UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR 

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

OR 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨ 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

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

(Exact name of Registrant as specified in its charter)

Volaris Aviation Holding Company

(Translation of Registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

Av. Antonio Dovalí Jaime No. 70, 13 Floor, Tower B
Colonia Zedec Santa Fe
United Mexican States, Mexico City, 01210

(Address of principal executive offices)

Maria Elena Rodriguez Asain (maelena.asain@volaris.com) +52-55-5261-6400
Av. Antonio Dovalí Jaime No. 70, 13 Floor, Tower B, Colonia Zedec Santa Fe United Mexican States, Mexico City, 01210

(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.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(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 Other o

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

Part I.				7
	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
		D.	Risk Factors	9
	ITEM 4	INFORMATION ON THE COMPANY		31
		A.	History and Development of the Company	31
		B.	Business Overview	36
		C.	Organizational Structure	52
		D.	Property, Plants and Equipment	54
	ITEM 4A	UNRESOLVED STAFF COMMENTS		54
	ITEM 5	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		54
		A.	Operating Results	54
		B.	Liquidity and Capital Resources	77
		C.	Research and Development, Patents and Licenses, Etc.	79
		D.	Trend Information	79
		E.	Off-Balance Sheet Arrangements	80
		F.	Tabular Disclosure of Contractual Obligations	80
		G.	Safe Harbor	80
	ITEM 6	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		80
		A.	Directors and Senior Management	80
		B.	Compensation	84
		C.	Board Practices	87
		D.	Employees	88
		E.	Share Ownership	89
	ITEM 7	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		89
		A.	Major Shareholders	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
		B.	Significant changes	93
	ITEM 9	THE OFFER AND LISTING		93
		A.	Offer and Listing Details	93
		B.	Plan of Distribution	93
		C.	Markets	93
		D.	Selling Shareholders	100
		E.	Dilution	100
		F.	Expenses of the Issue	100
	ITEM 10	ADDITIONAL INFORMATION		100
		A.	Share Capital	100
		B.	Memorandum and Articles of Association	100
		C.	Material Contracts	109
		D.	Exchange Controls	109
		E.	Taxation	109
		F.	Dividends and Paying Agents	115
		G.	Statement by Experts	115
		H.	Documents on Display	115
		I.	Subsidiary Information	115
	ITEM 11	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		115
	ITEM 12	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		117
		A.	Debt Securities	117
		B.	Warrants and Rights	117
		C.	Other Securities	117
		D.	American Depositary Shares	117

i

Part II.				122
	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 16	[Reserved]		123
	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
Part III.				127
	ITEM 17	FINANCIAL STATEMENTS		127
	ITEM 18	FINANCIAL STATEMENTS		127
	ITEM 19	EXHIBITS		127

ii

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;

· maintenance costs;

1

· our reliance on automated systems and the risks associated with changes made to those systems;

· use of personal data;

· lack of marketing alliances;

· government regulation, changes in law and interpretation and supervision of compliance with applicable law;

· maintaining and renewing our permits and concessions;

· our ability to execute our growth strategy;

· operational disruptions;

· our indebtedness;

· our liquidity;

· our reliance on third-party vendors and partners;

· our reliance on a single fuel provider in Mexico;

· an aircraft accident or incident;

· our aircraft and engine suppliers;

· changes in the Mexican and VFR (passengers who are visiting friends and relatives) markets;

· insurance costs;

· environmental regulations;

· cyber-attacks;

· our ability to respond to global health crises, such as the 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.

2

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.

3

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.

4

“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.

5

“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.

6

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.

Part I.

ITEM 1IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2   OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3KEY INFORMATION

A.Selected Consolidated Financial Data

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.

7

	For the Years ended December 31,
	2015			2016			2017			2018			2019			2019
							Adjusted(1)			Adjusted(1)
	(in thousands of pesos, except share and per share data and operating data)															(in thousands of U.S. dollars)(2)
CONSOLIDATED STATEMENTS OF OPERATIONS
Operating revenues:
Passenger revenues:
Fare revenues		14,130,365			17,790,130			17,791,317			18,487,858			23,129,991			1,227,368
Other passenger revenues		—			4,919,452			6,098,504			7,892,497			10,569,208			560,844
Non-ticket revenue		4,049,339			—			—			—			—			—
Non-passenger revenues:
Other non-passenger revenues		—			590,355			727,392			697,357			897,586			47,629
Cargo		—			171,623			170,973			227,438			228,836			12,143
Non-derivative financial instruments		—			—			—			—			(72,949	)		(3,871	)
		18,179,704			23,471,560			24,788,186			27,305,150			34,752,672			1,844,113
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
Maintenance expenses(3)		874,613			1,344,110			1,418,253			1,497,989			1,488,431			78,982
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
		15,669,371			20,772,760			23,545,482			26,770,353			30,397,249			1,612,998
Operating income		2,510,333			2,698,800			1,242,704			534,797			4,355,423			231,115
Finance income		47,034			102,591			105,795			152,603			207,799			11,027
Finance cost		(21,703	)		(35,116	)		(1,515,281	)		(1,876,312	)		(2,269,829	)		(120,446	)
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
Attributable to:
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 assets		15,231,504			21,781,771			49,952,973			56,724,683			63,295,127			3,358,689
Total short-term liabilities		7,073,372			7,962,382			13,555,372			14,083,029			17,324,216			919,294
Long-term liabilities		1,333,301			3,099,797			32,572,248			39,936,501			40,441,228			2,145,968
Total liabilities		8,406,673			11,062,179			46,127,620			54,019,530			57,765,444			3,065,262
Capital stock		2,973,559			2,973,559			2,973,559			2,973,559			2,973,559			157,789
Total equity		6,824,831			10,719,592			3,825,353			2,705,153			5,529,683			293,427
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		65,086			10,765			(3,634,598	)		(5,946,059	)		(5,238,840	)		(277,993	)
FINANCIAL DATA
Operating income		2,510,333			2,698,800			1,242,704			534,797			4,355,423			231,115
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
OPERATING DATA(9)
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			—
Departures(7)		87,931			101,811			108,060			117,920			138,084			—
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			—
Load factor(8)		82	%		86	%		84	%		85	%		86	%		—
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			—

8

(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.

(8) Includes scheduled.

(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.

B.Capitalization and Indebtedness

Not Applicable.

C.     Reasons for the Offer and Use of Proceeds

Not Applicable.

D.Risk Factors

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.

9

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.

10

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.

11

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.”

12

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.

13

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.

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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.

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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.

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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.

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We face numerous challenges in implementing our growth strategy, including our ability to:

· maintain profitability;

· 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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;

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· 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.

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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.

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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.

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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

A.History and Development of 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.

Overview

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.

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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.”

Mexican Regulation

Operational Regulation

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.

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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.

Aircraft

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.

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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.

Routes

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.

Fares

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.

Slots

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.”

Foreign Ownership

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.”

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Environmental Regulation

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.

Labor Regulation

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

Operational 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.

International Regulation

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.

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Security Regulation

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.

Environmental Regulation

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.

Other Regulations

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.

Future Regulations

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.

B. Business Overview

Industry

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.

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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.

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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.

Market Environment

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:

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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:

Passenger Volumes	2006			2007			2008			2009			2010			2011			2012			2013			2014			2015			2016			2017			2018			2019
(millions of segment passengers)
International		27.4			27.2			27.9			24.2			25.8			26.8			28.5			30.9			33.6			37.5			40.5			45.0			47.6			48.8
% 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	%
Domestic		22.2			27.4			27.6			24.4			24.5			25.5			28.2			30.6			33.0			37.3			41.9			45.4			49.7			53.7
% 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	%
Total		49.6			54.6			55.5			48.6			50.3			52.3			56.8			61.5			66.6			74.8			82.4			90.4			97.3			102.5
% 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	%

Source: AFAC

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:

Market Share(1) Domestic	2006			2007			2008			2009			2010			2011			2012			2013			2014			2015			2016			2017			2018			2019
Volaris(2)		4.04	%		7.94	%		12.16	%		12.82	%		14.79	%		17.96	%		20.39	%		23.04	%		23.23	%		24.67	%		27.42	%		27.40	%		28.31	%		31.23	%
Grupo Aeroméxico		32.91	%		28.58	%		28.01	%		32.28	%		36.20	%		40.17	%		37.78	%		35.77	%		36.04	%		33.74	%		31.13	%		28.98	%		27.59	%		24.21	%
Grupo Mexicana(3)		26.99	%		24.07	%		24.05	%		27.16	%		18.55	%		—			—			—			—			—			—			—			—			—
Interjet(4)		5.65	%		7.04	%		10.83	%		12.71	%		16.35	%		24.78	%		23.83	%		24.37	%		23.69	%		24.53	%		21.62	%		21.18	%		20.48	%		19.69	%
Viva Aerobus(5)		0.30	%		4.44	%		4.83	%		5.83	%		8.85	%		11.49	%		12.49	%		12.19	%		11.81	%		11.70	%		14.26	%		16.87	%		18.35	%		20.12	%

Source: AFAC

(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.

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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:

Market Share(1) International	2006			2007			2008			2009			2010			2011			2012			2013			2014			2015			2016			2017			2018			2019
Volaris(2)		—			—			—			2.92	%		9.38	%		21.11	%		21.45	%		20.42	%		21.24	%		22.75	%		24.70	%		22.80	%		19.63	%		21.83	%
Grupo Aeroméxico		31.68	%		34.05	%		31.73	%		31.06	%		39.83	%		75.73	%		67.24	%		64.63	%		66.05	%		61.67	%		56.82	%		55.65	%		53.20	%		45.58	%
Grupo Mexicana(3)		64.56	%		63.85	%		66.08	%		65.36	%		49.94	%		—			—			—			—			—			—			—			—			—
Interjet(4)		—			0.10	%		0.28	%		—			—			1.51	%		8.80	%		13.42	%		11.09	%		13.69	%		17.60	%		20.72	%		24.57	%		28.65	%
Viva Aerobus(5)		—			—			0.85	%		0.43	%		0.84	%		1.54	%		2.13	%		0.81	%		0.91	%		1.52	%		0.55	%		0.64	%		2.46	%		3.60	%

Source: AFAC

(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:

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· 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.

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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.

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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.

Our Operations

Operating revenues

As of January 1, 2018, we adopted IFRS 15 “Revenue from Contracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. 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

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.

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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.

Non-Passenger Revenues

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.

Route Network

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.

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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
Call center		5	%		198
Third-party travel agents		16	%		139
Airport counters		1	%		100
V-Club		7	%		0

Source: Volaris

(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.

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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.

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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.

Customer Service

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:

	2017			2018			2019
On-time performance(1)		84.9	%		82.28	%		79.2	%
Completion factor(2)		99.4	%		99.4	%		97.6	%
Mishandled baggage(3)		0.88	%		0.7	%		1.04	%

Source: Volaris

(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.

Competition

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.

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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.

Fleet

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
A319		6		8		5		—		5		—		—		(4	)		(2	)		—		(3	)		(3	)		(4	)		-
A320		—		—		2		—		—		8		7		7			8			4		8			5			6			3
A321		—		—		—		—		—		—		—		—			—			2		8			—			4			2
Total fleet		6		14		21		21		26		34		41		44			50			56		69			71			77			82

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
A319	(1	)	(4	)	—		--
A320	7		7		(3	)	2
A321	—		6		8		3
Total fleet	88		97		102		107

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.

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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.”

Maintenance

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.

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Safety

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

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.”

Insurance

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.

Sustainability

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.

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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.

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C.Organizational Structure

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.

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· 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
Name	Principal Activities	Country		2019			2018
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
Name	Principal Activities	Country		2019
CIBanco, S.A., Trust CIB/3249	Issuance of asset backed securities		Mexico		100.00	%

· Share-based payment trusts: We have formed the following share-based payment trust:

· Management Incentive Plan

In December 2012, our shareholders approved a share retention plan for the benefit of certain executive officers. Under this plan, designated officers generally may receive up to 3.0% of our capital stock on a fully diluted basis immediately prior to the completion of the related performance condition (consummation of our initial public offering or change of control), exercisable after such performance condition and for a period of ten years. To implement the plan, our shareholders approved (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of our capital stock, (ii) the transfer of such shares to the Management Trust number F/307750 (the “Management Trust”) for the benefit of certain officers and (iii) the execution of share sales agreements setting forth the terms and conditions upon which the officers will receive purchased shares from the trustee of the Management Trust. On December 24, 2012, the Management Trust was created by us, as trustor, and HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, División Fiduciaria, as trustee, to administer this plan, and the share sales agreements were executed. On December 27, 2012, the trust acquired the aforementioned shares. The shares will accrue any dividends paid by us during the time elapsing prior to the delivery to officers upon payment therefore.

On September 18, 2013, our Initial Public Offering Date, the key employees participating in the management incentive plan exercised 4,891,410 Series A and Series B shares. The key employees paid Ps.25.9 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

On November 16, 2015, as part of our secondary follow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps.23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between us and the Management Trust.

During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps.17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2017, the key employees participating in the management incentive plan exercised 120,000 Series A shares. As a result, the key employees paid Ps.0.6 million to the Management Trust corresponding to the shares exercised. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2018, the key employees participating in the management incentive plan exercised 2,003,876 Series A shares. As a result, the key employees paid Ps.10.7 million to the Management Trust corresponding to the shares exercised. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

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During 2019, the key employees participating in the management incentive plan exercised 2,780,000 Series A shares. As a result, the key employees paid Ps.14.8 million to the Management Trust corresponding to the shares exercised. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust. See Item 5: “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Long-term Retention Plans—Management Incentive Plan.”

As of December 31, 2019, 2018 and 2017, 7,653,981, 10,433,981 and 12,437,857 share options pending to be exercised were considered as treasury shares, respectively.

· Long-term Incentive Plan (equity-settled)

On November 6, 2014, we approved an amendment to our long-term incentive plan for the benefit of certain key executives, based on the recommendations of our board of directors at its meetings held on July 24 and August 29, 2014. In connection therewith, in November 2014, we established a plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps.10.8 million to be used to purchase our shares. An irrevocable administrative trust number F/745291 was created by Servicios Corporativos, as trustor, and Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte, as trustee, to administer this plan.

In November 2019, 2018 and 2017, our board of directors authorized extensions to this plan. The total costs of the plan extensions approved were Ps. 86.8 million, Ps. 64.0 million and Ps. 15.8 million, respectively, to be used to purchase our shares. See Item 5: “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Long-term Retention Plans—Long-term Incentive Plan.”

During the year ended December 31, 2018 and 2019, certain of these key employees left the Company. Therefore; the vesting conditions were not fulfilled. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares.

· Board of Directors Incentive Plan (BoDIP)

In April 2018 and 2019, our shareholders at the annual shareholders meeting authorized a stock plan for the benefit of certain independent members of our board of directors (“BoDIP”). The BoDIP was implemented through the execution of: (i) a trust agreement number CIB/3081 created by us, as trustor, and CIBanco, S.A., Institucion de Banco Multiple, as trustee, on August 29, 2018; and (ii) a stock purchase agreement between each plan participant and the trustee, under which a plan participant has a period of four years to exercise his/her option to pay a fixed purchase price, with the title to the shares transfering to the plan participant upon payment of such purchase price by the plan participant.  The number of shares held by the trustee as of December 31, 2019 was 2,072,344, of which 968,706 shares were priced at Ps. 16.80; 977,105 shares were priced at Ps. 16.12 and 126,533 shares were priced at Ps. 26.29. As of December 31, 2019, there were no exercises under the BoDIP.

D.Property, Plants and Equipment

We lease all of our facilities at each of the airports we serve. Our leases for our terminal passenger service facilities, which include ticket counter and gate space, operations support area and baggage service offices, generally have terms ranging from one to three years and contain provisions for periodic adjustments of lease rates. We expect to either renew these leases or find alternative space that would permit us to continue providing our services. We also are responsible for maintenance, insurance and other facility-related expenses and services. We have also entered into use agreements at each of the airports we serve that provide for the non-exclusive use of runways, taxiways and other facilities. Landing fees under these agreements are based on the number of landings and weight of the aircraft.

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, zip code 01210, where we lease 6,656 square meters under a lease that expires in May 2022. In addition, we sublease a hangar facility at the Tijuana airport, such sublease expires on July 15, 2022.

ITEM 4A UNRESOLVED STAFF COMMENTS

None.

ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.Operating Results

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”

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Description of Our Principal Line Items

Operating Revenues

As of January 1, 2018, we adopted IFRS 15 “Revenue from Contracts with Customers” using the full retrospective method of adoption. The main impact of IFRS 15 on us is the timing of recognition of certain air travel-related ancillary services. 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.

Passenger Revenues

Our passenger revenue includes income generated from: (i) fare revenue and (ii) other passenger revenue.

We derive our operating revenues primarily from transporting passengers on our aircraft and some tickets sold by other airlines such as Frontier. Approximately 67% of our total operating revenues were derived from passenger fares in 2019. Passenger revenues are based upon our capacity, load factor and the average ticket revenue per booked passenger. Our capacity is measured in terms of ASMs, which represents the number of seats we make available on our aircraft multiplied by the number of miles the seats are flown. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing RPMs by ASMs.  The average ticket revenue per booked passenger represents the total passenger revenue divided by booked passengers.

Other passenger revenues include but are not limited to fees charged for excess baggage, bookings through our call center or third-party agencies, advanced seat selection, itinerary 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. Approximately 30% of our total operating revenues were derived from other passenger revenues in 2019.

Non-Passenger Revenues

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 following table shows each of the line items in our consolidated statements of operations for the periods indicated as a percentage of our total operating revenues for that period:

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	For the Years ended December 31,
	2017			2018			2019
	Adjusted(1)			Adjusted(1)
Operating revenues:
Passenger revenues:
Fare revenues		72	%		68	%		67	%
Other passenger revenues		25	%		29	%		30	%
Non-passenger revenues:
Other non-passenger revenues		3	%		3	%		3	%
Cargo		0	%		0	%		0	%
Non-derivative financial instruments:		0	%		0	%		0	%
Total operating revenues		100	%		100	%		100	%
Other operating income		0	%		(2	)%		(1	)%
Fuel expense, net		29	%		37	%		33	%
Landing, take-off and navigation expenses		16	%		17	%		15	%
Depreciation of right of use assets		14	%		15	%		14	%
Salaries and benefits		11	%		11	%		10	%
Maintenance expenses		6	%		5	%		4	%
Sales, marketing and distribution expenses		7	%		5	%		4	%
Aircraft and engine variable lease expenses		6	%		4	%		3	%
Other operating expenses		4	%		4	%		3	%
Depreciation and amortization		2	%		2	%		2	%
Total operating expenses, net		95	%		98	%		87	%
Operating income		5	%		2	%		13	%
Finance income		0	%		1	%		1	%
Finance cost		(6	)%		(7	)%		(7	)%
Exchange gain, net		3	%		0	%		4	%
Income (loss) before income tax		2	%		(5	)%		11	%
Income tax (expense) benefit		(1	)%		1	%		(3	)%
Net income (loss)		1	%		(3	)%		8	%

(1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, using the full retrospective method of adoption in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Revenues from our international operations represented 30%, 32% and 29% of our total revenues in 2017, 2018 and 2019, respectively, and revenues from our domestic operations represented 70%, 68% and 71% of our total revenues in 2017, 2018 and 2019, respectively.

Revenue Recognition

General

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.

Passenger revenues

Revenues from the air transportation of passengers are recognized at the earlier of when the service is provided or when the non-refundable ticket expires at the date of the scheduled travel.

Ticket sales for future flights are initially recognized as contract liabilities under the caption unearned transportation revenue and, once we provide the transportation service or when the non-refundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as fare revenue and the unearned transportation revenue is reduced by the same amount. All of our tickets are non-refundable and are subject to change upon a payment of a fee. Additionally, the Company does not operate a frequent flier program.

Passenger revenues includes income generated from: (i) fare revenues and (ii) other passenger revenues. Other passenger services include but are not limited to fees charged for excess baggage, bookings through the call center or third-party agencies, advanced seat selection, itinerary changes and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by the Company or when the non-refundable ticket expires at the date of the scheduled travel.

