|Item 1 Identity of Directors, Senior Management and Advisers|
|Item 2 Offer Statistics and Expected Timetable|
|Item 3 Key Information|
|Item 4Information on The Company|
|Item 4Aunresolved Staff Comments|
|Item 5 Operating and Financial Review and Prospects|
|Item 6Directors, Senior Management and Employees|
|Item 7 Major Shareholders and Related Party Transactions|
|Item 8 Financial Information|
|Item 9 The Offer and Listing|
|Item 10Additional Information|
|Item 11Quantitative and Qualitative Disclosure About Market Risk|
|Item 12Description of Securities Other Than Equity Securities|
|Item 13Defaults, Dividend Arrearages and Delinquencies|
|Item 14Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15Controls and Procedures|
|Item 16Aaudit Committee Financial Expert|
|Item 16Bcode of Ethics|
|Item 16Cprincipal Accountant Fees and Services|
|Item 16Dexemptions From The Listing Standards for Audit Committees|
|Item 16Epurchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16Fchange in Registrant's Certifying Accountant|
|Item 16Gcorporate Governance|
|Item 16Hmine Safety Disclosure|
|Item 17Financial Statements|
|Item 18Financial Statements|
|Item 19 Exhibits|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|¨||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2019
|¨||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
|¨||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report
For the transition period from to
Commission file number 001-36059
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|American Depositary Shares (ADSs)||VLRS||New York Stock Exchange|
|Ordinary Participation Certificates (Certificados de Participación Ordinarios or CPOs)||VLRS||New York Stock Exchange|
|Series A shares of common stock, no par value||VOLARA||Mexican Stock Exchange|
Securities registered or to be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
|Ordinary Participation Certificates (Certificados de Participación Ordinarios):||806,435,856|
|Series A shares of common stock, no par value per share:||923,824,804|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. xYes oNo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. oYes xNo
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes oNo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer x||Accelerated filer ¨||Non-accelerated filer ¨||Emerging growth company ¨|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|U.S. GAAP o||International Financial Reporting Standards as issued |
by the International Accounting Standards Board x
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. oItem 17 oItem 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes xNo
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. oYes oNo
TABLE OF CONTENTS
|ITEM 1||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||7|
|ITEM 2||OFFER STATISTICS AND EXPECTED TIMETABLE||7|
|ITEM 3||KEY INFORMATION||7|
|A.||Selected Consolidated Financial Data||7|
|B.||Capitalization and Indebtedness||9|
|C.||Reasons for the Offer and Use of Proceeds||9|
|ITEM 4||INFORMATION ON THE COMPANY||31|
|A.||History and Development of the Company||31|
|D.||Property, Plants and Equipment||54|
|ITEM 4A||UNRESOLVED STAFF COMMENTS||54|
|ITEM 5||OPERATING AND FINANCIAL REVIEW AND PROSPECTS||54|
|B.||Liquidity and Capital Resources||77|
|C.||Research and Development, Patents and Licenses, Etc.||79|
|E.||Off-Balance Sheet Arrangements||80|
|F.||Tabular Disclosure of Contractual Obligations||80|
|ITEM 6||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||80|
|A.||Directors and Senior Management||80|
|ITEM 7||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||89|
|B.||Related Party Transactions||91|
|C.||Interests of Experts and Counsel||92|
|ITEM 8||FINANCIAL INFORMATION||92|
|A.||Consolidated Statements and Other Financial Information||92|
|ITEM 9||THE OFFER AND LISTING||93|
|A.||Offer and Listing Details||93|
|B.||Plan of Distribution||93|
|F.||Expenses of the Issue||100|
|ITEM 10||ADDITIONAL INFORMATION||100|
|B.||Memorandum and Articles of Association||100|
|F.||Dividends and Paying Agents||115|
|G.||Statement by Experts||115|
|H.||Documents on Display||115|
|ITEM 11||QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK||115|
|ITEM 12||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||117|
|B.||Warrants and Rights||117|
|D.||American Depositary Shares||117|
|ITEM 13||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||122|
|ITEM 14||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||122|
|A.||Use of Proceeds||122|
|ITEM 15||CONTROLS AND PROCEDURES||122|
|ITEM 16A||Audit Committee Financial Expert||123|
|ITEM 16B||Code of Ethics||123|
|ITEM 16C||Principal Accountant Fees and Services||123|
|ITEM 16D||Exemptions from the Listing Standards for Audit Committees||123|
|ITEM 16E||Purchases of Equity Securities by the Issuer and Affiliated Purchasers||123|
|ITEM 16F||Change in Registrant’s Certifying Accountant||123|
|ITEM 16G||Corporate Governance||124|
|ITEM 16H||MINE SAFETY DISCLOSURE||127|
|ITEM 17||FINANCIAL STATEMENTS||127|
|ITEM 18||FINANCIAL STATEMENTS||127|
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report on Form 20-F or our “annual report,” contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations, beliefs or projections concerning future events and financial trends affecting the financial condition of our business. When used in this annual report, the words “expects,” “intends,” “estimates,” “predicts,” “plans,” “anticipates,” “indicates,” “believes,” “forecast,” “guidance,” “potential,” “outlook,” “may,” “continue,” “will,” “should,” “seeks,” “targets” and similar expressions are intended to identify forward-looking statements. Similarly, statements that describe the Company’s objectives, plans or goals, or actions the Company may take in the future, are forward-looking statements. Forward-looking statements include, without limitation, statements regarding the Company’s intentions and expectations regarding the delivery schedule of aircraft on order, announced new service routes and customer savings programs. Forward-looking statements should not be read as a guarantee or assurance of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Forward-looking statements are subject to a number of factors that could cause the Company’s actual results to differ materially from the Company’s expectations, including the competitive environment in the airline industry; the Company’s ability to keep costs low; changes in fuel costs; the impact of worldwide economic conditions on customer travel behavior; the Company’s ability to generate non-ticket revenues; and government regulation. Additional information concerning these and other factors is contained in the Company’s Securities and Exchange Commission filings. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this annual report. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Important factors that could cause such differences include, but are not limited to:
|·||the competitive environment in our industry;|
|·||ability to keep costs low;|
|·||changes in our fuel cost, the effectiveness of our fuel cost hedges and our ability to hedge fuel costs;|
|·||the impact of worldwide economic conditions, including the impact of the economic recession on customer travel behavior;|
|·||actual or threatened terrorist attacks, global instability, geopolitical risks and potential U.S. military actions or activities;|
|·||ability to generate non-ticket revenues;|
|·||external conditions, including air traffic congestion, weather conditions and outbreak of disease and pandemics;|
|·||ability to maintain slots in the airports that we operate and service provided by airport operators;|
|·||ability to operate through new airports that match our operative criteria;|
|·||air travel substitutes;|
|·||labor disputes, employee strikes and other labor-related disruptions, including in connection with our negotiations with our union;|
|·||ability to attract and retain qualified personnel;|
|·||loss of key personnel;|
|·||aircraft-related fixed obligations;|
|·||dependence on cash balances and operating cash flows;|
|·||our aircraft utilization rate;|
|·||our reliance on automated systems and the risks associated with changes made to those systems;|
|·||use of personal data;|
|·||lack of marketing alliances;|
|·||government regulation, changes in law and interpretation and supervision of compliance with applicable law;|
|·||maintaining and renewing our permits and concessions;|
|·||our ability to execute our growth strategy;|
|·||our reliance on third-party vendors and partners;|
|·||our reliance on a single fuel provider in Mexico;|
|·||an aircraft accident or incident;|
|·||our aircraft and engine suppliers;|
|·||changes in the Mexican and VFR (passengers who are visiting friends and relatives) markets;|
|·||our ability to respond to global health crises, such as the recent outbreak of the coronavirus disease (COVID-19); and|
|·||other risk factors included under “Risk Factors” in this annual report.|
In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this annual report. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
INTRODUCTION AND USE OF CERTAIN TERMS
In this annual report, we use the term “Volaris” to refer to Controladora Vuela Compañía de Aviación, S.A.B. de C.V., “Volaris Opco” to refer to Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V., “Comercializadora” to refer to Comercializadora Volaris, S.A. de C.V., “Servicios Corporativos” to refer to Servicios Corporativos Volaris, S.A. de C.V., “Servicios Administrativos” to refer to Servicios Administrativos Volaris, S.A. de C.V., “Servicios Earhart” to refer to Servicios Earhart, S.A., “Vuela” to refer to Vuela, S.A. and “Vuela Aviación” to refer to Vuela Aviación, S.A., “Viajes Vuela” to refer to Viajes Vuela, S.A. de C.V., “Comercializadora Frecuenta” to refer to Comercializadora V. Frecuenta, S.A. de C.V., “Vuela El Salvador” to refer to Vuela El Salvador, S.A. de C.V. Volaris Opco, Comercializadora, Servicios Corporativos, Servicios Administrativos, Vuela, Vuela Aviación, Viajes Vuela, Comercializadora Frecuenta and Vuela El Salvador are wholly-owned subsidiaries of Volaris. The terms “we,” “our” and “us” in this annual report refer to Volaris, together with its subsidiaries, and to properties and assets that they own or operate, unless otherwise specified. References to “Series A shares” refer to Series A shares of Volaris.
GLOSSARY OF AIRLINES AND AIRLINE TERMS
Set forth below is a glossary of industry terms used in this annual report:
“Aerocalifornia” means Aerocalifornia, S.A. de C.V.
“Aeroméxico” means Aerovías de México, S.A. de C.V.
“AFAC” means the Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil).
“AirAsia” means AirAsia Berhad.
“Airbus” means Airbus S.A.S.
“Aladia” means Aladia Airlines, S.A. de C.V.
“Alaska Air” means Alaska Air Group, Inc.
“Allegiant” means Allegiant Travel Company.
“Alma” means Aerolíneas Mesoamericanas, S.A. de C.V.
“Aeroméxico Connect” means Aerolitoral, S.A. de C.V.
“American” means American Airlines Group.
“Available seat miles” or “ASMs” means the number of seats available for passengers multiplied by the number of miles the seats are flown.
“Average daily aircraft utilization” means flight hours or block hours, as applicable, divided by number of days in the period divided by average aircraft in the period.
“Average economic fuel cost per gallon” means total fuel expense net of hedging effect, divided by the total number of fuel gallons consumed.
“Average ticket revenue per booked passenger” means total passenger revenue divided by booked passengers.
“Average stage length” means the average number of miles flown per passenger flight segment.
“Aviacsa” means Consorcio Aviaxsa, S.A. de C.V.
“Avianca” means Avianca Holding S.A.
“Avolar” means Avolar Aerolíneas, S.A. de C.V.
“Azteca” means Líneas Aéreas Azteca, S.A. de C.V.
“Azul” means Azul Linhas Aéreas Brasileiras S.A.
“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time it leaves the gate until the time it arrives to the gate at destination.
“Booked passengers” means the total number of passengers booked on all flight segments.
“CASM” or “unit costs” means total operating expenses, net divided by ASMs.
“CASM ex fuel” means total operating expenses, net excluding fuel expense divided by ASMs.
“CBP” means United States Customs and Border Protection.
“CEO” means current engine option.
“Copa” means Copa Holding S.A.
“Delta” means Delta Air Lines, Inc.
“DOT” means the United States Department of Transportation.
“EPA” means the United States Environmental Protection Agency.
“FAA” means the United States Federal Aviation Administration.
“FCC” means the United States Federal Communications Commission.
“Flight hours” means the number of hours during which the aircraft is in revenue service, measured from the time it takes off until the time it lands at the destination.
“Frontier” means Frontier Airlines, Inc.
“Gol” means Linhas Aéreas Inteligentes, S.A.
“Grupo Aeroméxico” means Grupo Aeroméxico, S.A.B. de C.V., which includes Aeroméxico and Aeroméxico Connect.
“Grupo Mexicana” means Grupo Mexicana de Aviación, S.A. de C.V., which is the holding company for three airlines, Compañía Mexicana de Aviación, Mexicana Click and Mexicana Link.
“Grupo TACA” means Taca International Airlines, S.A.
“IATA” means the International Air Transport Association.
“Interjet” means ABC Aerolíneas, S.A. de C.V.
“LATAM” means LATAM Airlines Group S.A.
“Latin America” means, collectively, Mexico, the Caribbean, Central America and South America.
“Latin American publicly traded airline carriers” means, collectively, Aeroméxico, Avianca, Azul, Copa, Gol and LATAM.
“Legacy carrier” means an airline that typically offers scheduled flights to major domestic and international routes (directly or through membership in an alliance) and serves numerous smaller cities, operates mainly through a “hub-and-spoke” network route system and has higher cost structures than low-cost carriers due to higher labor costs, flight crew and aircraft scheduling inefficiencies, concentration of operations in higher cost airports and multiple classes of services.
“Load factor” means RPMs divided by ASMs and expressed as a percentage.
“Low-cost carrier” means an airline that typically flies direct, point-to-point flights, often serves major markets through secondary, lower cost airports in the same regions as major population centers, provides a single class of service, thereby increasing the number of seats on each flight and avoiding the significant and incremental cost of offering premium-class services, and tends to operate fleets with only one or two aircraft families, in order to maximize the utilization of flight crews across the fleet, improve aircraft scheduling efficiency and flexibility and minimize inventory and aircraft maintenance costs.
“NEO” means new engine option.
“Nova Air” means Polar Airlines de Mexico, S.A. de C.V.
“On-time” means flights arriving within 15 minutes of the scheduled arrival time.
“Other Latin American publicly traded airlines” means, collectively, Avianca, Azul, Copa, Gol, Grupo Aeroméxico and LATAM.
“Passenger flight segments” means the total number of passengers flown on all flight segments.
“RASM” means passenger revenue divided by ASMs.
“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.
“Ryanair” means Ryanair Holdings plc.
“SCT” means the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes).
“Southwest Airlines” means Southwest Airlines Co.
“Spirit” means Spirit Airlines, Inc.
“Tiger” means Tiger Airways Holdings Limited.
“Total operating revenue per ASM,” or “TRASM” means total revenue divided by ASMs.
“TSA” means the United States Transportation Security Administration.
“Trip” means TRIP Linhas Aéreas S.A.
“ULCC” or “ultra-low-cost carrier” means an airline that belongs to a subset of low-cost carriers, which distinguishes itself by using a business model with an intense focus on low-cost, efficient asset utilization, unbundled revenue sources aside from the base fares with multiple products and services offered for additional fees. In the United States, Spirit Airlines, Inc. and Allegiant define themselves as ULCCs and Volaris and VivaAerobus follow the ULCC model in Mexico.
“United” means United Continental Holdings, Inc.
“U.S.-based publicly traded target market competitors” means Alaska Air, American, Delta and United.
“VFR” means passengers who are visiting friends and relatives.
“VivaAerobus” means Aeroenlaces Nacionales, S.A. de C.V.
“Webjet” means Linhas Aéreas Econômicas.
“Wizz” means Wizz Air Holdings Plc.
PRESENTATION OF FINANCIAL INFORMATION AND OTHER INFORMATION
This annual report includes our audited consolidated financial statements at December 31, 2018 and 2019, and for each of the three years in the period ended December 31, 2019, which have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (IASB), referred hereinafter as IFRS.
Unless otherwise specified, all references to “U.S. dollars,” “dollars,” “U.S. $” or “$” are to United States dollars, the legal currency of the United States, and references to “pesos” or “Ps.” are to Mexican Pesos, the legal currency of Mexico. Except as otherwise indicated, peso amounts have been converted to U.S. dollars at the exchange rate of Ps.18.8452 per U.S. $1.00, 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 (tipo de cambio para solventar obligaciones denominadas en moneda extranjera, pagaderas en México) in effect on December 31, 2019.
Such conversions are for the convenience of the reader and should not be construed as representations that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all. Amounts presented in this annual report may not add up due to rounding.
Industry and Market Data
We obtained the industry and market data used in this annual report from research, surveys or studies conducted by third parties on our behalf, information contained in third-party publications, such as the Mexican Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía), or INEGI, reports from the Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil), or the AFAC, reports from the Mexican Central Bank and other publicly available sources. Third-party publications generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that this data and information is reliable, we have not independently verified it. Additionally, certain market share data is based on published information available for the Mexican states. There is no comparable data available relating to the particular cities we serve. In presenting market share estimates for these cities, we have estimated the size of the market on the basis of the published information for the state in which the particular city is located. We believe this method is reasonable, but the results have not been verified by any independent source.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following tables summarize selected financial and operating data for our business for the periods presented. You should read this selected consolidated financial data in conjunction with Item 5: “Operating and Financial Review and Prospects” and our audited consolidated financial statements, including the related notes thereto, all included elsewhere in this annual report. We prepare our consolidated financial statements in accordance with IFRS.
We derived the selected consolidated statements of operations data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated statements of financial position data as of December 31, 2017, 2018 and 2019 from our audited financial statements included in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2015, 2016 and 2017 and the selected consolidated statements of financial position data as of December 31, 2015 and 2016 were derived from the audited financial statements for those periods. See Item 18: “Financial Statements.” Our historical results are not necessarily indicative of the results to be expected in the future.
|For the Years ended December 31,|
|(in thousands of pesos, except share and per share data and operating data)|
|CONSOLIDATED STATEMENTS OF OPERATIONS|
|Other passenger revenues||—||4,919,452||6,098,504||7,892,497||10,569,208||560,844|
|Other non-passenger revenues||—||590,355||727,392||697,357||897,586||47,629|
|Non-derivative financial instruments||—||—||—||—||(72,949||)||(3,871||)|
|Other operating income||(193,155||)||(496,742||)||(96,765||)||(621,973||)||(327,208||)||(17,363||)|
|Fuel expense, net||4,721,108||5,741,403||7,255,636||10,134,982||11,626,069||616,925|
|Aircraft and engine rent expense||3,525,336||5,590,058||—||—||—||—|
|Aircraft and engine variable lease expenses||—||—||1,429,595||956,010||961,657||51,030|
|Landing, take-off and navigation expenses||2,595,413||3,272,051||4,002,744||4,573,319||5,108,489||271,076|
|Depreciation of right of use assets||—||—||3,437,903||4,043,691||4,702,971||249,558|
|Salaries and benefits||1,902,748||2,419,537||2,823,647||3,125,393||3,600,762||191,071|
|Sales, marketing and distribution expenses||1,088,805||1,413,348||1,691,524||1,501,203||1,447,637||76,818|
|Other operating expenses||697,786||952,452||1,034,258||1,059,098||1,112,927||59,056|
|Depreciation and amortization(4)||456,717||536,543||548,687||500,641||675,514||35,845|
|Exchange gain (loss), net||966,554||2,169,505||683,039||(103,790||)||1,440,501||76,439|
|Income (loss) before income tax||3,502,218||4,935,780||516,257||(1,292,702||)||3,733,894||198,135|
|Income tax (expense) benefit||(1,038,348||)||(1,457,182||)||(237,586||)||349,820||(1,094,831||)||(58,096||)|
|Net income (loss)||2,463,870||3,478,598||278,671||(942,882||)||2,639,063||140,039|
|Equity holders of the parent||2,463,870||3,478,598||278,671||(942,882||)||2,639,063||140,039|
|Net income (loss)||2,463,870||3,478,598||278,671||(942,882||)||2,639,063||140,039|
|Weighted average shares outstanding Basic and diluted||1,011,876,677||1,011,876,677||1,011,876,677||1,011,876,677||1,011,876,677||1,011,876,677|
|Earnings (loss) per share Basic and diluted(5)||2.43||3.44||0.28||(0.93||)||2.61||0.14|
|Earnings (loss) per ADS Basic and diluted(6)||24.35||34.38||2.75||(9.32||)||26.08||1.38|
|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (as of December 31,)|
|Cash and cash equivalents||5,157,313||7,071,251||6,950,879||5,862,942||7,979,972||423,449|
|Accounts receivable, net||434,955||962,718||1,449,292||1,466,690||2,320,334||123,126|
|Guarantee deposits—current portion||873,022||1,167,209||1,352,893||790,635||600,327||31,856|
|Total current assets||7,223,762||11,551,116||11,046,071||8,922,769||12,117,239||642,989|
|Total short-term liabilities||7,073,372||7,962,382||13,555,372||14,083,029||17,324,216||919,294|
|CASH FLOW DATA|
|Net cash flows provided by operating activities||3,069,613||978,732||6,018,767||6,276,707||9,509,643||504,618|
|Net cash flow used in investing activities||(601,277||)||(27,958||)||(2,260,440||)||(1,389,395||)||(1,879,341||)||(99,725||)|
|Net cash flow provided by|
(used in) financing activities
|Depreciation of right of use assets||—||—||3,437,903||4,043,691||4,702,971||249,558|
|Depreciation and amortization||456,717||536,543||548,687||500,641||675,514||35,845|
|Aircraft and engine rent expense||3,525,336||5,590,058||—||—||—||—|
|Aircraft and engine variable lease expenses||—||—||1,429,595||956,010||961,657||51,030|
|Aircraft at end of period||56||69||71||77||82||—|
|Average daily aircraft utilization (block hours)||12.68||12.80||12.57||13.21||12.94||—|
|Average daily aircraft utilization (flight hours)||10.34||10.24||10.02||10.56||10.90||—|
|Average pesos/U.S. dollar exchange rate||15.85||18.66||18.93||19.24||19.26||—|
|End of period pesos/U.S. dollar exchange rate||17.21||20.66||19.74||19.68||18.85||—|
|Airports served at end of period||61||65||69||69||65||—|
|Passenger flight segments (thousands)(7)||11,477||14,394||15,670||17,478||20,917||—|
|Booked passengers (thousands)(7)||11,983||15,005||16,427||18,396||21,975||—|
|Revenue passenger miles (RPMs) (thousands)(7)||11,561,859||14,325,898||15,917,246||17,748,408||21,032,364||—|
|Available seat miles (ASMs) (thousands)(7)||14,052,298||16,703,949||18,860,950||21,009,545||24,498,893||—|
|Average fare revenue per booked passenger(8)||1,181||1,189||1,086||1,006||1,054||56|
|Average other passenger revenue per booked passenger(7)(9)||—||328||371||429||481||26|
|Total ancillary revenue per booked passenger(7)(9)||338||379||426||479||532||28|
|Total operating revenue per ASM (TRASM) (cents)(7)(9)||129.4||140.5||131.4||130.0||142.2||7.5|
|Passenger revenue per ASM (RASM) (cents) (7)(9)||100.6||106.5||94.3||88.0||94.4||5.0|
|Operating expenses per ASM (CASM) (cents) (7)(9)||111.5||124.4||124.8||127.4||124.3||6.6|
|CASM ex fuel (cents) (7)(9)||77.9||90.0||86.4||79.2||76.6||4.1|
|Fuel gallons consumed (thousands)||164,033||196,709||210,536||227,436||251,802||—|
|Average economic fuel cost per gallon(9)||28.8||29.2||34.5||44.6||46.4||2.5|
|Employees per aircraft at end of period||59||66||67||60||60||—|
|(1)||As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017. Our financial results as of and for the years ended December 31, 2017 and 2018 as presented in our annual report for the year ended December 31, 2018 filed with the SEC on April 26, 2019 have been adjusted in our Audited Consolidated Financial Statements presented in this annual report to take into account this application of IFRS 16. See note 1x to our Audited Consolidated Financial Statements for more details.|
|(2)||Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps. 18.8452 per U.S. $1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2019. Such conversions should not be construed as a representation that the peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated, or at all.|
|(3)||Includes routine and ordinary maintenance expenses only. See Item 5: “Operating and Financial Review and Prospects—Operating Results.”|
|(4)||Includes, among other things, major maintenance expenses, which are capitalized and subsequently amortized. See Item 5: “Operating and Financial Review and Prospects—Operating Results.”|
|(5)||Basic and diluted earnings per share amounts are calculated by dividing the income for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares and unvested shares awarded under the management incentive and long-term incentive plans outstanding during the year, this is because the shares are entitled to a dividend if and when it is declared by the Company.|
|(6)||The basis used for the computation of the information is to multiply the earnings per basic and diluted share obtained pursuant to footnote (5) above by ten, which is the number of CPOs represented by each ADS. Each CPO, in turn, represents a financial interest in one Series A share of common stock of Volaris.|
|(7)||Includes scheduled and charter.|
(9) Excludes non-derivative financial instruments
|(10)||See “Glossary of Airlines and Airline Terms” elsewhere in this annual report for definitions of terms used in this table.|
Key Performance Indicators
The following measures are often provided, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to compare results to other airlines: Revenue passenger miles (RPMs); Average ticket revenue per booked passenger; Average non-ticket revenue per booked passenger, Total operating revenue per ASM (TRASM); Passenger Revenue per ASMS (RASM); Operating expenses per ASM (CASM); CASM ex fuel, and Average economic fuel cost per gallon.
