017, 2016 and 2015 the Company recorded an expense for an amount of Ps.0, Ps.53,738, and Ps.70,690, respectively, under the caption salaries and benefits.

 

v)  Long-term retention plan (“LTRP”)

 

The Company has adopted a Long-term incentive plan (“LTIP”). This plan consists of a share purchase plan (equity-settled) and a share appreciation rights “SARs” plan (cash settled), and is therefore accounted under IFRS 2 “Shared based payments”

 

vi)  Share-based payments

 

a)  LTIP

 

Share purchase plan (equity-settled)

 

Certain key employees of the Company receive additional benefits through a share purchase plan denominated in Restricted Stock Units (“RSUs”), which has been classified as an equity-settled share-based payment. The cost of the equity-settled share purchase plan is measured at the grant date, taking into account the terms and conditions on which the share options were granted. The equity-settled compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).

 

During the years ended December 31, 2017, 2016 and 2015, the Company expensed Ps.13,508, Ps.7,816 and Ps.6,018, respectively, related to RSUs. The expenses were recorded under the caption salaries and benefits.

 

SARs plan (cash settled)

 

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 time of exercise. The liability for the SARs is measured, initially and at the end of each reporting period until settled, at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation 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, 2017, 2016 and 2015, the Company recorded a (benefit) expense for Ps.(8,999), Ps.31,743, Ps.44,699, respectively, related to the SARs included in the LTIP. These amounts were recorded under the caption salaries and benefits.

 

b)  Management incentive plan (“MIP”)

 

MIP I

 

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 of operations under the caption of salaries and benefits, over the requisite service period (Note 17).

 

During the year ended December 31, 2015, the Company recorded an expense by Ps.327 as cost of the MIP, related to the vested shares, the expense was recorded in the consolidated statement of operations under the caption salaries and benefits.

 

MIP II

 

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 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 time of exercise. The liability for the SARs is measured initially and at the end of each reporting period until settled at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation 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, 2017 and 2016, the Company recorded a (benefit) expense for Ps.(16,499) and Ps.54,357, respectively, related to MIP II into the consolidated statement of operations.

 

vii)  Employee profit sharing

 

The Mexican Income Tax Law (“MITL”), establishes that the base for computing current year employee profit sharing shall be the taxpayer’s taxable income of the year for income tax purposes, including certain adjustments established in the Income Tax Law, at the rate of 10%. For the years ended December 2017, 2016 and 2015, the cost of employee profit sharing earned is Ps.8,342, Ps.9,967 and Ps.9,938, 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.

 

p)  Leases

 

The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.

 

Property and equipment lease agreements are recognized as finance leases if the risks and benefits incidental to ownership of the leased assets have been transferred to the Company when (i) the ownership of the leased asset is transferred to the Company upon termination of the lease; (ii) the agreement includes an option to purchase the asset at a reduced price; (iii) the term of the lease is for the major part of the economic life of the leased asset; (iv) the present value of minimum lease payments is at least substantially all of the fair value of the leased asset; or (v) the leased asset is of a specialized nature for the Company.

 

When the risks and benefits incidental to the ownership of the leased asset remain mostly with the lessor, they are classified as operating leases and rental payments are charged to results of operations on a straight-line over the term of the lease. The Company’s lease contracts for aircraft, engines and components parts are classified as operating leases.

 

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. Leases under sale and leaseback agreements meet the conditions for treatment as operating leases.

 

Profit or loss related to a sale transaction followed by an operating lease, is accounted for as follows:

 

(i)

Profit or loss is recognized immediately when it is clear that the transaction is established at fair value.

 

(ii)

If the sale price is at or below fair value, any profit or loss is recognized immediately. However, if the loss is compensated for by future lease payments at below market price, such loss is recognized as an asset in the consolidated statements of financial position and amortized to the consolidated statements of operations in proportion to the lease payments over the contractual lease term.

 

(iii)

If the sale price is above fair value, the excess of the price above the fair value is deferred and amortized to the consolidated statements of operations over the asset’s expected lease term, including probable renewals, with the amortization recorded as a reduction of rent expense.

 

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 applicable governmental entity or airport.

 

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. Management 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.

 

Deferred tax

 

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 which the temporary differences can be utilized.