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We also classify as other passenger revenue “V Club” and other similar services, which are recognized as revenue over time when the service is provided, as a modification of the tickets sold to V Club members.

Tickets sold by other airlines such as Frontier where we provide the transportation are recognized as passenger revenue when the service is provided.

We sell certain tickets with connecting flights with one or more segments operated by other airline partners. For segments operated by other airline partners, we have determined that we are acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract (i.e. transportation of the passenger). We, as the agent, recognize revenue within other operating revenue at the time of the travel for the net amount retained by us for any segments flown by other airlines.

Non-passenger revenues

Non-passenger revenues include revenues generated from: (i) other non-passenger revenues and (ii) cargo services.

Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and advertising spaces to third parties. They are recognized as revenue at the time the service is provided.

We concluded that the timing of satisfaction of revenue from advertising spaces is to be recognized over time because the customer simultaneously receives and consumes the benefits we provide.

Additionally, we recognize as revenue the air transportation facility charges for non-show passengers, when the non-refundable ticket expires at the date of the scheduled travel.

We also evaluated principal versus agent considerations as they relate to certain non-air travel services arrangements with third party providers. No changes were identified under this analysis as we are the agent for those services provided by third parties.

We are also required to collect certain taxes and fees from customers on behalf of government agencies and airports and remit these back to the applicable governmental entity or airport on a periodic basis. These taxes and fees include value added tax, federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure taxes. These items are collected from customers at the time they purchase their tickets, but are not included in passenger revenue. We record a liability upon collection from the customer and discharge the liability when payments are remitted to the applicable governmental entity or airport.

Operating Expenses, net

Our operating expenses consist of the following line items.

Other Operating Income. Other operating income primarily includes the gains from sale and lease back operations of our aircraft and engines.

Fuel expense, net. Fuel expense is our single largest operating expense. It includes the cost of fuel, related taxes, fueling into-plane fees and transportation fees. It also includes realized gains and losses that arise from any fuel price derivative activity qualifying for hedge accounting and gains and losses that arise from non-derivative financial instruments.

Landing, Take-off and Navigation Expenses. Landing, take-off and navigation expenses include airport fees, handling charges, and other rents, which are fixed and variable facilities’ expenses, such as the fees charged by airports for the use or lease of airport facilities, as well as costs associated with ground handling services that we outsource at certain airports. This expense also includes route charges, which are the costs of using a country’s or territory’s airspace and are levied depending on the distance flown over such airspace.

Depreciation of right–of–use assets. Depreciation of right-of-use assets use includes the depreciation of all aircraft and engine leases and some land and building leases that qualify under IFRS 16.

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With respect to this line item, 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 effect on our statement of financial position as of January 1, 2017. This led to approximately Ps.23.5 billion of right-of-use assets and Ps.32.7 billion as lease liabilities as of January 1, 2017. Our financial results as of and for the years ended 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.

Salaries and Benefits. Salaries and benefits expense include the salaries, hourly wages, employee health insurance coverage and variable compensation that are provided to employees for their services, as well as the related expenses associated with employee benefit plans and employer payroll taxes.

Maintenance Expenses. Maintenance expenses include all parts, materials, repairs and fees for repairs performed by thirdparty vendors directly required to maintain our fleet. It excludes the direct labor cost of our own mechanics, which is included under salaries and benefits and includes only routine and ordinary maintenance expenses. Major maintenance expenses are capitalized and subsequently amortized as described in “—Depreciation and Amortization—” below.

Sales, Marketing and Distribution Expenses. Sales, marketing and distribution expenses consist of advertising and promotional expenses directly related to our services, including the cost of web support, our outsourced call center, travel agent commissions, and credit card discount fees that are associated with the sale of tickets and other products and services.

Aircraft and Engine Variable Lease Expenses. Aircraft and engine variable expenses consist of the maintenance deposits we pay to the lessor as maintenance deposits when we determine that we will probably not recover such deposits in whole or in part. In these cases, we record these amounts in the results of operations as additional aircraft rent (supplemental rent) from the time we make the determination over the remaining term of the lease. Aircraft and engine variable lease expense also includes the estimated return costs of our fleet, which in no case are related to scheduled major maintenance. The return costs are recognized on a straight-line basis as a component of supplemental rent.

Other Operating Expenses. Other operating expenses include (i) administrative support such as travel expenses, stationery, administrative training, monthly rent paid for our headquarters’ facility, professional fees and all other administrative and operational overhead expenses; (ii) costs for technological support, communication systems, cell phones, and internal and operational telephone lines; (iii) premiums and all expenses related to the aviation insurance policy (hull and liability); and (iv) outsourced ground services and the cost of snacks and beverages that we serve on board to our passengers.

Depreciation and Amortization. Depreciation and amortization expense include the depreciation of all flight equipment, furniture and equipment we own and leasehold improvements to flight equipment. It also includes the amortization of major maintenance expenses we defer under the deferral method of accounting for major maintenance events associated with the aging of our fleet and recognize over the shorter period of the next major maintenance event or the remaining lease term.

A common measure of per unit costs in the airline industry is cost per available seat mile (CASM). The following table shows the breakdown of CASM for the periods indicated:

	For the years ended December 31,
	2017			2018			2019			2019
	Adjusted(2)
	(In Ps. cents)									(In U.S. $ cents)(1)
Other operating income		(0.5	)		(3.0	)		(1.3	)		(0.1	)
Fuel expense, net		38.5			48.2			47.7			2.5
Landing, take-off and navigation expenses		21.2			21.8			20.9			1.1
Depreciation of right of use assets		18.2			19.2			19.2			1.0
Salaries and benefits		15.0			14.9			14.7			0.8
Maintenance expenses		7.4			7.2			6.0			0.4
Sales, marketing and distribution expenses		9.0			7.1			5.9			0.3
Aircraft and engine variable lease expenses		7.6			4.6			3.9			0.2
Other operating expenses		5.5			5.0			4.5			0.2
Depreciation and amortization		2.9			2.4			2.8			0.2
Total operating expenses, net		124.8			127.4			124.3			6.6

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(1) 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.

(2) On adoption of IFRS 16 we apply the new standard described elsewhere in this annual report as of the effective date of January 1, 2019, using the full retrospective method of adoption in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Recent Developments

The 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, 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. Please refer to “Risk Factors—Risks related to the airline industry—Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, COVID-19 and other highly communicable diseases, affect travel behavior and could have a material adverse effect on the Mexican economy, airline industry reputation, the price of our shares, our business, results of operations and financial condition” for a discussion of the ways COVID-19 may impact our business and the Mexican economy.

As a result of the national health emergency and health security measures imposed by the Mexican government, 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. 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. For additional information see “—Trends and Uncertainties Affecting Our Business—Impact of COVID-19.”

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that affect airlines and their markets, trends affecting the broader travel industry, and trends affecting the specific markets and customer base that we target. The following key factors may affect our future performance.

Impact of COVID-19. COVID-19 has drastically reduced demand for air travel and caused major disruptions and volatility in global financial markets, resulting in the fall of stock prices (including the price of our stock), both trends which may continue. There are other broad and continuing concerns related to the 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.

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 the actual impact of the COVID-19 pandemic on our results of operations and financial condition remains uncertain, the following indicators, among others, are likely to have a negative impact on our consolidated financial results in the first quarter of 2020 (and further into the year depending on the length of the pandemic and Mexican governmental actions to control the pandemic):

· due to continued partial or total lockdowns in Mexico and the other countries in which we operate, demand for our flights is likely to continue to decrease which may require further reductions to our ASMs (in addition to the approximately 80% reduction we announced for the month of April 2020) and aircraft utilization and may lead to a decrease in our total operating revenue;

· the volatility in the international capital markets has resulted in (i) the fall of stock prices, including the price of our stock and (ii) financial losses associated with our financial portfolio, which may cause a deterioration of our financial condition or limitations on our ability to meet our liabilities;

· if our revenues decrease for a significant portion of time, we may have less cash available to meet our obligations under our aircraft and engine lease agreements and additional sources of financing may be difficult to obtain at favorable rates;

· contingency plans we have implemented in our corporate office in contingency plans we have implemented in order to address the COVID-19 emergency, including home offices, implementation of alternative offsite locations and so on, may cause a temporary increase in our administrative expenses; and

· as of the date of this annual report, we are experiencing a significant decline in international and domestic demand. In response to decreased demand, we have taken a number of actions. In addition to the schedule reductions discussed above, we have cancelled or postponed non-operational expenditures, non-essential capital expenditure and tooling expenses; and instituted other, company-wide cost cutting measures. However, even after the COVID-19 pandemic eases, there is a risk that we will experience reduced demand in the near to mid-term due to the potential economic impact of the pandemic on our customers, as well as customer health concerns about the safety of air travel.

Economic Conditions in Mexico. Based on information that was published prior to the COVID-19 pandemic, Mexico’s GDP is expected to grow by 2.15% per year for the next ten years according to the Mexican Central Bank, which is in line with the expected annual growth for the United States during the same period as reported by the U.S. Federal Reserve. See "Key Information—Risk Factors—Risks Related to the Airline Industry—Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory Syndrome (SARS), the Zika virus, 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" for more recent information on the impact of COVID-19 on Mexico's future macroeconomic condition.

Regarding population dynamics as of 2015, according to the INEGI intercensal survey, around 36% of the Mexican population was under 20 years of age, which benefits us by providing a strong base of potential customer growth. Inflation in Mexico during 2019 was 2.83% according to the INEGI. As of December 31, 2019, international reserves were at U.S. $180.749 billion.

Competition. The airline industry is highly competitive. The principal competitive factors in the airline industry are fare pricing, total price, flight schedules, aircraft type, passenger amenities and related services, number of routes served from a city, customer service, safety record and reputation, code-sharing relationships and frequent flier programs and redemption opportunities. Our current and potential competitors include traditional network 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 may serve more routes than we do.

Our principal competitive advantages are our low base fares and our focus on VFR travelers, leisure travelers and cost-conscious business people. These low base fares are facilitated by our low CASM, which at Ps. 124.3 cents (U.S. $6.45 cents) we believe was the lowest CASM in Latin America in 2019, compared to Avianca at U.S. $15.30 cents, Azul at U.S. $10.60 cents, Copa at U.S. $9.40 cents, Gol at U.S. $9.00 cents, Grupo Aeroméxico at U.S. $10.80 cents and LATAM at U.S. $10.50 cents. We also have lower costs than our publicly traded target market competitors in the United States, 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.

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Our principal competitors for the domestic market are Grupo Aeroméxico, Interjet and VivaAerobus, Interjet and VivaAerobus are low-cost carriers in Mexico. In 2019, the Mexican low-cost carriers (including us) combined had 71% of the domestic market based on passenger flight segments. We had 31% of the domestic market which placed us first, according to the AFAC.

We also face domestic competition from ground transportation alternatives, primarily long-distance bus companies. There are limited passenger rail services in Mexico. There is a large bus industry in Mexico, with total passenger segments of approximately 3.09 billion in 2018 (the latest year for which data is available as of the date of this annual report), of which approximately 83.48 million were executive and luxury passenger segments, according to the Mexican Authority of Ground Transportation (Dirección General de Autotransporte Federal) and which could include both long- and short-distance travel. We set certain of our promotional fares at prices lower than bus fares for similar routes in order to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus. We believe a small shift of bus passengers to air travel would dramatically increase the number of airline passengers and bring the air trips per capita figures in Mexico closer to those of other countries in the Americas.

Our principal competitors for the international routes between Mexico and the United States are Grupo Aeroméxico, Alaska Air, Delta and United. We have grown rapidly in the international market since we started international operations in 2009, reaching 7.8% market share on the routes that we operate and 11.5% market share considering all routes between Mexico and the United States in 2019, according to the AFAC.

Seasonality and Volatility. Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. We generally expect demand to be greater during the summer in the northern hemisphere, in December and around Easter, which can fall either in the first or second quarter, compared to the rest of the year. Our business is also volatile and highly affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, health outbreaks, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, weather and other factors have resulted in significant fluctuations in our revenues and results of operations in the past. Particularly, in 2008, the demand for air transportation services was significantly adversely affected by both the severe economic recession and the record high fuel prices. We believe, however, that demand for business travel historically has been more sensitive to economic pressures than demand for low-price leisure and VFR travel, which are the primary markets we serve.

In addition, on January 20, 2017, Donald Trump became president of the United States. President Trump has already implemented immigration policies that have adversely affected the United States—Mexico travel behavior, especially in the VFR and leisure markets, and there is a possibility that further immigration policy changes are to come. For example as a result of the COVID-19 pandemic, on April 22, 2020 the President of the United States 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.”

President Trump’s immigration policies had a negative impact on our results of operations during 2018 and 2019 and this negative impact can be expected to continue if the Trump administration continues to carry out such immigration policies.

Fuel. Fuel costs represent the single largest operating expense for most airlines, including ours, accounting for 31%, 38% and 38% of our total operating expenses for 2017, 2018 and 2019, respectively. Fuel availability and pricing are also subject to refining capacity, periods of market surplus and shortage, and demand for heating oil, gasoline and other petroleum products, as well as economic, social and political factors and other events occurring throughout the world, which we can neither control nor accurately predict. We source a significant portion of our fuel from refining sources located in Mexico.

During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 13,492 thousand gallons of fuel. Such hedges represented a portion of our fourth quarter 2019 projected consumption. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons of fuel. The latter hedges represented a portion of our projected third quarter 2019 and our 2020 consumption.

During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Call options and Zero-Cost Collars designated to hedge 45.6 million gallons of fuel. Additionally, as of December 31, 2017, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 61.1 million gallons of fuel.

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As of December 31, 2019, we purchased our domestic fuel under the ASA fuel service contract, and international fuel under the WFS, Shell, Uno Petrol, Uno El Salvador, BP Products North America and Chevron fuel service contracts. The cost and future availability of fuel cannot be predicted with any degree of certainty.

Foreign Exchange Gains and Losses. While most of our revenue is generated in pesos, 30%, 32% and 29% of our revenues came from our operations in the United States and Central America during the years ended December 31, 2017, 2018 and 2019, respectively, and U.S. dollar denominated collections accounted for 40%, 38% and 43% of our total collections in 2017, 2018 and 2019, respectively. In addition, the majority of our operating costs are denominated in or indexed to U.S. dollars, constituting 71%, 73% and 72% of our total operating costs in 2017, 2018 and 2019. Our key U.S. dollar-denominated operating costs include fuel, aircraft rentals and maintenance costs.

We manage our foreign exchange risk exposure by a policy of matching, to the extent possible, receipts and local payments in each individual currency. Most of the surplus funds are converted into U.S. dollars. However, we are exposed to fluctuations in exchange rates between the peso and the U.S. dollar.

As of December 31, 2017, 2018, and 2019, our net monetary liability position denominated in U.S. dollars was U.S. $1.2 billion, U.S. $1.7 billion and U.S. $1.7 billion, respectively. As a result of either the appreciation or depreciation of the peso against the U.S. dollar in 2017, 2018 and 2019, as the case may be, and our net U.S. dollar liability position, we recorded a foreign exchange gain (loss), net of Ps. 0.7 billion, Ps. (0.1) billion and Ps. 1.4 billion, respectively.

Maintenance Expenses. We are required to conduct varying levels of aircraft and engine maintenance, which involve significantly different labor and materials inputs. Maintenance requirements depend on the age and type of aircraft and the route network over which they operate. Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks. Aircraft maintenance and repair costs for routine and non-routine maintenance are divided into three general categories:

(i) Routine maintenance requirements consist of daily and weekly scheduled maintenance checks on our aircraft, including pre-flight, daily, weekly and overnight checks, diagnostic and routine repairs and any necessary unscheduled tasks performed. These types of line maintenance are currently serviced by our mechanics and are primarily completed at the main airports that we currently serve.

All other maintenance activities are sub-contracted to qualified maintenance, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and are required approximately every 22 months. All routine maintenance costs are expensed as incurred.

(ii) Major maintenance consists of a series of more complex tasks that can take from one to six weeks to accomplish and are generally required approximately every five to six years. Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized as improvements to leased assets and amortized over the shorter period of the next major maintenance event or the remaining lease term.

(iii) Engine services are provided pursuant to an engine flight hour agreement that guarantees a cost per overhaul, provides miscellaneous engine coverage, caps the cost of foreign objects damage events, ensures protection from annual escalations and grants an annual credit for scrapped components. We also have a power-by-hour agreement for component services, which guarantees the availability of aircraft parts for our fleet when they are required and provides aircraft parts that are not included in the redelivery conditions of the contract without constituting an additional cost at the time of redelivery. The costs associated with the miscellaneous engine coverage and the component services agreements are recorded in the consolidated statements of operations.

Due to the young age of our fleet (approximately 5.0 years on average as of December 31, 2019), maintenance expense in 2017, 2018 and 2019 remained relatively low. For the years ended December 31, 2017, 2018 and 2019 we capitalized major maintenance events as part of leasehold improvements to the flight equipment in the amount of Ps.529.3 million, Ps.676.5 million and Ps. 659.1 million, respectively. For the years ended December 31, 2017, 2018 and 2019 the amortization of these deferred major maintenance expenses was Ps.382.7 million, Ps.313.5 million and Ps. 450.4 million, respectively. The amortization of deferred maintenance expenses is included in depreciation and amortization rather than total maintenance costs as described in “—Critical Accounting Polices and Estimates.” In 2017, 2018 and 2019, total maintenance costs amounted to Ps.1.4 billion, Ps.1.5 billion and Ps. 1.5 billion, respectively. As the fleet ages, we expect that maintenance costs will increase in absolute terms. The amount of total maintenance costs and related amortization of heavy maintenance expense is subject to many variables such as future utilization rates, average stage length, the size and makeup of the fleet in future periods and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify future maintenance expenses for any significant period of time. However, we estimate that based on our scheduled maintenance events, current maintenance expense and maintenance-related amortization expense will be approximately Ps. 2.6 billion (U.S. $127 million) in 2020.

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Aircraft Maintenance Deposits Paid to Lessors. The terms of our aircraft lease agreements require us to pay maintenance deposits to lessors to be held as collateral for the performance of major maintenance activities, resulting in our recording significant prepaid deposits on our consolidated statements of financial position. As a result, the cash costs of scheduled major maintenance events are paid well in advance of the recognition of the maintenance event in our results of operations. Please see Item 5:—Critical Accounting Policies and Estimates.”

Ramp-up Period for New Routes. During 2017 we opened 31 new routes, added 35 more in 2018 and 30 more in 2019. As we continue to grow, we would expect to continue to experience a lag between when new routes are put into service and when they reach their full profit potential. See Item 3: “Key Information—Risk Factors—Airline consolidations and reorganizations could adversely affect the industry.”

Critical Accounting Policies and Estimates

The following discussion and analysis of our consolidated financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of supplemental assets and liabilities at the date of our consolidated financial statements. Note 1 to our consolidated financial statements included herein provides a detailed discussion of our significant accounting policies.

Critical accounting policies are defined as those policies that reflect significant judgments or estimates about matters that are both inherently uncertain and material to our financial condition or results of operations.

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Aircraft Maintenance Deposits Paid to Lessors. Our lease agreements provide that we pay maintenance deposits or supplement rent to aircraft lessors to be held as collateral in advance of our performance of major maintenance activities. Maintenance deposits are held as collateral in cash. These lease agreements provide that maintenance deposits are reimbursable to us upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event or (ii) the qualifying costs related to the specific maintenance event. Substantially all of these maintenance deposits are calculated based on a utilization measure, such as flight hours or cycles, and are used solely to collateralize the lessor for maintenance time run off the aircraft until the completion of the maintenance of the aircraft and engines. We paid Ps. 148.8 million, Ps. 454.0 million and Ps. 64.6 million in maintenance deposits, net of reimbursements, to our lessors for the years ended December 31, 2017, 2018 and 2019, respectively.

At lease inception and at each consolidated statement of financial position date, we assess whether the maintenance deposit payments required by the lease agreements are substantively and contractually related to the maintenance of the leased asset. Maintenance deposit payments that are substantively and contractually related to the maintenance of the leased asset are accounted for as maintenance deposits. Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position.

The portion of prepaid maintenance deposits that are deemed unlikely to be recovered, primarily relate to the rate differential between the maintenance deposits payments and the expected cost for the next related maintenance event that the deposits serve to collateralize is recognized as supplemental rent.