You should carefully consider all of the information set forth in this annual report and the risks described below before making an investment decision. Our business, results of operations and financial condition could be materially and adversely affected by any of these risks. The trading price of the ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment.
The risks described below are those that we currently believe may adversely affect us or the ADSs. In general, investing in the securities of issuers in emerging market countries, such as Mexico, involves risks that are different from the risks associated with investing in the securities of U.S. companies and companies located in other countries with developed capital markets. Any of these risks could materially and adversely affect our business and results of operations.
To the extent that information relates to, or is obtained from sources related to, the Mexican government or Mexican macroeconomic data, the following information has been extracted from official publications of the Mexican government and has not been independently verified by us.
Risks related to Mexico
Political and social events in Mexico as well as changes in Mexican federal governmental policies may have an adverse effect on our business, results of operations, financial condition and prospects.
Our business, results of operations and financial condition are affected by economic, political or social developments in Mexico, including, among others, any political or social instability in Mexico, changes in the rate of economic growth or contraction, changes in the exchange rate between the peso and the U.S. dollar, an increase in inflation or interest rates, changes in Mexican taxation and any amendments to existing Mexican laws, federal governmental policies and regulations.
Adverse social or political developments in or affecting Mexico could negatively affect us and Mexican financial markets generally, thereby affecting our ability to obtain financing. Presidential and federal congressional elections in Mexico were held on July 1, 2018. Mr. Andrés Manuel López Obrador, a member of the Movimiento Regeneración Nacional (National Regeneration Movement), was elected President of Mexico and took office on December 1, 2018. The President´s party holds the majority of the Chamber of Deputies and the Senate. We cannot provide any assurance that the current political situation or any future developments in Mexico will not have a material adverse effect on our business, results of operations, financial condition or prospects.
In addition, the Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. In particular, Mexican federal governmental actions and policies concerning air transportation and similar services could have a significant impact on us. We cannot assure you that changes in Mexican federal governmental and air transportation policies, such as opening Mexican domestic segments to airlines from other countries, will not adversely affect our business, results of operations, financial condition and prospects or the price of the ADSs.
Adverse economic conditions in Mexico may adversely affect our business, results of operations and financial condition.
Most of our operations are conducted in Mexico and our business is affected by the performance of the Mexican economy. In 2017 and 2018, the Mexican economy grew 2.1% and decreased 0.1% in 2019, in terms of gross domestic product or GDP, according to the INEGI. Moreover, in the past, Mexico has experienced prolonged periods of economic crises, caused by internal and external factors, over which we have no control. Those periods have been characterized by exchange rate instability, high inflation, high domestic interest rates, economic contraction, a reduction of international capital flows, a reduction of liquidity in the banking sector and high unemployment rates. Decreases in the growth rate of the Mexican economy, or periods of negative growth, or increases in inflation may result in lower demand for our flights, lower fares or a shift to ground transportation options, such as long-distance buses.
We cannot assure you that economic conditions in Mexico will not worsen, or that those conditions will not have an adverse effect on our business, results of operations and financial condition.
If inflation rates in Mexico increase, demand for our services may decrease and our costs may increase.
Mexico historically has experienced levels of inflation that are higher than the annual inflation rates of its main trading partners. The annual rate of inflation, as measured by changes in the Mexican national consumer price index calculated and published by the Mexican Central Bank and INEGI was 6.77% for 2017, 4.83% for 2018 and 2.83% for 2019. High inflation rates could adversely affect our business and results of operations by reducing consumer purchasing power, thereby adversely affecting consumer demand for our services, increasing our costs beyond levels that we could pass on to our customers and by decreasing the benefit to us of revenues earned to the extent that inflation exceeds growth in our pricing levels.
Currency fluctuations or the devaluation and depreciation of the peso could adversely affect our business, results of operations, financial condition and prospects.
Foreign currency exchange gains or losses included in our total financing cost result primarily from the impact of changes in the U.S. dollar-peso exchange rate on our U.S. dollar-denominated monetary liabilities (such as U.S. dollar-denominated debt, U.S. dollar-denominated aircraft lease payments and accounts payable arising from imports of spare parts and equipment) and assets (such as U.S. dollar-denominated cash, cash equivalents, accounts receivable, security deposits and aircraft maintenance deposits). Because after the implementation of IFRS 16 our U.S. dollar-denominated monetary liabilities have exceeded our U.S. dollar-denominated assets, the devaluation and appreciation of the peso resulted in exchange losses and gains, respectively.
The value of the peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. In 2008, as a consequence of the global economic and financial crisis, the peso depreciated 26.7% against the U.S. dollar in nominal terms. In 2009, 2010 and 2012, the peso appreciated 5.5%, 5.2% and 6.9%, respectively, against the U.S. dollar in nominal terms. However, in 2011 and 2013, the peso depreciated 12.9% and 0.5%, respectively, against the U.S. dollar in nominal terms. This trend in fluctuations has continued as the peso depreciated 20.1%, appreciated 4.5% and appreciated 0.3% against the U.S. dollar in nominal terms in 2016, 2017 and 2018, respectively. As of December 31, 2019, the peso appreciated 4.3% against the U.S. dollar in nominal terms since December 31, 2018.
In 2019, approximately 72% of our total operating costs and 43% of our collections were U.S. dollar-linked or denominated. The remainder of our expenses was denominated in pesos. If the peso declines in value against the U.S. dollar, our revenues, expressed in U.S. dollars, and our operating margin would be adversely affected. We may not be able to adjust our fares denominated in pesos to offset any increases in U.S. dollar-denominated expenses, increases in interest or rental expense or exchange losses on fixed obligations. In addition, 67% of our outstanding financial debt and 100% of our aircraft lease payments as of December 31, 2019, are denominated in U.S. dollars. Severe devaluation or depreciation of the peso could also result in governmental intervention or disruption of foreign exchange markets. For example, the Mexican government could institute restrictive exchange control policies in the future, as it has done in the past. This would limit our ability to convert and transfer pesos into U.S. dollars for purposes of purchasing or leasing aircraft and other parts and equipment necessary to operate and expand and upgrade our fleet, paying amounts due under some of our maintenance contracts and servicing our U.S. dollar-denominated indebtedness.
Devaluation or depreciation of the peso against the U.S. dollar may adversely affect the U.S. dollar value of an investment in the ADSs, as well as the U.S. dollar value of any dividend or other distributions that we may make.
Fluctuations in the exchange rate between the peso and the U.S. dollar, particularly depreciations in the value of the peso, may adversely affect the U.S. dollar equivalent of the peso price of the Series A shares on the Mexican Stock Exchange. Such peso depreciations will likely affect the market price of the ADSs. Exchange rate fluctuations would also affect the U.S. dollar equivalent value of any dividends and other distributions we may elect to make in the future, and may affect the timely payment of any peso cash dividends and other distributions to holders of CPOs that we may elect to pay in the future in respect of the Series A shares.
Developments in other countries could adversely affect the Mexican economy, the market value of our securities, our financial condition and results of operations.
The market value of securities of Mexican companies is affected by economic and market conditions in developed and other emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in any of these other countries, may have an adverse effect on the market value of securities of Mexican issuers. In recent years, for example, prices of both Mexican debt and equity securities have sometimes suffered substantial drops as a result of developments in other countries. In 2008-2009, credit issues in the United States related principally to the sale of sub-prime mortgages resulted in significant fluctuations in securities traded in global financial markets, including Mexico.
In addition, the direct correlation between economic conditions in Mexico and the United States has strengthened in recent years because of the North American Free Trade Agreement, or NAFTA, and increased economic activity between the two countries (including increased remittances of U.S. dollars from Mexican workers in the United States to their families in Mexico). However, Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the United States in the congressional election, has generated volatility in the currency and capital markets of emerging markets, such as Mexico and may create uncertainty regarding the future of NAFTA and trade between the United States and Mexico. On January 20, 2017, Donald Trump became president of the United States. President Trump and the Trump administration began a process to renegotiate NAFTA. As a result of such negotiations, on November 30, 2018, Mexico, the United States and Canada signed the USMCA (United States-Mexico-Canada Agreement), a new trade agreement that will replace NAFTA. The USMCA has been ratified by the Mexican Senate, United States Congress and by the Parliament of Canada. On April 24, 2020 it was announced that all required procedures had been completed by the three countries and that therefore the agreement will enter into force on July 1, 2020. Furthermore, President Trump has already implemented immigration policies that have already adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets, and there is a possibility that further immigration policy changes are to come. President Trump’s immigration policies had a negative impact on our results of operations during 2019 and this negative impact can be expected to continue if the Trump administration continues to carry out such immigration policies. In addition, as a result of the COVID-19 pandemic, on April 22, 2020 President Trump signed a Presidential Proclamation entitled: “Suspending Entry of Immigrants Who Present Risk to the U.S. Labor Market During the Economic Recovery Following the COVID-19 Outbreak.”
These events could have a material adverse effect on our operations and revenues, which could affect the market price of our securities, including the ADSs.
Mexican antitrust provisions may affect the fares we are permitted to charge to customers.
The Mexican Aviation Law (Ley de Aviación Civil) provides that in the event that the SCT considers that there is no effective competition among permit and concession holders (required to operate airlines in Mexico), the SCT may request the opinion of the Mexican Antitrust Commission (Comisión Federal de Competencia Económica) and then issue regulations governing the fares that may be charged for air transportation services by airlines operating in Mexico. Such regulations will be maintained only during the existence of the conditions that resulted in their establishment. The imposition of fare regulations by the SCT could materially affect our business, results of operations and financial condition.
Violent crime in Mexico has adversely impacted, and may continue to adversely impact, the Mexican economy and may have a negative effect on our business, results of operations or financial condition.
Mexico has experienced high levels of violent crime over the past few years relating to illegal drug trafficking, particularly in Mexico’s northern states near the U.S. border. This violence has had an adverse impact on the economic activity in Mexico. In addition, violent crime may further affect travel within Mexico and between Mexico and other countries, including the United States, affect the airports or cities in which we operate, including airports or cities in the north of Mexico in which we have significant operations, and increase our insurance and security costs. We cannot assure you that the levels of violent crime in Mexico or their expansion to a larger portion of Mexico, over which we have no control, will not increase or decrease and will have no further adverse effects on the country’s economy and on our business, results of operations or financial condition.
Risks related to the airline industry
We operate in an extremely competitive industry.
We face significant competition with respect to routes, fares, services and slots in airports. Within the airline industry, we compete with legacy carriers, regional airlines and low-cost airlines on many of our routes. The intensity of the competition we face varies from route to route and depends on a number of factors, including the strength of competing airlines. Our competitors may have better brand recognition and greater financial and other resources than we do. In the event our competitors reduce their fares to levels which we are unable to match while sustaining profitable operations or are more successful in the operation of certain routes (as a result of service or otherwise), we may be required to reduce or withdraw services on the relevant routes, which may cause us to incur losses or may impact our growth, financial condition or results of operations. See Item 4: “Information on the Company—Business Overview—Competition.”
The airline industry is particularly susceptible to price discounting, because once a flight is scheduled, airlines incur only nominal additional costs to provide service to passengers occupying otherwise unsold seats. Increased fare or other price competition could adversely affect our results of operations and financial condition. Moreover, other airlines have begun to unbundle services by charging separate fees for services such as baggage transported, alcoholic beverages consumed onboard and advance seat selection. This unbundling and potential reduction of costs could enable competitor airlines to reduce fares on routes that we serve, which may result in an improvement in their ability to attract customers and may affect our results of operations and financial condition.
In addition, airlines increase or decrease capacity in markets based on perceived profitability. Decisions by our competitors that increase overall industry capacity, or capacity dedicated to a particular region, market or route, could have a material adverse impact on our business. Our growth and the success of our ULCC business model could stimulate competition in our markets through our competitors’ development of their own ULCC strategies or new market entrants. Any such competitor may have greater financial resources and access to cheaper sources of capital than we do, which could enable them to operate their business with a lower cost structure than we can. If these competitors adopt and successfully execute a ULCC business model, we could be materially adversely affected, including our business, results of operations and financial condition.
Furthermore, we also face competition from air travel substitutes. On our domestic routes, we face competition from other transportation alternatives, such as bus or automobile. In addition, technology advancements may limit the desire for air travel. For example, video teleconferencing and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower cost substitutes for air travel. If we are unable to adjust rapidly in the event the basis of competition in our markets changes, it could have a material adverse effect on our business, results of operations and financial condition.
The airline industry is heavily impacted by the price and availability of fuel. Continued volatility in fuel costs or significant disruptions in the supply of fuel could have a material adverse effect on our business, results of operations and financial condition.
Fuel is a major cost component for airlines and is our largest operating expense. The cost of fuel accounted for 31%, 38% and 38% of our total operating costs in 2017, 2018 and 2019, respectively. As such, our operating results are significantly affected by changes in the cost and availability of fuel. Both the cost and the availability of fuel are subject to economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. Fuel prices have been subject to high volatility, fluctuating substantially over the past several years and very sharply beginning in 2008. Due to the large proportion of fuel costs in our total operating cost base, even a relatively small increase in the price of fuel can have a significant negative impact on our operating costs and on our business, results of operations and financial condition See Item 4: “Information on the Company—Business Overview—Fuel.”
Our inability to renew our concession or the revocation by the Mexican government of our concession would materially adversely affect us.
We hold a government concession authorizing us to provide domestic air transportation services of passengers, cargo and mail within Mexico, or our Concession. Our Concession was granted by the Mexican federal government through the SCT on May 9, 2005 initially for a period of five years and was extended by the SCT on February 17, 2010 for an additional period of ten years. On February 21, 2020, our Concession was extended for a 20-year term starting on May 9, 2020. Mexican law provides that concessions may be renewed several times. However, each renewal may not exceed 30 years and requires that the concessionaire (i) has complied with the obligations set forth in the concession title to be renewed, (ii) requests the renewal one year before the expiration of the applicable concession terms, (iii) has made an improvement in the quality of the services during the term of the concession, and (iv) accepts the new conditions established by the SCT according to the Mexican Aviation Law (Ley de Aviación Civil). Failure to renew our Concession would have a material adverse effect on our business, results of operations, financial condition and prospects and would prevent us from continuing to conduct our business.
We are required under the terms of our Concession to comply with certain ongoing obligations. Failure to comply with these obligations could result in penalties against us. In addition, the Mexican government has the right to revoke our Concession and the permits we currently hold for various reasons including: service interruptions; our failure to comply with the terms of our Concession; if we assign or transfer rights under our Concession or permits; if we fail to maintain insurance required under applicable law; if we charge fares different from fares registered with the SCT; if we violate statutory safety conditions; and if we fail to pay statutory indemnification or if we fail to pay to the Mexican government the required compensation. For more information on the potential causes for revocation of our Concession and permits, see Item 4: “Information of the Company—Regulation.” If our Concession or permits are revoked, we will be unable to operate our business as it is currently operated and be precluded from obtaining a new concession or permit for five years from the date of revocation.
Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances.
Pursuant to Mexican law and our Concession, the Mexican federal government may take or seize our assets, temporarily or permanently, including the aircraft, in the event of natural disasters, war, serious changes to public order or in the event of imminent danger to the national security, internal peace or the national economy. The Mexican federal government, in all cases, except in the event of international war, must indemnify us by paying the respective losses and damages at market value. In these circumstances, we would not be able to continue with our normal operations. Applicable law is unclear as to how indemnification is determined and the timing of payment thereof. A temporary seizure of our assets is likely to have a material adverse effect on our business, results of operations and financial condition.
The airline industry is particularly sensitive to changes in economic conditions. The recent global economic contraction or a reoccurrence of similar conditions could negatively impact our business, results of operations and financial condition.
Our business and the airline industry in general are affected by changing economic conditions beyond our control, including, among others:
|·||changes and volatility in general economic conditions, including the severity and duration of any downturn in Mexico, the United States or global economy and financial markets;|
|·||changes in consumer preferences, perceptions, spending patterns or demographic trends, including any increased preference for higher-fare carriers offering higher amenity levels, and reduced preferences for low-fare carriers offering more basic transportation, during better economic times or for other reasons;|
|·||higher levels of unemployment and varying levels of disposable or discretionary income;|
|·||health outbreaks, pandemics and concerns with safety;|
|·||depressed housing and stock market prices; and|
|·||lower levels of actual or perceived consumer confidence.|
These factors can adversely affect our results of operations and financial condition, our ability to obtain financing on acceptable terms and our liquidity generally. Current unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures and increased focus on reducing business operating costs can reduce spending for leisure, VFR and business travel. For many travelers, in particular the leisure and VFR travelers we serve, air transportation is a discretionary purchase that they can eliminate from their spending in difficult economic times. Unfavorable economic conditions could affect our ability to raise prices to counteract increased fuel, labor or other costs, which could result in a material adverse effect on our business, results of operations and financial condition. In addition, we are currently striving to increase demand for our flights among the portion of the population in Mexico that has traditionally used ground transportation for travel due to price constraints, by offering lower fares that compete with bus fares on similar routes. Unfavorable economic conditions could affect our ability to offer these lower fares and could affect this population segment’s discretionary spending in a more adverse manner than other travelers.
The airline industry is heavily regulated and our financial condition and results of operations could be materially adversely affected if we fail to maintain the required U.S., Mexican and Central American governmental concessions or authorizations necessary for our operations.
The airline industry is heavily regulated and we are subject to regulation in Mexico and in the United States for the routes we serve between Mexico and the United States. In order to maintain the necessary concessions or authorizations issued by the SCT, acting through the AFAC, the U.S. Federal Aviation Administration, or FAA, and some of the aviation authorities in the Central American countries in which we operate, including authorizations to operate our routes, we must continue to comply with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future. We cannot predict which criteria the SCT will apply for awarding rights to landing slots, bi-lateral agreements, and international routes, which may prevent us from obtaining routes that may become available. In addition, international routes are limited by bi-lateral agreements and not obtaining them will limit our expansion plans in the international market. Furthermore, we cannot predict or control any actions that the AFAC, FAA or the aviation authorities in the Central American countries in which we operate may take in the future, which could include restricting our operations or imposing new and costly regulations. Also, our fares are subject to review by the AFAC, the FAA and some of the aviation authorities in the Central American countries in which we operate, either of which may in the future impose restrictions on our fares. Our business, results of operations and financial condition could be materially adversely affected if we fail to maintain the required U.S., Mexican and Central American governmental concessions or authorizations necessary for our operations.
The airline industry is subject to increasingly stringent environmental regulations and non-compliance therewith may adversely affect our financial condition and results of operations.
The airline industry is subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, levels of noise, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. Compliance with all environmental laws and regulations can require significant expenditures and any future regulatory developments in Mexico, the United States and other countries could adversely affect operations and increase operating costs in the airline industry. For example, some form of federal regulation may be forthcoming in the United States with respect to greenhouse gas emissions (including carbon dioxide (CO2)) and/or ‘cap and trade’ legislation, compliance with which could result in the creation of substantial additional costs to us. The U.S. Congress is considering climate change legislation and the Environmental Protection Agency issued a rule that regulates larger emitters of greenhouse gases. Concerns about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and Mexico. Future operations and financial results may vary as a result of such regulations in the United States and equivalent regulations adopted by other countries, including Mexico. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and could have a material adverse effect on our business, results of operations and financial condition. Governmental authorities in several cities in the United States and abroad are also considering or have already implemented aircraft noise reduction programs, including the imposition of nighttime curfews and limitations on daytime take-offs and landings. We have been able to accommodate local noise restrictions imposed to date, but our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.
Compliance with airline industry regulations involves significant costs and regulations enacted in Mexico, the United States and Central America may increase our costs significantly in the future.
Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, the U.S. Congress has passed laws, and the DOT, FAA and TSA have issued regulations, relating to the operation of airlines that have required significant expenditures. FAA requirements cover, among other things, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. We expect to continue to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. For example, the DOT finalized rules, taking effect on April 29, 2010, requiring new procedures for customer handling during long onboard tarmac delays, as well as additional reporting requirements for airlines that could increase the cost of airline operations or reduce revenues.
The DOT released additional rules, most of which became effective beginning in August 2011, that address, among other things, concerns about how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft, including requirements for disclosure of base fares plus a set of regulatory mandated options and limits on cancellations and change fees. Failure to remain in full compliance with these rules, or new rules as enacted from time to time, may subject us to fines or other enforcement action, which could have a material effect on our business, results of operations and financial condition.
In addition, the TSA mandates the federalization of certain airport security procedures in the United States and imposes additional security requirements on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines. The U.S. federal government has on several occasions proposed a significant increase in the per ticket tax. The proposed ticket tax increase, if implemented, could negatively impact our business, results of operations and financial condition.