 

The Company considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilized: (a) whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilized before they expire; (b) whether it is probable that the Company will have taxable profits before the unused tax losses or unused tax credits expire; (c) whether the unused tax losses result from identifiable causes which are unlikely to recur; and (d) whether tax planning opportunities are available to the Company that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilized.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction in OCI.

 

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

 

The charge for income taxes incurred is computed based on tax laws approved in Mexico, Costa Rica and Guatemala at the date of the consolidated statement of financial position.

 

s)  Derivative financial instruments and hedge accounting

 

The Company mitigates certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctuations, through a risk management program that includes the use of derivative financial instruments.

 

In accordance with IFRS 9 (2013), derivative financial instruments are recognized in the consolidated statement of financial position at fair value. At inception of a hedge relationship, the Company formally designates 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 hedging instrument, the hedged item or transaction, the nature of the risks being hedged and how the entity 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 risk(s).

 

Only if such hedges are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge item(s) and are assessed on an ongoing basis to determine that they actually have been effective throughout the financial reporting periods for which they were designated, hedge accounting treatment can 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 recognized in current year earnings. During the years ended December 31, 2017, 2016 and 2015, there was no ineffectiveness with respect to derivative financial instruments. The amounts recognized in OCI are transferred to earnings in the period in which the hedged transaction affects earnings.

 

The realized gain or loss of derivative financial instruments that qualify as CFH is recorded in the same caption of the hedged item in the consolidated statement of operations.

 

Accounting for the time value of options

 

The Company accounts for the time value of options in accordance with IFRS 9 (2013), which requires all derivative financial instruments to be initially recognized at fair value. Subsequent measurement for options purchased and designated as CFH requires that the option’s changes in fair value be segregated into its intrinsic value (which will be considered the hedging instrument’s effective portion in OCI) and its correspondent changes in extrinsic value (time value and volatility). The extrinsic value changes will be considered as a cost of hedging (recognized in OCI in a separate component of equity) and accounted for in income when the hedged item also is recognized in income.

 

t)  Financial instruments — Disclosures

 

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).

 

u)  Treasury shares

 

The Company’s equity instruments that are reacquired (treasury shares), are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of treasury shares. Any difference between the carrying amount and the consideration received, if reissued, is recognized in additional paid in capital. Share-based payment options exercised during the reporting period are settled with treasury shares (Note 17).

 

v)  Operating segments

 

The Company is managed as a single business unit that provides air transportation and related services and accordingly, it has only one operating segment.

 

The Company has two geographic areas identified as domestic (Mexico) and international (United States of America and Central America) (Note 24).

 

w)  Current versus non-current classification

 

The Company presents assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset is current when it is: (i) expected to be realized or intended to be sold or consumed in normal operating cycle, (ii) expected to be realized within twelve months after the reporting period, or, (iii) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are 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 settled within twelve months after the reporting period, or, (iii) there is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Company classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as noncurrent assets and liabilities.

 

x) Impact of new International Financial Reporting Standards

 

New and amended standards and interpretations already effective

 

The Company applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2017. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

Although these new standards and amendments applied for the first time in 2017, they did not have a material impact on the annual consolidated financial statements of the Company. The nature and the impact of these changes to each new standard and amendment are described below:

 

Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative

 

The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). The Company has provided the information for both the current and the comparative period in Note 5.

 

Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealized Losses

 

The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary difference related to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. However, their application has no effect on the Company’s financial position and performance as there are no deductible temporary differences or assets that are in the scope of the amendments.

 

New and amended standards and interpretations not yet effective

 

Except for IFRS 9 adopted in 2014, the Company has not early adopted any of the following standards, interpretations or amendments that have been issued but is not yet effective.

 

IFRS 9 (2014) Financial Instruments

 

The Company adopted IFRS 9 (2013) in connection with its 2014 consolidated financial statements. IFRS 9 (2014) requires entities to apply an expected credit loss (ECL) model that replaces the IAS 39’s incurred loss model. The ECL model applies to debt instruments accounted for at amortized cost or at fair value through OCI, most loan commitments, financial guarantee contracts, contract assets under IFRS 15 Revenue from Contracts with Customers and lease receivables under IAS 17 Leases or IFRS 16 Leases.