Thus, any excess of the required deposit over the expected cost of the major maintenance event is recognized as supplemental rent starting from the period the determination is made. When it is not probable that we will recover amounts currently on deposit with a lessor, such amounts are expensed as supplemental rent. We expensed Ps. 265.8 million in 2017, Ps. 299.6 million in 2018 and Ps. 295.7 million in 2019 of maintenance deposits as supplemental rent.

As of December 31, 2017, 2018 and 2019 we had prepaid maintenance deposits of Ps. 6.9 billion, Ps. 6.5 billion and Ps. 6.4 billion, respectively, recorded in our consolidated statements of financial position. We currently expect that these prepaid maintenance deposits are likely to be recovered primarily because there is no rate differential between the maintenance deposit payments and the expected cost for the related next maintenance event that the deposits serve to collateralize.

During the years ended December 31, 2017, 2018 and 2019 we extended the lease term of three aircraft agreements, two aircraft agreements and one aircraft agreement, respectively. Additionally, we extended the lease term of one spare engine agreement in 2019, two spare engine agreements in 2018 and two spare engine agreements in 2017. These extensions made available maintenance deposits that were recognized in prior periods in the consolidated statements of operations as supplemental rent of Ps. 65.7 million, Ps. 0.0 million and Ps. 0.0 million during 2017, 2018 and 2019, respectively.

Because the lease extension benefits are considered lease incentives, the effect of these extensions are recorded reducing the right of use asset. See note 14 to our audited consolidated financial statements included elsewhere in this annual report.

During the year ended December 31, 2019, we added 7 new net aircraft to our fleet. The lease agreements of some of these aircraft do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so we do not record guarantee deposits regarding these aircraft. However, some of these agreements provide the obligation to make a maintenance adjustment payment to the lessors at the end of the contract period. This adjustment covers maintenance events that are not expected to be made before the termination of the contract. We recognize this cost as supplemental rent during the lease term of the related aircraft, in the consolidated statements of operations.

For the years ended December 31, 2017, 2018 and 2019, we expensed as supplemental rent Ps. 265.8 million, Ps. 299.6 million and Ps. 295.7 million, respectively.

Aircraft and Engine Maintenance. We account for major maintenance under the deferral method. Under the deferral method, the cost of major maintenance is capitalized (leasehold improvements to flight equipment) and amortized as a component of depreciation and amortization expense until the next major maintenance event or during the remaining contractual lease term, whichever occurs first. The next major maintenance event is estimated based on assumptions including estimated usage maintenance intervals mandated by the FAA in the United States and the AFAC in Mexico and average removal times suggested by the manufacturer. These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and changes in suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a major maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated useful life would decrease before the next maintenance event, resulting in additional amortization expense over a shorter period.

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In 2017, 2018 and 2019, we capitalized costs of major maintenance events of Ps. 529.3 million, Ps. 676.5 million and Ps. 659.1 million, respectively and we recognized amortization expenses of Ps. 382.7 million, Ps. 313.5 million and Ps. 450.4 million, respectively. The amortization of deferred maintenance expenses is included under the caption depreciation and amortization expense in our consolidated statements of operations. If the amortization of major maintenance expenditures were classified as maintenance expense, they would amount to Ps.1.8 billion, Ps.1.8 billion and Ps. 1.9 billion for the years ended December 31, 2017, 2018 and 2019, respectively.

In August 2012, we entered into a total support agreement with Lufthansa Technik AG (LHT), as amended in December 2016, that expires December 31, 2022, which includes a total component support agreement (power-by-hour) and ensures the availability of aircraft components for our fleet when they are required. The cost of the total component support agreement is applied monthly to the results of operations. As part of this total support agreement, we received credit notes of Ps. 46.5 million and of Ps. 28.1 million, which was deferred on the consolidated statements of financial position and is being amortized on a straight line basis, prospectively during the term of the agreement.

During 2017, 2018 and 2019, we amortized a corresponding benefit from these credit notes of, Ps. 6.6 million, Ps. 7.2 million and Ps. 5.2 million, respectively, which is recognized in the consolidated statements of operations as a reduction of maintenance expenses.

Return obligations. The aircraft and engine lease agreements also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in most cases are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of variable rent expenses and the provision is included as part of other liabilities, through the remaining lease term. We estimate the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2017, 2018 and 2019, the Company expensed as variable rent Ps. 851,410, Ps. 659,106 and Ps. 680,964, respectively.

Fair Value. The fair value of our financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets. They are determined using valuation techniques such as the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions regarding these factors could affect the reported fair value of financial instruments.

Gains and Losses on Sale and Leaseback. We enter into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to us.

Starting January 1, 2019, we measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, we recognize in the Statement of Operations only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. The rest of the gain is amortized over the lease term.

During the year ended December 31, 2017, 2018 and 2019 we sold and transferred aircraft and engines to third parties, giving rise to a gain of approximately Ps. 65.9 million, Ps. 609.2 million and Ps. 284.8 million respectively, that was recorded as other operating income in the consolidated statements of operations.

During the year ended December 31, 2011, we entered into aircraft and spare engine sale and leaseback transactions, which resulted in a loss of Ps.30.7 million. This loss was deferred on the consolidated statements of financial position and is being amortized over the contractual lease term. For the years ended December 31, 2017, 2018 and 2019, we amortized a loss of Ps. 3.0 million, Ps. 3.0 million and Ps. 3.0 million, respectively, as additional aircraft rental expense.

Before the IFRS 16 adoption, the profit or loss related to a sale transaction followed by an operating lease, was accounted for as follows:

(i) Profit or loss was recognized immediately when it was clear that the transaction was established at fair value.

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

(iii) If the sale price was above fair value, the excess of the price above the fair value was deferred and amortized to the consolidated statements of operations over the asset’s expected lease term, including probable renewals, with the amortization recorded as a reduction of rent expense. During the years ended December 31, 2017, 2018 and 2019 we sold and transferred aircraft and engines to third parties, giving rise to a gain of approximately Ps. 65.9 million, Ps. 609.2 million and Ps. 284.8 million, respectively, that was recorded as other operating income in the consolidated statements of operations

Equity-settled Transactions

Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. Our Equity-settled Transactions include long-term retention plans comprised of: (i) a management incentive plan; (ii) long-term incentive plan; and (iii) a board of directors incentive plan.

Long-Term Retention Plans

o Management Incentive Plan

The management incentive plan has been classified as an equity-settled transaction because as of the grant date the fair value of the transaction is fixed and is not adjusted by subsequent changes in the fair value of capital instruments.

The total cost of the management incentive plan is Ps. 2.7 million. This amount is being expensed over the vesting period, which commenced retroactively upon consummation of our initial public offering and ended on December 31, 2015. During 2012, we did not recognize any compensation expense associated with the management incentive plan in our consolidated statements of operations. During 2013, 2014 and 2015, we recorded Ps. 2.1 million Ps. 0.3 million and Ps. 0.3 million, respectively, as a cost of the management incentive plan related to the vested shares, as recorded in our consolidated statements of operations.

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The factors considered in the valuation model for the management incentive plan included a volatility assumption estimated from historical returns on common stock of comparable companies and other inputs obtained from independent and observable sources, such as Bloomberg. The share spot price fair value was determined using the market approach valuation methodology, with the following assumptions:

	2012
Dividend yield (%)		0.00
Volatility (%)		37.00
Risk—free interest rate (%)		5.96
Expected life of share options (years)		8.80
Exercise share price (in pesos)		5.31
Exercise multiple		1.10
Fair value of the stock at grant date		1.73

The dividend yield was set at zero because at the time the management incentive plan was valued and as of the date of this annual report, we do not have any plans to pay a dividend.

The volatility was determined based on average historical volatilities. Such volatilities were calculated according to a database including up to 18 months of historical stock price returns of U.S. and Latin American publicly traded airlines. The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome.

The risk-free interest rate is the interbank interest rate in Mexico, continuously expressed, accordingly to the corresponding term.

The expected life of the share options is an output of the valuation model and represents the average time the option is expected to remain viable, assuming the employee does not leave during the vesting period.

The management incentive plan explicitly incorporates expectations of the employee’s early exercise behavior by assuming that early exercise happens when the stock price is a certain multiple, M, of the exercise price. The exercise multiple M, of 1.1x incorporates the assumption that the employee’s exercise of the options can occur when the share prices are 1.1 times the exercise price, i.e. 10% above the exercise price.

On September 18, 2013, the key employees participating in the management incentive plan exercised 4,891,410 shares. As a result, the key employees paid Ps. 25.9 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

On November 16, 2015, as part of the secondary follow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps. 23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps. 17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2017, the key employees participating in the management incentive plan exercised 120,000 Series A shares. The key employees paid Ps. 0.6 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2018, the key employees participating in the management incentive plan exercised 2,003,876 Series A shares. The key employees paid Ps. 10.7 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

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During 2019, the key employees participating in the management incentive plan exercised 2,780,000 Series A shares. The key employees paid Ps. 14.8 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

As of December 31, 2019, 2018 and 2017, the 7,653,981, 10,433,981 and 12,437,857 share options pending to be exercised, respectively, were considered as treasury shares.

Movements during the year

The following table illustrates the number of share options and fixed exercise prices during the year:

	Number			Exercise price in pesos		Total in thousands of pesos
Outstanding as of December 31, 2012		25,164,126		Ps.	5.31	Ps.	133,723
Granted during the year		—			—		—
Forfeited during the year		—		—		—
Exercised during the year		(4,891,410	)		5.31		(25,993	)
Outstanding as of December 31, 2013		20,272,716		Ps.	5.31	Ps.	107,730
Granted during the year		—		—		—
Forfeited during the year		—		—		—
Exercised during the year		—		—		—
Outstanding as of December 31, 2014		20,272,716		Ps.	5.31	Ps.	107,730
Granted during the year		—			—		—
Forfeited during the year		—			—		—
Exercised during the year		(4,414,860	)		5.31		(23,461	)
Outstanding as of December 31, 2015		15,857,856		Ps.	5.31	Ps.	84,269
Granted during the year		—			—		—
Forfeited during the year		—			—		—
Exercised during the year		(3,299,999	)		5.31		(17,536	)
Outstanding as of December 31, 2016		12,557,857		Ps.	5.31	Ps.	66,733
Granted during the year		—			—		—
Forfeited during the year		—			—		—
Exercised during the year		(120,000	)		5.31		(638	)
Outstanding as of December 31, 2017		12,437,857		Ps.	5.31	Ps.	66,095
Granted during the year		—			—		—
Forfeited during the year		—			—		—
Exercised during the year		(2,003,876	)		5.31		(10,654	)
Outstanding as of December 31, 2018		10,433,981		Ps.	5.31	Ps.	55,441
Granted during the year		—			—		—
Forfeited during the year		—			—		—
Exercised during the year		(2,780,000	)		5.31		(14,773	)
Outstanding as of December 31, 2019		7,653,981		Ps.	5.31	Ps.	40,668

At December 31, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019, the shares held in trust to satisfy the management options were considered as treasury shares. At December 31, 2017, 2018 and 2019, 12,437,857, 10,433,981 and 7,653,981 share options pending to be exercised were considered as treasury shares, respectively.

o Long-term Incentive Plan (equity-settled)

In November 2014, we established an equity-settled long-term incentive plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps. 10.8 million to be used to purchase our shares. On April 21, 2016, an amendment to this plan was approved at our annual ordinary shareholders’ meeting. The key components of the plan are as follows:

(i) Servicios Corporativos granted a bonus to each key executive.

(ii) Pursuant to the instructions of such key executives, on November 11, 2014, an amount equal to Ps. 7.1 million (the fair value of the bonus net of withheld taxes) was transferred to an administrative trust for the acquisition of our Series A shares through an intermediary authorized by the Mexican stock market, based on the instructions of the administration trust’s technical committee. An amount equal to Ps. 7.5 million (the fair value of the bonus net of withheld taxes) was approved in April 2016 as an extension of this plan for the acquisition of our Series A shares, following the same mechanism.

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(iii) Subject to the terms and conditions set forth in the administrative trust agreement signed in connection thereto, the acquired shares are to be held in escrow in the administrative trust until the applicable vesting period date for each key executive, which is the date as of which each such key executive can fully dispose of the shares as desired.

(iv) If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale.

(v) Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee.

The total cost of this plan is Ps. 10.8 million. This valuation is the result of multiplying the total number of our Series A shares deposited in the administrative trust and the price per share, plus the balance in cash deposited in the administrative trust. This amount is being expensed over the vesting period, which commenced on November 11, 2014 and will end in November 2019.

In November 2019, 2018 and 2017, extensions to this plan were approved by our board of directors. The total cost of each of the extensions approved was Ps. 86.8 million (or Ps. 56.4 million, net of withheld taxes), Ps. 64.0 million (or Ps. 41.6 million, net of withheld taxes) and Ps. 15.8 million (or Ps. 10.1 million, net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares.

During 2017, 2018 and 2019, we recognized Ps.13.5 million, Ps.20.0 million and Ps.49.7 million, respectively, as compensation expense associated with the long-term incentive plan in our consolidated statements of operations.

Movements during the year

The following table illustrates the number of shares associated with our long-term incentive plan during the year:

	Number of Series A shares
Outstanding as of December 31, 2018		*3,553,295
Purchased during the year		2,694,600
Granted during the year		—
Exercised during the year		(959,614	)
Forfeited during the year		(173,090	)
Outstanding as of December 31, 2019		*5,115,191

* These shares were presented as treasury shares in the consolidated statements of financial position as of December 31, 2018 and 2019 and all are considered outstanding for basic and diluted earnings per share purposes because the holders are entitled to dividends if and when distributed.

The vesting period of the shares granted under the Company’s equity-settled long-term incentive plan is as follows:

Number of Series A shares	Vesting period
2,211,269	November 2019-2020
2,005,716	November 2020-2021
898,206	November 2021-2022
5,115,191

During the year ended December 31, 2019, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. During the year ended December 31, 2019, 173,090 shares were forfeited.

o Board of Directors Incentive Plan (BoDIP)

In April 2018, our shareholders at the annual shareholders meeting authorized a stock plan for the benefit of certain independent members of our board of directors (the “BoDIP”). The BoDIP was implemented through the execution of: (i) trust agreement number CIB/3081 created by us, as trustor, and CIBanco, S.A., Institucion de Banco Multiple, as trustee, on August 29, 2018; and (ii) a stock purchase agreement between each plan participant and the trustee, under which a plan participant has a period of four years to exercise his/her option to pay a fixed purchase price, with the title to the shares transferring to the plan participant upon payment of such purchase price by the plan participant. The number of shares held by the trustee as of December 31, 2019 was 2,072,344, of which 968,706 shares were priced at Ps. 16.80, 977,105 shares were priced at Ps. 16.12 and 126,533 shares were priced at Ps. 26.29. As of December 31, 2019, there were no exercises under the BoDIP.

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Cash-settled Transactions

Cash-settled transactions include share appreciation rights (“SARs”). Our cash-settled transactions include long-term retention plans comprised of: (i) management incentive plan II and (ii) a cash-settled long-term incentive plan.

·Long-term Retention Plans

o Management Incentive Plan II

On November 6, 2016, our board of directors approved an extension of the management incentive plan to certain key employees, known as MIP II. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested was also approved.

The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.

The carrying amount of the liability relating to these SARs as of December 31, 2019, 2018 and 2017 was Ps. 70.6 million, Ps. 32.9 million and Ps. 37.9 million, respectively. The compensation cost is recognized in our consolidated statements of operations under the caption salaries and benefits over the service period. During the years ended December 31, 2019, 2018 and 2017 we recorded a expense (benefit) of Ps. 37.8 million, Ps.(5.1) million and Ps.(16.5) million, respectively, associated with these SARs in our consolidated statements of operations. No SARs were exercised during 2019.

Number of SARs (Grant date: November 6, 2016)	Exercisable date
2,825,840	February 2020
3,391,020	February 2021
6,216,860*

*Includes forfeited SARs of 0, 1,563,520 and 0 for the years ended December 31, 2017, 2018 and 2019, respectively.

o Cash-settled Long-term Incentive Plan

During 2010, we adopted an employee long-term incentive plan, the purpose of which is to retain high-performing employees within the organization by paying incentives depending on our performance. Incentives under this plan were payable in three annual installments, following the provisions for other long-term benefits under IAS 19. During the year ended December 31, 2013 and 2012 we expensed Ps .6.3 million and Ps. 6.5 million respectively, as bonuses as part of the caption salaries and benefits. During 2014, this plan was structured as a long-term incentive plan, which consists of a long-term incentive plan (equity-settled) and long-term incentive plan (cash-settled).

On November 6, 2014 we granted 4,315,264 Series A SARs to key executives. The SARs vest during a three-year period as long as the employee completes the required service period and entitle them to a cash payment. As of the grant date the amount of SARs granted under this plan totaled Ps. 10.8 million.

Under the plan program extensions described above, the number of SARs granted to certain of our key executives totaled 3,965,351, 0 and 0, respectively, which amounts to a cost of Ps. 15.8 million (or Ps. 10.1 million, net of withheld taxes), Ps. 0.0 million (or Ps. 0.0 million, net of withheld taxes) and Ps .0.0 million (or Ps. 0.0 million, net of withheld taxes), for the years ended December 31, 2017, 2018 and 2019, respectively. The SARs vest during a three-year period as long as the employee completes the required service period.

The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table below). The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.

The carrying amount of the liability relating to the SARs as of December 31, 2017, 2018 and 2019 was Ps. 0.7 million, Ps. 0.5 million and Ps. 1.9 million, respectively. The compensation cost is recognized in our consolidated statements of operations under the caption of salaries and benefits over the service period. During the years ended December 31, 2017, 2018 and 2019 we recorded an expense (benefit) of Ps. (9.0) million, Ps. (0.2) million and Ps. 3.0 million, respectively, in respect of these SARs in our consolidated statements of operations.

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Number of SARs	Exercisable date
725,193	November 2020
725,193*

* Include forfeited SARs of 32,616, 484,656 and 145,769 for the years ended December 31, 2019, 2018 and 2017, respectively.

Derivative Financial Instruments and Hedge Accounting. We mitigate certain financial risks, such as volatility in the price of jet fuel, adverse changes in interest rates and exchange rate fluctuations, through a controlled risk management policy that includes the use of derivative financial instruments. The derivative financial instruments are recognized in the consolidated statement of financial position at fair value. The effective portion of a cash flow hedge’s unrecognized gain or loss is recognized in “Accumulated other comprehensive income (loss) items,” while the ineffective portion is recognized in current year earnings. The realized gain or loss of derivative financial instruments that qualify as hedging is recorded in the same statements of operations as the realized gain or loss of the hedged item. Derivative financial instruments that are not designated as or not effective as a hedge are recognized at fair value with changes in fair value recorded in current year earnings. During 2019, all derivative financial instruments held qualified for hedge accounting. Outstanding derivative financial instruments may require collateral to guarantee a portion of the unsettled loss prior to maturity. The amount of collateral delivered in guarantee, which is presented as part of “Guarantee deposits,” is reviewed and adjusted on a daily basis, based on the fair value of the derivative position. As of December 31, 2019 we did not have any collateral recorded as a guarantee deposits.

(i) Aircraft Fuel Price Risk. We account for derivative financial instruments at fair value and recognize them in the consolidated statements of financial position as an asset or liability. The cost of aircraft fuel consumed in 2017, 2018 and 2019 represented 31%, 38% and 38% of our operating expenses, respectively. To manage aircraft fuel price risk, we periodically enter into derivatives financial instruments.

During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 13,492 thousand gallons of fuel. Such hedges represented a portion of our fourth quarter 2019 projected consumption. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons of fuel. The latter hedges represented a portion of our projected third quarter 2019 and our 2020 consumption.

During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Call options and Zero-Cost Collars designated to hedge 45.6 million gallons of fuel. Additionally, as of December 31, 2017, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 61.1 million gallons of fuel.

Additionally, during the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge approximately 20% of our 2020 fuel consumption, as well as US Gulf Coast fuel 54 Asian call options that expired by the end of 2019 to hedge approximately 5% of projected fuel consumption for 2019. During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options and US Gulf Coast fuel 54 Asian call options designated to hedge approximately 18% of our 2019 projected fuel consumption.