Our ability to operate as an airline in the United States is dependent on maintaining our certifications issued to us by the DOT and the FAA. The FAA has the authority to issue mandatory orders relating to, among other things, the grounding of aircraft, inspection of aircraft, installation of new safety-related items and removal and replacement of aircraft parts that have failed or may fail in the future. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, our aircraft, for any reason, could negatively affect our business, results of operations and financial condition. U.S. federal law requires that air carriers operating large aircraft be continuously ‘fit, willing and able’ to provide the services for which they are licensed. Our “fitness” is monitored by the DOT, which considers factors such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. While the DOT has seldom revoked a carrier’s certification for lack of fitness, such an occurrence would render it impossible for us to continue operating as an airline in the United States. The DOT may also institute investigations or administrative proceedings against airlines for violations of regulations.
On July 26, 2017 amendments to the Mexican Aviation Law (Ley de Aviación Civil) and the Consumer Protection Law were enacted to provide for additional passenger rights, and this legislation has increased our costs and has reduced our ability to charge for certain ancillary services.
Furthermore, we cannot assure you that airline industry regulations enacted in the future in Mexico, Central America and the United States will not increase our costs significantly.
Airlines are often affected by factors beyond their control, including air traffic congestion at airports, weather conditions, health outbreaks or concerns, pandemics, or increased security measures, any of which could harm our business, results of operations and financial condition.
Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, health outbreaks or concerns, increased security measures and new travel related taxes. Delays frustrate passengers, reduce aircraft utilization and increase costs, all of which in turn could adversely affect profitability. The federal governments of Mexico, the United States and the countries in Central America in which we operate control their respective airspace and airlines are completely dependent on the AFAC, the FAA and the aviation authorities in Central America to operate these airspaces in a safe, efficient and affordable manner. The air traffic control system, which is operated by Servicios a la Navegación en el Espacio Aéreo Mexicano in Mexico, the FAA in the United States and the Corporación Centroamericana de Servicios de Navegación Aérea in Central America, faces challenges in managing the growing demand for air travel. U.S. and Mexican air-traffic controllers often rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. Adverse weather conditions and natural disasters can cause flight cancellations or significant delays. Cancellations or delays due to weather conditions or natural disasters, air traffic control problems, health outbreaks or concerns, pandemics, breaches in security or other factors and any resulting reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition.
Airline consolidations and reorganizations could adversely affect the industry.
The airline industry has undergone substantial consolidation throughout the years and recently, and it may undergo additional consolidation in the future. Any consolidation or significant alliance activity within the airline industry could increase the size and resources of our competitors. The airline industry in Mexico has seen a sharp contraction, with the exit of eight Mexican airlines since 2007 (Aerocalifornia, Aladia, Alma, Aviacsa, Avolar, Azteca, Nova Air and Grupo Mexicana). Prior to ceasing operations, Grupo Mexicana was one of our most significant competitors. In December 2016, the DOT issued a final order granting approval of, and antitrust immunity for, the proposed alliance between Delta and Aeromexico and the Mexican Antitrust Commission has also granted approval. Aeromexico and Delta will use the antitrust immunity to operate a joint venture between the U.S. and Mexico and will coordinate their network planning, pricing, and sales activities, as well as enhance the alignment of their respective frequent flyer programs. On March 15, 2017, Delta completed a public offering for the purchase of 32% of the capital stock of Aeromexico. On May 8, 2017 Aeromexico and Delta announced they began their joint cooperation agreement to operate transborder flights between the United States and Mexico. Additionally, on July 27, 2017 Delta exercised an option to acquire an additional 12.8% ownership interest for a total of 49% of the outstanding shares of Aeromexico. In addition, air carriers involved in reorganizations have historically engaged in substantial fare discounting in order to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could lower yields for all carriers, including us.
Because the airline industry is characterized by high fixed costs and relatively elastic revenues, airlines cannot quickly reduce their costs to respond to shortfalls in expected revenue.
The airline industry is characterized by low gross profit margins, high fixed costs and revenues that generally exhibit substantially greater elasticity than costs. The operating costs of each flight do not vary significantly with the number of passengers flown and, therefore, a relatively small change in the number of passengers, fare pricing or traffic mix could have a significant effect on operating and financial results. These fixed costs cannot be adjusted quickly to respond to changes in revenues and a shortfall from expected revenue levels could have a material adverse effect on our results of operations and financial condition.
Increases in insurance costs and/or significant reductions in coverage would harm our business, results of operations and financial condition.
Following the September 11, 2001 terrorist attacks, premiums for insurance against aircraft damage and liability to third parties increased substantially, and insurers could reduce their coverage or increase their premiums even further in the event of additional terrorist attacks, hijackings, airline crashes or other events adversely affecting the airline industry. In the future, certain aviation insurance could become unaffordable, unavailable or available only for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage required by aircraft lenders and lessors or applicable government regulations.
Governments in other countries have agreed to indemnify airlines for liabilities that they might incur from terrorist attacks or provide low-cost insurance for terrorism risks. In that respect, the Mexican government provided certain loans to help airlines face increases in aircraft insurance right after the 2001 terrorist attacks. However, the Mexican government has not indicated an intention to provide similar benefits to us now or at any time in the future. Increases in the cost of insurance may result in both higher fares and a decreased demand for air travel generally, which could materially and negatively affect our business, results of operations and financial condition.
Downturns in the airline industry caused by terrorist attacks or war, which may alter travel behavior or increase costs, may adversely affect our business, results of operations and financial condition.
Demand for air transportation may be adversely affected by terrorist attacks, war or political and social instability, natural disasters and other events. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items.
The terrorist attacks in the United States on September 11, 2001, for example, have had a severe and lasting adverse impact on the airline industry. Airline traffic in the United States fell dramatically after the attacks and decreased severely throughout Latin America. The repercussions of September 11, including increases in security, insurance and fear of similar attacks, continue to affect us and the airline industry. Since September 11, 2001, the Department of Homeland Security and the TSA in the United States have implemented numerous security measures that restrict airline operations and increase costs and are likely to implement additional measures in the future. For example, following the widely publicized attempt of an alleged terrorist to detonate plastic explosives hidden underneath his clothes on a Northwest Airlines flight on Christmas Day in 2009, international passengers became subject to enhanced random screening, which may include pat-downs, explosive detection testing or body scans. Enhanced passenger screening, increased regulation governing carry-on baggage and other similar restrictions on passenger travel may further increase passenger inconvenience and reduce the demand for air travel. In addition, increased or enhanced security measures have tended to result in higher governmental fees imposed on airlines, resulting in higher operating costs for airlines. Therefore, any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations, including an escalation of military involvement in the Middle East, or otherwise and any related economic impact, could result in decreased passenger traffic and materially and adversely affect our business, results of operations and financial condition.
Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, the novel coronavirus (“COVID-19”) and other highly communicable diseases, could affect suspension of domestic and international flights, travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial condition.
During the second quarter of 2009, passenger traffic was negatively affected as a result of the H1N1 flu crisis, which resulted in lower overall demand for intra-Latin America travel, especially to and from Mexico. In the past, Latin American travel has been negatively affected as a result of the Zika virus. Most recently, the ongoing outbreak of COVID-19 was first reported on December 31, 2019 in Wuhan, Hubei Province, China. From Wuhan, the disease spread rapidly to other parts of China as well as other countries, including Mexico and the United States, and has been declared a pandemic by the World Health Organization. Since the outbreak began, countries have responded by taking various containment measures, including imposing quarantines and medical screenings, restricting domestic and international travel, closing borders, restricting or prohibiting public gatherings and widely suspending previously scheduled activities and events. In addition, concerns related to COVID-19 have drastically reduced demand for air travel and caused major disruptions and volatility in global financial markets, resulting in the fall of stock prices (including the price of our stock), both trends which may continue. There are other broad and continuing concerns related to the potential effects of COVID-19 on international trade (including supply chain disruptions and export levels), travel, restrictions on our ability to access our facilities or aircraft, requirements to collect additional passenger data, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities, particularly for airlines, that may have a destabilizing effect on financial markets and economic activity. In addition, our operations could be negatively affected if essential employees are required to be quarantined as the result of an actual or suspected exposure to COVID-19. In the case of a COVID-19-related shutdown involving us or any of our subsidiaries, our contractors, suppliers, customers and other business partners, our business, results of operations and financial condition may also be materially adversely affected. Furthermore, any actions taken by governmental authorities and other third parties in response to the pandemic may negatively impact our business, results of operations and financial condition.
The first case of COVID-19 in Mexico was confirmed on February 28, 2020. As of the date of this annual report, the Mexican government has taken various measures in order to prepare the country for a mass contagion, including declaring a national health emergency, asking the public to stay home, closing schools and imposing restrictions on non-essential activities in the public, private and social sectors. However, the pandemic is not expected to peak in the region until at least the first half of May 2020 and additional containment measures may be implemented. As a result of the national health emergency and health security measures imposed by the Mexican government, which on April 21, 2020 were extended until May 30, 2020, we reduced our capacity as measured by available seat miles (“ASMs”) by approximately 80% for the month of April and by approximately 90% for the month of May. Additionally, we have suspended service on certain routes. Costa Rica, Guatemala and El Salvador have also imposed operational and migratory restrictions that make it impossible to operate international passenger flights to those countries. If additional travel restrictions or border closures are enacted in the countries where we operate, reduced passenger demand and revenue may result in further capacity reductions. In addition, if the Mexican government imposes total or partial lockdowns in all or part of Mexico or shuts down airports in response to the COVID-19 pandemic, it may result in our inability to operate flights, which would have a material adverse effect on our business, results of operation and financial condition. While other countries, including the United States, have passed legislation to bail out airlines devastated by the impacts of the COVID-19 pandemic, we can offer no assurance that the Mexican government will provide Mexican airlines, including us, with financial assistance.
From a macroeconomic point of view, the impact of COVID-19 in Mexico is uncertain. Initial estimates indicate that Mexico’s GDP, previously predicted to grow between 0.5% and 1.5% in 2020, could contract by -4.0% as a result of the COVID-19 pandemic. However, as the full effects of the pandemic have yet to be realized, Mexican GDP may contract in an amount that is not yet possible to estimate. Economic stagnation, the depreciation of the peso, contraction and decreased income levels and increased unemployment levels could result in decreased passenger demand and lower net income in the long term, even after any potential COVID-19-related travel restrictions and border closures are lifted. For example, for the period from March 13, 2020 to April 6, 2020, 346,878 jobs were lost in Mexico. Furthermore, the COVID-19 outbreak has also resulted in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses.
While our business and the airline industry have begun to experience material adverse impacts due to COVID-19, as of the date of this annual report, we cannot yet quantify the impact on us and we cannot offer any assurance that these impacts will not intensify to the extent that the outbreak persists and spreads throughout Mexico. Further, additional government measures in order to avoid mass contagion remain unknown and depend on future developments with respect to COVID-19, including the scope and duration of the pandemic, which are highly fluid, uncertain and cannot be predicted. It is not yet possible to determine when the adverse effects of COVID- 19 will abate and the extent to which they will further decrease demand for air travel, which could continue to materially and negatively affect our business, results of operations and financial condition. Furthermore, although our cash flows from operations and our available capital have been sufficient to meet our obligations and commitments to date, our liquidity has been, and may in the future be, negatively affected by the risk factors discussed herein, including risks related to future results arising from the COVID-19 pandemic. If our liquidity is materially diminished, we might not be able to timely pay our leases and debts or comply with certain operating and financial covenants under our financing agreements or with other material provisions of our contractual obligations.
For more information about the current status of COVID-19 in Mexico and the impact on us, see “Item 5. Operating and Financial Review and Prospects—Recent Developments” and “Item 5. Operating and Financial Review and Prospects—Trends and Uncertainties Affecting Our Business.”
Risks related to our business
We may not be able to implement our growth strategy.
Our growth strategy includes increasing the flights to markets we currently serve, expanding the number of markets served where we expect our ultra-low-cost structure to be successful and acquiring additional aircraft. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to sustain or increase our profitability.
We face numerous challenges in implementing our growth strategy, including our ability to:
|·||access airports located in our targeted geographic markets where we can operate routes in a manner that is consistent with our cost strategy;|
|·||maintain our high level of service notwithstanding the number of different ground transportation services and airport companies that we use in the course of our business;|
|·||maintain satisfactory economic arrangements (including benefits) with our executives and our union;|
|·||access sufficient gates, slots and other services at airports we currently serve or may seek to serve;|
|·||obtain authorization of new routes;|
|·||renew or maintain our Concession;|
|·||gain access to international routes; and|
|·||obtain financing to acquire new aircraft and in connection with our operations.|
Our growth depends upon our ability to maintain a safe and secure operation. An inability to hire and retain trained personnel, maintain suitable arrangements with our union, timely secure the required equipment, facilities and airport services in a cost-effective manner, operate our business efficiently or obtain or maintain the necessary regulatory approvals may adversely affect our ability to achieve our growth strategy, which could harm our business. In addition, expansion to new international markets may have other risks due to factors specific to those markets. We may be unable to foresee all of the risks attendant upon entering certain new international markets or respond adequately to these risks, and our growth strategy and our business may suffer as a result. In addition, our competitors may reduce their fares and/or offer special promotions following our entry into a new market. We cannot assure you that we will be able to profitably expand our existing markets or establish new markets.
Our target growth markets are in Mexico, the United States and Latin America, including countries with less developed economies that may be vulnerable to more unstable economic and political conditions, such as significant fluctuations in GDP, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us and the resulting instability may adversely affect our ability to implement our growth strategy.
Expansion of our markets and services may also strain our existing management resources and operational, financial and management information systems to the point that they may no longer be adequate to support our operations, requiring us to make significant expenditures in these areas. We expect that we will need to develop further financial, operational and management controls, reporting systems and procedures to accommodate future growth. We cannot assure you that we will be able to develop these controls, systems or procedures on a timely basis, and the failure to do so could harm our business.
Our ultra-low-cost structure is one of our primary competitive advantages and many factors could affect our ability to control our costs.
Our ultra-low-cost structure is one of our primary competitive advantages. However, we have limited control over many of our costs. For example, we have limited control over the price and availability of fuel, aviation insurance, airport and related infrastructure taxes, the cost of meeting changing regulatory requirements, and our cost to access capital or financing. We cannot guarantee we will be able to maintain a cost advantage over our competitors. If our cost structure increases and we are no longer able to maintain a cost advantage over our competitors, it could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our fuel hedging strategy may not reduce our fuel costs.
Our fuel hedging policy allows us to enter into fuel derivative instruments to hedge against changes in fuel prices when we have excess cash available to support the costs of such hedges. As of December 31, 2019, we had hedged approximately 20% of our projected fuel requirements for the year ended December 31, 2020. However, we cannot provide any assurance that our fuel hedging program is sufficient to protect us against significant increases in the price of fuel. Furthermore, we have down side risk on our hedging portfolio, with potential losses or collateral requests if prices decrease considerably. There is no assurance that we will be able to secure new fuel derivative contracts on terms which are commercially acceptable to us or at all. Furthermore, our ability to react to the cost of fuel is limited since we set the price of tickets in advance of incurring fuel costs. Our ability to pass on any significant increases in fuel costs through fare increases is also limited by our ultra low-cost, low-fare business model.
We have a significant amount of fixed obligations that could impair our liquidity and thereby harm our business, results of operations and financial condition.
The airline business is capital intensive and, as a result, many airline companies are highly leveraged. Most of our aircraft and spare engines are leased, and we paid the lessors rent and maintenance deposits aggregating U.S. $346.5 million and U.S. $78.0 million, respectively, in 2019, and have future operating lease obligations aggregating approximately U.S. $2.1 billion over the next 14 years. In addition, we have significant obligations for aircraft and engines that we have ordered from Airbus, IAE International Aero Engines AG (IAE) and Pratt & Whitney (P&W), respectively, for delivery over the next six years. Our ability to pay the fixed costs associated with our contractual obligations will depend on our operating performance and cash flow, which will in turn depend on, among other things, the success of our current business strategy, whether fuel prices continue at current price levels and/or further increase or decrease, further weakening or improvement in the Mexican and U.S. economies, whether financing is available on reasonable terms or at all, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our aircraft related fixed obligations could have a material adverse effect on our business, results of operations and financial condition and could:
|·||require a substantial portion of cash flow from our operations for operating lease and maintenance deposit payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;|
|·||limit our ability to make required pre-delivery deposit payments to Airbus for our aircraft on order;|
|·||limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;|
|·||make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments;|
|·||reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with less fixed payment obligations; and|
|·||cause us to lose access to one or more aircraft and forfeit our rent and purchase deposits if we are unable to make our required aircraft lease rental payments or purchase installments and our lessors exercise their remedies under the lease agreement including under cross default provisions in certain of our leases.|
A failure to pay our operating leases and other fixed cost obligations or a breach of our contractual obligations could result in a variety of adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to fulfill our obligations, make required lease payments or otherwise cover our fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.
Inability to obtain lease or debt financing for additional aircraft would impair our growth strategy.
We presently finance our aircraft through operating leases as well as sale and leaseback arrangements. In the future, we may elect to own a portion of our fleet as well as continue to lease aircraft through long-term operating leases. We may not be able to obtain lease or debt financing on terms attractive to us, or at all. To the extent we cannot obtain such financing on acceptable terms or at all, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our growth strategy and business.
Our limited lines of credit and borrowing facilities make us highly dependent upon our operating cash flows.
We have limited lines of credit and borrowing facilities and rely primarily on operating cash flows to provide working capital. Unless we secure additional lines of credit, borrowing facilities or equity financing, we will be dependent upon our operating cash flows to fund our operations and to make scheduled payments on our debt and other fixed obligations. If we fail to generate sufficient funds from our operations to meet these cash requirements or are unable to secure additional lines of credit, other borrowing facilities or equity financing, we could default on our debt and other fixed obligations. Our inability to meet our obligations as they become due would materially adversely affect our ability to grow and seriously harm our business, results of operations and financial condition.
We are highly dependent on the Mexico City, Tijuana, Guadalajara and Cancún airports for a large portion of our business.
Our business is heavily dependent on our routes to and from the Mexico City, Tijuana, Guadalajara and Cancún airports. Routes through Mexico City, Tijuana, Guadalajara and Cancún make up a large portion of the balance of our routes. The Mexico City Airport has been declared saturated and we cannot guarantee that in the future we may obtain additional slots in Mexico City. Any significant increase in competition, redundancy in demand for air transportation or disruption in service or the fuel supply at these airports, could have a material adverse impact on our business, results of operations and financial condition. In addition, conditions affecting services at these airports or our slots, such as adverse changes in local economic or political conditions, negative public perception of these destinations, unfavorable weather conditions, violent crime or drug related activities, could also have a material adverse impact on our business, results of operations and financial condition.
Our maintenance costs will increase as our fleet ages.
As of December 31, 2019, the average age of our 82 aircraft in service was approximately 5.0 years. Our relatively new aircraft require less maintenance now than they will in the future. Our fleet will require more maintenance as it ages and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. In addition, the terms of most of our lease agreements require us to pay supplemental rent, also known as maintenance deposits, to be paid to the lessor in advance of the performance of major maintenance, resulting in our recording significant aircraft maintenance deposits on our statements of financial position. We expect scheduled and unscheduled aircraft maintenance expenses to increase as a percentage of our revenue over the next several years. Any significant increase in maintenance and repair expenses would have a material adverse effect on our margins and our business, results of operations and financial condition.
Our business could be harmed by a change in the availability or cost of air transport infrastructure and airport facilities.
The lack of adequate air transport infrastructure can have a direct adverse impact on our business operations, including our future expansion plans. The availability and cost of terminal space, slots and aircraft parking are critical to our operations. Additional ground and maintenance facilities, including gates and hangars and support equipment will be required to operate additional aircraft in line with our expansion plans and may be unavailable in a timely or economic manner in certain airports. Our inability to lease, acquire or access airport facilities on reasonable terms, at preferred times or based upon adequate service, to support our operations and growth could have a material adverse effect on our operations. Further, as old airports become modernized or new airports are constructed, this may lead to increases in the costs of using airport infrastructure and facilities and may also result in an increase in related costs such as landing charges. Such increases may adversely affect our business, results of operations and financial condition.
Our ability to pass on such increased costs to our passengers is limited by several factors, including economic and competitive conditions.
We are exposed to increases in landing charges and other airport access fees and restrictions, and cannot be assured access to adequate facilities and landing rights necessary to achieve our expansion plans.
We must pay fees to airport operators for the use of their facilities. Any substantial increase in airport charges could have a material adverse impact on our results of operations and financial condition. Passenger taxes and airport charges have also increased in recent years, sometimes substantially. We cannot assure you that the airports used by us will not impose, or further increase, passenger taxes and airport charges in the future, particularly in light of increased competition, and any such increases could have an adverse effect on our results of operations and financial condition.
Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose slot restrictions during certain periods of the day. As a result, we cannot assure you that we will be able to obtain a sufficient number of slots, gates and other facilities at airports to maintain or expand our services as we are proposing to do. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots reallocated to other airlines. Where slots or other airport resources are not available or their availability is restricted in some way, we may have to amend our schedules, change routes or reduce aircraft utilization, any of which could have an adverse effect on our business, results of operations and financial condition.
In addition, some of the airports we serve impose various restrictions, including limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. We cannot assure you that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports.
Our reputation and business could be adversely affected in the event of an emergency, accident or similar incident involving our aircraft.
We are exposed to potential significant losses and material adverse effects on our business in the event that any of our aircraft is subject to an emergency, accident, terrorist incident or other similar incident, and significant costs related to passenger claims, repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. There can be no assurance that we will not be affected by such events, or that the amount of our insurance coverage will be adequate in the event such circumstances arise and any such event could cause a substantial increase in our insurance premiums. See “—Increases in insurance costs and/or significant reductions in coverage would harm our business, results of operations and financial condition.” In addition, any future aircraft emergency, accident or similar incident, even if fully covered by insurance or even if it does not involve our airline, may create a public perception that our airline or the equipment we fly is less safe or reliable than other transportation alternatives, which could have an adverse impact on our reputation and could have a material adverse effect on our business, results of operations and financial condition.
We are exposed to certain risks against which we do not have insurance.
In line with industry practice, we leave some business risks uninsured including business interruption, loss of profit or revenue and consequential business losses arising from mechanical breakdown. To the extent that uninsured risks materialize, we could be materially and adversely affected. There can also be no assurance that our insurance coverage will cover actual losses incurred. To the extent that actual losses incurred by us exceed the amount insured, we may have to bear substantial losses which could have a material adverse effect on our financial condition and results of operations.
A failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and our financial condition and results of operations.