 

IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018, and since the Company early adopted IFRS 9 (2013), no additional impact is expected

 

IFRS 15 Revenue from Contracts with Customers

 

IFRS 15 was issued in May 2014 and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue. The new revenue standard will supersede all current revenue recognition requirements under IFRS. IFRS 15 also requires additional disclosures about the nature, timing, and uncertainty of revenue cash flows arising from customer contracts, including significant judgments and changes in judgments.

 

The Company will adopt the new standard on the required effective date as of January 1, 2018, using the full retrospective method of adoption, in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016.

 

During 2016, the Company performed a preliminary assessment of IFRS 15, which was continued with a more detailed analysis completed in 2017. The Company expects that the main impact of IFRS 15 is the timing of recognition of certain air travel-related services (“ancillaries”). Under the current accounting policy, certain ancillaries are recognized as revenue at the time of the booking by customer (or when the service is provided); under the new standard, those ancillaries will be recognized when the air transportation service is rendered (at the time of the flight). This change arises primarily because those ancillaries do not constitute separate performance obligations or represent administrative tasks that do not represent a promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation.  Also certain services provided to the Company’s customers that under the new standard qualify as variable considerations that will be recorded as reduction to revenues.  The Company considers this accounting change will not have a material impact on its results of operations and financial position.

 

The Company also expects that the classification of certain ancillary fees in the statement of operations, such as advanced seat selection, fees charges for excess baggage, itinerary changes and other air travel-related services, will change upon adoption of IFRS 15 since they are part of the single performance obligation of providing passenger transportation. The Company expects that these revenues currently classified as non-ticket revenues, approximately Ps.5,915,263 in 2017 and Ps.4,758,074 in 2016, will be reclassified to passenger revenues.

 

The Company also evaluated the principal versus agent considerations as it relates to certain non-air travel services arrangements with third party providers. The Company expects that there will be no changes on revenue.

 

The Company has also identified and implemented changes to its accounting policies and practices, systems and controls, as well as designed and implemented specific controls over its evaluation of the impact of the new guidance on the Company, including a calculation of the cumulative effects, disclosure requirements and the collection of relevant data into the reporting process. While the Company is substantially complete with the process of quantifying the impacts from applying the new guidance, final impact assessment will be finalized during the first quarter of 2018.

 

IFRS 16 Leases

 

IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form 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. The standard includes two recognition exemptions for lessees — leases of low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less).

 

At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset).

 

Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

 

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

 

IFRS 16 also requires lessees to make more extensive disclosures than under IAS 17.

 

IFRS 16 is effective for annual periods beginning on or after January 1, 2019. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.

 

The Company is in process of completing an assessment of the potential impact of adopting IFRS 16. The adoption of this standard will have a significant impact on the accounting for leased aircraft, engines and other lease agreements, requiring the presentation of those leases with durations of greater than twelve months on the consolidated statement of financial position. The Company anticipates adopting the new standard using the full retrospective method, see Note 14 for more information on the Company’s lease agreements.

 

IFRS 2 Classification and Measurement of Share-based Payment Transactions — Amendments to IFRS 2

 

In June 2016, the IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled, share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled.

 

On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The amendments are effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company does not expect the amendments to have a significant effect on its consolidated financial statements.

 

IFRIC 23 — Uncertainty over Income Tax Treatments

 

IFRIC 23 clarifies the accounting for uncertainties in income taxes, the interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12.

 

An entity has to consider whether it is probable that the relevant authority will accept each tax treatment, or group of tax treatments, that it used or plans to use in its income tax filing; if the entity concludes that it is probable that a particular tax treatment is accepted, the entity has to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment included in its income tax filings.

 

IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. The Company expects to adopt this interpretation at the effective date.

 

y)  Convenience translation

 

U.S. dollar amounts at December 31, 2017 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.19.7354 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, 2017. 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.

v3.8.0.1
Significant accounting judgments, estimates and assumptions
12 Months Ended
Dec. 31, 2017
Significant accounting judgments, estimates and assumptions  
Significant accounting judgments, estimates and assumptions

 

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 financial position or results of operations.

 

Actual results could differ from these estimates. Revisions to accounting estimates are recognized in the period in which the estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

i)  Aircraft maintenance deposits paid to lessors

 

The Company makes certain assumptions at the inception of a lease and at each reporting date to determine the recoverability of maintenance deposits. The key assumptions include the estimated time between the maintenance events, the costs of future maintenance, the date the aircraft is due to be returned to the lessor and the number of flight hours the aircraft is estimated to be flown before it is returned to the lessor (Note 11).