We utilize IFRS 9, which comprises aspects related to classifications and measurement of financial assets and financial liabilities, as well as hedge accounting treatment. Paragraph 6.2.4 (a) of IFRS 9 allows us to separate the intrinsic value and time value of an option contract and to designate as the hedging instrument only the change in the intrinsic value of the option. As further required in paragraph 6.5.15 therein, because the external value (time value) of the Jet fuel 54 Asian call options are related to a “transaction related hedged item,” it is required to be segregated and accounted for as a “cost of hedging” in other comprehensive income (“OCI”) and accrued as a separate component of stockholders’ equity until the related hedged item affects profit and loss.

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Since monthly forecasted jet fuel consumption is considered the hedged item of the “related to a transaction” type, then the time value included as accrued changes on external value in capital is considered as a “cost of hedging” under IFRS 9. The hedged item (jet fuel consumption) of the Jet fuel 54 Asian call options contracted by us represent a non-financial asset (energy commodity), which is not in our inventory. Instead, it is directly consumed by our aircraft at different airport terminals. Therefore, although a non-financial asset is involved, its initial recognition does not generate a book adjustment in our inventories. Rather, it is initially accounted for in our other comprehensive income (OCI) and a reclassification adjustment is made from OCI toward the profit and loss and recognized in the same period or periods during which the hedged item is expected to be allocated to profit and loss (in accordance with IFRS 9.6.5.15, B6.5.29 (a), B6.5.34 (a) and B6.5.39). As of January 2015, we began to reclassify these amounts (previously recognized as a component of equity) to our statement of operations in the same period in which our expected jet fuel volume consumed affects our jet fuel purchase line item therein.

As of December 31, 2017 and 2018, the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian call options was Ps. 497.4 million and Ps. 48.2 million respectively. During the year ended December 31, 2019, the Company entered into US Gulf Coast Jet Fuel 54 Asian call options which expired by the end of 2019. As of December 31, 2018 and 2019 the fair value of our outstanding US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options was a loss of (Ps. 122.9) million and a gain of Ps. 133.6 million, respectively, and these were presented as part of the financial assets and financial liabilities line items in our consolidated statements of financial position. The amount of positive cost of hedging derived from the extrinsic value changes of these options as of December 31, 2017, 2018 and 2019 recognized in other comprehensive income totaled Ps. 163.8 million, Ps. 134.1 million, and Ps. 133.6 million, respectively, and will be recycled to our fuel cost during 2020, as these options expire on a monthly basis and as jet fuel is consumed. During the years ended December 31, 2017, 2018 and 2019, the net negative (positive) cost of these options recycled to our fuel cost totaled Ps. 27.0 million, (Ps. 402.5) million and Ps. 70.5 million, respectively.

(ii) Foreign Currency Risk. Foreign currency risk is the risk that the fair value of future cash flows will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities (when revenue or expense is denominated in a different currency than pesos). Exchange exposure relates to amounts payable arising from U.S. dollar-denominated and U.S. dollar-linked expenses and payments. To mitigate this risk, we may use foreign exchange derivative financial instruments and non-derivative financial instruments.

During the years ended December 31, 2017 and 2018, the Company entered into foreign currency forward contracts in U.S. dollars to hedge approximately 9% and 20% of its future 12 and 6 months of aircraft rental expenses, respectively. A portion of the Company’s foreign currency forwards matured during the second half of 2017 (in August, September, November and December), therefore there was no outstanding balance as of December 31, 2017. In addition, a portion of the Company’s foreign currency forwards matured during the fourth quarter of 2018 (November and December).

During the year ended December 31, 2019, the Company did not enter into foreign currency forward contracts

Our foreign exchange exposure as of December 31, 2017, 2018 and 2019 was a net liability position of U.S. $1.2 billion, U.S. $1.7 billion and U.S. $1.7 million, respectively.

Hedging relationships with non-derivative financial instruments

Regarding the foreign currency risk effective since January 1, 2019, we implemented two hedging strategies for our forecasted foreign exchange exposures using with non-derivative financial instruments. In the first hedging strategy, we have designated a hedge to mitigate our foreign exchange rate risk and the foreign exchange variation fluctuation in U.S. dollar denominated forecasted revenues using the financial liabilities corresponding to the lease liability denominated in U.S. dollars over the term of the remaining leases term. As of December 31, 2019 we had an amount equivalent to U.S. $2.1 billion of lease liability designated as hedging forecasted revenues over the remaining lease term.

Additionally, the second strategy involves a hedging relationship for our foreign exchange rate with non-derivative financial instruments in order to mitigate the exchange rate risk and foreign exchange (the peso to U.S. dollar) variation intrinsic in our U.S. dollar denominated Jet Fuel purchases. For this strategy, a portion of our Jet Fuel consumption over approximately the next two years has been designated as a hedge item; as hedging instrument we designated a portion of the guaranteed deposits and cash and cash equivalents denominated in U.S. dollars. In this hedging relationship, for foreign exchange rate with non-derivate financial instruments, we designated an amount equivalent to U.S. $410 million, which represents a portion of the financial assets denominated in U.S. dollars.

For both hedging relationships in accordance with the Cash Flows Hedging Model, the accounting records corresponding to the recycling of the reserve for hedging of cash flows (Other Comprehensive Income or “OCI”, part of the Stakeholders’ Equity) will be done as it is indicated on IFRS 9, this means to reclassify to OCI through the accounts of results in the same period or periods in which the expected hedging for cash flows affects our results for such period, i.e. when those sales are recognized as revenue, always adjusting them because of the hedging effects for the program.

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(iii) Interest Rate Risk. Interest rate risk is the risk that the fair value of future cash flows will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our long-term debt obligations and lease obligations with floating interest rates. As of December 31, 2017 and 2018, the Company did not have any interest rate derivatives. As of December 31, 2019, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps. 1.5 billion and a fair value of Ps. 2.7 million. These instruments are included as assets in our consolidated statements of financial position. For the year ended December 31, 2017, the reported loss on the interest rate swaps was Ps. 13.8 million, which was recognized as part of rental expense in the consolidated statements of operations. All the Company’s positions in the form of interest rate swaps matured on March 31 and April 30, 2017. Consequently, there was no outstanding balance as of December 31, 2018 and 2017.

The table below presents the payments required by our financial liabilities:

	Within one Year		One to five Years		Total
Interest-bearing borrowings:
Pre-delivery payment facilities		1,855,956		1,452,553		3,308,509
Short-term working capital facilities		200,000		-		200,000
Asset backed trust note		-		1,500,000		1,500,000
Total		2,055,956		2,952,553		5,008,509

Deferred Taxes. We account for income taxes using the liability method. Deferred taxes are recorded based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carry-forwards. In assessing our ability to realize deferred tax assets, our management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. In evaluating our ability to utilize our deferred tax assets, we consider all available evidence, both positive and negative, in determining future taxable income on a jurisdiction by jurisdiction basis. At December 31, 2017, 2018 and 2019 we had tax loss carry-forwards amounting to Ps. 1.5 billion, Ps. 1.6 billion and Ps. 1.3 billion, respectively. These losses relate to our and our subsidiaries’ operations on a stand-alone basis, which in conformity with current Mexican Income Tax Law may be carried forward against taxable income generated in the succeeding years in each country and may not be used to offset taxable income elsewhere in our consolidated group. During the years ended December 31, 2017, 2018 and 2019 we used tax-loss carry-forwards of Ps. 16.4 million, Ps. 154.4 million and Ps. 214.5 million, respectively.

Central America (Guatemala, Costa Rica and El Salvador)

According to Guatemala corporate income tax law, under the regime on profits from business activities net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2018 and 2019, we generated a net operating income (loss) of Ps. 8.5 million and Ps. (1.1) million, respectively.

According to Costa Rica corporate income tax law, under the regime on profits from business activities, net operating losses can offset taxable income in a term of three years. For the years ended December 31, 2017, 2018 and 2019, we obtained net operating losses of Ps. 300.6 million, Ps. 170.7 million and Ps. 50.2 million, respectively, which have not been recognized as deferred tax assets.

According to El Salvador corporate income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2019, we obtained a net operating loss of Ps. 32.5 million.

Impairment of Long-Lived Assets. The carrying value of flight equipment, furniture and equipment and right of use assets is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of flight equipment, furniture and equipment and right of use assets.

We record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less cost to sell and its value in use.

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

For the years ended December 31, 2017, 2018 and 2019, no impairment charges were recorded in respect of our long-lived assets.

Allowance for Credit Losses. An allowance for credit losses is established using the life-time expected credit loss approach, based on objective evidence that we will not be able to collect all amounts due according to the original terms of the receivables. At December 31, 2017, 2018 and 2019, the allowance for credit losses was Ps. 17.8 million, Ps. 11.3 million and Ps. 40.3 million, respectively.

Operating Revenues

2018 compared to 2019

	For the years ended December 31,
	2018 Adjusted(1)		2019		Variation
	(In thousands of pesos, except for % and operating data)
Operating Revenues
Passenger revenues:
Fare revenues	18,487,858		23,129,991		4,642,133		25.1	%
Other passenger revenues	7,892,497		10,569,208		2,676,711		33.9	%
Non-passenger revenues:
Other non-passenger revenues	697,357		897,586		200,229		28.7	%
Cargo	227,438		228,836		1,398		0.6	%
Non-derivative financial instruments	-		(72,949	)	(72,949	)	n.a.
Total operating revenues	27,305,150		34,752,672		7,447,522		27.3	%
Operating Data
Capacity (in ASMs in thousands)	21,009,545		24,498,893		3,489,348		16.6	%
% Load factor booked	85	%	86	%	-		1.0	pp
Booked passengers (in thousands)	18,396		21,975		3,579		19.5	%
Average ticket revenue per booked passenger	1,006		1,054		48		4.8	%
Average other passenger revenue per booked passenger	429		481		52		12.1	%
Average total ancillary revenue per booked passenger	479		532		53		11.1	%
Revenue passenger miles (RPMs in thousands)	17,748,408		21,032,364		3,283,956		18.5	%

(1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, using the full retrospective method of adoption in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Fare revenues. The increase in fare revenues in 2019 was primarily due to growth in our ASM capacity by 16.6% resulting from the incorporation of five new net aircraft. Additionally, our booked passengers increased 19.5%, and our average ticket revenue per booked passenger increased 4.8% year over year.

Other passenger revenues. The increase in other passenger revenues in 2019 was primarily due to higher volume of passengers electing to purchase additional services. We continue executing our fare unbundling and demand stimulation strategy. In particular, during 2019, our total ancillary revenues increased due to improved revenue from fees charged for excess baggage, advanced seat selection and itinerary changes.

Other non-passenger revenues. The increase in other non-passenger revenues was primarily due to higher revenues from airport incentives recorded during 2019.

Cargo. The increase in cargo revenues in 2019 was primarily due to a higher volume of cargo operations recorded during 2019.

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2017 compared to 2018

	For the years ended December 31,
	2017 Adjusted(1)		2018		Variation
	(In thousands of pesos, except for % and operating data)
Operating Revenues
Passenger revenues:
Fare revenues	17,791,317		18,487,858		696,541		3.9	%
Other passenger revenues	6,098,504		7,892,497		1,793,993		29.4	%
Non-passenger revenues:
Other non-passenger revenues	727,392		697,357		(30,035	)	(4.1	)%
Cargo	170,973		227,438		56,465		33.0	%
Total operating revenues	24,788,186		27,305,150		2,516,964		10.2	%
Operating Data
Capacity (in ASMs in thousands)	18,860,950		21,009,545		2,148,595		11.4	%
%Load factor booked	84	%	85	%	—		1.0	%
Booked passengers (in thousands)	16,427		18,396		1,969		12.0	%
Average ticket revenue per booked passenger	1,086		1,006		(80	)	(7.4	)%
Average other passenger revenue per booked passenger	371		429		58		15.6	%
Average total ancillary revenue per booked passenger	426		479		53		12.4	%
Revenue passenger miles (RPMs in thousands)	15,917,246		17,748,408		1,831,162		11.5	%

(1) As of January 1, 2018, we adopted IFRS 15 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2016.

Fare revenues. The increase in fare revenues in 2018 was primarily due to growth in our ASM capacity by 11.4% resulting from the incorporation of six new net aircraft, which was partially offset by a lower average ticket revenue per booked passenger of 7.4% year over year. Our traffic as measured in terms of RPMs increased 11.5% in 2018, also resulting from the increase in our fleet size.

Other passenger revenues. The increase in other passenger revenues in 2018 was primarily due to higher volume of passengers electing to purchase additional services. We continue executing our fare unbundling and demand stimulation strategy. In particular, during 2018, our total ancillary revenues increased due to improved revenue from fees charged for excess baggage, advanced seat selection and itinerary changes.

Other non-passenger revenues. The decrease in other non-passenger revenues was primarily due to higher revenues from airport incentives recorded during 2017.

Cargo. The increase in cargo revenues in 2018 was primarily due to a higher volume of cargo operations recorded during 2018.

Operating Expenses, net

2018 compared to 2019

	For the years ended December 31,
	2018(1)		2019		Variation
	(In thousands of pesos, except for %)
Other operating income	(621,973	)	(327,208	)	294,765		(47.4	)%
Fuel expense, net	10,134,982		11,626,069		1,491,087		14.7	%
Landing, take-off and navigation expenses	4,573,319		5,108,489		535,170		11.7	%
Depreciation of right of use assets	4,043,691		4,702,971		659,280		16.3	%
Salaries and benefits	3,125,393		3,600,762		475,369		15.2	%
Sales, marketing and distribution expenses	1,501,203		1,447,637		(53,566	)	(3.6	)%
Maintenance expenses	1,497,989		1,488,431		(9,558	)	(0.6	)%
Aircraft and engine variable lease expenses	956,010		961,657		5,647		0.6	%
Other operating expenses	1,059,098		1,112,927		53,829		5.1	%
Depreciation and amortization	500,641		675,514		174,873		34.9	%
Total operating expenses, net	26,770,353		30,397,249		3,626,896		13.5	%

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Total operating expenses, net increased 13.5% in 2019 primarily as a result of growth of operations and other factors described below.

Other Operating Income. Other operating income decreased Ps. 294.8 million or 47.4% in 2019, primarily due to lower sale and leaseback gains recorded during 2019 compared to the previous year as a result of the adoption of IFRS 16.

Fuel expense, net. The 14.7% increase in fuel expense was primarily as a result of an increase in the average fuel cost per gallon of 4.1% and an increase in fuel gallons consumed of 10.7% which, in turn, was primarily due to more aircraft in operation and a 17.1% increase in our departures.

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During the years ended December 31, 2019 and 2018, we entered into Asian Zero-Cost collar options and Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2019, their intrinsic value loss of Ps. 70.5 million was recycled to the cost of fuel.

Landing, Take-off and Navigation Expenses. The 11.7% increase in landing, take-off and navigation expenses in 2019 was primarily due to an increase in our operations as measured by number of departures by 17.1%. These increases were partially offset by a decrease in the number of airports where we operated during the year and incentives received from certain airport groups as a result of the growth of our operations.

Depreciation of right of use assets. The 16.3% increase in depreciation of right of use assets in 2019 was primarily due to an increase in our fleet, as we incorporated five new net aircraft and four new net engine leases during 2019.

Salaries and Benefits. The 15.2% increase in salaries and benefits in 2019 was primarily the result of the annual salary increase and an increase of 7.6% in our total number of employees during the year. Additionally, the variable compensation of our workforce increased also due to higher operations recorded during 2019, as well as the accounting accrual impact related to our management retention plans. See Item 6: “Directors, Senior Management and Employees—Employees.”

Sales, Marketing and Distribution Expenses. The 3.6% decrease in sales, marketing and distribution expenses was mainly due to efficiencies in our marketing and distribution expenses related to our efficiency and cost reduction plan.

Maintenance Expenses. The 0.6% decrease in maintenance expenses in 2019 was mainly due to the receipt of credit notes from some maintenance suppliers. This decrease was partially offset by the 6.5% increase in our fleet size as a result of the addition of five new net aircraft received during the year and the depreciation of approximately 0.1% in the average exchange rate of the peso against the U.S. dollar during 2019 since some of these maintenance expenses are denominated in U.S. dollars.

Aircraft and engine variable lease expenses. The 0.6% increase in aircraft and engine variable expenses in 2019 was primarily due to the depreciation in the average exchange rate of the peso against the U.S. dollar, since the majority of these expenses are denominated in U.S. dollars.

Other Operating Expenses. The 5.1% increase in other operating expenses in 2019 was primarily the result of our purchase of additional insurance to cover flight equipment and an increase in other administrative expenses. Additionally, during 2019, other operating expenses on a dollar basis increased due to the depreciation of approximately 0.1% in the average exchange rate of the peso against the U.S. dollar during 2019, since some of these expenses are denominated in U.S. dollars.

Depreciation and Amortization. The 34.9% increase in depreciation and amortization in 2019 was primarily due to higher amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2018 and 2019, we recorded amortization of major maintenance leasehold improvements of Ps .313.5 million and Ps. 450.4 million, respectively.

2017 compared to 2018

	For the years ended December 31,
	2017(1)		2018(1)		Variation
	(In thousands of pesos, except for %)
Other operating income	(96,765	)	(621,973	)	(525,208	)	>100	%
Fuel expense	7,255,636		10,134,982		2,879,346		39.7	%
Landing, take-off and navigation expenses	4,002,744		4,573,319		570,575		14. 3	%
Depreciation of right of use assets	3,437,903		4,043,691		605,788		17.6	%
Salaries and benefits	2,823,647		3,125,393		301,746		10.7	%
Sales, marketing and distribution expenses	1,691,524		1,501,203		(190,321	)	(11.3	)%
Aircraft and engine variable lease expenses	1,429,595		956,010		(473,585	)	(33.1	)%
Maintenance expenses	1,418,253		1,497,989		79,736		5.6	%
Other operating expenses	1,034,258		1,059,098		24,840		2.4	%
Depreciation and amortization	548,687		500,641		(48,046	)	(8.8	)%
Total operating expenses, net	23,545,482		26,770,353		3,224,871		13.7	%

(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.

Total operating expenses, net increased 13.7% in 2018 primarily as a result of growth of operations and other factors described below.

Other Operating Income. Other operating income increased Ps. 525.2 million or greater than 100% in 2018, primarily due to a higher number of sale and leaseback transactions, which resulted in higher profit realized during 2018.

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Fuel expense. The 39.7% increase in fuel expense was primarily as a result of an increase in the average fuel cost per gallon of 29.2% and an increase in fuel gallons consumed of 8.0% which, in turn, was primarily due to more aircraft in operation and a 9.1% increase in our departures.

During the year ended December 31, 2018, we entered into Asian Zero-Cost collar options and Asian call options contracts. Additionally, during the year ended December 31, 2017, we entered into Asian call options contracts. These instruments also qualify for hedge accounting. As a result, during 2018, their extrinsic value benefit of Ps.402.5 million was recycled to the cost of fuel.

Landing, Take-off and Navigation Expenses. The 14.3% increase in landing, take-off and navigation expenses in 2018 was primarily due to an increase in the number of airports where we operated during the year. In addition, our operations as measured by number of departures increased by 9.1%. These increases were partially offset by incentives received from certain airport groups as a result of the growth of our operations.

Depreciation of right of use assets. The 17.6% increase in depreciation of right of use assets in 2018 was primarily due to an increase in our fleet size, as we incorporated six new net aircraft and new net engine leases during 2018.

Salaries and Benefits. The 10.7% increase in salaries and benefits in 2018 was primarily the result of the annual salary increase, as well as severance payments related to a net decrease of 2.9% in our total number of employees as part of our efficiency and cost reduction plan. Additionally, the variable compensation of our workforce increased also due to higher operations recorded during 2018, as well as the accounting accrual impact related to our management retention plans. See Item 6: “Directors, Senior Management and Employees—Employees.”

Sales, Marketing and Distribution Expenses. The 11.3% decrease in sales, marketing and distribution expenses was mainly due to efficiencies in our marketing and distribution expenses related to our efficiency and cost reduction plan.