We have entered into aircraft and engine operating lease agreements and sale and leaseback arrangements with various lessors. These agreements contain certain events of default and also require us to comply with certain covenants, including covenants triggered by a change of control, during the term of each agreement. The lease agreements generally provide for events of default if (i) we fail to obtain or maintain the insurance required, (ii) we breach any covenant or representation and warranty and do not cure it within the agreed time periods, (iii) we do not have unencumbered control or possession of the aircraft or engines, (iv) we discontinue (temporarily or otherwise) business or sell or otherwise dispose of all or substantially all of our assets, (v) we no longer possess the licenses, certificates and permits required for the conduct of our business as a certificated air carrier, (vi) Volaris Opco experiences a change of control, or (vii) we fail to pay when due any airport or navigation charges or any landing fees assessed with respect to the aircraft or any aircraft operated by us which, if unpaid, may give rise to any lien, right of detention, right of sale or other security interest in relation to the aircraft or parts thereof. The lease agreements also provide for events of default in case of certain insolvency events and if a material adverse change occurs in our financial condition which, in lessor’s reasonable opinion, would materially and adversely affect our ability to perform our obligations under the lease agreements and related documents. Failure to comply with covenants could result in a default under the relevant agreement, and ultimately in a re-possession of the relevant aircraft or engine. Certain of these agreements also contain cross default clauses, as a result of which defaults under one agreement may be treated as defaults under other lease agreements. As such, a failure to comply with the covenants in our aircraft and engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and, as a result, on our financial condition and results of operations.
We rely on maintaining a high daily aircraft utilization rate to implement our ultra-low-cost structure, which makes us especially vulnerable to flight delays or cancellations or aircraft unavailability.
One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate. Our average daily aircraft utilization was 12.57 block hours in 2017, 13.21 block hours in 2018 and 12.94 block hours in 2019. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers. Our revenue per aircraft can be increased by high daily aircraft utilization, which is achieved in part by reducing turnaround times at airports, so we can fly more hours on average in a day. Aircraft utilization is reduced by delays and cancellations arising from various factors, many of which are beyond our control, including air traffic congestion at airports or other air traffic control problems, adverse weather conditions, increased security measures or breaches in security, international or domestic conflicts, terrorist activity, health outbreaks or other changes in business conditions. In addition, pulling aircraft out of service for unscheduled and scheduled maintenance, which will increase as our fleet ages, may materially reduce our average fleet utilization. High aircraft utilization increases the risk that if an aircraft falls behind schedule during the day, it could remain behind schedule during the remainder of that day and potentially into the next day, which can result in disruption in operating performance, leading to passenger dissatisfaction related to delayed or cancelled flights and missed connections. Due to the relatively small size of our fleet and high daily aircraft utilization rate, the unavailability of one or more aircraft and resulting reduced capacity or our failure to operate within time schedules, could have a material adverse effect on our business, results of operations and financial condition.
The growth of our operations to the United States is dependent on continued favorable safety assessment in Mexico and the Central American countries in which we operate.
The FAA periodically audits the aviation regulatory authorities of other countries. As a result of their investigation, each country is given an International Aviation Safety Assessment, or IASA, rating. In December 2010, Mexico’s IASA rating was upgraded back to Category 1 from Category 2, six months after it had been downgraded due to alleged deficiencies in Mexican air safety standards. We cannot assure you that the government of Mexico, and the AFAC in particular, or the aviation authorities in the Central American countries in which we operate, will continue to meet international safety standards, and we have no direct control over their compliance with IASA guidelines. If Mexico’s or the Central American countries’ in which we operate IASA rating were to be downgraded in the future, it could restrict our ability to maintain or increase service to the United States, which would in turn adversely affect our business, results of operations and financial condition.
We rely heavily on technology and automated systems to operate our business and any failure of these technologies or systems or failure by their operators could harm our business.
We are highly dependent on technology and automated systems to operate our business and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting system, telecommunications systems, website, maintenance systems and check-in kiosks. For our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained by third-party service providers, to be able to issue, track and accept these electronic tickets. If our reservation system fails or experiences interruptions or denial of service and we are unable to book seats for any period of time, we could lose significant amounts of revenues as customers book seats on competing airlines. We have experienced short duration reservation system outages from time to time and may experience similar outages in the future. Furthermore, if our flight operations system were to fail, our operations would be materially and adversely affected.
We also rely on third-party service providers of our other automated systems for technical support, system maintenance and software upgrades. If our automated systems are not functioning or function partially or if the current providers were to fail to adequately provide updates or technical support for any one of our key existing systems, we could experience service disruptions and delays, which could harm our business and result in the loss of important data, increase our expenses and decrease our revenues. In the event that one or more of our primary technology or systems’ vendors goes into bankruptcy, ceases operations or fails to perform as contemplated in the agreements, replacement services may not be readily available on a timely basis, at competitive rates or at all and any transition time to a new system may be significant.
We retain personal information received from customers and have put in place security measures to protect against unauthorized access to such information. Personal information is further protected under applicable Mexican and United States law. Personal information held both offline and online is highly sensitive and, if third parties were to access such information without the customers’ prior consent or if third parties were to misappropriate that information, our reputation could be adversely affected and customers could bring legal claims against us, any of which could adversely affect our business, results of operations and financial condition. In addition, we may be liable to credit card companies should any credit card information be accessed and misused as a result of lack of sufficient security systems implemented by us.
In addition, our automated systems cannot be completely protected against events that are beyond our control, including natural disasters, computer viruses or telecommunications failures. Substantial or sustained system failures could cause service delays or failures and result in our customers purchasing tickets from other airlines. We have implemented security measures, back-up procedures and disaster recovery plans; however, we cannot assure you that these measures are adequate to prevent disruptions. Disruption in, changes to or a breach of, these systems could result in the disruption to our business and the loss of important data. These disruptions may also result in adverse economic consequences. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.
We rely on third-party service providers to perform functions integral to our operations.
We have entered into agreements with third-party service providers to furnish certain facilities and services required for our operations, including Lufthansa Technik AG for certain technical services and Aeromantenimiento S.A., or Aeroman, a FAA-approved maintenance provider, for our heavy airframe and engine maintenance, as well as other third-party service providers, including the concessionaries’ of the Mexican airports in which we operate, for ground handling, catering, passenger handling, engineering, refueling and airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new markets we decide to enter, and there can be no assurance that we will be able to obtain the necessary services at acceptable rates.
Although we seek to monitor the performance of third-party service providers, their efficiency, timeliness and quality of contract performance are often beyond our control, and any failure by any of them to perform their contracts may have an adverse impact on our business and operations. We expect to be dependent on such third-party arrangements for the foreseeable future.
Furthermore, our agreements with third parties are subject to termination upon short notice. The loss or expiration of these contracts or any inability to renew them or negotiate and enter into contracts with other providers at comparable rates could harm our business. Our reliance upon others to provide essential services on our behalf also gives us less control over costs, and the efficiency, timeliness and quality of contract services.
Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation.
In the processing of our customer transactions, we receive, process, transmit and store a large volume of identifiable personal data, including financial data such as credit card information. This data is subject to legislation and regulation, intended to protect the privacy of personal data that is collected, processed and transmitted. More generally, we rely on consumer confidence in the security of our system, including our internet site on which we sell the majority of our tickets. Our business, results of operations and financial condition could be adversely affected if we are unable to comply with existing privacy obligations or legislation or regulations are expanded to require changes in our business practices. Furthermore, lawsuits may be initiated against us and our reputation may be negatively affected if we fail to comply with applicable law and privacy obligations.
We depend on our non-ticket revenue to remain profitable, and we may not be able to maintain or increase our non-ticket revenue base.
Our business strategy significantly relies upon our portfolio of non-ticket revenues, including ancillary products and services and cargo revenue, on which we depend to remain profitable due to our ULCC strategy of low base fares. There can be no assurance that passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the ancillary products and services we currently offer. Failure to maintain our non-ticket revenues would have a material adverse effect on our results of operations and financial condition. Furthermore, if we are unable to maintain and grow our non-ticket revenues, we may not be able to execute our strategy to continue to lower base fares in order to stimulate demand for air travel. In addition, our strategy to increase and develop non-ticket revenue by charging for additional ancillary services may be adversely perceived by our customers and negatively affect our business.
Restrictions on or increased taxes applicable to fees or other charges for ancillary products and services paid by airlines passengers could harm our business, results of operations and financial condition.
Our non-ticket revenues are 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 passenger charges for no-show tickets. Revenues from non-air-travel-related services include commissions charged to third parties for the sale of hotel rooms, trip insurance and rental cars. Additionally, services not directly related to air transportation include Volaris’ sale of V-Club membership and the sale of advertising spaces to third parties.
In April 2011, the DOT published a broad set of final rules relating to, among other things, how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft. The final rules require airlines to publish a full fare for a flight, including mandatory taxes and fees, and to enhance disclosure of the cost of optional products and services, including baggage charges. The rules restrict airlines from increasing ticket prices post-purchase (other than increases resulting from changes in government-imposed fees or taxes) and increasing significantly the amount and scope of compensation payable to passengers involuntarily denied boarding due to over sales. The final rules also extend the applicability of penalties to include international flights and provide that reservations made more than one week prior to flight date may be held at the quoted fare without payment, or cancelled without penalty, for 24 hours. Failure to remain in full compliance with these rules may subject us to fines or other enforcement action, including requirements to modify our passenger reservations system, which could have a material adverse effect on our business. Moreover, we cannot assure you that compliance with these new rules will not have a material adverse effect on our business.
In addition, the U.S. Congress and Federal administrative agencies have undertaken investigations of the airline industry practice of unbundling services, including public hearings held in 2010. If new taxes are imposed on non-ticket revenues, or if other laws or regulations are adopted that make unbundling of services impermissible, or more cumbersome or expensive than the new rules described above, our business, results of operations and financial condition could be materially adversely affected. Congressional and other government agency scrutiny may also change industry practice or public willingness to pay for ancillary services. See also “—Compliance with airline industry regulations involves significant costs and regulations enacted in both Mexico and the United States may increase our costs significantly in the future.”
Changes in how we or others are permitted to operate at airports could have a material adverse effect on our business, results of operations and financial condition.
Our results of operations may be affected by actions taken by the Mexican airports’ concessionaires, governmental or other agencies or authorities having jurisdiction over our operations at airports, including, but not limited to:
|·||termination of our airport use agreements, some of which can be terminated by the other party or airport authorities with little notice to us;|
|·||international travel regulations such as customs and immigration;|
|·||increases in taxes;|
|·||changes in the law that affect the services that can be offered by airlines in particular markets and at particular airports;|
|·||strikes and other similar disruptions affecting airports;|
|·||restrictions on competitive practices;|
|·||the adoption of statutes or regulations that impact customer service standards, including security and health standards and termination of licenses or concessions to operate airports; and|
|·||the adoption of more restrictive locally-imposed noise regulations or curfews.|
In general, any changes in airport operations could have a material adverse effect on our business, results of operations and financial condition.
We rely on a number of single suppliers for our fuel, aircraft and engines.
We purchase fuel from Aeropuertos y Servicios Auxiliares, or ASA, which also supplies fuel and fills our aircraft tanks in Mexico, where we do most of the fillings. In the United States, we have entered into fuel supply agreements with suppliers such as World Fuel Services, or WFS, BP Products North America, Chevron and Associated Energy Group pursuant to which those companies or their affiliates sell fuel to us at various airports as specified in the agreements. The agreement with ASA expires in September 2020, and may be terminated by us with 30-days prior notice and by ASA only if we do not pay for the fuel provided. If ASA or our other fuel providers offer fuel to one or more of our competitors at a more competitive price or with more advantageous terms, it may materially affect our ability to compete against other airlines, and may have a material effect on our business. If ASA or our other fuel providers terminate their agreements with us, are unwilling to renew them upon termination or are unable or unwilling to cover our fuel needs, we would have to seek alternative sources of fuel. Currently, no substitute exists for ASA as a fuel supplier in Mexico. We cannot assure you that we will be able to find another fuel provider or, if so, whether we will be able to find one that provides fuel in such a cost-effective a manner as our current agreements with ASA and other fuel providers. Failure to renew agreements or to source fuel from alternate sources will materially and adversely affect our business, results of operations and financial condition.
One of the elements of our business strategy is to save costs by operating an aircraft fleet consisting solely of Airbus A319, A320 and A321 aircraft, narrow body aircraft, powered by engines manufactured by IAE and P&W.
We currently intend to continue to rely exclusively on these aircraft and engine manufacturers for the foreseeable future. If Airbus, IAE or P&W becomes unable to perform its contractual obligations, or if we are unable to acquire or lease aircraft or engines or spare parts from other owners, operators or lessors on acceptable terms, we would have to find other suppliers for a similar type of aircraft, engine or spare parts. If we have to lease or purchase aircraft from another supplier, we would lose the significant benefits we derive from our current single fleet composition. We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities and maintenance programs. Our operations could also be materially affected by the failure or inability of aircraft, engine and parts suppliers to provide sufficient spare parts or related support services on a timely basis.
Any real or perceived problem with the Airbus A320 family aircraft or IAE and P&W engines could adversely affect our operations.
We operate a uniform fleet of Airbus A319, A320 and A321 aircraft, which belong to the Airbus A320 family aircraft. Our aircraft also exclusively use IAE and P&W engines. Our dependence on the Airbus A319, A320 and A321 aircraft and IAE and P&W engines makes us particularly vulnerable to any problems that might be associated with the Airbus A320 family aircraft or engines. If any design defect or mechanical problem is discovered, or if the technology relating to such aircrafts should become obsolete, our aircraft may have to be grounded while such defect or problem is corrected, assuming it could be corrected at all. Any such defect or problem may also result in aviation authorities in Mexico and the United States implementing certain airworthiness directives which may require substantial cost to comply with. Further, our operations could be materially adversely affected if passengers avoid flying with us as a result of an adverse perception of the Airbus A320 family aircraft or IAE and P&W engines due to real or perceived safety concerns or other problems. During 2017, 2018 and 2019, P&W’s PW1100G-JM engines have experienced technical and production issues worldwide. As a result, several A320 NEO operators, including us, have reportedly caused their aircraft to be inoperative for long periods of time. This problem has also resulted in the delay of delivery of our A320 and A321 NEO aircraft. We cannot assure you when such problems will be resolved by P&W.
Cyber-attacks or other breaches of network or information technology security, including breaches in data privacy, could have an adverse effect on our business.
Cyber-attacks or other breaches of network or information technology security may cause equipment failures or disruptions to our operations. Our inability to operate our networks as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other airlines. Cyber-attacks, which include malware, computer viruses, denial of service and other means for disruption or unauthorized access to companies, have increased in frequency, scope and potential harm in recent years. We take preventive actions to reduce the risk of cyber incidents and protect our information technology and networks, but there is always a risk that we may suffer a major cyber-attack that we are unable to repel. The costs associated with a major cyber-attack on us could include increased expenditures on cyber security measures, litigation, damage to our reputation, lost revenues from business interruption and the loss of existing customers and business partners. In addition, if we fail to prevent the theft of valuable information such as financial data and sensitive information about us, or if we fail to protect the privacy of customer and employee confidential data against breaches of network or information technology security, it could result in damage to our reputation, which could adversely impact customer and investor confidence. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.
In response to these threats there has been heightened legislative and regulatory focus on data privacy and cybersecurity around the globe, particularly with respect to critical infrastructure providers, including those in the transportation sector. As a result, we must comply with a proliferating and fast-evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident. The regulatory environment is increasingly challenging and may present material obligations and risks to our business, including significantly expanded compliance burdens, costs and enforcement risks. In May 2018, the European Union’s new General Data Protection Regulation (GDPR) came into effect and in January 2020, the California Consumer Privacy Act (CCPA) came into effect. GDPR and the CCPA impose data privacy and security requirements, imposing significant costs on us and carrying substantial penalties for non-compliance. Similar regulations may be enacted by other countries and states in the future.
In addition, many of our commercial partners, including credit card companies, have imposed data security standards that we must meet. While we continue our efforts to meet these standards, new and revised standards may be imposed that may be difficult for us to meet and could increase our costs.
If we are unable to attract and retain qualified personnel or fail to maintain our company culture, our business, results of operations and financial condition could be harmed.
We require large numbers of pilots, flight attendants, maintenance technicians and other personnel, and our growth strategy will require us to hire, train and retain a significant number of new employees in the future. The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and maintenance technicians. This has been particularly acute for Mexico. In addition, as is common with most of our competitors, we have faced considerable turnover of our employees. We may be required to increase wages and/or benefits or to implement additional training programs in order to attract and retain qualified personnel. If we are unable to hire, train and retain qualified employees, our business could be affected adversely and we may be unable to complete our growth plans.
In addition, as we hire more people and grow, we believe it may be increasingly challenging to continue to hire people who will maintain our company culture. Our company culture, which is one of our competitive strengths, is important to providing high-quality customer service and having a productive, accountable workforce that helps keep our costs low. As we continue to grow, we may be unable to identify, hire or retain enough people who meet the above criteria, including those in management or other key positions. Our company culture could otherwise be adversely affected by our growing operations and geographic diversity. If we fail to maintain the strength of our company culture, our competitive ability and our business, results of operations and financial condition could be harmed.
Increased labor costs, union disputes, employee strikes, and other labor-related disruption may adversely affect our operations.
Our business is labor intensive, with labor costs representing approximately 12%, 12% and 12% of our total operating costs for the fiscal years 2017, 2018 and 2019, respectively. As of December 31, 2019, approximately 80% of our workforce was represented by the general aviation union (Sindicato de Trabajadores de la Industria Aeronaútica, Similares y Conexos de la República Méxicana—STIAS) and thereby covered by substantially the same collective bargaining agreement entered into between us and each of our subsidiaries. The collective bargaining agreements are negotiated every two years in respect of general labor conditions and every year in connection with wages. Our current agreements with this union will expire in February 2021 with respect to salaries and February 2022 with respect to benefits. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. We cannot assure you that our labor costs going forward will remain competitive because in the future our labor agreements may be amended and new agreements could have terms with higher labor costs or more onerous conditions, one or more of our competitors may significantly reduce their labor costs, thereby reducing or eliminating our comparative advantages as to one or more of such competitors, or our labor costs may increase in connection with our growth. Traditionally, the relationship between Mexican legacy carriers and their unions has been complex. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize or unionized workers may decide to join a different union. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any such action or other labor dispute with unionized employees (including negotiation of more onerous conditions), or the deterioration of the relationship between unions and businesses in Mexico, could disrupt our operations, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.
Our business, results of operations and financial condition could be materially adversely affected if we lose the services of our key personnel.
Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect on our business, results of operations and financial condition. Experienced executives in the airline industry are difficult to source. We do not maintain key-man life insurance on our management team.
Our results of operations will fluctuate.
The airline industry is by nature cyclical and seasonal, and our operating results can be expected to vary from quarter to quarter. We generally expect demand to be greater during the summer months in the northern hemisphere, in December and around Easter, which can fall either in the first or second quarter, compared to the rest of the year. We generally experience our lowest levels of passenger traffic in February, September and October. Given our high proportion of fixed costs, seasonality can affect our profitability from quarter to quarter. Demand for air travel is also affected by factors such as economic conditions, war or the threat of war, fare levels, security and health concerns and weather conditions.
In addition, we expect our quarterly operating results to fluctuate in the future based on a variety of other factors, including:
|·||the timing and success of our growth plans as we increase flights in existing markets and enter new markets;|
|·||changes in fuel, security, health and insurance costs;|
|·||increases in personnel, marketing, aircraft ownership and other operating expenses to support our anticipated growth; and|
|·||the timing and amount of maintenance expenditures.|
Due to the factors described above and others described in this annual report, quarter-to-quarter comparisons of operating results may not be good indicators of our future performance. In addition, it is possible that in any quarter our operating results could be below the expectations of investors and any published reports or analyses regarding our company. In that event, the price of the ADSs could decline, perhaps substantially.
We do not have a control group.
Since the completion of our initial public offering on September 23, 2013, we have not had a control group and corporate decisions requiring shareholder approval, such as the election of a majority of the board of directors, are made by the majority of our Series A shareholders, which shares are required to be owned by Mexican nationals. We no longer have a control group because holders of ADSs and CPOs do not have voting rights, and the CPOs and ADSs are voted by the CPO trustee in the same manner as the majority of the holders of Series A shares that are not represented by CPOs or ADSs. Thus, there are no large groups holding a large block. Furthermore, it is unlikely that a significant block of shareholders will form in the future because no person or group of persons is permitted to acquire more than 5% of our outstanding capital stock without our board of directors’ consent. As a result, a shareholder or shareholders of a very small number of Series A shares could determine the outcome of any shareholder vote without being a control group.
Volaris is a holding company and does not have any material assets other than the shares of its subsidiaries.
Volaris is a holding company that conducts its operations through a series of operating subsidiaries. We support these operating subsidiaries with technical and administrative services through various other subsidiaries of Volaris. All of the assets we use to perform administrative and technical services and to operate the concessions and authorizations are held at the subsidiary level. As a result, Volaris does not have any material assets other than the shares of its subsidiaries. Dividends or payments that Volaris may be required to make will be subject to the availability of cash provided by its subsidiaries. Transfers of cash from Volaris’ subsidiaries to Volaris may be further limited by corporate and legal requirements, or by the terms of the agreements governing our indebtedness. If a shareholder were to assert a claim against Volaris, the enforcement of any related judgment would be limited to the available assets of Volaris, rather than the assets of Volaris and its combined subsidiaries.
Changes in accounting standards could impact our reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. For example, IFRS 15 “Revenue from Contracts with Customers,” was issued in May 2014 and applies to annual reporting periods beginning on or after January 1, 2018.
The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. Under the new standard, certain ancillary services are recognized when we satisfy our performance obligations, which is typically when the air transportation service is rendered (at the time of the flight). In addition, these ancillary services do not constitute separate performance obligations or represent administrative tasks that do not represent a different promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation. Therefore, the classification of certain ancillary fees in our statement of operations changed with adoption of IFRS 15, since they are part of the single performance obligation of providing passenger transportation. We have recasted our financial statements as of January 1, 2016 and 2017 for comparability purposes. See notes 1d and 1x to our Audited Consolidated Financial Statements for more details.
In addition, IFRS 16 was issued in January 2016 and 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. Under IFRS 16, at the commencement date of a lease, a lessee recognizes a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees are required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees are also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term or a change in future lease payments). The lessee generally recognizes the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. In addition, for leases denominated in a foreign currency other than our functional currency (which is the Mexican Peso) the lease liability will be remeasured at each reporting date, using the foreign exchange of the period. We adopted IFRS 16 on the mandatory date, January 1, 2019, through the full retrospective method recognizing the adoption effect on our statement of financial position as of January 1, 2017. This led to approximately Ps.23.5 billion of right-of-use assets and Ps.32.7 billion in lease liabilities as of such date. See note 1x to our Audited Consolidated Financial Statements for more details.
Any other changes made to accounting standards can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Risks related to our securities and the ADSs
The trading prices for the ADSs and our Series A shares may fluctuate significantly.