 

ii)  LTIP and MIP (equity settled)

 

The Company measures the cost of its equity-settled transactions at fair value at the date the equity benefits are conditionally granted to employees.

 

The cost of equity-settled transactions is recognized in earnings, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled. For grants that vest on meeting performance conditions, compensation cost is recognized when it becomes probable that the performance condition 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 that will ultimately vest.

 

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the share option, 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).

 

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). This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is remeasured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognized in salaries and benefits expense together with the fair value at the grant date. As with the equity settled awards described above, the valuation of cash settled awards also requires using similar inputs, as appropriate.

 

iii)  Deferred taxes

 

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 that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning opportunities to advance taxable profit before expiration of available tax losses.

 

At December 31, 2017, the Company’s tax loss carry-forwards amounted to Ps.1,501,630, (Ps.111,083 at December 31, 2016). These losses relate to operations of the Company on a stand-alone basis, which in conformity with current Mexican Income Tax Law (“MITL”) and Costa Rican Income Tax Law (“CRITL”) may be carried forward against taxable income generated in the succeeding ten and three years, respectively, and may not be used to offset taxable income elsewhere in the Company’s consolidated group (Note 19).

 

During the years ended December 31, 2017, 2016 and 2015, the Company used Ps.16,378, Ps.195,116 and Ps.1,618,850, respectively, of the available tax loss carry-forwards (Note 19).

 

iv)  Fair value of financial instruments

 

Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows 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 considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (Note 4).

 

v)  Impairment of long-lived assets

 

The Company assesses whether there are indicators of impairment for long-lived assets annually and at other times when such indicators exist. Impairment exists when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value-in-use. The value-in-use calculation is based on a discounted cash flow model, using the Company’s projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation.

 

vi)  Allowance for expected credit loss

 

An allowance for expected credit loss on accounts receivables is established in accordance with the information mentioned in Note (1f) (ii).

v3.8.0.1
Financial instruments and risk management
12 Months Ended
Dec. 31, 2017
Financial instruments and risk management  
Financial instruments and risk management

 

3.  Financial instruments and risk management

 

Financial risk management

 

The Company’s activities are exposed to different financial risks stemming from exogenous variables which are not under their control but whose effects might be potentially adverse such as: (i) market risk, (ii) credit risk, and (iii) liquidity risk. The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on net earnings and working capital requirements. The Company uses derivative financial instruments 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 liabilities, as well as in “off-balance sheet” contractual agreements and on highly expected forecasted transactions. These on and off-balance sheet exposures, depending on their profiles, do represent potential cash flow variability exposure, in terms of receiving less inflows or facing the need to meet outflows which are higher than expected, therefore increase the working capital requirements.

 

Also, since adverse movements erode the value of recognized financial assets and liabilities, as well some other off-balance sheet financial exposures such as operating leases, there is a need for value preservation, by transforming the profiles of these fair value exposures.

 

The Company has a Finance and Risk Management department, which identifies and measures financial risk exposures, in order to design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the corporate governance level for approval.

 

Market risk

 

a)  Jet fuel price risk

 

Since the contractual agreements with jet fuel suppliers include references to the jet fuel index, the Company is exposed to fuel price risk which might have an impact on the forecasted consumption volumes. The Company’s jet fuel risk management 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 with approved counterparties and within approved limits. Aircraft jet fuel consumed in the years ended December 31, 2017, 2016 and 2015 represented 29%, 28% and 30%, of the Company’s operating expenses, respectively.

 

During the years ended December 31, 2017 and 2016, the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 61.1 million gallons and 134.3 million gallons, respectively. Such hedges represent a portion of the projected consumption for the next nine and twenty-one months respectively.

 

The Company decided to early adopt IFRS 9 (2013), beginning on October 1, 2014, which allows the Company to separate the intrinsic value from the extrinsic value of an option contract; as such, the change in the intrinsic value can be designated as hedge accounting. Because extrinsic value (time and volatility values) of the Asian call options is related to a “transaction related hedged item”, it is required to be segregated and accounted for as a cost of hedging in OCI and accrued as a separate component of stockholders’ equity until the related hedged item matures and therefore impacts profit and loss.