Maintenance Expenses. The 5.6% increase in maintenance expenses in 2018 was mainly due to the increase in our fleet size of 8.5% as a result of the addition of six new net aircraft received during the year. Additionally, during 2018 our maintenance expenses increased due to the depreciation of approximately 1.6% in the average exchange rate of the peso against the U.S. dollar during 2018, since some of these expenses are denominated in U.S. dollars.

Aircraft and engine variable lease expenses. The 33.1% decrease in aircraft and engine variable expenses was primarily due to a decrease in the number of aircraft returned to lessors.

Other Operating Expenses. The 2.4% increase in other operating expenses in 2018 was primarily the result of additional technical and communication support and passenger service expenses required for the growth of our operations. Additionally, during 2018, other operating expenses on a dollar basis increased due to the depreciation of approximately 1.6% in the average exchange rate of the peso against the U.S. dollar during 2018, since some of these expenses are denominated in U.S. dollars.

Depreciation and Amortization. The 8.8% decrease in depreciation and amortization 2018 was primarily due to lower amortization of major maintenance events associated with the aging of our fleet. The cost of the major maintenance events is accounted for under the deferral method. During 2017 and 2018, we recorded amortization of major maintenance leasehold improvements of Ps. 382.7 million and Ps. 313.5 million, respectively.

Operating Results

2018 compared to 2019

	For the years ended December 31,
	2018 Adjusted(1)	2019	Variation
	(In thousands of pesos, except for %)
Operating Results
Total operating revenues	27,305,150	34,752,672	7,447,522	27.3	%
Total operating expenses, net	26,770,353	30,397,249	3,626,896	13.5	%
Operating income	534,797	4,355,423	3,820,626	>100	%

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Operating Income. As a result of the factors outlined above, our operating income was Ps. 4,355 million in 2019, a greater than 100% increase compared to our operating income of Ps. 534.8 million in 2018. As a consequence of the adoption of IFRS 16, operating expenses decreased and our operating income increased.

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2017 compared to 2018

	For the years ended December 31,
	2017	2018
	Adjusted(1)		Variation
	(In thousands of pesos, except for %)
Operating Results
Total operating revenues	24,788,186	27,305,150	2,516,964		10.2	%
Total operating expenses, net	23,545,482	26,770,353	3,224,871		13.7	%
Operating income	1,242,704	534,797	(707,907	)	(57.0	)%

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Operating Income. As a result of the factors outlined above, our operating income was Ps. 534.8 million in 2018, lower than our operating income of Ps. 1,242.7 million in 2017 by 57%. As a consequence of the adoption of IFRS 16, operating expenses decreased and improved the operating income in both years.

Financial Results

2018 compared to 2019

	For the years ended December 31,
	2018 (Adjusted)(1)		2019		Variation
	(In thousands of pesos, except for %)
Financing Results
Finance income	152,603		207,799		55,196		36.2	%
Finance cost	(1,876,312	)	(2,269,829	)	(393,517	)	21.0	%
Exchange (loss) gain, net	(103,790	)	1,440,501		1,544,291		n.a.
Total financing results	(1,827,499	)	(621,529	)	1,205,970		(66.0	)%

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

Total Financing Results. The 66.0% decrease in our total financing loss in 2019 was primarily due to the increase in our foreign exchange gain, year over year.

During 2019, we recorded an exchange gain of Ps. 1.4 billion, which resulted from the 4.3% appreciation of the peso against the U.S. dollar at year-end, since we maintained a net monetary liability position of U.S. $1.7 billion in 2019. Our U.S. dollar net monetary liability position mainly resulted from the value of our lease liabilities and financial debt. Additionally, our finance income increased by Ps. 55.2 million, mainly due to an increase in our short-term investments as a result of a higher level of Cash during 2019. Our finance cost increased by Ps. 393.5 million, mainly due to an increase in our lease financial cost related to the recognition of IFRS 16 and interest paid on our asset backed trust notes.

2017 compared to 2018

	For the years ended December 31,
	2017		2018		Variation
	(Adjusted)(1)
	(In thousands of pesos, except for %)
Financing Results
Finance income	105,795		152,603		46,808		44.2	%
Finance cost	(1,515,281	)	(1,876,312	)	(361,031	)	23.8	%
Exchange gain (loss), net	683,039		(103,790	)	(786,829	)	n.a.
Total financing results	(726,447	)	(1,827,499	)	(1,101,052	)	>100	%

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

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Total Financing Results. The greater than 100% increase in our total financing loss in 2018 was primarily due to the foreign exchange loss we recorded during 2018.

During 2018, we recorded an exchange loss of Ps. 103.8 million, which resulted from the 0.3% appreciation of the peso against the U.S. dollar at year-end, since we maintained a net monetary liability position of U.S. $1.7 billion in 2018. Our U.S. dollar net monetary liability position mainly resulted from the value of our lease liabilities and financial debt. Additionally, our finance income increased Ps. 46.8 million, mainly due to an increase in our short-term investments. Our finance cost increased by Ps. 361.0 million, mainly due to higher lease financial cost related to the recognition of IFRS 16 and interest costs and higher commissions resulting from our letters of credit.

Income Tax Expense and Net Income

2018 compared to 2019

	For the years ended December 31,
	2018 (Adjusted)(1)		2019		Variation
	(In thousands of pesos, except for %)
Net (loss) income
(Loss) income before income tax	(1,292,702	)	3,733,894		5,026,596		n.a.
Income tax benefit (expense)	349,820		(1,094,831	)	(1,444,651	)	n.a.
Net (loss) income	(942,882	)	2,639,063		3,581,945		n.a.

(1) As of January 1, 2019, we adopted IFRS 16 using the full retrospective method of adoption in order to provide comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

We recorded net gain of Ps. 2.6 billion in 2019 compared to a net loss of Ps. 942.9 million in 2018. During the years ended December 31, 2019 and 2018, we recorded a tax (expense) benefit of Ps. (1.1 billion) and Ps. 349.8 million, respectively. At December 31, 2019, our tax loss carry-forwards amounted to Ps. 1.3 billion (Ps. 1.6 billion of December 31, 2018).

During the years ended December 31, 2019 and 2018, we used Ps. 214.5 million and Ps. 154.4 million, in available tax loss carry-forwards, respectively. The effective tax rate during 2019 and 2018 was of 29.3% and 27.1% respectively.

2017 compared to 2018

	For the years ended December 31,
	2017		2018
	(Adjusted)(1)				Variation
	(In thousands of pesos, except for %)
Net income (loss)
Income (loss) before income tax	516,257		(1,292,702	)	(1,808,959	)	n.a
Income tax (expense) benefit	(237,586	)	349,820		587,406		n.a
Net income (loss)	278,671		(942,882	)	(1,221,553	)	n.a

(1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, using the full retrospective method of adoption in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

We recorded net loss of Ps. 942.9 million in 2018 compared to a net income of Ps. 278.7 million in 2017. During the years ended December 31, 2018 and 2017, we recorded a tax benefit (expenses) of Ps. 349.8 million and Ps. (237.6) million, respectively. At December 31, 2018 and 2017, our tax loss carry-forwards amounted to Ps. 1.6 billion and Ps. 1.5 billion, respectively.

During the years ended December 31, 2018 and 2017, we used Ps. 154.4 million and Ps. 16.4 million, in available tax loss carry-forwards, respectively. The effective tax rate during 2018 and 2017 was of 27.1% and 46.0% respectively.

* Calculation of effective tax rate may vary due to the recasted financial statements from prior periods after the adoption of IFRS 15; the tax amount variance was deemed as immaterial.

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B. Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is cash provided by operations, with our primary uses of liquidity being working capital and capital expenditures.

	For the years ended December 31,
	2017			2018			2019
	(Adjusted)(1)
	(In thousands of pesos)
Net cash flows provided by operating activities		6,018,767			6,276,707			9,509,643
Net cash flows used in investing activities		(2,260,440	)		(1,389,395	)		(1,879,341	)
Net cash flows used in financing activities		(3,634,598	)		(5,946,059	)		(5,238,840	)

(1) On adoption of IFRS 16 we apply the new standard on the required effective date as of January 1, 2019, using the full retrospective method of adoption in order to provide for comparative results in all periods presented, recognizing the effect in retained earnings as of January 1, 2017.

In recent years, we have been able to meet our working capital requirements through cash from our operations. Our capital expenditures consist primarily of the acquisition of flight equipment, including pre-delivery payments for aircraft acquisitions. From time to time, we finance pre-delivery payments related to our aircraft with revolving lines of credit with the commercial banks. We have obtained committed financing for pre-delivery payments in respect of all the aircraft to be delivered through 2022.

Our cash and cash equivalents increased by Ps. 2.1 billion, from Ps. 5.9 billion at December 31, 2018 to Ps. 8.0 billion at December 31, 2019. At December 31, 2019, we had available credit lines totaling Ps. 9.0 billion, of which Ps. 6.6 billion were related to financial debt and Ps. 2.4 billion were related to letters of credit (Ps. 1.7 billion were undisbursed). At December 31, 2018, we had available credit lines totaling Ps. 6.7 billion, of which Ps. 4.1 billion were related to financial debt and Ps. 2.7 billion were related to letters of credit (Ps. 1.0 billion were undisbursed).

We have an investment policy to optimize the performance and ensure availability of, and minimize the risk associated with, the investment of cash, cash equivalents and short-term investments. Such policy provides for guidelines regarding minimum balance, currency mix, instruments, deadlines, counterparties and credit risk. At December 31, 2019, 88% of our cash, cash equivalents and short-term investments were denominated in U.S. dollars and 12% were denominated in pesos. See note 3 to our audited consolidated financial statements included elsewhere in this annual report.

Net cash flows provided by operating activities. We rely primarily on cash flows from operating activities to provide working capital for current and future operations. Net cash flows provided by operating activities totaled Ps. 9.5 billion and Ps. 6.3 billion in 2019 and 2018, respectively. Our net cash flows increased primarily due to a significant increase in unearned transportation revenue as compared to 2018.

Net cash flows provided by operating activities totaled Ps. 6.3 billion and Ps. 6.0 billion in 2018 and 2017, respectively. Our net cash flows increased primarily due to an increase in recoverable guarantee deposits and unearned transportation revenue as compared to 2017.

Net cash flows used in investing activities. During 2019, net cash flow used in investing activities totaled Ps. 1.9 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps. 1.4 billion, partially offset by pre-delivery payments reimbursements totaling Ps. 0.7 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, net of disposals of Ps. 1.2 billion.

During 2018, net cash flow used in investing activities totaled Ps. 1.4 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps. 1.2 billion, partially offset by pre-delivery payments reimbursements totaling Ps. 0.6 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, net of disposals of Ps. 0.8 billion.

During 2017, net cash flow used in investing activities totaled Ps. 2.3 billion, which consisted primarily of pre-delivery payments for aircraft and engine acquisitions totaling Ps. 1.7 billion, partially offset by pre-delivery payments reimbursements totaling Ps. 0.2 billion. Additionally, we recorded other capital expenditures relating to aircraft parts and rotable spare parts acquisitions, intangible assets and major maintenance costs, net of disposals of Ps. 0.81 billion.

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Net cash flow used in financing activities. During 2019, net cash flows used in financing activities totaled Ps. 5.2 billion, which consisted primarily of payments of the principal portion of lease liabilities of Ps. 6.4 billion (aircraft and spare engine rent payment), payments of financial debt related to the aircraft financing pre-delivery payments for a net amount of Ps. 0.7 billion, payments of working capital credit lines of Ps. 0.5 billion and interest paid of Ps. 0.3 billion, which were partially offset by proceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps. 1.1 billion, proceeds from our asset backed trust notes (CEBUR) of Ps. 1.4 billion, which take into account amortized transaction costs, and proceeds from additional short-term working capital facilities with Banco Sabadell, S.A. of Ps. 0.2 billion.

During 2018, net cash flows used in financing activities totaled Ps. 5.9 billion, which consisted primarily of payments of the principal portion of lease liabilities of Ps. 5.7 billion (aircraft and spare engine rent payments), payments of financial debt related to the aircraft financing pre-delivery payments for a net amount of Ps. 0.7 billion, payments of working capital credit lines of Ps. 0.5 billion and interest paid of Ps. 0.2 billion, which were partially offset by proceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps. 1.2 billion.

During 2017, net cash flows used in financing activities totaled Ps. 3.6 billion, which consisted primarily of payments of the principal portion of lease liabilities of Ps. 5.0 billion (aircraft and spare engine rent payments), payments of aircraft financing pre-delivery payments for a net amount of Ps. 0.2 billion, payments of working capital credit lines of Ps. 0.7 billion and interest paid of Ps. 0.1 billion, which were partially offset by proceeds from disbursements under our revolving credit facility with Banco Santander and Bancomext of Ps. 1.5 billion, and additional short-term working capital facilities with Banco Nacional de México S.A. and Bank of America México, S.A. of Ps. 0.9 billion.

Loan Agreements

The revolving credit facility with Banco Santander México and Bancomext, dated July 27, 2011 as amended and restated on August 1, 2013 and as further amended on February 28, 2014 and November 27, 2014, under which we are a guarantor, provides financing for pre-delivery payments in connection with our purchase of nineteen A320 aircraft. On August 25, 2015, we entered into an additional amendment to such loan agreement to finance pre-delivery payments of eight additional A320 aircraft. On November 2016, we entered into an additional amendment to such loan agreement to finance the pre-delivery payments for the twenty-two remaining A320 aircraft under the Airbus purchase agreement. On December 2017, we entered an additional amendment to extend the term of the loan agreement to November 2021. Finally, we entered into one further amendment to this loan agreement on November 2018, to extend the term to May 2022.

The aggregate principal amount of this revolving line is for up to U.S. $183.0 million, of which U.S. $103.7 million is provided by Banco Santander México and U.S. $79.3 million by Bancomext. This revolving credit facility bears annual interest at three-month LIBOR plus 260 basis points. The maturity is on May 31, 2022, but it could be extended to November 2022. Any principal repaid may be re-borrowed until May 31, 2022. This revolving line of credit may limit our ability to, among others, declare and pay dividends in the event that we fail to comply with the payment terms thereunder, dispose of certain assets, incur indebtedness and create certain liens.

In December 2016, we entered into a short-term working capital facility with Banco Nacional de México S.A. in the amount of Ps.406.3 million, bearing annual interest the Interbank Equilibrium Interest Rate (tasa de interés interbancaria de equilibrio or the TIIE) 28 days plus 90 basis points. In December 2017, we rolled over this short-term working capital facility with Banco Nacional de México S.A. in the amount of Ps.948.4 million, bearing annual interest at TIIE 28 days plus a spread in a range of 20 to 80 basis points. Finally, in December 2018, we rolled over this short-term working capital facility with Bancomext in the amount of Ps.461.3 million, bearing annual interest at TIIE 28 days plus 90 basis points, with final maturity date in January 2019.

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. The notes mature in five years, have principal amortizations of Ps. 250,000, Ps. 500,000, Ps. 500,000 and Ps. 250,000 in 2021, 2022, 2023 and 2024, respectively, and bear annual interest at TIIE 28 days plus 175 basis points.

In December 2019, we entered into a short-term working capital facility with Banco Sabadell, S.A., Institución de Banca Multiple (“Sabadell”) with Concesionaria as our obligor in the amount of Ps. 200 million and bearing annual interest at TIIE 28 days plus 120 basis points. As of December 31, 2019, we were current with principal and interest payments as well as in compliance with the covenants under our revolving credit facility and short-term working capital facilities.

C. Research and Development, Patents and Licenses, Etc.

We have registered the trademark “Volaris” with the trademark office in Mexico, the United States and in the countries in which operate in Central America. We have also registered several additional trademarks and slogans with the trademark office in Mexico, the United States and in the countries in which we operate in Central America.

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We operate software products under licenses from our vendors, including Jeppesen Systems AB, Navitaire LLC and Juniper Technologies Corporation. Under our agreements with Airbus, we use Airbus’ proprietary information to maintain our aircraft.

D. Trend Information

See Item 5: “Operating and Financial Review and Prospects—Operating Results—Trends and Uncertainties Affecting our Business.”

E. Off-Balance Sheet Arrangements

None of our operating lease obligations are reflected on our statements of financial position. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value guarantee to our lessors.

F. Tabular Disclosure of Contractual Obligations

The following table sets forth certain contractual obligations as of December 31, 2019:

	Contractual Obligations* Payments due by Period
	Total	Less than 1 year	1 to 3 years	3 to 5 years	More than 5 years
	(In thousands of pesos)
Debt(1)	4,998,441	2,086,017	2,202,553	709,871	—
Lease liabilities(2)	40,517,045	4,720,505	9,695,025	8,404,284	17,697,231
Future lease liabilities(3)	19,959,084	392,866	2,698,915	3,326,518	13,540,785
Flight equipment, spare engines and spare parts purchase obligations(4)	82,828,498	2,661,281	14,542,803	28,719,331	36,905,083
Total future payments on contractual obligations	148,303,068	9,860,669	29,139,296	41,160,004	68,143,099

(1)	Includes scheduled interest payments.
(2)	Does not include maintenance deposit payments because they depend on the utilization of the aircraft.
(3)	Our sale and leaseback agreements consist primarily of future lease payments with the lessors.
(4)	Our contractual purchase obligations consist primarily of aircraft and engine acquisitions through manufacturers and aircraft leasing companies. In December 2011, we signed an amendment to our purchase agreement with Airbus for an additional order of 44 A320 family aircraft for delivery between 2014 and 2020.
*	Disclosure of contractual obligations does not include obligations relating to our post-employment benefits which totaled Ps. 38.2 million at December 31, 2019.

Committed expenditures for these aircraft, spare engines, spare parts and related flight equipment, including estimated amounts for contractual price escalations of pre-delivery payments, will be approximately Ps. 18.8 billion from 2020 to 2025 and thereafter.

In 2020, we expect our capital expenditures, excluding pre-delivery payments, to be Ps. 82.8 billion, consisting primarily of aircraft parts and rotable spare parts, construction and improvements to leased assets, and major maintenance costs (leasehold improvements to flight equipment recorded into rotable spare parts furniture and equipment, net).

G. Safe Harbor

Not applicable.

ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Board of Directors

Our by-laws provide that the board of directors be comprised of no more than 21 members and their corresponding alternates, in which at least 25% of the members and their corresponding alternates are required to be independent pursuant to the Mexican Securities Market Law. A determination about independence must be made by our shareholders and it may be challenged by the CNBV. As of the date of this annual report, our board of directors is comprised of 14 principal members, of which 64% are independent.

Under our by-laws and the Mexican Securities Market Law, any shareholder or group of shareholders representing 10% of Volaris’ outstanding capital stock, have the right to appoint one director for each such 10% ownership stake.

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Set forth below are the name, age, position and biographical description of each of our directors as of the date of this annual report. The business address of our directors is that of our principal office.

Name	Age	Title	Alternate*
Brian H. Franke	56	Chairman of the Board	Andrew Broderick
William A. Franke	83	Director	Andrew Broderick
Harry F. Krensky	56	Director
Marco Baldocchi Kriete	46	Director	Rodrigo Antonio Escobar Nottebohm
Alfonso González Migoya	75	Independent Director
Stanley L. Pace	66	Independent Director
William Dean Donovan	58	Independent Director
Enrique Javier Beltranena Mejicano	57	Director
José Luis Fernández Fernández	60	Independent Director	José Carlos Silva Sánchez-Gavito
Joaquín Alberto Palomo Déneke	69	Independent Director	José Carlos Silva Sánchez-Gavito
John A. Slowik	69	Independent Director	José Carlos Silva Sánchez-Gavito
Ricardo Maldonado Yañez	52	Independent Director	Eugenio Macouzet de León
Guadalupe Phillips Margain	49	Independent Director
Mónica Aspe Bernal	42	Independent Director

* Alternate directors are authorized to act on behalf of their respective directors in the event of such directors’ inability to attend board meetings.