Future trading prices of the ADSs or Series A shares may be volatile, and could be subject to wide fluctuations in response to various factors, including:
|·||changes in the market valuation of companies that provide similar services;|
|·||economic, regulatory, political and market conditions in Mexico, the United States and other countries;|
|·||industry conditions or trends;|
|·||availability of routes and airport space;|
|·||the introduction of new services by us or by our competitors;|
|·||our historical and anticipated quarterly and annual operating results;|
|·||variations between our actual or anticipated results and analyst and investor expectations;|
|·||announcements by us or others and developments affecting our business;|
|·||changes in technology affecting our aircraft;|
|·||announcements, results or actions taken by our competitors;|
|·||investors’ perceptions of our company or the services we provide;|
|·||changes in financial or economic estimates by securities analysts;|
|·||our announcement of significant transactions or capital commitments;|
|·||currency devaluations and imposition of capital controls;|
|·||additions or departures of key management;|
|·||future sales of the ADSs and Series A shares;|
|·||strategic actions by us or our competitors, such as acquisitions or restructurings;|
|·||accidents, health concerns, pandemics, and other events affecting airline operations;|
|·||media reports and publications about the safety of our aircraft or the aircraft type we operate;|
|·||changes in the price of fuel;|
|·||announcements concerning the availability of the type of aircraft we use;|
|·||changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations; or|
|·||sales of our common stock or other actions by investors with significant shareholdings.|
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our Series A shares and ADSs. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any such litigation against us could result in substantial costs, divert management’s attention and resources, and harm our business or results of operations.
The relatively low liquidity and high volatility of the Mexican securities market may cause trading prices and volumes of our Series A shares and the ADSs to fluctuate significantly.
The Mexican Stock Exchange is one of Latin America’s largest exchanges in terms of aggregate market capitalization of the companies listed therein, but it remains relatively illiquid and volatile compared to other major foreign stock markets. For example, in March 2020, trading on the Mexican Stock Exchange was halted for 15 minutes given the significant drop in stock prices as a result of the COVID-19 pandemic. In addition, although the public participates in the trading of securities on the Mexican Stock Exchange, a substantial portion of trading activity on the Mexican Stock Exchange is conducted by or on behalf of large institutional investors. The trading volume for securities issued by emerging market companies, as Mexican companies, tends to be lower than the trading volume of securities issued by companies in more developed countries. These market characteristics may limit the ability of a holder of our Series A shares to sell its Series A shares and may also adversely affect the market price of the Series A shares and, as a result, the market price of the ADSs.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
If we issue additional equity securities in the future, shareholders may suffer dilution, and trading prices for our securities may decline.
In connection with our business strategy of expanding through acquisitions, we may finance corporate needs and expenditures, or future transactions, by issuing additional capital stock. Any such issuances of capital stock would result in the dilution of shareholders’ ownership stake. In addition, future issuances of our equity securities or sales by our shareholders or management, or the announcement that we or they intend to make such an issuance or sale, could result in a decrease in the market price of the ADSs and Series A shares.
Provisions of Mexican law and our by-laws make a takeover more difficult, which may impede the ability of holders of Series A shares or ADSs to benefit from a change in control or to change our management and board of directors.
Provisions of Mexican law and our by-laws may make it difficult and costly for a third party to pursue a tender offer or other takeover attempt resulting in a change of control. Holders of ADSs may desire to participate in one of these transactions, but may not have an opportunity to do so. For example, our by-laws contain provisions which, among other things, require board approval prior to any person or group of persons acquiring, directly or indirectly, (i) 5% or more of our shares (whether directly or by acquiring ADSs or CPOs), or (ii) 20% or more of our shares (whether directly or by acquiring ADSs or CPOs) and in the case of this item (ii) if such approval is obtained, require the acquiring person to make a tender offer to purchase 100% of our shares and CPOs (or other securities that represent them) at a substantial premium over the market price of our shares to be determined by the board of directors, based upon the advice of a financial advisor.
These provisions could substantially impede the ability of a third party to control us, and be detrimental to shareholders desiring to benefit from any change of control premium paid on the sale of the company in connection with a tender offer. See Item 10: “Additional Information—Memorandum and Articles of Association—Overview—Change of Control Provisions” and “Additional Information—Memorandum and Articles of Association—Overview —Voting Rights.”
Substantial sales of the ADSs or Series A shares could cause the price of the ADSs or Series A shares to decrease.
We may finance future corporate needs and expenditures by using shares of Series A common stock, to be evidenced by Series A shares or ADSs. Any such issuances of such shares could result in a dilution of your ownership stake or a decrease in the market price of the ADSs or the Series A shares. In addition, our principal shareholders are entitled to rights with respect to registration of their shares under the Securities Act, pursuant to the registration rights agreement we have on file with the SEC. Please see Item 7: “Major Shareholders and related Party Transactions—Major Shareholders.” For example, on November 16, 2015, certain of our principal shareholders, including affiliates of Discovery Americas, and Blue Sky Investments, exercised registration rights in the form of ADS’s, pursuant to our shelf registration statement on Form F-3 filed with the Securities and Exchange Commission (the “SEC”), and sold 99,000,000 CPOs in the form of ADSs at a price to the public of U.S. $16.00 per ADS in the United States and the other countries outside of Mexico. In connection with that offering, the underwriters also exercised their option in full to purchase 9,900,000 additional CPOs in the form of ADSs to cover over-allotments, for a total offering of 108,900,000 CPOs in the form of ADSs. This exercise of their registration rights, and any future exercise, with respect to such shares, means that there are Series A shares eligible for trading in the public market, which may have an adverse effect on the market price of our Series A shares and ADSs.
Non-Mexican investors may not hold our Series A shares directly and must have them held in a CPO trust at all times.
Each ADS represents ten CPOs and each CPO represents a financial interest in one Series A share. Non-Mexican investors in the ADSs may not directly hold the underlying Series A shares, but may hold them only indirectly through CPOs issued by a Mexican bank as trustee under the CPO trust or ADSs evidencing CPOs. Upon expiration of the 50-year term of our CPO trust agreement, the underlying Series A shares must be placed in a new trust similar to the current CPO trust for non-Mexican investors to hold an economic interest in such Series A shares, or be sold to third parties or be delivered to non-Mexican holders to the extent then permitted by applicable law (not currently permitted).
We cannot assure you that a new trust similar to the CPO trust will be created if the current CPO trust terminates, or that, if necessary, the Series A shares represented by the CPOs will be sold at an adequate price, or that Mexican law will be amended to permit the transfer of Series A shares to non-Mexican holders in the event that the trust is terminated. In that event, unless Mexican law has changed to permit non-Mexican investors to hold our shares directly, non-Mexican holders may be required to cause all of the Series A shares represented by the CPOs to be sold to a Mexican individual or corporation.
We have obtained authorization from the Mexican Ministry of Economy (Secretaría de Economía) for the issuance up to 90% of our outstanding capital stock in CPOs. Since non-Mexican investors are required to invest in CPOs in order to hold any interest in our capital stock, if this 90% threshold were to be met, we would be unable to obtain additional capital contributions from non-Mexican investors.
Holders of the ADSs and CPOs have no voting rights.
Holders of the ADSs and CPOs are not entitled to vote the underlying Series A shares. As a result, holders of the ADSs and CPOs do not have any influence over the decisions made relating to our company’s business or operations, nor are they protected from the results of any such corporate action taken by our holders of Series A shares and Series B shares. Mexican investors will determine the outcome of substantially all shareholder matters. For a more complete description of the circumstances under which holders of our securities may vote, see Item 10: “Additional Information—Memorandum and Articles of Association—Overview.”
Preemptive rights may be unavailable to non-Mexican holders of the ADSs and CPOs and, as a result, such holders may suffer dilution.
Except in certain circumstances, under Mexican law, if we issue new shares of common stock for cash as part of a capital increase, we must grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs and CPOs in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act. Similar restrictions may apply to holders of ADSs and CPOs in other jurisdictions. We cannot assure you that we will file a registration statement with the SEC, or any other regulatory authority, to allow holders of ADSs and CPOs in the United States, or any other jurisdiction, to participate in a preemptive rights offering. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether we will file such a registration statement. Under Mexican law, sales by the depositary of preemptive rights and distribution of the proceeds from such sales to you, the ADS holders, is not possible.
In addition, additional CPOs may be issued only if the CPO deed permits the issuance of a number of CPOs sufficient to represent the shares to be issued to and held by the CPO trustee upon the exercise of preemptive rights. Because non-Mexican holders of ADSs and CPOs are not entitled to acquire direct ownership of the underlying Series A shares in respect of such ADSs and CPOs, they may not be able to exercise their preemptive rights if the CPO deed will not permit additional CPOs to be delivered in an amount sufficient to represent the shares of common stock to be issued as a result of the exercise of preemptive rights on behalf of non-Mexican ADS or CPO holders, unless the CPO deed is modified, or a new CPO deed is entered into, which permits delivery of the number of CPOs necessary to represent the shares to be subscribed and paid as a result of the exercise of such preemptive rights. Although we expect to take all measures necessary to maintain sufficient CPOs available to permit non-Mexican holders of ADSs and CPOs to exercise preemptive rights, if and when applicable, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuance and delivery of CPOs. As a result of the limitations described above, if we issue additional shares in the future in connection with circumstances giving rise to preemptive rights, the equity interests of holders of ADSs and CPOs may be diluted. See Item 10: “Additional Information—Memorandum and Articles of Association—Preemptive Rights.”
We do not intend to pay cash dividends for the foreseeable future, and our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends.
We have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, will require the approval of our general shareholders meeting, may only be paid if losses for prior fiscal years have been unpaid and if shareholders have approved the net income from which the dividends are paid, and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments and such other factors as our board of directors deems relevant. In addition, our revolving line of credit with Banco Santander México and Bancomext may limit our ability to declare and pay dividends in the event that we fail to comply with the payment terms thereunder. See Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements” and Item 8: “Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”
Minority shareholders may be less able to enforce their rights against us, our directors, or our controlling shareholders in Mexico.
Under Mexican law, the protections afforded to minority shareholders are different from those afforded to minority shareholders in the United States. For example, because Mexican laws concerning fiduciary duties of directors (i.e., the duty of care and the duty of loyalty) have been in existence for a relatively short period and are not as developed as securities laws in other jurisdictions, it is complex for minority shareholders to bring an action against directors for breach of these duties, as would be permitted in some other foreign jurisdictions. Also, such actions may not be initiated as a direct action, but as a shareholder derivative suit (that is for the benefit of our company and not the initiating shareholder). The grounds for shareholder derivative actions under Mexican law are limited. Even though applicable law has been modified to so permit, and procedures for class action lawsuits have been adopted in Mexico, there is very limited experience with regards to class action lawsuits and how procedures for such suits are followed in Mexico. Therefore, it will be much more difficult for minority shareholders to enforce their rights against us, our directors, or our controlling shareholders than it would be for minority shareholders of a U.S. company.
Mexico has different corporate disclosure and accounting standards than those in the United States and other countries.
A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information, including accounting information. However, there may be different or less publicly available information about issuers of securities in Mexico than is regularly made available by public companies in countries with highly developed capital markets, including the United States.
Our interest rate expense for any particular period will fluctuate based on LIBOR and other variable interest rates
A substantial portion of our long-term indebtedness/derivative instruments bear interest at fluctuating interest rates, primarily based on the London interbank offered rate (LIBOR). LIBOR tends to fluctuate based on general short-term interest rates, rates set by the U.S. Federal Reserve and other central banks, the supply of and demand for credit in the London interbank market and general economic conditions. We have not hedged our interest rate exposure with respect to our floating rate debt. Accordingly, our interest expense for any particular period will fluctuate based on LIBOR and other variable interest rates. To the extent the interest rates applicable to our floating rate debt increase, our expense will increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. See Item 11: “Quantitative and Qualitative Disclosure about Market Risk—Interest Rates.”
|ITEM 4||INFORMATION ON THE COMPANY|
We were founded on October 27, 2005 under the name Controladora Vuela Compañía de Aviación, S.A. de C.V. by Blue Sky Investments, S.à r.l., Discovery Air Investments, L.P., Corporativo Vasco de Quiroga, S.A. de C.V. and Sinca Inbursa, S.A. de C.V., Sociedad de Inversión de Capitales.
On July 16, 2010, we became a sociedad anónima promotora de inversión de capital variable, or variable capital investment promotion stock corporation. In June 2013, we became a sociedad anónima bursátil de capital variable, or variable capital public stock corporation, under the name Controladora Vuela Compañía de Aviación, S.A.B. de C.V. See Item 9: “The Offer and Listing—Markets—The Mexican Stock Market—Mexican Securities Market Law” for a description of the differences between these two forms of legal entities.
On September 23, 2013, we and certain of our shareholders completed a dual-listing initial public offering on NYSE and the Mexican Stock Exchange. The Company raised Ps.2.68 billion (approximately U.S. $207.7 million) of gross proceeds from the global offering of 173,076,910 Series A shares, consisting of (i) an offering of Series A shares in Mexico and (ii) a concurrent international offering of CPOs in the form of ADSs in the United States and other countries outside of Mexico, at a public offering price of Ps.15.51 per share (U.S. $1.20 dollars) or U.S. $12.00 per ADS. Each ADS represents ten CPOs and each CPO represents a financial interest in one of our Series A shares. The Series A shares were listed on the Mexican Stock Exchange under the trading symbol “VOLAR” and the ADSs were listed on NYSE under the trading symbol “VLRS.” The Series A shares and ADSs began trading on September 18, 2013.
On November 16, 2015, certain of our principal shareholders, including affiliates of Discovery Americas, and Blue Sky Investments, exercised registration rights in the form of ADS’s and sold 99,000,000 CPOs in the form of ADSs, at a price to the public of U.S. $16.00 per ADS in the United States and the other countries outside of Mexico, pursuant to our shelf registration statement on Form F-3 filed with the SEC. In connection with that offering, the underwriters also exercised their option in full to purchase 9,900,000 additional CPOs in the form of ADSs to cover over-allotments, for a total offering of 108,900,000 CPOs in the form of ADSs.
We are an ultra-low-cost carrier, or ULCC, incorporated under the laws of Mexico. Our primary corporate offices and headquarters are located in Mexico City at Av. Antonio Dovalí Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México City, México, zip code 01210. Our telephone number is +52-55-5261-6400. Our website is www.volaris.com. The information and contents on our website are not a part of, and are not incorporated by reference into, this Annual Report.
Since we began operations in 2006, we have increased our routes from five to more than 197 and grown our cost-efficient Airbus A320 family aircraft from four to 82 as of December 31, 2019. We currently operate up to 131 daily flight segments on routes that connect 40 cities in Mexico as well as 25 cities in the United States and Central America. We have substantial market presence in the top five airports in Mexico, based on number of passengers, comprising Cancún, Guadalajara, Mexico City, Monterrey and Tijuana. The main cities we currently serve are home to some of the most populous Mexican communities in the United States based on data from the Pew Hispanic Research Center. Additionally, our operating subsidiary in Costa Rica, Vuela Aviación, began operations on December 1, 2016. We seek to replicate our ultra-low-cost model in Central America by offering low base fares and point-to-point service in the region.
In addition, on January 16, 2018, we signed a codeshare agreement with U.S. ultra-low-cost carrier Frontier, which started operations on August 23, 2018. We expect this agreement, one of the first ever between ULCCs, to open additional ultra-low fare travel options between Mexico and the United States. In particular, we currently serve seven destinations in the U.S. and 40 in Mexico, of which 23 coincide with Frontier destinations in both countries. We believe that the codeshare agreement will enhance the potential for connecting itineraries.
We are the lowest cost carrier based on CASM among the other Latin American publicly traded airlines. In 2019, our CASM was Ps. 124.3 cents (U.S. $6.45 cents), compared to an average CASM of U.S. $10.93 cents for the other Latin American publicly traded airlines. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta, JetBlue, Southwest Airlines and United, which had an average CASM of U.S. $13.10 cents in 2019. With our ULCC business model, we have grown significantly while maintaining a low CASM over the last five years. We have achieved this through our efficient and uniform fleet, high asset utilization, our emphasis on direct sales and distribution and our variable, performance-based compensation structure. We have a relentless focus on low costs as part of our organizational culture, and we believe that we can further lower our CASM by deploying additional sharklet technology equipped Airbus A320 aircraft and leveraging our existing infrastructure to drive economies of scale. We believe that further reductions to our CASM will allow us to continue to lower base fares, stimulate market demand and increase non-ticket revenue opportunities.
Our ULCC business model and low CASM allow us to compete principally through offering low base fares to stimulate demand. We use our yield management system to set our fares in an effort to achieve appropriate yields and load factors on each route we operate. We use promotional fares to stimulate demand and our base fares are priced to compete with long-distance bus fares in Mexico.
During 2019, our average base fare was Ps. 1,053 (U.S. $54.65) and we regularly offer promotional base fares of down to Ps. 309 (U.S. $32.6). Since May 2012, we have unbundled certain components of our air travel service as part of a strategy to enable our passengers to select and pay for the products and services they want to use. This unbundling strategy has allowed us to significantly grow our non-ticket and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. In 2019, our average load factor was 85.9%, compared to an average load factor of 83.1% for the other Latin American publicly traded airlines and 84% for our U.S.-based publicly traded target market competitors. Higher load factors help us generate additional non-ticket and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.
In addition to low fares, we also aim to deliver a high-quality flying experience to our passengers. We strive to deliver on-time performance to our customers, with an 79.2% on-time performance rate in 2019. We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. We believe that our corporate culture of positive “customer relationship management” has also been a key element of our success.
Principal Capital Expenditures
For the years ended December 31, 2017, 2018 and 2019, we incurred capital expenditures of Ps.2.7 billion, Ps.2.8 billion and Ps.3.6 billion, respectively, which include acquisitions of flight equipment, spare engines, rotable spare parts, furniture and equipment and acquisitions of intangible assets. For a discussion of our capital expenditures and future projections, see Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
Air transportation services for passengers provided on a regular basis, as opposed to charter flights and permits, are considered a public service in Mexico. To render regular air transportations services, a concession granted by the Mexican federal government is required. The legal framework of the air transportation industry in Mexico is primarily established by the Mexican Aviation Law (Ley de Aviación Civil) and its regulations, the Mexican Airport Law (Ley de Aeropuertos) and its regulations, the General Communications Ways Law (Ley de Vias Generales de Comunicación), and applicable Mexican Official Rules (Normas Oficiales Mexicanas). The main regulatory authority overseeing air transportation is the SCT, acting mainly through the AFAC.
Pursuant to the Mexican Aviation Law, the SCT, through the AFAC, is responsible and has the authority, among others, to (i) impose and conduct the policies and programs for the regulation and development of air transportation services; (ii) grant concessions and permits, oversee compliance with, and, if applicable, resolve amendments to or termination of such concessions or permits; (iii) issue the Mexican Official Rules and other administrative provisions; (iv) provide and control the air navigation services; (v) issue and enforce the safety and health rules that must be observed in air transportation services; (vi) issue certificates of registration, certificates of airworthiness, and certificates to air services providers and declare the suspension, cancellation, revalidation or revocation of such certificates; (vii) maintain and operate the Mexican Aeronautical Registry (Registro Aéronautico Mexicano), where aircraft and leases over aircrafts are regulated; (viii) participate in the international agencies and in the negotiation of treaties; (ix) promote the development and training of the aeronautical technical staff; (x) issue and, if applicable, revalidate or cancel the licenses of the aeronautical technical staff; (xi) interpret the Mexican Aviation Law and its regulations for administrative purposes; (xii) authorize the verification visits; (xiii) appoint or, if applicable, remove the regional commanding officer and the commanding officers for airports, heliports and civil airdromes in general, and (xiv) approve flight plans.
The AFAC primarily oversees and verifies compliance by the concessionaires, licensees, operators and airline services providers with the Mexican Aviation Law, its regulations, the Mexican Official Rules and any other applicable provisions.
A concession granted by the SCT is required to render domestic and regular air transportation services in Mexico. Any such concession may only be granted to Mexican entities which meet certain technical, financial, legal and administrative requirements that are deemed necessary to adequately provide services with quality, safety, and timeliness.
Other requirements to be met to obtain a concession are (i) the availability of aircraft and aircraft equipment, which is required to comply with technical requirements of safety, airworthiness conditions and environmental conditions; (ii) the availability of hangars, repair shops and infrastructure needed for operations, as well as the availability of technical and administrative staff trained for the operation of the concession; and (iii) experience in the industry. To provide any other air transportation service in Mexico, different from domestic and regular air transportation, a permit from the SCT is required pursuant to the Mexican Aviation Law.
Concession and Permits
Through our subsidiary Volaris Opco, we hold (i) the Concession, which authorizes us to provide domestic regular passenger, cargo and mail air transportation services within Mexico, (ii) a permit for domestic charter air transportation passenger services, and (iii) a permit for international regular passenger and charter passenger air transportation services.
Our Concession was granted by the Mexican federal government through SCT, on May 9, 2005 originally for a period of five years, and was extended by SCT on February 17, 2010 for an additional period of ten years. On February 21, 2020 our Concession was extended for a 20-year term starting on May 9, 2020. The Concession authorizes us the use of certain aircraft and certain routes. Pursuant to the terms of the Mexican Aviation Law, our Concession, together with specific authorizations granted to us by the AFAC, allow us to provide domestic and international regular air transportation services. Pursuant to our Concession, we have to pay to the Mexican federal government certain fees arising from the services we render. The exhibits to the Concession must be updated every time a new aircraft is operated by Volaris Opco, any time new routes are added, or existing routes are modified. For more information regarding our aircraft and routes, see Item 4: “Information on the Company—Business Overview.”
The permit for domestic charter air transportation of passengers was granted by the SCT on April 16, 2007, without a termination date; it authorizes certain aircraft to operate under such permit and specifies, among other terms and conditions, that Volaris Opco is required to request authorization from the AFAC before carrying out any charter flight.
The permit for international charter air transportation of passengers was granted by the AFAC on June 3, 2009 for an unspecified period of time; it authorizes certain aircraft to operate under such permit and indicates, among other terms and conditions, that Volaris Opco is required to request authorization from the AFAC, before carrying out any charter flight.
To operate our aircraft, each aircraft is required to have on board its certificate of registration, its certificate of airworthiness, and its insurance policy. All aircraft must have on board all documents and equipment required by the treaties, the Mexican Aviation Law and all applicable provisions. We believe we hold all necessary operating and airworthiness authorizations, certificates and licenses, and carry all necessary insurance policies and are operating in compliance with applicable law.