 

The underlying US Gulf Coast Jet Fuel 54 of the options held by the Company is a consumption asset (energy commodity), which is not in the Company’s inventory. Instead, it is directly consumed by the Company’s fleet at different airport terminals. Therefore, although a non-financial asset is involved, its initial recognition does not generate a book adjustment in the Company’s inventories. Rather, it is initially accounted for in the Company’s OCI and a reclassification adjustment is made from OCI to profit and loss and recognized in the same period or periods in which the hedged item is expected to be allocated to profit and loss. Furthermore, the Company hedges its forecasted jet fuel consumption month after month, which is congruent with the maturity date of the monthly serial Asian call options.

 

As of December 31, 2017 and 2016, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was Ps.497,403 and Ps.867,809, respectively, and is presented as part of the financial assets in the consolidated statement of financial position (See Note 5).

 

The amount of positive cost of hedging derived from the extrinsic value changes of these options as of December 31, 2017 recognized in other comprehensive income totals Ps.163,836 (the positive cost of hedging in 2016 totals Ps. 218,038), and will be recycled to the fuel cost during 2018, as these options expire on a monthly basis and the jet fuel is consumed. During the years ended December 31, 2017, 2016 and 2015, the net cost of these options recycled to the fuel cost was Ps.26,980, Ps.305,166 and Ps.112,675 respectively.

 

The following table includes the notional amounts and strike prices of the derivative financial instruments outstanding as of the end of the year:

 

 

 

Position as of December 31, 2017

 

 

 

Jet fuel Asian call option contracts maturities

 

 

 

1 Half 2018

 

2 Half 2018

 

2018 Total

 

Jet fuel risk

 

 

 

 

 

 

 

Notional volume in gallons (thousands)*

 

69,518

 

61,863

 

131,381

 

Strike price agreed rate per gallon (U.S. dollars)**

 

US$

1.6861

 

US$

1.8106

 

US$

1.7447

 

Approximate percentage of hedge (of expected consumption value)

 

60

%

50

%

55

%

 

* US Gulf Coast Jet 54 as underlying asset

** Weighted average

 

 

 

Position as of December 31, 2016

 

 

 

Jet fuel Asian call option contracts maturities

 

 

 

1 Half 2017

 

2 Half 2017

 

2017 Total

 

1 Half 2018

 

3Q 2018

 

2018 Total

 

Jet fuel risk

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional volume in gallons (thousands)*

 

55,436

 

63,362

 

118,798

 

62,492

 

7,746

 

70,238

 

Strike price agreed rate per gallon (U.S. dollars)**

 

US$

1.6245

 

US$

1.4182

 

US$

1.5145

 

US$

1.6508

 

US$

1.5450

 

US$

1.6392

 

Approximate percentage of hedge (of expected consumption value)

 

51

%

53

%

52

%

45

%

10

%

24

%

 

* US Gulf Coast Jet 54 as underlying asset

** Weighted average

 

b)  Foreign currency risk

 

While Mexican Peso is the functional currency of the Company, a significant portion of its operating expenses is 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. 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.

 

Most of the Company’s revenue is generated in Mexican pesos, although 30% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2017 (33% at December 31, 2016) and U.S. dollar denominated collections accounted for 40% and 38% of the Company’s total collections in 2017 and 2016, respectively.

 

However, certain of its expenditures, particularly those related to aircraft leasing and acquisition, are also U.S. dollar denominated. In addition, although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican peso U.S. dollar exchange rate. The Company’s foreign exchange on and off-balance sheet exposure as of December 31, 2017 and 2016 is as set forth below:

 

 

 

Thousands of U.S. dollars

 

 

 

2017

 

2016

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

US$

344,038

 

US$

297,565

 

Other accounts receivable

 

13,105

 

11,619

 

Aircraft maintenance deposits paid to lessors

 

352,142

 

343,787

 

Deposits for rental of flight equipment

 

25,343

 

30,025

 

Derivative financial instruments

 

25,204

 

41,996

 

 

 

 

 

 

 

Total assets

 

759,832

 

724,992

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Financial debt (Note 5)

 

128,296

 

76,789

 

Foreign suppliers

 

53,729

 

56,109

 

Taxes and fees payable

 

10,304

 

6,874

 

Derivative financial instruments

 

 

684

 

 

 

 

 

 

 

Total liabilities

 

192,329

 

140,456

 

 

 

 

 

 

 

Net foreign currency position

 

US$

567,503

 

US$

584,536

 

 

 

 

 

 

 

 

 

 

At April 25, 2018, date of issuance of these financial statements, the exchange rate was Ps.18.8628 per U.S. dollar.