Brian H. Franke has been one of our directors since 2010 and chairman of the board since April 2020. Currently, he is a principal specializing in aviation investments with Indigo Partners LLC, a private equity firm based in the United States. Mr. Franke has previously been a member of the board of directors of Tiger Airways Holdings (Singapore) since 2008 and Tiger Airways Australia since May 2009. He is also a member of the board of directors of Frontier and JetSMART Airlines (Chile). Prior to that, Mr. Franke was vice president of Franke & Company Inc., a boutique private equity firm focused on small and medium enterprises investments. He was also a director in marketing for Anderson Company, a U.S. real estate developer, from 1989 to 1992 and a marketing manager for United Brands Inc., a U.S. distribution and licensing company for consumer goods, from 1987 to 1989. Mr. Franke holds a Bachelor of Science in Business from the University of Arizona and a Masters of International Management from Thunderbird School of Global Management. He also serves on the University of Arizona Foundation Board and participates on its Investment Committee. He is William A. Franke’s son.

William A. Franke has been one of our directors since 2010. He is also a member of the board of directors of Wizz Air Holdings Plc (Hungary). He is currently the managing member of Indigo Partners LLC (since 2002), which is a private equity firm. Mr. Franke is chairman of the board of directors of Frontier, JetSMART Airlines (Chile) and Energet (Canada) and was the founding chairman of Tiger Airways Holdings (Singapore), a member of the board of directors of Spirit and the chief executive officer/chairman of America West Airlines from 1993 to 2001. He is also a member of the board of directors of Falcon Acquisitions Group, Inc. Mr. Franke has undergraduate and graduate degrees from Stanford University. He also has an honorary doctorate from Northern Arizona University awarded in 2008. He is Brian H. Franke’s father.

Harry F. Krensky has been one of our directors since our founding. He is also a member of the board of directors of transportation company Traxion, hospital operator H+ (SISI) and education company AMCO International. Mr. Krensky is managing partner of the private equity firms Discovery Americas and Discovery Air. Previously, he was a founder of emerging market hedge fund managers Discovery Capital Management and Atlas Capital Management, and a founder of Deutsche Bank’s emerging market hedge fund. He has been an assistant professor in the subject of international business in NYU Stern Business School and was a member of the Board of Trustees of Colby College. Mr. Krensky has a Bachelor of Arts from Colby College, a master’s degree from the London School of Economics and Political Science and a Master of Business Administration from the Columbia University Graduate School of Business.

Marco Baldocchi Kriete has been one of our directors since April 2020. He previously he served as an interim director beginning in July 2019 and as an alternate director beginning in 2010. He is the Chief Executive Officer of Central American Comercial, S.A. de C.V, a retail company in Latin America. He was a founder member of Transactel Inc. He is currently a member of the board of Aeromantenimiento (MRO Holdings, Inc.). Past board experience includes Onelink Holdings, Avianca-Taca and Banco Agricola. Mr. Baldocchi has a Bachelor of Arts from Vanderbilt University and a Master of Business Administration from the Kellogg School of Management.

Alfonso González Migoya has been one of our directors since November 2014. He served as our chairman of the board from November 2014 to April 2020. He is also a director at FEMSA, Coca Cola FEMSA, Bolsa Mexicana de Valores and Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM), among others. Previously, Mr. González was chairman and chief executive officer of Grupo Industrial Saltillo, chief executive officer of Servicios Interpuerto Monterrey, held different senior roles in Grupo ALFA and was executive vice president and chief financial officer of senior executive Grupo Financiero BBVA Bancomer. Mr. González holds a Bachelor of Science in Electromechanical Engineering from ITESM and a Master of Business Administration from Stanford University Graduate School of Business.

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Stanley L. Pace has been one of our directors since April 2017. He is a senior partner and director at Bain & Company where he has served as a member and chairman of most of the company’s key governance boards. Mr. Pace was the founder of the transformation and airline practices at Bain & Company and has led many of the company’s largest and most successful relationships and transformations. For a period of two years in the late 1990s, Mr. Pace became the chief executive officer of ATA. At that time, ATA was the largest charter airline in the world. Mr. Pace received an undergraduate degree in finance from the University of Utah where he graduated as valedictorian. He later received his Master of Business Administration from Harvard Business School where he graduated with high distinction.

William Dean Donavan has been one of our directors since 2010 (prior to April 2017, he served as an alternate director). He is a Managing Director of Columbia Equity Partners and is a senior director of Discovery Americas, a Mexico City based private equity fund. Mr. Donovan sits on the boards of Prophet Brand Strategy, a marketing consultancy, and the Metropolitan Bank. In 2005, he co-founded Volaris along with several other parties. Between 1989 and 2003, Mr. Donovan worked with Bain & Company. He was Managing Director of Bain Africa between 1999 and 2002 and head of Bain’s airline practice and auto practice at various times. He also is a consultant for Stellar Labs, a software company focused on fleet optimization and revenue management in the private aviation space. In 2005, Mr. Donovan co-founded Diamond Stream, a SaaS analytics application for the travel and entertainment industry. Mr. Donovan has served as chief operating officer of Nimblefish Technologies, a specialized micromarketing agency and as chief executive officer of SearchForce, a paid search workflow management and optimization platform. Mr. Donovan received his Bachelor of Arts from the University of California Berkeley, where he graduated Phi Beta Kappa and Summa Cum Laude, and his Master of Business Administration from the Wharton School at the University of Pennsylvania.

Enrique Beltranena has been our chief executive officer since March 2006 and one of our directors since September 2016. Previously he worked as Grupo TACA’s chief operating officer, human resources and institutional relations vice president, cargo vice president and commercial director for Mexico and Central America. He also held the position of general director of Aviateca in Guatemala. Mr. Beltranena started his career in the aerospace industry in 1988. During the 1990s, he was responsible for the commercial merger of Aviateca, Sahsa, Nica, Lacsa and TACA Peru, which consolidated them into a single management entity called Grupo TACA. While at Grupo TACA, Mr. Beltranena also led the development of single operating codeshare and the negotiation of open skies bilateral agreements among each of the Central American countries and the United States. In 2001, Mr. Beltranena led Grupo TACA’s complete restructuring as its chief operating officer. In 2017, Mr. Beltranena participated in one of the biggest joint negotiations for the purchase of single aisle aircraft with Airbus. In 2009 Mr. Beltranena was awarded with the Federico Bloch Awards by the Latin American & Caribbean Air Transport Association. Mr. Beltranena was named to the Entrepreneur of The Year Hall of Fame in Monaco after being nominated by Ernst & Young—Innovation in 2012. He was also named Entrepreneur of The Year in Mexico after being nominated by Ernst & Young—Mexico in 2011. He also received the National Order of Merit (Knight’s Badge) from the President of France.

José Luis Fernández Fernández has been one of our independent directors since 2012 and he also serves as the chairman of our audit and corporate governance committee. He is also a member of the audit committees of various companies, including Grupo Televisa, S.A.B., Grupo Financiero Banamex and Banco Nacional de México S.A., and an alternate member of the board of Arca Continental, S.A.B. de C.V. Mr. Fernández is a partner at Chevez Ruiz Zamarripa. Mr. Fernández has a degree in Public Accounting from Universidad Iberoamericana and a certification issued by the Mexican Institute of Public Accountants.

Joaquín Alberto Palomo Déneke has been one of our directors since 2005 and he also serves as a member of our audit and corporate governance committee. He is also a member of the board of directors of Aeroman. Mr. Palomo has over two decades of experience in the financial air transportation and commercial aerospace sectors, where he created and implemented the first organization for Grupo TACA. He also actively participated in the planning, purchasing negotiations, closing, organization and final merger of AVIATECA, Tan/Sahsa, TACA de Honduras, Nica, Lacsa, Isleña de Inversiones, La Costeña, Aeroperlas and Trans American Airlines to form Grupo TACA. Mr. Palomo negotiated the financing of more than $1 billion in aircraft leases, sales and leasebacks. Mr. Palomo has a Bachelor of Science degree in Agricultural Economics from Texas A&M University.

John A. Slowik has been one of our directors since 2012 and he also serves as a member of our audit and corporate governance committee. He has over three decades of experience in the air transportation and commercial aerospace sectors as a banker at Citi (and its predecessors) and Credit Suisse, where he managed its America’s Airline Industry investment banking practice. His extensive experience includes corporate and investment banking, where his activities involved public and private capital raising, structured debt issuance, aircraft leasing, principal investment and mergers and acquisitions advisory work. Mr. Slowik is also a member of the board of directors of Rotor Engine Securitization, Ltd. and Turbine USA LLC, private commercial jet engine leasing companies operating out of Ireland and the United States, respectively. He is a board member and chairs the audit committee of Quintillion Subsea Holdings, LLC, a privately held company operating a subsea fiber optic cable system connecting Nome to Prudhoe Bay, with four landing stations in between, and a terrestrial fiber optic cable system connecting Prudhoe Bay to Fairbanks, Alaska. Mr. Slowik serves as a senior advisor to VoloFin, a specialty finance company focused on delivering innovative financing solutions for the commercial aviation market. Mr. Slowik has an undergraduate degree in Mechanical Engineering from Marquette University and a Masters in Management from the Kellogg School, Northwestern University.

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Ricardo Maldonado Yañez has been one of our independent directors since April 2018. He is a partner at Mijares, Angoitia, Cortés y Fuentes, S.C., since 1999. Mr. Maldonado has over 20 years of experience providing advice and counseling to Mexican and foreign companies and clients on domestic and cross-border merger and acquisition transactions, joint ventures and strategic alliances. He also represents issuers and financial institutions in a number of domestic and international, public and private, debt and equity offerings, and advises clients in the negotiation, structuring and drafting of commercial loans, in complex financings and in infrastructure projects. Mr. Maldonado serves as member and/or secretary of the Board of Directors of several companies including Grupo Televisa, Consorcio Ara, Grupo Axo, SeaMex Ltd., Biossmann Group, Empresas Cablevisión, Grupo Pueblo Bonito (Blazki), Grupo Aeroportuario del Centro Norte (OMA), Grupo Financiero Banorte, ICA Tenedora, S.A. de C.V. and Endeavor Mexico. Mr. Maldonado received his LLM from University of Chicago Law School, holds a certificate on Business Law from the Instituto Tecnologico de México and holds a law degree from the Universidad Nacional Autónoma de México.

Guadalupe Phillips Margain has been one of our directors since April 2020.  She is the Chief Executive Officer of Empresas ICA Tenedora, S.A. de C.V. Previously she worked in Grupo Televisa where she was Vice-president of Finance and Risk and served in other positions. Ms. Phillips serves as member of the board of directors of several companies including Grupo Televisa, Grupo Financiero Banorte, Innova, Grupo Axo and Grupo Aeroportuario del Centro Norte (OMA). Ms. Phillips holds a Ph.D. and a M.A.L.D. (Master of Arts in Law and Diplomacy) from The Fletcher School of Law and Diplomacy, Tufts University and holds a law degree from the Instituto Tecnológico Autónomo de México.

Mónica Aspe Bernal has been one of our directors since April 2020.  She is the Interim Chief Executive Officer of AT&T, Mexico. Previously she was ambassador in the Permanent Delegation of Mexico to the OECD. She served as Vice-Minister of Communications of the Ministry of Communications and Transportation. Ms. Aspe holds a Masters in Political Science from Columbia University and holds a degree on Political Science from the Instituto Tecnológico Autónomo de México.

Senior Management

Our executive officers are appointed by our board of directors, pursuant to a proposal made by our compensation committee, for an indefinite term and may be removed by our board of directors at will, provided the corresponding severance payments are made, if applicable, in accordance with Mexican labor law and the applicable labor contract.

Set forth below are the name, age, position and a description of the business experience of each of our executive officers not described above, as of the date of this annual report. The business address of our executive officers is that of our principal office.

Name	Age	Title
Enrique Beltranena	57	President and Chief Executive Officer
Sonia Jerez	50	Vice President and Chief Financial Officer
Jaime Pous	50	Senior Vice President - Chief Legal Officer and Corporate Affairs
José Luis Suárez	52	Senior Vice President and Chief Operating Officer
Holger Blankenstein	45	Executive Vice President Airline Commercial and Operations
Carlos Alberto González	46	Controlling and Transformation Director
Carolyn Prowse	47	Vice President and Chief Commercial Officer
Alejandro Alba	48	Internal Audit Director

Sonia Jerez has been our Vice President and chief financial officer since January 2019. Ms. Jerez has extensive experience in the airline industry and the telecom sector. Prior to joining us, she worked as the chief financial officer of WIZZ AIR Hungary Ltd., and VUELING Airlines (IAG Group, London). Ms. Jerez received her Executive Master of Business Administration from University of Chicago, and holds a Bachelor of Electronics Superior Engineer and Physics Science from the Instituto University of Barcelona.

Jaime Pous has been our Senior Vice President Chief Legal Officer and Corporate Affairs since November 2017, previously serving as our legal executive director since January 2016 and our general counsel since January 2013. Additionally he has served as secretary of the Board of Directors since 2018 and secretary of the audit and corporate governance committee since 2013. Prior to joining us, Mr. Pous worked at Grupo Televisa, where he had been legal director from 1999 to 2012. Mr. Pous received his LLM from The University of Texas at Austin, School of Law and holds a law degree from the Instituto Tecnológico Autónomo de México (ITAM).

José Luis Suárez has been our chief operating officer since October 2015 and our Senior Vice President since November 2017. He joined Volaris in early 2006 as sales director. In 2012, he occupied the position of Retail and Customer Service Director, where he supervised the airport operations, ramp management, flight attendants and customer solutions. Prior to joining us, Mr. Suárez Durán worked for ten years at Sabre Holdings. Mr. Suárez Durán received his Masters in Science in Industrial Engineering and Masters in Business Administration from the University of Missouri, Columbia. He also holds a degree in Executive Management from IPADE and a Bachelor of Science in Industrial Engineering (Cum Laude) from the Universidad Iberoamericana.

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Holger Blankenstein has been our Executive Vice President Airline Commercial and Operations since November 2017, in charge of the commercial, digital, operations, customer service and maintenance areas of the company. Prior to his current role, Blankenstein was the Chief Commercial Officer since 2009, leading the areas of sales, marketing, planning, itineraries, revenue management and cargo and leading the IT department. Blankenstein was part of the team that took the Company public in 2013; he has been with the Company since its inception in 2005, as one of the founding members of the team he was involved both in the setting up and launching of the airline. Before 2005, he was Director of Strategic Development at TACA International Airlines in El Salvador, from 2003 to 2005, where he led many key projects such as the integrated airline systems migration, TACA’s maintenance business growth strategy and the business plan for Volaris. He began his career as a consultant for Bain & Company in 1998 in the Munich office. Blankenstein transferred to the Sydney office in 2000. He was involved with assignments in financial services, automotive and retail industries. Blankenstein earned an MBA from the University of Iowa and a graduate degree in business and economics from Goethe University in Frankfurt, Germany.

Carlos Alberto González has been our controlling and transformation director since November 2019, and has previously been our corporate control, compliance and administration director since January 2019, our corporate control and compliance director since June 2016 and our corporate control director from June 2010 to May 2016. Currently, he is responsible for transformation, internal control and process. He has been with us since April 2006. Prior to joining us, he worked as a financial planning and control manager in Mexico and in Spain for Grupo Telefonica Moviles. Additionally, he previously was a senior associate at PricewaterhouseCoopers and an internal auditor analyst at Scotiabank Inverlat. Mr. González is a Certified Public Accountant with a post-graduate degree in Corporate Finance from ISEC University and he also holds an MBAdegree from Antonio de Nebrija University in Spain.

Carolyn Prowse has been our Vice President and chief commercial officer since March 2019. Prior to joining us, Ms. Prowse ran her own business advising aviation clients in Europe, Africa and the Indian Ocean and the Middle East on a wide range of topics including strategy, transformation and restructuring. Most recently, she was working with easyJet on their 5 year plan and core strategic initiatives, and other clients include advisory firms, hedge funds and both full service and low cost airlines and their shareholders. From 2011-2013 she was Senior Vice President, Corporate Strategy and Special Projects for Etihad Airways in Abu Dhabi, responsible for strategy, mergers & acquisitions, the corporate programme management office and other key initiatives and special projects.

Her career in aviation also includes ten years with British Airways Plc in London. Carolyn’s background also includes roles in investment banking (managing a global portfolio of private equity, investment banking and strategic investments) and strategy consulting with LEK Consulting. She has a Bachelor degree in Chemistry from the University of Oxford.

Alejandro Alba has been our Internal Audit Director since July 2019. Prior to joining Volaris, he was the Senior Internal Audit Director at Walmart Mexico and Central America, Chief Audit Executive at Grupo Bimbo and Risk Managing Partner for Mexico and Central America at EY. He has extensive experience in the fields of audit, risk, internal control and corporate governance. He was named a leader of the future by the magazine Expansion, which recognized him as one of the most influential young leaders in Mexico. Mr. Alba holds a degree in accounting and received his MBA from Arizona State University. He has completed postgraduate studies at MIT, IPADE, ITEMS, and ITAM and possesses the following certifications: CIA (Certified Internal Auditor), CRMA (Certification in Risk Management Assurance), PMP (Project Management Professional), CQIA (Certified Quality Improvement Associate), Certification in Technology, Operations, and Value Chain Management, CCSA (Certification in Control Self-Assessment), and CGAP (Certified Government Auditing Professional).

Activities of Senior Management

Our chief executive officer and members of our senior management (directivos relevantes) are required to focus their activities on creating value for the company and will be liable for damages to the corporation for: (i) favoring a shareholder or group of shareholders, (ii) approving transactions between the company (or its subsidiaries) with related persons without satisfying legal requirements, such as obtaining a fairness opinion and the approval of our board of directors, on a case-by-case basis, (iii) using (or authorizing a third party to use) our assets in a manner that is against our policies, (iv) making inappropriate use of our non-public information, (v) taking advantage of corporate opportunities or consulting a third party to take advantage of corporate opportunities without approval from our board of directors, (vi) knowingly disclosing or revealing false or misleading information or omitting the disclosure of material information, (vii) ordering that transactions undertaken be omitted from registration, (viii) destroying or modifying company results or information and (ix) filing false or misleading information with the CNBV.

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Our chief executive officer is required, primarily, to (i) implement the instructions established at our shareholders’ meeting and that of our board of directors, (ii) submit to the board of directors for approval the principal strategies for the business, (iii) submit to the audit and corporate governance committee proposals for our internal control system, (iv) disclose all material information to the public, (v) comply with applicable law in connection with share repurchases and subsequent purchases, (vi) initiate actions in respect of liabilities caused by us, (vii) comply with applicable law in respect of dividend payments, and (viii) maintain adequate accounting and registration internal control systems and mechanisms.

B.Compensation

Director and Executive Compensation

In 2017, 2018 and 2019, the senior managers positions listed in this annual report, received an aggregate compensation of approximately Ps. 76.6 million, Ps. 120.4 million and Ps. 154.9 million. The chairman and the independent members of our board of directors received an aggregate compensation of approximately Ps. 9.0 million, Ps. 7.2 million and Ps. 8.1 million, and the rest of the directors received a compensation of Ps. 7.8 million, Ps. 5.2 million and Ps. 4.4 million.

Our directors or executive officers are not entitled to any benefits upon termination, except for indemnification payments provided under the Mexican Federal Labor Law (Ley Federal del Trabajo), if any.

Long-term Retention Plans

Management Incentive Plan

In December 2012, our shareholders approved a share incentive plan for the benefit of certain executive officers. Under this plan, designated officers generally may receive up to 3.0% of our capital stock on a fully diluted basis immediately prior to the completion of the related performance condition (consummation of our initial public offering or change of control), exercisable after such performance condition and for a period of ten years. To implement the plan, our shareholders approved (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of our capital stock, (ii) the transfer of such shares to the Management Trust for the benefit of certain officers and (iii) the execution of share sales agreements setting forth the terms and conditions upon which the officers will receive purchased shares from the trustee of the Management Trust.

On December 24, 2012, the Management Trust was created and the share sales agreements were executed. On December 27, 2012, the trust acquired the aforementioned shares. The shares accrue any dividends paid by us during the time elapsing prior to the delivery to officers upon payment therefore.

On September 18, 2013, the key employees participating in the management incentive plan exercised 4,891,410 shares. As a result, the key employees paid Ps. 25.9 million to the trust corresponding to the exercised shares. Thereafter, we received from the trust the payment related to the exercised shares by the key employees as a repayment of the loan between the company and the trust.