The Mexican Aviation Law provides that concessions and permits may be revoked for any of the following principal reasons: (i) failure to exercise rights conferred by the concessions or permits for a period exceeding 180 calendar days from the date that such concessions or permits were granted; (ii) failure to maintain in effect the insurance required pursuant to the Mexican Aviation Law; (iii) change of nationality of the holder of the concession or permit; (iv) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any foreign government or foreign state; (v) assignment, mortgage, transfer or conveyance of concessions, permits or rights thereunder to any person without the approval of the SCT; (vi) applying fares different from the registered or approved fares, as applicable; (vii) interruption of the services without authorization from the SCT, except in the events of acts of God or force majeure; (viii) rendering services different to those set forth in the respective permit or concession; (ix) failure to comply with safety conditions; (x) failure to indemnify from damages arising from the services rendered and (xi) in general, failure to comply with any obligation or condition set forth in the Mexican Aviation Law, its regulations or the respective concession or permit. In the event our Concession was revoked, for any of the reasons specified above, we will not be entitled to any compensation and we will be unable to continue to conduct our business.
Pursuant to the Mexican Aviation Law and our Concession, all the aircraft used to provide our services must be registered in Mexico before the Mexican Aeronautical Registry and flagged as Mexican aircraft and, if registered in other countries, such aircraft need to be authorized to operate in Mexico. The registration with the Mexican Aeronautical Registry is granted subject to compliance with certain legal and technical requirements. All the aircraft which comprise our fleet as of this date have been authorized by and registered with the AFAC.
We have to maintain our aircraft in airworthiness condition. The maintenance must be provided as specified in the manufacturers’ maintenance manuals and pursuant to a maintenance program approved by the AFAC. The AFAC has authority to inspect our aircraft, their maintenance records and our safety procedures. Based on such inspections, the AFAC may declare our aircraft unfit to fly and in certain cases revoke our Concession.
Pursuant to the Mexican Aviation Law and our Concession, we may only provide our services on routes approved under our Concession. Any new route or change in the existing routes must be approved by the AFAC. Domestic routes are subject to our Concession and the Mexican Aviation Law. International routes to the United States are subject to our Concession, the international routes authorization permits issued by the AFAC, the Mexican Aviation Law and the USA Mexico Bilateral Air Transport Agreement dated December 18, 2015, pursuant to which we were granted a general exemption from the DOT to allow us to operate any route into the United States. The USA Mexico Bilateral Air Transport Agreement provides a legal framework for the international routes of Mexican and U.S. carriers between the United States and Mexico and vice versa. Under the USA Mexico Bilateral Air Transport Agreement any American or Mexican carrier may request authorization to fly from any city in Mexico to the United States and vice versa.
According to the Mexican Aviation Law, concessionaries or licensees of air transportation may freely set fares for the services provided by them on terms that permit the rendering of services in satisfactory conditions of quality, competitiveness, safety and consistency. The international fares must be approved by the SCT pursuant to applicable treaties except that fares for routes to and from the United States do not require approval or registration from either the SCT or any other authority. The fares (both domestic and international) must be registered with the SCT and be permanently available to users of the services. The SCT may deny the registration of fares set by the concessionaires or licensees if such fares imply predatory or monopolistic practices, dominance in the market from a competition perspective or disloyal competition which prevents the participation in the market of other concessionaires or licensees. The SCT may also set minimum and maximum levels of fares (restricting, in that case, the ability of concessionaires and holders of licenses to freely determine rates), as applicable, for the corresponding services, to promote competition. The fares will describe clearly and explicitly the restrictions such fares are subject to and will remain valid for the time and under the conditions offered. The Mexican Aviation Law provides that in the event that the SCT considers that there is no competition among concession and permit holders, the SCT may request the opinion of the Mexican Antitrust Commission and then approve regulations governing fares that may be charged for air transportation services, thus limiting the ability of participants to freely determine rates. Such regulations will be maintained only during the existence of the conditions that resulted in the negative competition effects.
Under Mexican Law, a “slot” is the schedule for the landing and taking off of aircraft. The regulation of the slots is provided by the Mexican Airport Law and its regulations. A slot is assigned to an operator by the airport administrator considering the recommendation of a committee of operations, for the organization and planning of the flights at the relevant airport. According to the regulations to the Mexican Airport Law, the operating rules of each airport in Mexico, must contain the guidelines for the assignment of slots. Therefore, the different airports’ administrations will establish in such guidelines how slots are to be assigned considering (i) the operation schedule of the airport, (ii) safety and efficiency criteria, (iii) capacity of the services providers, (iv) schedule availability, and (v) compliance with the requirements for the assignment of the slots.
Taking or Seizure
Pursuant to Mexican law and our Concession, the Mexican federal government may take or seize our assets temporarily or permanently, in the event of natural disasters, war, serious changes to public order or in the event of imminent danger to the national security, internal peace or the national economy. The Mexican federal government, in all cases, except in the event of international war, must indemnify us by paying the respective losses and damages at market value. See Item 3: “Key Information—Risk Factors—Under Mexican law, our assets could be taken or seized by the Mexican government under certain circumstances.”
The Mexican Foreign Investment Law (Ley de Inversión Extranjera) limits foreign investment in companies rendering domestic air transportation services up to 49% of such companies’ voting stock. This limit applies to Volaris Opco, but not to us as a holding company. We, as a holding company, must remain a Mexican-investor controlled entity, as a means to control Volaris Opco. The acquisition of our Series A shares through the CPOs, that strip-out voting rights but grant any and all economic rights, by foreign investors, is deemed neutral, from a foreign investment perspective, and is not, as a result, counted as foreign investment excluded from this restriction. For a discussion of the procedures we instituted to ensure compliance with these foreign ownership rules, see Item 10: “Additional Information—Memorandum and Articles of Association—Other Provisions—Foreign Investment Regulations.”
We are subject to regulations relating to the protection of the environment such as the General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente), the regulations of the General Law of Ecological Balance and Environmental Protection regarding Environmental Impact, Prevention and Control of Air Pollution and of Hazardous Waste (Reglamentos en Materia de Evaluación del Impacto Ambiental, Prevención y Control de Contaminación del Aire y Desperdicios Peligrosos), the General Law for Prevention and Handling of Wastes (Ley General de Prevención y Gestión Integral de Riesgos) and the National Waters Law (Ley Nacional de Aguas) and its regulations, official Mexican standards, international treaties, bilateral agreements and specifically by an Official Rule NOM 036 SCT3 2000 which regulates the maximum limits of the aircraft noise emissions as well as the requirements to comply with such limits. Volaris Opco is ISO 14,000 certified.
We are subject to the provisions of the Mexican Labor Law (Ley Federal del Trabajo) and the provisions contained in the collective bargaining agreements with Sindicato de Trabajadores de la Industria Aeronáutica, Similares y Conexos de la República Mexicana-STIAS. For more information on our relationship with such labor union and our labor collective bargaining agreements, see Item 6: “Directors, Senior Management and Employees—Employees.”
U.S. and International Regulation
The airline industry is heavily regulated by the U.S. government. Two of the primary regulatory authorities overseeing air transportation in the United States are the DOT and the FAA. The DOT has jurisdiction over economic issues affecting air transportation, such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. The DOT has authority to issue permits required for airlines to provide air transportation. We hold a Foreign Air Carrier Permit issued by the DOT that authorizes us to engage in scheduled air transportation of passengers, property and mail between Mexico and the United States, as well as on routes beyond the United States.
The FAA is responsible for regulating and overseeing matters relating to air carrier flight operations, including airline operating certificates, aircraft certification and maintenance and other matters affecting air safety. The FAA requires each non-U.S. commercial airline to obtain and hold an FAA air carrier certificate and to comply with Federal Aviation Regulations 129 and 145. This certificate, in combination with operations specifications issued to the airline by the FAA, authorizes the airline to operate at specific airports using aircraft approved by the FAA.
As of the date of this annual report, we had FAA airworthiness certificates for 41 of our aircraft (the remainder being registered with the AFAC in Mexico), we had obtained the necessary FAA authority to fly to all of the cities we currently serve, and all of our aircraft had been certified for over-water operations. Pilots operating and mechanics providing maintenance services on “N” or U.S.-registered aircraft require a special license issued by the FAA. We hold all necessary operating and airworthiness authorizations, certificates and licenses and are operating in compliance with applicable DOT and FAA regulations, interpretations and policies.
We are also subject to the regulation of the aviation authorities in the countries of Central America in which we currently operate. We hold all necessary operating authorizations, certificates and licenses and are operating in compliance with applicable regulations in Central America.
Our service to the U.S. is also subject to U.S. Customs and Border Protection, or CBP (a law enforcement agency that is part of the U.S. Department of Homeland Security), immigration and agriculture requirements and the requirements of equivalent foreign governmental agencies. Like other airlines flying international routes, from time to time we may be subject to civil fines and penalties imposed by CBP if un-manifested or illegal cargo, such as illegal narcotics, is found on our aircraft. These fines and penalties, which in the case of narcotics are based upon the retail value of the seizure, may be substantial. We have implemented a comprehensive security program at our airports to reduce the risk of illegal cargo being placed on our aircraft, and we seek to cooperate actively with CBP and other U.S. and foreign law enforcement agencies in investigating incidents or attempts to introduce illegal cargo onto our flights.
Our flight operations are also subject to Animal and Plant Health Inspection Service, or APHIS (an agency of the U.S. Department of Agriculture) requirements. APHIS imposes restrictions on the agricultural products that may be transported to and from the United States, how we cater our flights and how we handle trash generated during flights landing in the United States. APHIS can impose fines and penalties for non-compliance with these requirements. We comply with all APHIS cargo requirements and regulations related to our flights.
The TSA was created in 2001 with the responsibility and authority to oversee the implementation, and ensure the adequacy, of security measures at airports and other transportation facilities in the United States. Since the creation of the TSA, airport security has seen significant changes including enhancement of flight deck security, the deployment of federal air marshals onboard flights, increased airport perimeter access security, increased airline crew security training, enhanced security screening of passengers, baggage, cargo and employees, training of security screening personnel, increased passenger data to CBP, background checks and restrictions on carry-on baggage. Funding for passenger security is provided in part by a per enplanement ticket tax (passenger security fee) of U.S. $5.60 per one-way trip for air transportation that originates at an airport in the United States (cap U.S. $11.20 per round trip). The TSA was granted authority to impose additional fees on air carriers if necessary to cover additional federal aviation security costs. Pursuant to its authority, the TSA may revise the way it assesses this fee, which could result in increased costs for passengers and/or us. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements.
We are subject to various federal, state and local U.S. laws and regulations relating to the protection of the environment and affecting matters such as aircraft engine emissions, aircraft noise emissions, and the discharge or disposal of materials and chemicals, which laws and regulations are administered by numerous state and federal agencies. The Environmental Protection Agency, or EPA, regulates our operations in the United States, including air carrier operations, which affect the quality of air in the United States. We believe the aircraft in our fleet meet all emission standards issued by the EPA. Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.
U.S. law recognizes the right of airport operators with special noise issues to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport. None of the airports we serve currently restricts the number of flights (except New York’s John F. Kennedy Airport, which restricts the number of flights allowed for capacity reasons, not noise abatement) or hours of operation, although it is possible one or more of such airports may do so in the future with or without advance notice.
In the U.S., we are subject to certain provisions of the Communications Act of 1934, as amended, and are required to obtain an aeronautical radio license from the Federal Communications Commission, or FCC. To the extent we are subject to FCC requirements, we take all necessary steps to comply with those requirements. We are also subject to state and local laws and regulations at locations where we operate and the regulations of various local authorities that operate the airports we serve.
The Mexican, U.S. and other foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
There are two main categories of passenger airlines that operate in the domestic and international Mexican market: (i) the traditional legacy network carriers, which include Grupo Aeroméxico, and (ii) the low-cost carriers, which include Interjet, VivaAerobus and Volaris. The ULCC business model is a subset of the low-cost carrier market.
Legacy carriers offer scheduled flights to major domestic and international routes (directly or through membership in an alliance, such as Star Alliance, Oneworld and/or Skyteam) and serve numerous smaller cities. These carriers operate mainly through a “hub-and-spoke” network route system. This system concentrates most of an airline’s operations in a limited number of hub cities, serving other destinations in the system by providing one-stop or connecting service through hub airports to end destinations on the spokes. Such an arrangement permits travelers to fly from a given point of origin to more destinations without switching to another airline. Traditional legacy carriers typically have higher cost structures than low-cost carriers due to higher labor costs, flight crew and aircraft scheduling inefficiencies, concentration of operations in higher cost airports, and multiple classes of services. Other examples of legacy carriers in the Latin American market include Avianca, Copa, and LATAM.
Low-cost carriers typically fly direct, point-to-point flights, which tends to improve aircraft and crew scheduling efficiency. In addition, low-cost carriers often serve major markets through secondary, lower cost airports in the same regions as major population centers. Many low-cost carriers only provide a single class of service, thereby increasing the number of seats on each flight and avoiding the significant and incremental cost of offering premium-class services. Finally, low-cost carriers tend to operate fleets with only one or two aircraft families at most, in order to maximize the utilization of flight crews across the fleet, improve aircraft scheduling flexibility and minimize inventory and aircraft maintenance costs. The Mexican market, which has a large population of VFR and leisure travelers, has seen demand for these low-cost carriers expand in recent years. Low-cost carriers have made a significant emergence in the Latin American market in recent years, particularly in Brazil, where Gol, Webjet (merged with Gol in 2012), Azul, and Trip (merged with Azul in 2012) have started operations in the last ten years.
In recent years, many traditional legacy network carriers globally have undergone significant financial restructuring, including ceasing operations or merging and consolidating with one another. These restructurings have allowed legacy carriers to reduce high labor costs, restructure debt, modify or terminate pension plans and generally reduce their cost structure. This has resulted in improved workforce flexibility and reduced costs while simultaneously improving product offerings similar to those of other low-cost carriers. Furthermore, many of the legacy carriers have made these improvements while still maintaining their expansive route networks, alliances and frequent flier programs.
One result of the restructuring of the network carriers is that the difference in the cost structures, and the competitive advantage previously enjoyed by low-cost airlines, has somewhat diminished. We believe that this trend has provided an opportunity for the introduction of the ULCC business model in Mexico as a subset of the more mature group of low-cost carriers.
The ULCC business model involves, among other things, intense focus on low cost, efficient asset utilization, unbundled revenue sources aside from the basic fare with multiple products and services offered for additional fees. Globally, ULCCs with highly successful business models include Allegiant and Spirit in the United States, Ryanair and Wizz in Europe, and AirAsia in Asia.
ULCCs are able to achieve low-cost operations due to highly efficient and uniform fleets with high density seating and single aisle configurations. Additionally, ULCCs provide extremely low fares to customers in order to stimulate market demand and generate high aircraft utilization rates. With high aircraft utilization rates, ULCCs are able to generate substantial ancillary revenues through the offering of additional products and services, such as baggage fees, advanced seat selection, extra legroom, ticket change fees, and/or itinerary attachments such as hotels, airport transportation, and rental cars. ULCCs focus on VFR and leisure customers as opposed to business travelers. The ULCC product appeals to the cost-conscious customer because they are offered a low base-fare and are able to choose to pay for only the additional products and services they want to receive.
Economic and Demographic Trends
We believe the Mexican airline industry has strong potential for growth, given the country’s young demographics, improving macroeconomic base and growing middle class, which will likely facilitate organic expansion of the airline sector. In addition, the national airline industry is relatively underpenetrated when compared to other countries of similar size and demographic characteristics. These elements combine at a time when the industry is under considerable attrition due in part from some of the legacy operators ceasing operations.
In terms of the macroeconomic environment, GDP growth in Mexico is expected to be between 0.5% and 1.5% in 2020 and between 1.1% and 2.1% in 2021 according to the Mexican Central Bank. These estimates are below the estimates for the United States for 2020, when American GDP growth is expected to be between 1.8% and 2.3%, but are in line with the expected growth of American GDP for 2021 of between 1.7% and 2.2%, according to the Federal Reserve. This projected GDP growth is expected to result in the continuing growth trend of middle-income homes, having already grown from 12.0 million in 2000 to 15.2 million in 2010, according to information derived from the Mexican Association of Market Research and Public Opinion Agencies (Asociación Mexicana de Agencias de Investigación de Mercado y Opinión Pública, A.C.) and the INEGI. As of 2015, according to the INEGI intercensal survey, approximately 33.3% of the Mexican population was under 18 years of age, which we believe benefits Volaris by providing a strong base of young, potential passengers in the future. This contrasts favorably with more mature aviation markets like the United States, where approximately 22.4% of the population is currently under 18 years of age. Additionally, the Mexican aviation market is currently underpenetrated, as evidenced by the number of trips per capita. On a global basis the World Bank estimates that as of 2019, there are, on average 0.51 annual trips per capita, whereas in Mexico the number is roughly a portion of that.
The Mexican low-cost airline industry competes with ground transportation alternatives, primarily long-distance bus companies. Given the limited passenger rail services in Mexico, travel by bus has traditionally been the only low-cost option for long-distance travel for a significant portion of the Mexican population. In 2018 (the latest year for which date is available as of the date of this annual report), bus companies transported over 3.09 billion passengers in Mexico, of which approximately 83 million were executive and luxury passenger segments, as measured in segments which include both long- (five hours or greater) and short-distance travel, according to the Mexican General Direction of Ground Transportation Authority. We believe that just a small shift of bus passengers to air travel would significantly increase the number of airline passengers. We believe that an increased shift in demand from bus to air travel in Mexico presents a significant opportunity as the macroeconomic environment improves and rising demographics take shape across the country. Furthermore, we believe that long-distance bus passengers will continue to shift to airplane travel when certain promotional fares are priced lower than bus fares for similar routes.
In the past the Mexican government has made a substantial investment in developing Mexico’s airport infrastructure. In 1998, the Mexican government created a program to open Mexico’s airports to private investments. Three private airport operators (Grupo Aeroportuario del Pacífico, S.A.B. de C.V., Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. and Aeropuertos del Sureste de Mexico, S.A.B. de C.V.) were incorporated and granted 50-year concessions to operate airports in Mexico. In the first stage of the privatization process, the Mexican government sold a minority stake to strategic partners. The privatization process culminated in mid-2006, when the Mexican government sold the balance of its holdings to the public via initial public offerings.
The Mexican government still manages and operates the Mexico City International Airport (AICM), which it considers strategic, as well as other minor airports in the country. We believe that strong foundational infrastructure, and continued investment and development will result in significant growth potential for the Mexican airline market. In September 2014, the Mexican government announced the construction of a new international airport for Mexico City to replace the current international airport. In January 2019, the Mexican government announced the cancellation of the construction of the new Mexico City Airport and introduced plans to invest in the expansion of the existing airport and is building a new airport in the Mexico City metropolitan area.
Since 2010, annual passenger traffic growth to/from/within Latin America has averaged 5.9%, and Boeing estimates this same robust growth rate for the next 20 years. Continued growth of the middle class as well as rising income levels is expected to continue to drive long-term economic expansion in Latin America. Traffic between Central America and the Caribbean and North America is expected to remain strong, as North and Latin American LCCs continue to grow their service in this flow.
The Mexican aviation industry has undergone a significant transformation due to the emergence of low-cost carriers, including us, Interjet and VivaAerobús, the exit of eight carriers (Aerocalifornia, Aladia, Alma, Aviacsa, Avolar, Azteca, Nova Air and Grupo Mexicana). Changes in the Mexican airline competitive environment have resulted in an important increase in the domestic market load factor for the remaining carriers. While load factor in Mexico has historically lagged more than in developed markets, this positive trend will likely drive greater profitability among the remaining airlines in Mexico. This dramatic capacity reduction and its low-fare strategy allowed Volaris to increase load factor to 85.9% in 2019.
The airline industry is highly competitive. The principal competitive factors in the airline industry include fare pricing, total ticket price, flight schedules, aircraft type, passenger amenities, number of routes/destinations served from a city, customer service, safety record and reputation, code-sharing relationships, frequent flier programs and redemption opportunities. The airline industry is particularly susceptible to price discounting because once a flight is scheduled, airlines incur only nominal incremental costs to provide service to passengers occupying otherwise unsold seats. The expenses of a scheduled aircraft flight do not vary significantly with the number of passengers carried, and, as a result, a relatively small change in the number of passengers or in pricing can have a disproportionate effect on an airline’s operating and financial results. Price competition occurs on a market-by-market basis through price discounts, changes in pricing structures, fare matching, targeted promotions and frequent flier initiatives. Airlines typically use discount fares and other promotions to stimulate traffic during normally slower travel periods to generate cash flow and to maximize revenue per ASM. The prevalence of discount fares can be particularly acute when an airline has excess capacity and is under financial pressure to sell tickets.
In Mexico, the United States and Central America, the scheduled passenger service market consists of three principal groups of travelers: business travelers, leisure travelers, and travelers visiting friends and relatives, or VFR. Leisure travelers and VFR travelers typically place most of their emphasis on lower fares, whereas business travelers typically place a high emphasis on flight frequency, scheduling flexibility, breadth of network and service enhancements, including loyalty programs and airport lounges, as well as price.
VFR and leisure passengers travel for a number of reasons, including social visits and vacation travel. We believe that VFR and leisure traffic are the most important components of the traffic in the markets we target and serve and are important contributors to our non-ticket revenue production. We believe that VFR and leisure passengers represent a significant percentage of our total passenger volume. As part of our route development strategy, we target markets that will likely appeal to VFR and leisure travels at price points that were previously not available. This strategy allows us to stimulate demand in new markets by encouraging travel by VFR and leisure travelers.
Domestic passenger volumes have grown in Mexico by a CAGR of 7.0% and international volumes have grown by a CAGR of 4.5% from 2006 to 2019 according to the AFAC. The following table sets forth the historical passenger volumes on international and domestic routes in Mexico from 2006 to 2019:
Domestic passenger volumes have grown in Mexico by a CAGR of 7.0% and international volumes have grown by a CAGR of 4.5% from 2006 to 2019 according to the AFAC. The following table sets forth the historical passenger volumes on international and domestic routes in Mexico from 2006 to 2019:
|(millions of segment passengers)|
|% growth (decreased)||6.1||%||(0.5||)%||2.5||%||(13.2||)%||6.3||%||4.1||%||6.5||%||8.1||%||8.8||%||11.7||%||7.9||%||11.1||%||5.8||%||2.4||%|
|% growth (decreased)||11.8||%||23.6||%||0.9||%||(11.6||)%||0.3||%||3.9||%||10.2||%||8.6||%||7.7||%||13.0||%||12.5||%||8.2||%||9.5||%||8.1||%|
|% growth (decreased)||8.6||%||10.3||%||1.8||%||(12.4||)%||3.5||%||4.0||%||8.3||%||8.3||%||8.3||%||12.3||%||10.2||%||9.6||%||7.7||%||5.3||%|
Our international growth strategy has focused on targeting markets in the United States with large Mexican and Mexican-American communities in order to stimulate VFR demand and leisure traffic in those markets. Approximately 60% of international passengers in Mexico fly to the United States, making the United States the largest international destination for air passengers in Mexico. All of the major U.S. legacy carriers fly to and from Mexico, but at a higher cost than low-cost carriers. We have learned that many Mexicans in the United States purchase airline tickets for family members living in Mexico to fly to the United States to visit. For this reason, we focus our international routes on U.S. cities with significant Mexican and Mexican-American communities. These cities are generally located in and near to counties with Hispanic populations of over one million as of 2018; including Los Angeles (Los Angeles County, 4.9 million), Houston (Harris County, 2.0 million), Miami (Miami-Dade County, 1.9 million), Phoenix (Maricopa County, 1.4 million), Chicago (Cook County, 1.3 million); Ontario, California (Riverside County, 1.2 million) and Dallas (Dallas County, 1.0 million), according to PEW Research Hispanic Center based on U.S. Census Bureau data. In recent years, we have also been growing our operations in Central America.