 

 

 

Thousands of U.S. dollars

 

 

 

2017

 

2016

 

Off-balance sheet transactions exposure:

 

 

 

 

 

Aircraft and engine operating lease payments (Note 14)

 

US$

1,856,909

 

US$

1,727,644

 

Aircraft and engine commitments (Note 23)

 

1,123,377

 

315,326

 

 

 

 

 

 

 

Total

 

US$

2,980,286

 

US$

2,042,970

 

 

 

 

 

 

 

 

 

 

During the year ended December 31, 2017, the Company entered into foreign currency forward contracts in U.S. dollars to hedge approximately 9% of the aircraft rental expense for the second half of 2017. As of December 31, 2016, the Company did not enter into foreign exchange rate derivatives financial instruments.

 

All of the Company’s position in foreign currency forward contracts matured throughout the second half of 2017 (August, September, November and December), therefore there is no outstanding balance as of December 31, 2017. For the year ended December 31, 2017, the net loss on the foreign currency forward contracts was Ps.11,290, which was recognized as part of rental expense in the consolidated statements of operations. As there were no foreign currency forward contracts as of December 31, 2016, no impact was recognized in the consolidated statements of operations.

 

c)  Interest rate risk

 

Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations and flight equipment operating lease agreements with floating interest rates.

 

The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such changes may have on operational lease payments indexed to the London Inter Bank Offered Rate (“LIBOR”). The Company uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these instruments as an accounting hedge. In 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 operation.

 

As of December 31, 2016, the Company had outstanding hedging contracts in the form of interest rate swaps with notional amount of US$ 70 million and fair value of Ps.14,144, respectively, recorded in liabilities. For the years ended December 31, 2017, 2016 and 2015, the reported loss on the interest rate swaps was Ps.13,827, Ps.48,777 and Ps.46,545, respectively, which was recognized as part of rental expense in the consolidated statements of operations. All of the Company’s position in the form of interest rate swaps matured on March 31 and April 30, 2017 consequently there is no outstanding balance as of December 31, 2017.

 

d)  Liquidity risk

 

Liquidity risk represents the risk that the Company has insufficient funds to meet its obligations.

 

Because of the cyclical nature of the business, the operations, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, the Company requires liquid funds to meet its obligations.

 

The Company attempts to manage its cash and cash equivalents and its financial assets, relating the term of investments with those of its obligations. Its policy is that the average term of its investments may not exceed the average term of its obligations. This cash and cash equivalents position is invested in highly-liquid short-term instruments through financial entities.

 

The Company has future obligations related to maturities of bank borrowings and derivative contracts. The Company’s off-balance sheet exposure represents the future obligations related to operating lease contracts and aircraft purchase contracts. The Company concluded that it has a low concentration of risk since it has access to alternate sources of funding.

 

The table below presents the Company’s contractual principal payments required on its financial liabilities and the derivative financial instruments fair value:

 

 

 

December 31, 2017

 

 

 

Within one
year

 

One to five
years

 

Total

 

Interest-bearing borrowings:

 

 

 

 

 

 

 

Pre-delivery payments facilities (Note 5)

 

Ps.

1,449,236

 

Ps.

1,079,152

 

Ps.

2,528,388

 

Short-term working capital facilities (Note 5)

 

948,354

 

 

948,354

 

 

 

 

 

 

 

 

 

Total

 

Ps.

2,397,590

 

Ps.

1,079,152

 

Ps.

3,476,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Within one
year

 

One to five
years

 

Total

 

Interest-bearing borrowings:

 

 

 

 

 

 

 

Pre-delivery payments facilities (Note 5)

 

Ps.

328,845

 

Ps.

943,046

 

Ps.

1,271,891

 

Short-term working capital facilities (Note 5)

 

716,290

 

 

716,290

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

Interest rate swaps contracts

 

14,144

 

 

14,144

 

 

 

 

 

 

 

 

 

Total

 

Ps.