On November 16, 2015, as part of our secondary follow-on equity offering, the key employees exercised 4,414,860 Series A shares. The key employees paid Ps. 23.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2016, the key employees participating in the management incentive plan exercised 3,299,999 Series A shares. The key employees paid Ps. 17.5 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2017, the key employees participating in the management incentive plan exercised 120,000 Series A shares. The key employees paid Ps. 0.6 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2018, the key employees participating in the management incentive plan exercised 2,003,876 Series A shares. The key employees paid Ps. 10.7 million to the Management Trust corresponding to the exercised shares. Thereafter, we received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

During 2019, the key employees participating in the management incentive plan exercised 2,780,000 Series A shares. The key employees paid Ps. 14.8 million to the Management Trust corresponding to the exercised shares. Thereafter, were received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

At December 31, 2017, 2018 and 2019, the shares held in trust to satisfy the management options were considered as treasury shares. As of December 31, 2017, 2018 and 2019, 12,437,857, 10,433,981, and 7,653,981 share options were vested, respectively.

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Management Incentive Plan II

On November 6, 2016, our board of directors approved an extension of the management incentive plan to certain key employees, known as MIP II. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the executives can exercise MIP II once the SARs are vested was also approved.

The fair value of these SARs is estimated at the grant date and at each reporting period using the Black-Scholes option pricing model, which takes into account the terms and conditions on which the SARs were granted (vesting schedule included in the table above, see Item 5: “Long-term Retention Plans—Management Incentive Plan II”).

The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.

The carrying amount of the liability relating to these SARs as of December 31, 2019, 2018 and 2017 was Ps. 70.6 million, Ps. 32.8 million, and Ps. 37.9 million, respectively. The compensation cost or (benefit) is recognized in our consolidated statements of operations under the caption salaries and benefits over the service period. During the years ended December 31, 2019, 2018 and 2017 we recorded a cost (benefit) of Ps. 37.8 million, Ps. (5.1) million, and Ps. (16.5) million, respectively, associated with these SARs in our consolidated statements of operations. No SARs were exercised during 2019.

Board of Directors Incentive Plan (BoDIP)

In April 2018 and 2019, our shareholders at the annual shareholders meeting authorized a stock plan for the benefit of certain independent members of our board of directors (“BoDIP”). The BoDIP was implemented through the execution of: (i) a trust agreement number CIB/3081 created by us, as trustor, and CIBanco, S.A., Institucion de Banca Multiple, as trustee, on August 29, 2018; and (ii) a stock purchase agreement between each plan participant and the trustee, under which a plan participant has a period of four years to exercise his/her option to pay a fixed purchase price, with the title to the shares transfering to the plan participant upon payment of such purchase price by the plan participant. The number of shares held by the trustee as of December 31, 2019 was 2,072,344, of which 968,706 shares were priced at Ps. 16.80, 977,105 shares were priced at Ps. 16.12 and 126,533 shares were priced at Ps. 26.29. As of December 31, 2019, there were no exercises under the BoDIP.

Long-term Incentive Plan

During 2010, we adopted an employee long-term incentive plan, the purpose of which is to retain high-performing employees within the organization by paying incentives depending on our performance. During the year ended December 31, 2013 and 2012 we expensed Ps. 6.3 million and Ps. 6.5 million respectively, as bonuses as part of the caption salaries and benefits. During 2014, this plan was structured as a long-term incentive plan, which consists of a long-term incentive plan (equity-settled) and share appreciation rights plan (cash-settled), each as further described below.

Equity-Settled

In November 2014, we established an equity-settled long-term incentive plan pursuant to which certain of our key executives were granted a special bonus equal to a fair value of Ps. 10.8 million to be used to purchase our shares. In April 2016, an extension to this plan was approved at our annual ordinary shareholders’ meeting, with an effective date in November 2015. The key components of the plan are as follows:

(i) Servicios Corporativos granted a bonus to each key executive.

(ii) Pursuant to the instructions of such key executives, on November 11, 2014, an amount equal to Ps. 7.1 million (the fair value of the bonus net of withheld taxes) was transferred to an administrative trust for the acquisition of our Series A shares through an intermediary authorized by the Mexican stock market based on the instructions of the administration trust’s technical committee. An amount equal to Ps. 7.5 million (the fair value of the bonus net of withheld taxes) was approved in April 2016 as an extension of this plan for the acquisition of our Series A shares, following the same mechanism.

(iii) Subject to the terms and conditions set forth in the administrative trust agreement signed in connection thereto, the acquired shares are to be held in escrow in the administrative trust until the applicable vesting period date for each key executive, which is the date as of which each such key executive can fully dispose of the shares as desired.

(iv) If the terms and conditions set forth therein are not meet by the applicable vesting period date, then the shares will be sold in the BMV and Servicios Corporativos will be entitled to receive the proceeds from such sale.

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(v) Each key executive’ account balance will be administered by the administrative trustee, whose objective is to manage the shares granted to each key executive based on instructions set forth by the administrative trust’s technical committee.

In November 2019, 2018 and 2017, extensions to this plan were approved by our board of directors. The total cost of the extensions approved was Ps. 86.8 million (or Ps. 56.4 million net of withheld taxes), Ps. 64.0 million (or Ps. 41.6 million net of withheld taxes) and Ps. 15.8 million (or Ps. 10.1 million net of withheld taxes), respectively. Under these extensions, certain of our key employees were granted a special bonus that was transferred to the administrative trust for the acquisition of our Series A shares.

During 2017, 2018 and 2019, we recognized Ps. 13.5 million, Ps. 20.0 million and Ps. 49.7 million, respectively, as compensation expense associated with the long-term incentive plan in our consolidated statements of operations.

During the years ended December 31, 2017, 2018 and 2019, some key employees left the Company; therefore, these employees did not fulfill the vesting conditions. In accordance with the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares. As of December 31, 2019, 294,541 shares were forfeited.

At December 31, 2019, 5,115,191 shares were held in trust under this plan as all shares granted remained unvested. Such shares were considered as treasury shares and considered outstanding for diluted earnings per share purposes because the holders are entitled to dividends if and when distributed.

Cash-Settled

On November 6, 2017, November 6, 2018 and November 6, 2019, we granted 3,965,351, 0 and 0 SARs, respectively, to key executives. The SARs vest during a three-year period as long as the employee completes the required service period, and entitle them to a cash payment. As of the grant date, the valuation of the SARs granted under this plan totaled Ps. 15.8 million, Ps. 0.0 million and Ps. 0.0, respectively.

During the year ended December 31, 2017, 2018 and 2019, we made a cash payment to key employees related to the SARs plan of Ps. 6.0 million, Ps. 0.0 million and Ps. 2.4 million, respectively. These amounts were determined based on the increase in the share price of the Company between the grant date and the exercisable date of November 2019, 2018 and 2017, respectively.

C.Board Practices

Board Practices

The members of our board of directors are elected annually at our ordinary general meeting of shareholders. All board members hold their positions for one year and may be reelected. The current members of the board of directors were reelected or selected pursuant to the unanimous resolutions adopted by our shareholders prior to the offering referred to herein.

Authority of the Board of Directors

For a description of the authority of our directors, see Item 10: “Additional Information—Memorandum and Articles of Association—Provisions of Our By-laws and Mexican Law Relating to Directors.”

Duty of Care and Duty of Loyalty

The Mexican Securities Market Law imposes duties of care and of loyalty on directors.

For a description of the duties of care and loyalty of our directors, see Item 10: “Additional Information—Memorandum and Articles of Association—Provisions of Our By-laws and Mexican Law Relating to Directors.”

Audit and Corporate Governance Committee

The Mexican Securities Market Law requires us to have an audit and corporate governance committee, which must be comprised of at least three independent members. We established an audit and corporate governance committee pursuant to the unanimous resolutions adopted by our shareholders outside of a general shareholders meeting in June 2013. We believe that all of the members of the audit and corporate governance committee are independent under the Mexican Securities Market Law and Exchange Act Rule 10A-3.

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The audit and corporate governance committee’s principal duties are (i) supervising and evaluating our external auditors and analyzing their reports (including their opinion of our annual report), (ii) analyzing and supervising the preparation of our financial statements and making a recommendation to the board of directors on their approval, (iii) informing the board of directors of the status of our internal controls, our internal audit and their adequacy, (iv) supervising the execution of related party transactions and transactions representing 20% or more of consolidated assets being undertaken pursuant to applicable law, (v) requesting reports from our executive officers or independent experts whenever it deems appropriate, (vi) investigating and informing the board of directors of any irregularities that it may encounter, (vii) receiving and analyzing recommendations and observations made by the shareholders, members of the board of directors, executive officers or any third party and taking the necessary actions, (viii) calling shareholders’ meetings, (ix) supervising compliance by our chief executive officer of instructions provided by our board or shareholders, (x) providing an annual report to the board in respect of accounting policies, their sufficiency and adequacy, and consistency, (xi) rendering opinions to the board of directors in connection with the designation of our chief executive officer, his compensation and removal and policies for the description and comprehensive remuneration of other executive officers, (xii) supervising and reporting on the performance of our key officers, (xiii) rendering its opinion to the board of directors in connection with transactions with related parties, (xiv) requesting opinions from independent third party experts, (xv) calling shareholders’ meetings, (xvi) providing assistance to the board of directors in the preparation of reports for the annual shareholders’ meeting and (xvii) hiring or recommending auditors to shareholders and approving them.

As of the date of this annual report, the audit and corporate governance committee has at least one financial expert, José Luis Fernández Fernández, and is composed of three members.

The current members of our audit and corporate governance committee are:

Name	Title
José Luis Fernández Fernández	Chairman of the Audit and Corporate Governance Committee, Independent Director
Joaquín Alberto Palomo Déneke	Independent Director
John A. Slowik	Independent Director

Mr. José Carlos Silva Sanchez-Gavito is the alternate member of the Audit and Corporate Governance Committee.

Compensation and Nominations Committee

Our board of directors has created a compensation and nominations committee, which is comprised by four non-independent members, as determined by our board of directors from time to time, appointed by our board of directors. We established a compensation and nominations committee pursuant to the unanimous resolutions adopted by our shareholders in June 2013.

The compensation and nominations committee is responsible for, among other things, (i) submitting proposals to the board of directors and to the audit and corporate governance committee relating to the removal of officers within the first two corporate levels, (ii) proposing the to the board of directors and to the audit and corporate governance committee creation, amendment or termination of any incentive plan for officers, (iii) consulting with third-party experts in connection with any issues related to compensation, organizational development, and other related matters, (iv) proposing to board of directors and to the audit and corporate governance committee the compensation packages for officers within the first four corporate levels, (v) proposing to our board of directors the entering into, amendment or termination of any collective bargaining agreements, (vi) informing our board of directors of any material contingencies, (vii) the assessment of the performance of all relevant executive officers and reporting such assessments to the board of directors and to the audit and corporate governance committee, and (viii) submitting periodic reports to our board of directors.

As of the date of this annual report, the current members of the compensation and nominations committee are:

Name	Title
Marco Baldocchi Kriete	Chairman
Brian H. Franke	Member
Harry F. Krensky	Member
Enrique Beltranena	Member

Mr. Rodrigo Escobar Nottebohm is the alternate of Mr. Marco Baldocchi Kriete.

D.Employees

We believe that having well-trained and driven employees impacts our growth potential and the quality of the service we provide. We therefore expend significant effort on selecting and training individuals who we believe are the best qualified for our company and will fit well within our corporate culture of customer service, meritocracy and efficient operations.

As of December 31, 2019, we had 4,950 employees, which consisted of 926 pilots, 1,864 flight attendants, 91 ramp operations personnel, 804 airport and customer service personnel, 352 maintenance personnel and 913 management and administrative personnel. 3,960 of our employees (approximately 80%) are part of the Sindicato de Trabajadores de la Indústria Aeronaútica, Similares y Conexos de la República Méxicana—STIAS and the remaining 20% of our employees are not part of any union. We and each of our subsidiaries entered into substantially the same collective bargaining agreement with our pilots and flight attendants on February 15, 2020 for a term of two years for benefits and on February 15, 2020 for a term of one year for salaries. Salaries under these collective bargaining agreements are negotiated yearly, whereas other benefits are negotiated every two years. We believe we have a good relationship with our employees, and have never had labor strikes or work stoppages.

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The following table sets forth the number of our employees per category and average of employees per aircraft for the periods indicated below:

	For the Years ended December 31,
Employees	2017		2018		2019
Pilots		968		940		926
Flight attendants		1,536		1,604		1,864
Ramp operations personnel		102		67		91
Airport and customer service personnel		954		948		804
Maintenance personnel		317		575		352
Management and administrative personnel		875		466		913
Total		4,752		4,600		4,950
Average of employees per aircraft		67		60		60

We provide extensive training to our pilots, flight attendants, technical staff and customer service representatives, which complies with Mexican and international standards. We have implemented employee accountability initiatives both at the time of hiring and on an ongoing basis in order to maintain the quality of our crew and customer service.

Our compensation strategy is meant to retain talented and motivated employees and is designed to align the interests of our employees with our own. All of our employees, including pilots, flight attendants, ground employees and management, are subject to variable compensation employment arrangements, which are intended to promote efficiency, operating performance and profitable results. In addition, there is no seniority pay escalation among our pilots in order to encourage meritocracy.

E.Share Ownership

As of the date of this annual report, our directors and officers owned shares as follows:

Name	Title	Number of shares
Harry F. Krensky	Director	4,745,200*
Brian H. Franke	Chairman of the Board	2,610,000*
John A. Slowik	Independent Director	62,500*
William Dean Donovan	Independent Director	4,108,080*
Alfonso González Migoya	Independent Director	107,791
Marco Baldocchi	Director	1,870,500*
Enrique Beltranena	Director, President and Chief Executive Officer	8,309,205
Jaime Pous	Senior Vice President - Chief Legal Officer and Corporate Affairs	487,688
José Luis Suárez	Senior Vice President and Chief Operating Officer	322,632
Holger Blankenstein	Executive Vice President Airline Commercial and Operations	3,572,976*
Sonia Jerez	Vice President and Chief Financial Officer	140,354*
Carolyn Prowse	Vice President and Chief Commercial Officer	143,153*
Carlos Alberto González	Controlling and Transformation Director	132,536
Alejandro Alba	Internal Audit Director	82,285

* Shares owned through CPOs or ADSs.

This share ownership represents less than 2.66% of our shares. No other director or member of senior management owns any of our capital stock as of the date of this annual report. Except for the management incentive plan disclosed in this annual report, we have no arrangements for the issuing or granting of our options, shares or securities to our employees, nor do we have any other arrangement for involving our employees in our capital.

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ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

Our Principal Shareholders

Our shareholders are Mexican investors, international investors, investment funds managed by Blue Sky Investments, and investment funds managed by Indigo Partners LLC, or Indigo. Our shareholders have a long history of investing in Mexico and some of them have experience in the airline industry by having formed, or by holding interests in, Avianca, Frontier, Spirit, Tiger and Wizz.

Major Shareholders and Share Ownership

The following table sets forth information as of the date of this annual report with respect to beneficial ownership of our capital stock:

· each person that is a beneficial owner of 5% or more of our outstanding shares of capital stock;

· each of our executive officers;

· each of our directors; and

· all of our executive officers and directors as a group.

	Common Stock
	Number				Percentage
Shareholders	Series A		Series B		Series A			Series B
5% Shareholders:
Blue Sky Investments, S.à. r.l.(1)		70,201,880		44,857,124		7.60	%		50.94	%
Funds managed by Indigo(2)		139,380,930		43,194,749		15.1	%		49.1	%
Harris Associates L.P.(3)		58,947,580		-		5.8	%		-
Named Executive Officers and Directors:
William A. Franke(2)		139,380,930		43,194,749		15.1	%		49.1	%
All Executive officers and directors as a group (one person) HSBC trust F/307750(4)		7,653,981		-		.83	%		-

(1) Consists of 44,857,124 Series B shares and 70,201,880 Series A shares deposited in the CPO trust held by Blue Sky Investments, S.à r.l. Rodrigo Antonio Escobar Nottebohm and Rémy Cornet are the managers of Blue Sky Investments, S.à r.l. and share voting and investment power over the shares held by Blue Sky Investments, S.à r.l. Messrs. Escobar Nottebohm and Cornet disclaim beneficial ownership of the shares held by Blue Sky Investments, S.à r.l. except to the extent of their respective individual pecuniary interests in these shares. Blue Sky Investments, S.à r.l. has a principal business address at: 17, rue Robert Stümper, L-2557 Luxembourg.

(2) Consists of 135,974,070 Series A shares (deposited in the CPO trust) held by Indigo LatAm LP., 1,000,649 Series B shares and 3,228,640 Series A shares (deposited in the CPO trust) held by Long Bar LatAm, LLC, 178,220 Series A shares (deposited in the CPO trust) held by Long Bar LatAm II LP and 42,194,100 Series B shares held by Indigo Mexico Cöoperatief U.A. William A. Franke is the managing member of a fund that is the general partner of Indigo Mexico Cöoperatief U.A, and is manager of the funds of Long Bar LatAm, LLC, Indigo LatAm LP and Long Bar LatAm II LP, and as such, has voting and dispositive power over these shares. Mr. Franke disclaims beneficial ownership of the shares held by these entities except to the extent of any pecuniary interest therein.

Each entity listed herein whose shares are beneficially owned by Indigo has a principal business address at: c/o Indigo Mexico Coöperatief U.A.; Schiphol Boulevard 231, 1118 Bh Amsterdam, Netherlands.

(3) Harris Associates L.P. has a principal business address at: 111 South Wacker Drive, Suite 4600 Chicago, Illinois 60606.

(4) Certain executive officers benefit from a share incentive plan pursuant to which they have the right to receive an aggregate of 7,653,981 Series A shares, representing .83% of our Series A shares. Such shares are fully paid and held in trust for the benefit of certain of our executive officers. The shares will accrue any dividends paid by us during the time that they are deposited in the trust and prior to their release by the trustee to us. Item 6: “Directors, Senior Management and Employees—Compensation.”

Securities Held in Host Country

As of December 31, 2019, 73,511,847 ADSs (equivalent to 735,118,340 shares, or 72.65% of the total outstanding shares of our common stock) were outstanding and held of record by 17 institutional depositary receipts. We are aware that many ADSs are held of record by brokers and other nominees, and accordingly the above numbers are not necessarily representative of the actual number of U.S. persons who are beneficial holders of ADSs or the number of ADSs beneficially held by such persons.

Registration Rights

We have granted the registration rights described below to our principal shareholders, to register shares of capital stock (and/or CPOs having such shares as underlying securities) owned by each of them after our initial public offering with SEC under the Securities Act, pursuant to the terms of a registration rights agreement filed as Exhibit 4.7 to our registration statement on Form F-1 field with the SEC on September 16, 2013, or the Registration Rights Agreement. No registration rights were granted to our principal shareholders in respect of the registration of our shares with the RNV maintained by the CNBV, because all of our Series A shares were registered thereat concurrently with our initial public offering, and such registration will be updated, from time to time, as required under applicable Mexican law.

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The following description of the terms of the Registration Rights Agreement is intended as a summary only and is qualified in its entirety by reference to the copy filed as Exhibit 4.7 to our registration statement on Form F-1 field with the SEC on September 16, 2013.

Demand and Short-Form Registration Rights

Since the completion of our initial public offering, our principal shareholders are entitled to certain demand and short-form registration rights. The holders of at least a majority of the shares (and/or CPOs having such shares as underlying securities) subject to the registration rights can, on not more than two occasions, request that we register all or a portion of their shares (and/or CPOs having such shares as underlying securities) under the Securities Act.

In addition, since our initial public offering, these holders became entitled to certain short-form registration rights. The holders of shares (and/or CPOs having such shares as underlying securities) with a proposed aggregate offering price of at least U.S. $20 million at the time of the request may make a written request that we register their shares (and/or CPOs having such shares as underlying securities) on a short form registration, if we are eligible to file a registration statement on Form F-3. These holders may make an unlimited number of requests for registration on Form F-3. However, we will not be required to effect a demand or short-form registration within 90 days after the effective date of a previous demand or short-form registration.