In 2019, the Mexican low-cost and ULCCs (Interjet, VivaAerobus and Volaris) together maintained 71.0% of the domestic market, based on passenger flight segments, according to the AFAC. The following table sets forth the historical market shares on domestic routes, based on passenger flight segments, of each major market participant for each of the periods indicated:
|(1)||Market share is obtained by dividing each airline’s number of passengers by the total number of passengers for all airlines for the period indicated.|
|(2)||Began operations in March 2006.|
|(3)||Ceased operations in August 2010.|
|(4)||Began operations in December 2005.|
|(5)||Began operations in November 2006.|
The airline industry in Mexico has recently seen sharp attrition, with the exit of eight airlines since 2007, including the bankruptcy of Grupo Mexicana in April 2014. This allowed us to further expand our international product offering in a very short timeframe.
The following table sets forth the historical market shares on international routes between Mexico, the United States and other countries, based on passenger flight segments, of key Mexican industry participants for each of the periods indicated:
|(1)||Market share is obtained by dividing each Mexican airline’s number of passengers by the total number of passengers for all Mexican airlines for the period indicated.|
|(2)||Began operations in March 2006.|
|(3)||Ceased operation in August 2010.|
|(4)||Began operations in December 2005.|
|(5)||Began operations in November 2006.|
We have been able to grow our international market share substantially over the past five years even with significant competition from leading U.S. carriers including United, American, Alaska Air, and Delta. As of December 31, 2019, we were the sixth largest international carrier in terms of passenger flight segments out of all airlines flying internationally to and from Mexico. We have been able to grow our international market share substantially due to the Grupo Mexicana reorganization and our strategy to target and stimulate markets in the United States with large Mexican and Mexican-American communities.
In terms of both domestic and international ticketed passengers, our total passenger volume increased at a CAGR of 27.8% from 2006 to 2019, with approximately 0.9 million booked passengers in 2006 and 21.9 million booked passengers in 2019. We attribute the rapid growth of our business to the favorable economic environment in Mexico, our dedicated ULCC strategy targeted at VFR and leisure travelers, our strong focus on delivering high quality customer service, and our tremendous brand recognition among domestic and international travelers in Mexico and the United States.
Our Business Model
Our business model is based on that of other ULCCs operating elsewhere in the world, such as Allegiant and Spirit in the United States, Ryanair and Wizz in Europe and AirAsia in Asia. We utilize our ULCC business model and efficient operations to offer low base fares and to stimulate demand while aiming to provide high quality customer service. Our unbundled pricing strategy allows us to provide low base fares and enables our passengers to select and pay for a range of optional products and services for additional fees. We target VFR, cost-conscious business people and leisure travelers in Mexico and to select destinations in the United States.
Since May 2012, we have unbundled certain components of our air travel service as part of a strategy to enable our passengers to select and pay for the products and services they want to use. This unbundling strategy has allowed us to significantly grow our non-ticket and total revenue. We plan to continue to use low base fares to stimulate additional passenger demand, shift bus passengers to air travel and increase our load factor. We believe a small percentage shift of bus passengers to air travel would dramatically increase the number of airline passengers. Higher load factors help us generate additional non-ticket and total revenue, which in turn, allow us to further lower base fares and stimulate new demand.
We have a relentless focus on low costs as part of our organizational culture. We are the lowest cost airline carrier in Latin America, based on CASM, compared to the other Latin American publicly traded companies. We are also the lowest cost carrier in our target markets in Mexico and the United States, compared to our target market competitors, according to public information available from such competitors. We are able to keep our costs low due to our efficient and uniform fleet, high asset utilization, our emphasis on direct sales and distribution and our variable, performance-based compensation structure.
We were established and are operated to achieve the following goals: (i) to create a profitable and sustainable business model; (ii) to successfully compete by creating structural advantages over other carriers serving Mexico through our ULCC business model; (iii) to provide affordable air travel with a high quality experience for our customers; and (iv) to create a dynamic, cost conscious and entrepreneurial working culture for our employees. We believe that our strengths are:
Lowest Cost Structure. We believe that in 2019 we had the lowest cost structure of any of the other Latin American publicly traded airlines, with CASM of Ps. 124.3 cents (U.S. $6.45 cents), compared to Avianca at U.S. $15.3 cents, Azul at U.S. $10.6 cents, Copa at U.S. $9.4 cents, Gol at U.S. $9.0 cents, Grupo Aeroméxico at U.S. $10.8 cents and LATAM at U.S. $10.5 cents. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air at U.S. $11.58 cents, American at U.S. $14.85 cents, Delta at U.S. $14.67 cents, Jet Blue at U.S. $11.43 cents, Southwest Airlines at U.S. $12.38 cents and United at U.S. $13.67 cents in 2019, according to publicly available financial information. We achieve our low operating costs in large part due to:
|·||Efficient and Uniform Fleet. We operate a uniform and efficient fleet of Airbus A320 family aircraft, which is the youngest fleet in Mexico, with an average aircraft age of 5.0 years as of December 31, 2019.|
|·||High Asset Utilization. Our fleet has a uniform, high density seat configuration and we had one of the highest worldwide average aircraft utilization rates of 12.9 block hours per day in 2019.|
|·||Direct Sales Distribution. We encourage our customers to purchase tickets via our website, mobile app, call center or airport service desks as these distribution channels are the lowest cost to us. We sell 81% of our tickets through these channels. We do not use global distribution system, or GDS.|
|·||Variable, Performance-Based Compensation Structure. We compensate our employees on the basis of their performance, and we reward them for the contribution they make to the success of the company rather than their seniority.|
Ancillary Revenue Generation. We have been able to grow our non-ticket revenue by allowing our passengers to choose what additional products and services they purchase and use. Thanks to our “Tú Decides” (“You Decide”) strategy, we have increased average non-ticket revenue per passenger flight segment from approximately U.S. $6.92 in 2009 to U.S. $28.2 in 2019 by, among other things:
|·||charging for excess baggage (over the 25 kilograms of free checked luggage required by Mexican regulations on domestic flights), and starting March 1, 2017, we began charging for the first checked luggage on routes to/from the United States);|
|·||utilizing our excess aircraft belly space to transport cargo;|
|·||passing through all distribution-related expenses;|
|·||charging for advance seat selection, extra legroom, and carriage of sports equipment;|
|·||consistently enforcing ticketing policies, including change fees;|
|·||generating subscription fees from our ultra-low-fare subscription service, V-Club;|
|·||deriving brand-based fees from proprietary services, such as our Volaris affinity credit card program;|
|·||selling itinerary attachments, such as hotel and car rental reservations and airport parking, and making available trip interruption insurance commercialized by third parties, through our website; and|
|·||selling onboard advertising.|
Core Focus on VFR, Cost-conscious Business People and Leisure Travelers in High Growth Markets. We primarily target VFR, cost-conscious business people and leisure travelers in Mexico and the United States. We believe these people represent the highest potential for growth in our target markets. By offering low promotional fares, we stimulate demand for VFR and leisure travel, and attract new customers, including those who previously may have only traveled by bus. We use our yield management system to set prices based on the time of booking.
We regularly manage yield and load factor, including through targeted promotional fares that can be as low as Ps. 299 (U.S. $44) or. Ps. 249 (U.S. $39) for Vclub members. We have found that many Mexicans and Mexican Americans living in the United States buy airline tickets for themselves and their family members in Mexico. In addition, we have over 20,000 points of payment throughout Mexico and the United States that allow travelers, particularly in Mexico, who do not have credit cards, or are reluctant to provide credit card information over the web or call center, to reserve seats using the web or call center and pay with cash the next day. Furthermore, we offer night flights, which appeal to our domestic and international customer base that seek to save on lodging expenses.
Disciplined Approach to Market and Route Selection. We select target markets and routes where we believe we can achieve profitability within a reasonable timeframe, and we only continue operating on routes where we can achieve and maintain our target level of profitability. When developing our route network, we focus on gaining market share on routes that have been underserved or are served primarily by higher cost airlines where we have a competitive cost advantage. We thereby stimulate new demand with low base fares and attempt to shift market share from incumbent operators. We have developed a profitable route network, on an annual basis based on the results of our most recently completed fiscal year, and built a leading market share in several of our markets. As of December 31, 2019, we had more than 20.3% passenger market share in 200 of our 217 routes. As of December 31, 2019 we faced no competition from any other carrier on 11.5% of our domestic seat capacity. We entered the U.S. market in July 2009 and by 2019 derived 31.3% of our passenger revenues from our U.S. routes and attributed 29.5% of our ASMs to U.S. routes.
Market Leading Efficiency and Performance. We believe we are one of the most efficient airline carriers in Latin America. In 2019, we achieved an average passenger load factor of 85.9% and an average aircraft utilization rate of 12.9 block hours per day with a standard turnaround time between flights of approximately 65 minutes. For our fleet type, our average aircraft utilization rate of 10.94 flight hours per day was among the highest worldwide and was 25% higher than the industry average of 8.03 flight hours per day for all Airbus A319 aircraft, 22% higher than the 9.14 flight hours per day for all Airbus A320 aircraft and 12% higher than the 9.40 flight hours per day for all Airbus A321 aircraft, according to information for the year ended December 31, 2019 available from Airbus. The high-density, single-class seating configurations on our aircraft allow us to increase ASMs and reduce fixed costs per seat as compared to a lower density configuration flown by certain of our competitors. In addition, we strive for market-leading operational performance, with a 79.2% on-time performance rate, 97.6% flight completion rate and a mishandled baggage rate of only 1.04 bags per 1,000 passengers in 2019.
Brand Recognition with a Fast Growing Fan Base. We believe that we have developed strong brand recognition due to our focus on delivering good value and a positive traveling experience to our customers. As of December 31, 2019, we had approximately 4.04 million fans on Facebook and 1.9 million followers on Twitter, both of which we primarily use for marketing, customer service and promotion. Our social media reach has been a very low cost, yet effective, marketing tool for us and has afforded us the capability to develop highly effective, targeted marketing promotions on a very short notice. We have also established various programs to make air travel more inviting for first time travelers and other passengers who may desire extra services, such as an unaccompanied senior program.
Balance Sheet Positioned for Growth. We have a low level of financial debt, since we have principally financed our operations through equity and operating cash flows and we have only used operating leases for our aircraft. We believe that our strong financial position enables us to prudently finance the emerging growth opportunities in our markets and to defend our existing network from our competitors. As of December 31, 2019, we had a balance of Ps. 8.0 billion in unrestricted cash and cash equivalents, representing 23% of our last twelve months operating revenues. As of December 31, 2019, we had financial debt of approximately Ps. 5.0 billion.
Strong Company Culture, Experienced Management Team and Principal Shareholders. We have developed a strong company culture among our employees that is focused on safety, meritocracy, efficiency and profitability, with a significant component of performance-based variable compensation. Our management team has been assembled with experienced executives in their respective fields, including in the aviation, sales and marketing, finance or IT industries in Latin America. In addition, our principal shareholders have extensive prior experience in funding, establishing and leading airline carriers around the world. Their expertise has helped us develop our ULCC business model and allowed us to benefit from their procurement power and relationships with key vendors.
Our Growth Strategy
Our goal is to continue to grow profitability on an annual basis and maintain our leadership position in the Mexican aviation market by operating our ULCC business model and focusing on VFR, cost-conscious business people and leisure travelers. The key elements of our growth strategy include:
Remain the Low Cost Carrier of Choice. We believe that by deploying additional cost-efficient Airbus A320 and A321 aircraft with higher seat density, spreading our low fixed cost infrastructure over a larger scale of operations, outsourcing operating functions and keeping sales and marketing overhead low, we can continue to improve operating efficiencies while maintaining low costs. Our ULCC business model enables us to operate profitably, on an annual basis based on the results of our most recently completed fiscal year, at low fare levels, and we intend to continue to maintain low fares to stimulate demand. We also make flying easy and strive to remain the low-cost carrier of choice for our existing and new customers as we continue to focus on providing an affordable and high quality travel experience to our customers across our expanding operations in Mexico, the United States and Central America.
Grow Non-ticket Revenue while Maintaining Low Base Fare to Stimulate Demand. We intend to increase our non-ticket revenues by further unbundling our fare structure and by offering our passengers new and innovative products and services. Through our multiple points of interaction with our customers during each stage of their travel, from ticket purchase through flight and post-trip, we have the opportunity to offer third party products, such as hotel rooms, car rentals and trip interruption insurance, on which we receive commissions. In addition, we sell in-flight products and we plan to introduce and expand upon products and services that are unrelated to passenger travel. In June 2012, we started a membership based ultra-low-fare subscription service called V-Club which had approximately 632,000 members as of December 31, 2019. We intend to generate additional fees from proprietary brand-based services such as the Volaris affinity card which was introduced in January 2013. We also continue to expand the cargo transportation services we provide on our aircraft. As we broaden our ancillary products and services and increase our non-ticket revenue, we believe that we will be able to further lower base fares and continue to stimulate demand.
Gain Additional Market Share by Stimulating Demand in our Existing Markets. We plan to continue to grow our existing markets by adding routes that connect cities in which we currently have operations and by adding capacity on existing routes where we believe we can continue to stimulate demand. We also intend to continue to aggressively target long-distance bus passengers who we believe may shift to air travel. We set certain promotional fares at prices lower than bus fares for similar routes, and we believe this will encourage bus travelers to switch to air travel.
Continue our Disciplined Fleet Growth. As of the date of this annual report, we have firm commitments for 103 Airbus A320 family aircraft equipped with sharklet technology that will be delivered over the next six years, including 63 of the next generation Airbus A320 NEO and 40 of the next generation Airbus A321 NEO, the delivery of which commenced in 2016 and 2018, respectively. We have obtained committed financing for the pre-delivery payments for the deliveries through 2021. During 2019, we incorporated 5 A320 NEO and 2 A321 NEO aircraft into our fleet. In December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries between 2019 and 2022.
Our fleet reached 82 aircraft as of the date of this annual report. Consistent with our ULCC model, our new Airbus A320 aircraft offers 19% more passenger seats than Interjet, one of our competitors that offers 150 passenger seats per Airbus A320 aircraft. We believe that a disciplined ramp-up in young and efficient aircraft as our market share expands reduces our exposure to market conditions. We intend to maintain our commitment to a common fleet type because we believe it is the most efficient option for our markets and operations.
Grow Passenger Volume by Profitably Establishing New Routes. We believe our focus on low fares and customer service will stimulate growth in overpriced, underserved and inefficient new markets. We will continue our disciplined approach to domestic and international market entry by using our rigorous selection process where we identify and survey possible target markets that have the potential to be profitable within our business model.
For example, in 2019, we added the following 29 new routes: four domestic routes from Guadalajara, six domestic routes from Mexico City, three domestic routes from Tijuana, 11 domestic routes from other cities within Mexico and five international routes from other cities to the United Sates. As part of our continuous monitoring of routes and markets for profitability, we have a proven track record of withdrawing routes that do not meet our profitability expectations. For our future growth opportunities, we have identified approximately 69 routes within Mexico serving markets in excess of 250,000 inhabitants and other leisure destinations, and that have stage lengths of at least 170 miles, and approximately 138 routes internationally that have stage lengths of at least 500 miles.
As of January 1, 2018, we adopted IFRS 15 “Revenue from Contracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. Under the new standard, certain ancillary services are recognized when we satisfy our performance obligations, which is typically when the air transportation service is rendered (at the time of the flight). In addition, these ancillary services do not constitute separate performance obligations or represent administrative tasks that do not represent a different promised service and therefore should be accounted for together with the air fare as a single performance obligation of providing passenger transportation.
Therefore, the classification of certain ancillary fees in our statement of operations, such as advanced seat selection, fees charged for excess baggage, itinerary changes and other air travel-related services, changed with adoption of IFRS 15, since they are part of the single performance obligation of providing passenger transportation. We have recasted our financial statements as of January 1, 2016 and 2017 for comparability purposes. See note 1d to our Audited Consolidated Financial Statements for more details.
Passenger revenues accounted for approximately Ps. 33 billion or 97% of our total operating revenues in 2019. VFR traffic makes up the largest component of our customers, and we believe our VFR customers are the most cost-conscious and time/schedule flexible of all of our travelers. Our VFR market tends to complement our leisure-driven market from both a seasonal and week-day perspective. VFR traffic is strongest during the summer, Christmas and New Year season, followed by Easter. Leisure traffic makes up the second largest component of our customers. This segment responds well to demand stimulation based on low fares. Leisure traffic tends to coincide with holidays, school schedules and cultural events with peaks in July and August and again in December and January. Cost-conscious business people make up the third largest component of our customers. Although business travel can be cyclical with the economy, this segment tends to travel steadily throughout the year regardless of the season. We do not operate a frequent flier program.
Our passenger revenues include income generated from: (i) fare revenues and (ii) other passenger revenues. Other passenger services include but are not limited to fees charged for excess baggage, bookings through our call center or third-party agencies, advanced seat selection, itinerary changes, V-Club memberships and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by us or when the non-refundable ticket expires at the date of the scheduled travel.
We generate fees from our subscription service V-Club by charging an individual annual membership of U.S. $54.99 or a group annual membership of U.S. $219.99. V-Club subscriptions accounted for approximately 1.6% of our other passenger revenues in 2019.
Members of the V-Club have exclusive access to the lowest fares and promotions through our website and mobile app. We also generate revenues from our affinity credit card from multiple revenue streams including electronic credit redemptions earned through credit card purchases. Revenue from the Volaris affinity credit card accounted for approximately 2.13% of our non-ticket revenues as of December 31, 2019. As of December 31, 2019, we had approximately 632,000 V-Club members and 282,000 affinity credit card holders.
Our non-passenger revenues include income generated from (i) other non-passenger revenues and (ii) cargo services. In 2019, we derived approximately Ps. 1.1 billion, or 3% of our total operating revenues from non-passenger revenues.
Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and advertising spaces to third parties. They are recognized as revenue at the time the service is provided.
Revenues from cargo services are recognized when the cargo transportation is provided (upon delivery of the cargo to the destination).
The typical fees for advance seat selection, extra legroom, carriage of sports equipment, pets and ticket changes are approximately U.S. $6.99 to U.S. $19.99, U.S. $15.99 to U.S. $30, U.S. $74.99 to U.S. $150, U.S. $89.99 to U.S. $170 and U.S. $74.99 to U.S. $100, respectively and we generate such fees in Mexico, the United States and Central America. We also make available trip insurance commercialized by third parties through our website.
We make efficient use of extra capacity in our aircraft by carrying cargo on our passenger flights. We offer cargo transportation services on all domestic routes. We outsourced all ground cargo handling services, including storage, to several third-party providers and the related cost of such services are paid by our cargo clients. We offer competitive rates and our service includes reception, check-in, shipping and delivery to the final destination.
We also offer charter services, which do not represent a significant part of our total operating revenues.
Not taking into account temporary closures due to the COVID-19 pandemic, we currently serve 47 cities throughout Mexico, the United States and Central America and operate up to 131 daily segments on routes that connect 40 cities in Mexico, including highly demanded destinations such as Cancún, Guadalajara, Mexico City, Monterrey and Tijuana, and seven cities in the United States and Central America, including: Albuquerque, Charlotte, Chicago, Dallas, Denver, Fresno, Houston, Las Vegas, Los Angeles, Miami, Milwaukee, New York, Oakland, Ontario, Orlando, Phoenix, Portland, Reno, Sacramento, San Antonio, San Jose (California), Seattle, Washington D.C. San Jose (Costa Rica), Guatemala City (Guatemala) and San Salvador (El Salvador). Our route network is designed to provide service within Mexico and between Mexico and cities in the United States with large Mexican and Mexican American communities, primarily in California. As of the date of this report, our subsidiary Vuela Aviación does not serve any cities in Central America due to governmental travel restrictions imposed due to the COVID-19 pandemic. Prior to the imposition of such restrictions, Vuela Aviación served three cities throughout Central America.
As part of our point-to-point strategy and route network, we generally offer direct flights between cities with high traffic volumes. We believe this model of scheduling allows us to more frequently serve a greater number of cities and to generate higher load factors, enabling us to increase aircraft utilization and providing us with greater flexibility in our scheduling options.
We schedule a morning bank and an evening bank of flights, with flights timed to arrive at each destination and depart a short time later in order to minimize turnaround times. Many of our evening flights are intended to provide red-eye travel for the longer routes we cover and to appeal to customers who want to save on lodging expenses. Our day flights allow us to maximize our fleet utilization and utilize the employees at our airports efficiently.
Not taking into account temporary closures due to the COVID-19 pandemic, the map below sets forth the destinations we currently serve.
Sales, Distribution, Marketing and Advertising
Sales and Distribution. We currently sell our product through four primary distribution channels: our website, our mobile app, our call center, airports and third parties such as travel agents. We use our website as the primary platform for ticket sales. After our website and mobile app, our distribution sources are our outsourced call center, third-party travel agents and airport counter sales. The following table sets forth the approximate percentage of our ticket sales in 2019 per distribution source and applicable fees:
|Distribution Source||% of tickets Sold in 2019||Fee in pesos(1)|
|Website and mobile app||71||%||0|
|Third-party travel agents||16||%||139|
|(1)||Standard fee charged per customer.|
Sales through our website and mobile app represent our lowest cost distribution channel, and it is the channel through which we offer our lowest fares. For all other channels, we pass the additional costs associated with them through to our customers.
Our passengers may pay for their tickets at the time of booking on our website or through our call center by credit or debit card, or within 24 hours in cash at one of the various points of payment, located at several different businesses vendors we have made available. Approximately 90% of our sales are paid by credit and debit card and 10% by cash and other forms of payment. We have entered into agreements with Cadena Comercial OXXO, S.A. de C.V., and certain banks to provide our customers with the possibility to pay in cash for their tickets at over 49,060 points of payment. These agreements are generally entered into for one- or two-year periods, are subject to termination upon short notice and are renewable by mutual agreement. In 2019, we expensed an aggregate of Ps. 702.5 million in commissions, a portion of the cost of which was transferred to the customers using this service.