1,059,279

 

Ps.

943,046

 

Ps.

2,002,325

 

 

 

 

 

 

 

 

 

 

 

 

 

e)  Credit risk

 

Credit risk is the risk that any counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments including derivatives.

 

Financial instruments that expose the Company to credit risk involve mainly cash equivalents and accounts receivable. Credit risk on cash equivalents relate to amounts invested with major financial institutions.

 

Credit risk on accounts receivable relates primarily to amounts receivable from the major international credit card companies.

 

The Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, which have a large portion of their sales settled in credit cards.

 

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

 

Some of the outstanding derivative financial instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not expect any of its counterparties to fail to meet their obligations. The amount of such credit exposure is generally the unrealized gain, if any, in such contracts.

 

To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty and monitors the market position with each counterparty. The Company does not purchase or hold derivative financial instruments for trading purposes. At December 31, 2017, the Company concluded that its credit risk related to its outstanding derivative financial instruments is low, since it has no significant concentration with any single counterparty and it only enters into derivative financial instruments with banks with high credit-rating assigned by international credit-rating agencies.

 

f)  Capital management

 

Management believes that the resources available to the Company are sufficient for its present requirements and will be sufficient to meet its anticipated requirements for capital expenditures and other cash requirements for the 2017 fiscal year.

 

The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios to support its business and maximize the shareholder’s value. No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2017 and 2016. The Company is not subject to any externally imposed capital requirement, other than the legal reserve (Note 18).

v3.8.0.1
Fair value measurements
12 Months Ended
Dec. 31, 2017
Fair value measurements  
Fair value measurements

 

4.  Fair value measurements

 

The only financial assets and liabilities recognized at fair value on a recurring basis are the derivative financial instruments.

 

Fair value is the price that would be received from sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

 

(i)

In the principal market for the asset or liability, or

(ii)

In the absence of a principal market, in the most advantageous market for the asset or liability.

 

The principal or the most advantageous market must be accessible to the Company.

 

The fair value of an asset or a liability is assessed using the course of thought which market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

The assessment of a non-financial asset’s fair value considers the market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

 

Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

 

Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

 

Set out below, is a comparison by class of the carrying amounts and fair values of the Company’s financial instruments, other than those for which carrying amounts are reasonable approximations of fair values:

 

 

 

Carrying amount

 

Fair value

 

 

 

2017

 

2016

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

Ps.

497,403

 

Ps.

867,809

 

Ps.

497,403

 

Ps.

867,809

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Financial debt

 

(3,476,742

)

(1,988,181

)

(3,481,741

)

(1,988,445

)

Derivative financial instruments

 

 

(14,144

)

 

(14,144

)

 

 

 

 

 

 

 

 

 

 

Total

 

Ps.

(2,979,339

)

Ps.

(1,134,516

)

Ps.

(2,984,338

)

Ps.

(1,134,780

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the fair value measurements at December 31, 2017:

 

 

 

Fair value measurement

 

 

 

Quoted prices
in active
markets
Level 1

 

Significant
observable
inputs
Level 2

 

Significant
unobservable
inputs
Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivatives financial instruments:

 

 

 

 

 

 

 

 

 

Jet fuel Asian call options contracts*

 

Ps.

 

Ps.

497,403

 

Ps.

 

Ps.

497,403

 

Liabilities for which fair values are disclosed:

 

 

 

 

 

 

 

 

 

Interest-bearing loans and borrowings**

 

 

(3,481,741

)

 

(3,481,741

)

 

 

 

 

 

 

 

 

 

 

Net

 

Ps.

 

Ps.

(2,984,338

)

Ps.

 

Ps.

(2,984,338

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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.

 

The following table summarizes the fair value measurements at December 31, 2016:

 

 

 

Fair value measurement

 

 

 

Quoted prices
in active
markets
Level 1

 

Significant
observable
inputs
Level 2

 

Significant
unobservable
inputs
Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivatives financial instruments:

 

 

 

 

 

 

 

 

 

Jet fuel Asian call options contracts*

 

Ps.

 

Ps.

867,809

 

Ps.

 

Ps.