We have entered into an agreement with One Link, S.A. de C.V., or One Link, to outsource our call center. Pursuant to this agreement, One Link receives calls from our customers to book flights and provides our customers with information about our fares, schedules and availability. As with our online bookings, purchases through our call center can be paid for at the time of booking by credit or debit card, or within 24 hours in cash at one of our points of payment. The agreement with One Link expires in July 2022.
We have signed agreements with Navitaire LLC and Jeppessen Systems AB, major suppliers of IT solutions in the global airline industry. Through these agreements we are provided with technology systems that allow us to conduct our operations.
Pursuant to our agreement with Navitaire LLC, Navitaire LLC provides us with hosted reservation services, including reservations, revenue accounting, and operations management and recovery, as well as certain services related thereto. This agreement has an initial term of ten years and certain additional renewal periods, unless it is terminated with prior notice subject to certain conditions.
The foregoing description of the terms of the agreement with Navitaire LLC is intended as a summary only and is qualified in its entirety by reference to the copy filed as an exhibit to this annual report.
Marketing and Advertising. Our marketing and advertising activities include the use of the Internet, television, radio and billboards. We focus on direct consumer marketing for our markets, by offering promotional fares and maintaining a strong presence in digital media, such as Facebook, Twitter, Google+, Instagram and YouTube. As of December 31, 2019, we had approximately 4.04 million fans on Facebook and 1.9 million followers on Twitter, which we primarily use for marketing and promotion.
We directly reach our customers by holding promotional events that build brand recognition, such as concerts on our aircraft and on-board runway shows of new crew uniforms. We also advertise on billboards and in venues that our core consumers frequently attend, including concerts, school campuses, and bus stations, among others. We have Internet promotions directed at current customers, who can register on our website. In addition, we send emails with promotions and advertisement to approximately 1.6 million e-mail addresses on a weekly basis. We strive to have the highest marketing impact at the lowest cost. We recently launched a new marketing campaign, denominated “Volar Sí” and “Volar is,” that was designed to focus on the low to middle income traveler and address specific cultural behaviors, with efforts allocated in new channels.
In June 2012, we started a membership based ultra-low-fare subscription service called V-Club which had approximately 632,000 members as of December 31, 2019. The V-Club is an annual subscription based service that allows members exclusive access to the lowest fares on offer and discounted baggage fees. V-Club members pay a small annual fee for first access to offerings of low fares. The membership provides benefits such as guaranteed exclusive, member-only fare sales (at least once every six weeks) and private offers on hotels, rental cars and other travel necessities.
In January 2013, we launched the Volaris affinity credit card program. This credit card provides holders with cash back on Volaris-related purchases, grants priority boarding and ten extra kilograms of luggage on our flights, and access to the Visa lounge in Mexico City’s international airport. We receive a fee from all purchases made with the card.
Pricing and Yield Management
Our emphasis on keeping our operating costs low has allowed us to set low base fares and ancillary revenues while achieving and increasing profitability. We have designed our fare structure to balance our load factors and yields in a way that we believe will generate the highest revenue per block hour on our flights. Most of our seats are sold in the low and mid fare ranges. With the exception of special offers and promotions, we do not have advance purchase restrictions, minimum stays or any other fare restrictions, such as required Saturday night stays. For some of our flights, we set very low discounted base fares based upon the fares charged by bus lines for travel to the same destinations in order to increase our customer base by adding customers who have previously used other forms of transportation.
We have one single base fare type which is a basic, “unbundled fare” that includes 25 kilograms of checked luggage on domestic flights and just a small carry-on and one personal item on board the cabin. Starting March 1, 2017, we began charging for the first checked luggage on routes to and from the United States. Our fares are non-refundable and passengers changing their travel plans on our flights are subject to flight alteration fees. In addition to our base fare, customers can choose a variety of additional products and services to customize their travel experience. These include options of pre-selecting a higher baggage allowance and an on-time performance guarantee, as well as purchasing food, beverages and other products on board. Additional products and services can be purchased at different points in time, including at the time of purchase, before the flight and at the airport. We increase the prices of these products and services the closer the customer purchases them to the departure date.
We use yield management in an effort to maximize revenues per flight, which is also linked to our route and schedule planning and our sales and distribution methods. Yield management is an integrated set of business procedures and mathematical models that provide us with the ability to understand markets, anticipate customer behavior and respond quickly to opportunities. The number of seats we offer at each fare class in each market is based on a continuous process of analysis and forecasting. Past booking history, seasonality, the effects of competition and current booking trends are used to forecast demand. Current fares and knowledge of upcoming events at destinations we serve that we believe will affect traffic volumes are also included in our forecasting model to arrive at an optimal seat allocation for our fares on specific routes. We use a combination of approaches, taking into account yields and flight load factors, depending on the characteristics of the markets served, to design a strategy to achieve the best possible TRASM by balancing the average fare charged and ancillary services sold against the corresponding effect on our load factors.
We are committed to providing our customers with value for their money and on-time and reliable performance. We believe that our low fares initially attract customers and that our exceptional service strengthens customer loyalty and enhances our brand recognition through word-of-mouth as our customers tell others about their experience.
We hire employees who we believe will treat customers in a courteous and friendly manner, and emphasize customer service during their training and as a general part of our company culture. We call our employees ambassadors. We also focus on other details that can improve the travel experience, including on-line check-in and seat assignment options, e-ticket travel, single-class seating, modern aircraft interiors and discounted shuttle services between certain airports and drop-off zones on certain routes. We provide personalized in-cabin support for customers who need it and the option of special assistance for unaccompanied minors and seniors. We believe our customer relationship management has been a key element of our success.
We are committed to compensating our employees on the basis of their performance, rewarding them for the contribution that they make to our success instead of seniority. We base part of our employee compensation on customer service, which is measured through a net promoter score obtained from customer interviews. We currently conduct approximately 20,522 monthly Net Promoter Score (NPS) surveys; as we expand our operations, this number will likely increase.
We understand that efficient and punctual operations are important to our customers, and we intend to continue to excel in operational performance. The following table sets forth certain performance-related customer service measures for the years ended 2017, 2018 and 2019:
|(1)||Percentage of our scheduled flights that were operated by us and that arrived on time (within 15 minutes of the scheduled arrival time).|
|(2)||Percentage of our scheduled flights that were operated by us, whether or not delayed (i.e., not cancelled).|
|(3)||Our incidence of delayed, mishandled or lost baggage per 1,000 passengers.|
The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price (including ancillary services), flight schedules, aircraft type, passenger amenities, number of routes served from a city, customer service, safety record and reputation, code sharing relationships, and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network airlines, low-cost carriers, regional airlines and new entrant airlines. We typically compete in markets served by legacy carriers and other low-cost carriers, and, to a lesser extent, regional airlines. Some of our current or future competitors may have greater liquidity and access to capital, and serve more routes than we do.
Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which is the lowest among the other Latin American publicly traded airlines. In 2019, our CASM was Ps. 124.3 cents (U.S. $6.45 cents), compared to an average CASM of U.S. $10.93 cents for the other Latin American publicly traded airlines. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air, American, Delta, JetBlue, Southwest Airlines and United, which had an average CASM of U.S. $13.10 cents in 2019.
Our principal competitors in Mexico are Grupo Aeroméxico, Interjet and VivaAerobus. Internationally, we compete with Grupo Aeroméxico and many U.S.-based carriers, including Alaska Air, American, Delta and United. In the Mexico — Central America market our principal competitors are Grupo Aeroméxico, Interjet and Avianca, while in the Central America — U.S. market our principal competitors are Avianca and Delta.
Since we began operations in March 2006, we have increased our fleet from four to 82 aircraft as of December 31, 2019.
As of December 31, 2019, we flew only Airbus A319, A320 and A321 aircraft, which provides us with significant operational and cost advantages compared to airlines that operate multiple fleet types. The Airbus A320 family is based on a common aircraft type with the same cabin cross-section, and virtually the same systems, cockpit controls, operating and maintenance procedures, and pilot type rating. The Airbus A320 family aircraft are fuel efficient and allow flight crews to be interchangeable across all of our aircraft while decreasing training, maintenance, spare parts inventory and other operational costs. Due to the commonality among the Airbus A320 family, we can retain the benefits of a fleet comprised of a single type of aircraft while still having the flexibility to match the capacity and range of the aircraft to the demands of each of our routes.
In December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement.
In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries between 2019 and 2022.
As of December 31, 2019, our fleet of 82 Airbus narrow-body aircraft consisted of eight Airbus A319s (including one owned), 58 A320s (17 of them are NEO) and 16 A321s (six of them are NEO). We have a young fleet with the average age of our fleet being 5.0 years as of December 31, 2019, as compared to an average of 8.3 years for the other Mexican airlines according to the AFAC. A young fleet leads to better reliability in terms of the performance of our aircraft, greater fuel efficiency and lower maintenance costs.
Consistent with our ULCC business model, each of our aircraft is configured with a single-class high density seating configuration. Our Airbus A319s accommodate 144 passengers, our Airbus A320s accommodate 180 or 186 passengers and our Airbus A321s accommodate 220 or 230 passengers. Each of our Airbus A320 family aircraft is equipped with IAE or P&W engines. We have taken delivery of 16 spare engines (all of them leased) for service replacement and for periodic rotation through our fleet.
The following table shows the historical development of our fleet from the start of our operations in March 2006 through December 31, 2019:
|Fleet additions (Returns)||2006||2007||2008||2009||2010||2011||2012||2013||2014||2015||2016||2017||2018||2019|
The following table shows the development of our fleet from 2020 to 2023 pursuant to our current contracts:
|Fleet additions (Returns)||2020E||2021E||2022E||2023E|
We have financed the acquisition of our aircraft through a combination of pre-delivery payment financing (including the revolving line of credit with Banco Santander México and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”) under which we act as a guarantor), purchase and leaseback transactions and direct lease agreements, all of which meet the conditions for consideration as operating leases. With respect to purchase and leaseback transactions, we have entered into agreements to purchase aircraft from Airbus which are sold to lessors and are simultaneously leased back through leaseback agreements. We have obtained committed financing for the pre-delivery payments in respect of all the aircraft to be delivered through 2021.
As of December 31, 2019, we had 81 aircraft leased pursuant to long-term lease agreements for an average term of 10 years each. The operating leases for these aircraft expire between 2020 and 2033. We make monthly rent payments and are not required to make termination payments at the end of the lease unless there is an event of default or total loss of the aircraft. Our aircraft leases provide for fixed rent payments. We are required to make certain non-refundable monthly maintenance payments and to return the aircraft in the agreed upon condition at the end of the lease term. We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease.
The purchase agreement with Airbus requires us to accept delivery of 103 Airbus A320 family aircraft in the next six years (from January 2020 to November 2026). The agreement provides for the addition of 103 A320 NEOs to our fleet as follows: eight in 2020, 13 in 2021, 13 in 2022, 16 in 2023, 13 in 2024, 15 in 2025 and 25 in 2026. The basic price for each of the firm-order aircraft to be delivered pursuant to our contracts may be adjusted for changes in economic conditions as published by the United States Department of Labor. We must make pre-delivery payments at specific dates prior to the scheduled delivery. Although the purchase agreement with Airbus does not include the option to have fewer aircraft delivered, we cannot guarantee that our fleet will increase as indicated in the table above.
Additionally, during December 2017, we entered into an agreement with Airbus to purchase 80 aircraft, which we are committed to receive from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement and prior to the delivery of each aircraft, we agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement. In November 2018, we amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries between 2019 and 2022.
On February 13, 2014, we executed a lease agreement with a leasing company for the lease of ten Airbus A320NEO (one which was delivered in September 2016, four in 2017, three in 2018 and two that were delivered in 2019) and six Airbus A321NEO (four delivered in 2018 and two that were delivered in 2019). We have decided to move to a bigger gauge aircraft by leasing delivery of Airbus A320 and A321 aircraft instead of Airbus A319 aircraft, in order to support our growth strategy. During 2015, we executed lease agreements with different leasing companies for the lease of eight Airbus A321 CEO aircraft which were delivered during 2016.
We have eight scheduled A319 aircraft returns in the next five years: one in 2020, four in 2021, two in 2024 and one in 2025. Additionally, we have 31 A320 aircraft returns in the next five years: one in 2020, eight in 2022, nine in 2023, three in 2024 and ten in 2025. We also have three A321 aircraft in the next five years, two in 2023 and one in 2024. However if necessary, we believe we can negotiate extensions under our lease agreements as we have done in the past, which increases our fleet flexibility. In addition, we have been able to lease aircraft from lessors and have the flexibility to do so again in the future. For certain risks related to our lease agreements, see Item 3: “Key Information—Risk Factors—A failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and our financial condition and results of operations.”
We have a AFAC, FAA and a Direction General of Civil Aviation in Costa Rica mandated and approved maintenance program administered by our maintenance engineering department. Our maintenance technicians undergo extensive initial and ongoing training to ensure the safety of our aircraft. Maintenance is performed by our qualified technicians, some of whom are FAA-certified and by maintenance providers which hold the necessary certifications.
Aircraft maintenance and repair consists of routine and non-routine maintenance, and the work performed is divided into three general categories: line maintenance, major maintenance and component service. Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled items on an as needed basis. Line maintenance events are currently serviced by in-house mechanics and supplemented by contract labor and are primarily completed at the airports we currently serve. Line maintenance also includes scheduled tasks that can take from seven to 14 days to complete and are typically required approximately every 22 months.
Heavy airframe maintenance checks consist of a series of more complex tasks that can take up to six weeks to complete. Heavy engine maintenance is performed approximately every five to six years and includes a more complex work scope. Due to our relatively small fleet size and projected fleet growth, we believe outsourcing all of our major maintenance, such as engine servicing and major part repairs, is more efficient. We have entered into a long-term flight hour agreement with IAE and P&W for our engine overhaul services and Lufthansa Technik AG on a power-by-hour basis for component services. We contract with Lufthansa Technik AG for certain technical services and Aeroman for our heavy airframe maintenance. Aeroman is an FAA-approved maintenance provider.
Our recent maintenance expenses have been lower than what we expect to incur in the future because of the relatively young age of our aircraft fleet. Our maintenance costs are expected to increase as the frequency of repair increases with our aircraft’s age. As our aircraft age, scheduled scope work and frequency of unscheduled maintenance events are likely to increase as with any mature fleet.
We are committed to the safety and security of our passengers and employees. Some of the safety and security measures we have taken include (i) aircraft security and surveillance, (ii) positive bag matching procedures, (iii) enhanced passenger and baggage screening and search procedures, and (iv) secured cockpit doors. We strive to comply with or exceed health and safety regulation standards. In pursuing these goals, we maintain an active aviation safety program and all of our personnel are expected to participate in the program and take an active role in the identification, reduction and elimination of hazards.
Our ongoing focus on safety relies on training our employees to use the proper safety equipment and take the proper safety measures by providing them with the tools and equipment they require to perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our operation including flight operations, maintenance, in-flight, dispatch and station operations. We have received the IOSA (IATA’s Operational Safety Audit) certification.
The TSA is charged with aviation security for both airlines and airports in the United States. We maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for the security of our personnel, customers, equipment and facilities are exercised throughout our operation. In Mexico, the Mexican Civil Aeronautic Authority through the Assistant General Aviation Authority (Dirección General Adjunta de Aviación) is in charge of air traffic safety and has the authority to establish or modify the operations condition of air traffic and to coordinate and control the airports. See Item 4: “Information of the Company—History and Development of the Company.”
Fuel is a major cost component for airlines and is our largest operating expense. Fuel accounted for 31%, 38% and 38% of our total operating costs in 2017, 2018 and 2019, respectively. We purchase fuel from ASA which also supplies fuel and fills our aircraft tanks in Mexico. Under our agreement with ASA, the price of fuel is determined by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) and this agreement may be terminated by either party upon short notice. In the United States we have entered into fuel supply agreements with suppliers such as WFS, BP Products North America, Chevron and Associated Energy Group pursuant to which these suppliers or their affiliates sell fuel to us at various airports as specified in the agreements. See Item 3: “Key Information—Risk Factors—We rely on a number of single suppliers for our fuel, aircraft and engines.”
Historically, the fuel costs experienced substantial variances, which cannot be predicted with any degree of certainty since it is subject to many global and geopolitical factors. Fuel prices are dependent on crude oil prices, which are quoted in U.S. dollars. If the value of the U.S. dollar rises against the peso, our fuel costs, expressed in pesos, may increase even absent any increase in the U.S. dollar price of crude oil. Our fuel hedging policy is to enter into fuel derivative contracts to hedge against changes in fuel prices up to 18 months forward subject to certain financing controls. See Item 3: “Key Information—Risk Factors—Our fuel hedging strategy may not reduce our fuel costs.”
We maintain insurance policies we believe are of the types customary in the airline industry and as required by the Mexican and U.S. aviation authorities. In connection with our operations, we carry insurance coverage against loss and damages, including war and terrorist risks, for our entire fleet of aircraft, spares and equipment. We carry passenger and third-party liability insurance coverage at levels that we believe are adequate and consistent with general industry standards. We also hold non-aviation insurance coverage that includes directors’ and officers’ liability, vehicles value and liability and life and major medical expenses insurance for our employees.
In 2019, we redefined our sustainability strategy through the development of the Corporate Sustainability Program. This program is comprised of three focuses aimed at allowing the efforts of the business to be directed towards sustained growth in the future: The Economic and Corporate Governance Focus, the Planet Care Focus and the People Care Focus.
Within the Economic and Corporate Governance Focus, we aim to reduce costs, optimize resources, maintain operational efficiency and reliability, influence public policies and do business in a culture valuing ethics and legality, implementing anti-corruption and anti-bribery practices, managing risks and crises, and ensuring the protection of information and transparency in all our processes.
Within the Care of the Planet Focus, we define our comprehensive environmental protection policy, called #CielitoLimpio, through which we aim to achieve aviation's commitments to protecting the planet and reducing polluting emissions. This policy includes the following initiatives: 1) Efficient management of fuel use, through the acquisition of a young fleet and investment in the best technology, as well as the use of other fuel saving techniques; and 2) A CO2 emissions compensation program, through which our clients have the option of offsetting part of the carbon footprint of their trips. Through these voluntary offsets, we acquired certified carbon bonds from the Mexican Carbon Platform.
We have additional environmental initiatives such as programs to reduce paper and electricity consumption, and are also involved in efforts to promote biodiversity, including through reforestation. Finally, we comply with current environmental regulations, including those related to reporting polluting emissions, the proper management of hazardous waste and the accreditation of environmental certifications, such as ISO 14001 and 9001.
Within the People Care Focus, we aim to strengthen our commitment to people, the fundamental center of the management of a sustainable business. This includes our employees, clients and the communities where we operate.
We have labor practices designed to support solid labor relationships and the well-being of our employees through the Volaris Culture, which is comprised of: (i) Our vision: transcending by creating and living the best travel experiences, (ii) our mission: with the best people and at low cost we enable more people to travel ... Well!, (iii) our behaviors: credibility, respect, impartiality, camaraderie and pride and (iv) our pillars: safety, customer service and sustained profitability.
We seek to attract, develop and retain the talent of competent and professional people, which is why we have a competitive benefit plan that exceeds legal requirements. We also seek to maintain the occupational safety and health of our employees. To that end, we have a series of initiatives that aim to allow our employees to work in an environment free of violence, that foster the conditions necessary for equal opportunities, and that provide constant training to assure the sustained well-being of our employees.
Our corporate volunteer program #VoluntariosVolaris aims to promote the culture of volunteering and the culture of belonging to the Company among our employees. In 2019, we had 513 volunteer employees participate in the program.
Relations with the communities where we operate are an essential part of our Caring for People Focus. We seek to generate value for society through our programs: 1) Volaris Aid Aircraft and 2) Human Rights Protection Program.
The Volaris Aid Aircraft program aims to help people who are in vulnerable situations, such as medical emergencies and natural disaster emergencies, through strategic alliances. We transport rescuers, medical personnel, volunteers, patients, humanitarian aid, organs and tissues for transplant purposes, and others where needed thorough this program.
Through the Human Rights Protection program, through strategic alliances, we have promoted the protection of the rights of girls and boys who travel with Volaris. With this program we seek to implement protocols, in collaboration with the ECPAT (End Child Prostitution and Trafficking for its acronym in English) Code and with the Mexican National Institute of Migration, to protect minors who travel on our aircraft from potential human trafficking and commercial sexual exploitation in the context of travel and tourism.
Finally, the well-being and protection of the rights of our clients is another of the fundamental pillars of the People Care Focus. At Volaris we have the responsibility to protect the lives of our clients, so their safety and well-being is an absolute priority for us. It is for this reason that we strictly comply with the highest safety standards and with domestic and international regulations. In 2019, Volaris was ranked as one of the top ten safest low-cost airlines in the world by AirlineRatings.com.
For more information, see our 2019 Annual Sustainability Report on our website www.ir.volaris.com.
The following is an organizational chart showing Volaris and its subsidiaries as well as Volaris’ ownership and voting percentage in each as of the date of this annual report:
Volaris Opco is our airline operating subsidiary. Comercializadora is our operating subsidiary that is primarily engaged in marketing, advertising and other commercial matters. Servicios Corporativos and Servicios Administrativos employ our employees. Viajes Vuela performs travel agency services. Comercializadora Frecuenta has not started operations and may be engaged in providing air travel-related ancillary services. These subsidiaries are incorporated in Mexico. Vuela is our operating subsidiary in Guatemala and Servicios Earhart employs some of our employees in Guatemala. Both Vuela and Servicos Earhart are incorporated in Guatemala. Vuela Aviación is our operating subsidiary in Costa Rica and is incorporated there. Vuela El Salvador is incorporated in El Salvador and has not started operations but it is expected to be our operating subsidiary there. See Exhibit 21.1 to this annual report for a complete list of our subsidiaries.
Additionally, under IFRS 10 Consolidated Financial Statements, we exercise control over other trusts as described below.
|·||Pre-delivery payments financing trusts: We have assigned our rights and obligations under our purchase agreement with Airbus, including our guaranteed obligation to make pre-delivery payments under such agreement to certain Mexican trusts for purposes of financing such pre-delivery payments. These trusts are as follows:|
|% Equity interest|
|Deutsche Bank México, S.A., Trust 1710||Pre-delivery payments financing||Mexico||100.00||%||100.00||%|
|Deutsche Bank México, S.A., Trust 1711||Pre-delivery payments financing||Mexico||100.00||%||100.00||%|
|·||Trust for the issuance of asset backed securities: On June 20, 2019, our subsidiary Volaris Opco issued 15,000,000 asset backed trust notes under the ticker VOLARCB 19 in the amount of Ps. 1.5 billion through Irrevocable Trust number CIB/3249 created by Volaris Opco. This issuance is part of a program approved by the CNBV for an amount of up to Ps. 3.0 billion.|
|% Equity interest|
|CIBanco, S.A., Trust CIB/3249||Issuance of asset backed securities||Mexico||100.00||%|