867,809

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives financial instruments:

 

 

 

 

 

 

 

 

 

Interest rate swap contracts**

 

 

(14,144

)

 

(14,144

)

Liabilities for which fair values are disclosed:

 

 

 

 

 

 

 

 

 

Interest-bearing loans and borrowings**

 

 

(1,988,445

)

 

(1,988,445

)

 

 

 

 

 

 

 

 

 

 

Net

 

Ps.

 

Ps.

(1,134,780

)

Ps.

 

Ps.

(1,134,780

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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.

 

The following table summarizes the loss from derivatives financial instruments recognized in the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015:

 

Consolidated statements of operations

 

Instrument

 

Financial statements line

 

2017

 

2016

 

2015

 

Jet fuel swap contracts

 

Fuel

 

Ps.

 

Ps.

 

Ps.

(128,330

)

Jet fuel Asian call options contracts

 

Fuel

 

(26,980

)

(305,166

)

(112,675

)

Foreign currency forward

 

Aircraft and engine rent expenses

 

(11,290

)

 

 

Interest rate swap contracts

 

Aircraft and engine rent expenses

 

(13,827

)

(48,777

)

(46,545

)

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Ps.

(52,097

)

Ps.

(353,943

)

Ps.

(287,550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the net (loss) gain on CFH before taxes recognized in the consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015:

 

Consolidated statements of other comprehensive (loss) income

 

Instrument

 

Financial statements
line

 

2017

 

2016

 

2015

 

Jet fuel Asian call options Contracts

 

OCI

 

Ps.

(54,202

)

Ps.

583,065

 

Ps.

(221,592

)

Interest rate swap contracts

 

OCI

 

14,144

 

41,629

 

27,723

 

Foreign currency forward

 

OCI

 

(2,090

)

 

 

 

 

 

 

 

 

 

 

 

 

Total (Note 22)

 

 

 

Ps.

(42,148

)

Ps.

624,694

 

Ps.

(193,869

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

v3.8.0.1
Financial assets and liabilities
12 Months Ended
Dec. 31, 2017
Financial assets and liabilities  
Financial assets and liabilities

 

5.  Financial assets and liabilities

 

At December 31, 2017 and 2016, the Company’s financial assets are represented by cash and cash equivalents, trade and other accounts receivable, accounts receivable with carrying amounts that approximate their fair value.

 

a)  Financial assets

 

 

 

2017

 

2016

 

Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI)

 

 

 

 

 

Jet fuel Asian call options

 

Ps.

497,403

 

Ps.

867,809

 

 

 

 

 

 

 

 

 

Total financial assets

 

Ps.

497,403

 

Ps.

867,809

 

 

 

 

 

 

 

 

 

Presented on the consolidated statements of financial position as follows:

 

 

 

 

 

Current

 

Ps.

497,403

 

Ps.

543,528

 

 

 

 

 

 

 

 

 

Non-current

 

Ps.

 

Ps.

324,281

 

 

 

 

 

 

 

 

 

 

b)  Financial debt

 

(i)At December 31, 2017 and 2016, the Company’s short-term and long-term debt consists of the following:

 

 

 

2017

 

2016

 

I.  Revolving line of credit with Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander (“Santander”) and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”), in U.S. dollars, to finance pre-delivery payments, maturing on November 30, 2021, bearing annual interest rate at the three-month LIBOR plus a spread according to the contractual conditions of each disbursement in a range of 199 to 225 basis points.

 

Ps.

2,528,388

 

Ps.

1,271,891

 

 

 

 

 

 

 

II. In December 2016, the Company entered into a short-term working capital facility with Banco Nacional de México S.A. (“Citibanamex”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a spread according to the contractual conditions of each disbursement in a range of 20 to 80 basis points.

 

948,354

 

406,330

 

 

 

 

 

 

 

III. In December 2016, the Company entered into a U.S. dollar denominated short-term working capital facility with Bank of America México S.A. Institución de Banca Múltiple (“Bank of America”) in U.S. dollars, bearing annual interest rate at the one-month LIBOR plus 160 basis points.

 

 

309,960

 

IV. Accrued interest

 

5,972

 

6,102

 

 

 

 

 

 

 

 

 

3,482,714

 

1,994,283

 

Less: Short-term maturities

 

2,403,562

 

1,051,237

 

 

 

 

 

 

 

Long-term

 

Ps.

<