Moreover, once every 12 months, we may postpone for up to six months the filing or the effectiveness of a registration statement for a demand or a short-form registration, if our board of directors determines that such registration would have a material adverse effect on any of our proposals or plans to engage in any acquisitions of assets, merger, consolidation, tender offer or any other material transaction.

Piggyback Registration Rights

In the event that we propose to register any of our securities under the Securities Act, our principal shareholders will be entitled to certain “piggyback” registration rights allowing the holder to include their shares (and/or CPOs having such shares as underlying securities) in such registration, subject to certain marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act (pursuant to a demand or short-form registration, or pursuant to a registration on Form F-4 or F-8 or any successor or similar forms), our current principal shareholders holding these shares (and/or CPOs having such shares as underlying securities) are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares (and/or CPOs having such shares as underlying securities) included in the registration, to include their shares (and/or CPOs having such shares as underlying securities) in the registration.

Expenses of Registration, Restriction and Indemnification

We will pay all registration expenses, including the legal fees of one counsel for all holders under the Registration Rights Agreement. In addition, we will reimburse such holders for the reasonable fees and disbursements of each additional counsel retained for the purpose of rendering any legal opinion if and to the extent required by underwriters or us.

The demand, short-form and piggyback registration rights are subject to customary restrictions such as blackout periods and any limitations on the number of shares (and/or CPOs having such shares as underlying securities) to be included in the underwritten offering imposed by any lead underwriter. The Registration Rights Agreement also contains indemnification provisions that we believe are customary for similar transactions.

Significant Changes in Share Ownership

None.

Differences in Voting Rights

See Item 10: “Additional Information—Memorandum and Articles of Association—Overview—Voting Rights.”

B.       Related Party Transactions

We have engaged in a number of transactions with related parties.

Servprot

Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, our Chief Executive Officer and a member of our board of directors, is a shareholders of such company. Servprot provides security services for Mr. Beltranena and his family. As of December 31, 2017, 2018 and 2019, we accrued an expense of Ps.1.8 million, Ps.2.8 million and Ps. 3.1 million, respectively, in connection with these services.

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One Link, S.A. de C.V.

OneLink S.A. de C.V. (“Onelink”) was a related party until December 31, 2017, because Marco Baldocchi, a member of the board of directors, was a director of Onelink. As of October 24, 2019 Onelink, Holdings, S.A. (“Onelink Holdings”) and its subsidiary Onelink are once again related parties, because Mr. Rodrigo Antonio Escobar Nottebohm, an alternate board member of Onelink Holdings, became an alternate member of our board of directors. Pursuant to this agreement, One Link receives calls from the customers to book flights and provides customers with information about fares, schedules and availability. As of December 31, 2017 and 2019, our balance due under this agreement was Ps. 25.0 million, and Ps. 39.8 million, respectively, and we accrued an expense under this agreement of Ps. 200.0 million and Ps. 37.0 million for the years ended December 31, 2017 and 2019, respectively. For the year ended December 31, 2018, we did not have net balance and any expense recognized under this agreement.

Mijares, Angoitia, Cortés y Fuentes, S.C.

Mijares, Angoitia, Cortés y Fuentes, S.C. (“Mijares”) is a related party because Ricardo Maldonado Yañez and Eugenio Macouzet de León, member and alternate member, respectively, of our board of directors since April 2018, are partners of Mijares. Mijares provides legal services to us. As of December 31, 2019, our balance due in connection with these services was Ps. 1.0 million. As of December 31, 2018, and 2017, we did not have a net balance. For the years ended December 31, 2019, 2018 and 2017, we accrued an expense of Ps. 1.3 million, Ps. 1.7 million and Ps. 0 million, respectively, in connection with the legal services provided by Mijares.

Frontier

Frontier is a related party because Mr. William A. Franke and Brian H. Franke, members of our board of directors, are also members of the board of Frontier. Furthermore, Indigo Partners, one of our significant shareholders, has investments in Frontier as well. We executed a codeshare agreement with Frontier on January 16, 2018. As of December 31, 2019 and 2018, the account receivable under this agreement was Ps. 23.4 million and Ps. 8.3 million, respectively, and the account payable was Ps. 16.3 million and Ps. 2.8 million , respectively. For the years ended December 31, 2019 and 2018 the Company recognized revenue under this agreement of Ps. 209.0 million and Ps. 8.4 million, respectively.

C.       Interests of Experts and Counsel

Not Applicable.

ITEM 8 FINANCIAL INFORMATION

A.       Consolidated Statements and Other Financial Information

Our annual consolidated financial statements prepared in accordance with IFRS on pages F-1 through F-89 are filed as part of this annual report.

Legal Proceedings

We are subject to various legal proceedings in the ordinary course of our business that we believe are incidental to the operation of our business. We believe that the outcome of the proceedings to which we are currently a party will not, individually or in the aggregate, have a material adverse effect on our consolidated financial statements.

Dividend Policy

We have not paid any cash dividends in the past and do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our shareholders on the recommendation of our board of directors and will depend on our earnings, financial condition, results of operations, capital requirements and contractual, regulatory and other restrictions on the payment of dividends and other factors our shareholders deem relevant. In addition, we may not pay any dividend unless such dividend is paid from our net profit account and the financial statements including such net profit and the payment of the relevant dividend have been approved by a shareholder resolution. Furthermore, 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.”

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Mexican law requires that at least 5% of a company’s net income each year (after profit sharing and other deductions required by Mexican law) be allocated to a legal reserve fund until such fund reaches an amount equal to at least 20% of its capital stock from time to time (without adjustment for inflation). For the years ended December 31, 2017, 2018 and 2019, we did not allocate any amount to our legal reserve fund. As of December 31, 2017, 2018 and 2019, our reserve fund was Ps. 291.2 million or 9.8% of our capital stock.

Mexican companies may pay dividends only out of earnings (including retained earnings after all losses have been absorbed or paid up), after allocation to the legal reserve fund and only if shareholders have approved the yearly financials from which such earnings are derived and the payment of the dividend. The reserve fund is required to be funded on a stand-alone basis for each company, rather than on a consolidated basis. The level of earnings available for the payment of dividends is determined under IFRS. Our subsidiaries are required to allocate earnings to their respective legal reserve funds prior to paying dividends to us.

Dividends that are paid from a company’s distributable earnings that have not been subject to corporate income tax are subject to a corporate-level tax payable by us. Companies are entitled to apply any such tax on the distribution of earnings as a credit against their Mexican corporate income tax corresponding to the fiscal year in which the dividend was paid or against the Mexican corporate income tax of the two fiscal years following the date in which the dividend was paid. Dividends paid from a company’s distributable earnings that have been subject to corporate income tax are not subject to this corporate-level dividend income tax. Dividends paid to resident and non-resident holders with respect to the CPOs and ADSs were not subject to Mexican withholding or similar tax until December 31, 2013. As of January 1, 2014, a 10% Mexican withholding tax applies.

In the event we were to declare dividends, they would be in pesos. In the case of CPOs represented by ADSs, the cash dividends would be paid to the depositary and, subject to the terms of the Deposit Agreement, converted into and paid in U.S. dollars at the prevailing rate of exchange, net of conversion expenses of the depositary and applicable Mexican withholding tax. Fluctuations in exchange rates would affect the amount of dividends that ADS holders would receive. For a more detailed discussion, see Item 12: “Description of Securities Other than Equity Securities—American Depositary Shares.”

B.Significant changes

Except as otherwise disclosed in this annual report, there has been no undisclosed significant change since the date of our annual consolidated financial statements.

ITEM 9 THE OFFER AND LISTING

A.Offer and Listing Details

New York Stock Exchange

American Depositary Shares

Our ADSs, each representing 10 of our Series A shares, are listed on the NYSE under the trading symbol “VLRS.” The ADSs began trading on the NYSE on September 18, 2013 and were issued initially by the Bank of New York Mellon.

Mexican Stock Exchange

Series A Shares

The Series A shares are listed on the Bolsa Mexicana de Valores, S.A.B. de C.V., or the Mexican Stock Exchange, under the trading symbol “VOLAR.” The Series A shares began trading on the Mexican Stock Exchange on September 18, 2013.

B.Plan of Distribution

Not Applicable.

C.Markets

The Mexican Stock Market

The information concerning the Mexican securities market set forth below has been prepared based on materials obtained from public sources, including the CNBV, the Mexican Stock Exchange and information made public by market participants. The following summary does not purport to be a comprehensive description of all of the material aspects related to the Mexican securities market.

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Trading on the Mexican Stock Exchange

The Mexican Stock Exchange, located in Mexico City, is the only stock exchange currently operating in Mexico. Operating continuously since 1907, the Mexican Stock Exchange is organized as a variable capital public stock corporation. Securities trading on the Mexican Stock Exchange occurs each business day from 8:30 a.m. to 3:00 p.m., Mexico City time subject to adjustments to operate uniformly with certain markets in the United States.

Since January 1999, all trading on the Mexican Stock Exchange has been effected electronically. The Mexican Stock Exchange may impose a number of measures to promote an orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer, when price fluctuations exceed certain limits.

Settlement of transactions with equity securities on the Mexican Stock Exchange are effected three business days after a share transaction is agreed to. Deferred settlement is not permitted without the approval of the Mexican Stock Exchange, even where mutually agreed. Securities traded on the Mexican Stock Exchange are on deposit in book-entry form through the facilities of Indeval, a privately owned securities depositary that acts as a clearinghouse, depositary, and custodian, as well as a settlement, transfer, and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities. Transactions must be settled in pesos except under limited circumstances and in respect of limited transactions in which settlement in foreign currencies may be permitted.

Market Regulation

In 1925, the Mexican National Banking Commission (Comisión Nacional Bancaria) was established to regulate banking activity and in 1946, the Mexican Securities Commission (Comisión Nacional de Valores) was established to regulate stock market activity. In 1995, these two entities merged to form the CNBV.

Among other things, the CNBV regulates the public offering and trading of securities, public companies and their regime and participants in the Mexican securities market (including brokerage houses and the Mexican Stock Exchange), and imposes sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law. The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms, through its staff and a board of governors comprised of thirteen members.

Mexican Securities Market Law

The current Mexican Securities Market Law was enacted on December 8, 2005, published in the Official Gazette of the Federation (Diario Oficial de la Federación) or Official Gazette of the Federation on December 30, 2005, and became effective on June 28, 2006, and is referred to as the Mexican Securities Market Law. The Mexican Securities Market Law changed Mexican securities laws in various material respects to further align Mexican laws with the securities and corporate governance standards laws in effect in other jurisdictions that maintained more developed securities markets.

In particular, the Mexican Securities Market Law:

· establishes the sociedad anónima promotora de inversión, a form of corporate organization that permits agreements among shareholders, mediating rights of first offer and refusal, tag-along rights, vetoes, non-compete provisions and other terms that enhance rights of minority shareholders;

· establishes the variable capital public stock corporation, a corporate form of organization that is subject to the general requirements of the Mexican Corporations Law, but is subject to specific requirements for issuers with stock registered with the CNBV and listed in the Mexican Stock Exchange;

· includes private placement exemptions directed to Mexican institutional and qualified investors, and specifies the requirements that need to be satisfied for an issuer or underwriter to fall within the exemption;

· includes improved rules for tender offers, dividing them in either voluntary or mandatory;

· establishes standards for disclosure of holdings applicable to shareholders of public companies;

· expands and strengthens the role of the board of directors of public companies;

· defines the role of the chief executive officer and other relevant officers of public corporations;

· defines the standards applicable to the board of directors and the duties and potential liabilities and penalties applicable to each director, the chief executive officer and other executive officer and of members of the technical committee and the corporate governance committee (introducing concepts as the duty of care, duty of loyalty and safe harbors for actions attributable to directors, committee members and officers);

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· replaces the statutory auditor (comisario) with the audit committee and establishes the corporate governance committee with clearly defined responsibilities;

· improves the rights of minority shareholders (including rights to initiate shareholders’ derivative suits);

· defines applicable sanctions for violation of law;

· provides for flexibility to allow regulated Mexican brokerage firms to engage in certain limited activities;

· regulates stock exchanges, clearinghouses, futures and derivatives markets, and rating agencies;

· establishes penalties (including incarceration), arising from violations of the Securities Market Law and regulations thereunder;

· establishes that public companies are considered a single economic unit with the entities they control;

· introduces concepts such as consortiums, groups of related persons or entities, control, related parties and decision-making power;

· defines rules relating to types of securities that may be offered by public companies;

· sets forth information for share repurchases; and

· specifies requirements for implementing anti-takeover measures.

In March 2003, the CNBV issued certain general regulations applicable to issuers and other securities market participants, which regulations have since been amended, or the General Regulations, and in September 2004, the CNBV issued certain general regulations applicable to brokerage firms. The General Regulations, which repealed several previously enacted CNBV regulations, provide a consolidated set of rules governing public offerings, reporting requirements and issuer activity, among other things.

Registration and Listing Standards

In order to offer securities to the public in Mexico, an issuer must meet specific qualitative and quantitative requirements. Only securities that have been registered with the Mexican National Securities Registry (Registro Nacional de Valores) or the RNV, pursuant to an approval by the CNBV may be listed on the Mexican Stock Exchange. In addition, the Mexican Stock Exchange has created a parallel quotation system, named the international quotation system or “SIC,” where debt and equity securities issued by non-Mexican issuers may be listed, for trading by institutional and accredited investors. Issuers listed on the SIC have limited disclosure and reporting requirements and may comply with obligations through a sponsor and by providing disclosure made available in their home market. These securities may be listed through the SIC if (i) the securities are not already listed on the RNV, (ii) the market of origin of the company issuing the shares has received, based on its characteristics, recognition from the CNBV, and (iii) the securities satisfy the listing requirements of the applicable stock exchange.

The General Regulations require the Mexican Stock Exchange to adopt minimum requirements for issuers that seek to list their securities in Mexico. These requirements relate to operating history, financial and capital structure, and minimum public floats applicable to shares of public companies, among other things. The General Regulations also require the Mexican Stock Exchange to implement minimum requirements (including minimum public floats) for issuers to maintain their listing in Mexico. These requirements relate to the issuer’s financial condition, capital structure and public float, among others. The CNBV may waive some of these requirements in certain circumstances. In addition, some of the requirements are applicable for each series of shares of the relevant issuer.

The CNBV’s approval for registration with the RNV does not imply any kind of certification or assurance related to the investment quality of the securities, the solvency of the issuer, or the accuracy or completeness of any information delivered to the CNBV or included in any offering document.

The Mexican Stock Exchange may review compliance with the foregoing requirements and other requirements at any time, but will normally do so on an annual, semi-annual and quarterly basis. The Mexican Stock Exchange must inform the CNBV of the results of its review, and this information must, in turn, be disclosed to investors.

If an issuer fails to comply with any of these minimum requirements, the Mexican Stock Exchange will request that the issuer propose a plan to cure the violation. If the issuer fails to propose a plan, if the plan is not satisfactory to the Mexican Stock Exchange, or if an issuer does not make substantial progress with respect to the implementation of the corrective plan, trading of the relevant series of shares on the Mexican Stock Exchange may be temporarily suspended. In addition, if an issuer fails to implement the plan in full, the CNBV may cancel the registration of the shares, in which case the majority shareholder or any controlling group will be required to carry out a tender offer to acquire all of the outstanding shares of the issuer in accordance with the tender offer provisions set forth in the Mexican Securities Market Law (under which all holders must be treated in the same manner).

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Reporting Obligations

Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements (together with an explanation thereof) and periodic reports, in particular reports dealing with material events, with the CNBV and the Mexican Stock Exchange. Mexican issuers must file the following reports with the CNBV:

· a comprehensive annual report prepared in accordance with the General Regulations, by no later than April 30 of each year;

· quarterly reports, within 20 days following the end of each of the first three quarters and 40 days following the end of the fourth quarter;

· reports disclosing material information;

· reports and disclosure memoranda revealing corporate restructurings such as mergers, spin-offs or acquisitions or sales of assets, to be approved by shareholders’ meeting or the board of directors;

· reports regarding the policies and guidelines with respect to the use of the company’s (or its subsidiaries) assets by related persons; and

· details dealing with agreements among shareholders.

Pursuant to the General Regulations, the internal rules of the Mexican Stock Exchange were amended to implement an automated electronic information transfer system (Sistema Electrónico de Envío y Difusión de Información, or SEDI) called Sistema Electrónico de Comunicación con Emisoras de Valores, or EMISNET, for information required to be filed with the Mexican Stock Exchange. Issuers of listed securities must prepare and disclose their financial and other information via EMISNET. Immediately upon receipt, the Mexican Stock Exchange makes this financial and other information available to the public.

The General Regulations and the rules of the Mexican Stock Exchange require issuers of listed securities to file through SEDI information that relates to any event or circumstance that could influence an issuer’s share prices and investor decisions to acquire stock. If listed securities experience unusual price volatility, the Mexican Stock Exchange must immediately request that an issuer inform the public as to the causes of the volatility or, if the issuer is unaware of the causes, that it make a statement to the effect that it is unaware of the causes of such volatility. In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to material events when it deems the available public information to be insufficient, as well as instruct issuers to clarify information when necessary. The Mexican Stock Exchange may request that issuers confirm or deny any material event that has been disclosed to the public by third parties when it deems that the material event may affect or influence the price of the listed securities. The Mexican Stock Exchange must immediately inform the CNBV of any such request. In addition, the CNBV may also make any of these requests directly to issuers. An issuer may delay the disclosure of material events if:

· the issuer implements adequate confidentiality measures (including maintaining a log with the names of parties in possession of confidential information and the date when each such party became aware of the relevant information);

· the information is related to incomplete transactions;

· there is no misleading public information relating to the material event; and

· no unusual price or volume fluctuation occurs.

Similarly, if an issuer’s securities are traded on both the Mexican Stock Exchange and a foreign securities exchange, the issuer must simultaneously file the information that it is required to file pursuant to the laws and regulations of the foreign jurisdiction with the CNBV and the Mexican Stock Exchange.

Suspension of Trading

In addition to the authority of the Mexican Stock Exchange under its internal regulations described above, the CNBV and the Mexican Stock Exchange may suspend trading in an issuer’s securities:

· if the issuer does not disclose a material event; or

· upon price or volume volatility or changes in the trading of the relevant securities that are not consistent with the historic performance of the securities and cannot be explained solely through information made publicly available pursuant to the General Regulations.

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The Mexican Stock Exchange must immediately inform the CNBV and the general public of any suspension. An issuer may request that the CNBV or the Mexican Stock Exchange permit trading to resume if it demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with periodic reporting requirements. If an issuer’s request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading (which may include a bidding process to determine applicable prices). If trading in an issuer’s securities is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose via SEDI, before trading may resume, a description of the causes that resulted in the suspension.

Under consent regulations, the Mexican Stock Exchange may consider the measures adopted by other non-Mexican exchanges to suspend and/or resume trading of an issuer’s shares, in cases where the relevant securities are simultaneously traded on stock exchanges located outside of Mexico.

Insider Trading, Trading Restrictions and Tender Offers

The Mexican Securities Market Law contains specific regulations regarding insider trading, including the requirement that persons in possession of information deemed privileged abstain (i) from directly or indirectly, trading in the relevant issuer’s securities, or derivatives with respect to such securities, the trading price of which may be affected by such information, (ii) from making recommendations or providing advice to third parties to trade in such securities, and (iii) disclosing or communicating such privileged information to third parties (except for persons to whom such information must be disclosed as a result of their positions or employment, as governmental authorities).

Pursuant to the Mexican Securities Market Law, the following persons must notify the CNBV of any transactions undertaken by them with respect to a listed issuer’s securities, whether on a case-by-case basis or quarterly:

· members of a listed issuer’s board of directors;

· shareholders controlling 10% or more of a listed issuer’s outstanding capital stock;

· advisors;

· groups controlling 25% or more of a listed issuer’s outstanding capital stock; and

· other insiders.

These persons must also inform the CNBV of the effect of the transactions within five days following their completion, or, alternatively, that the transactions have not been consummated. In addition, insiders must abstain from purchasing or selling securities of the issuer within three months from the last sale or purchase, respectively.

Also, for purposes of preparing annual reports, holders of 1% or more of the outstanding shares of a Mexican public company, must disclose their holdings and the relevant issuer.

Subject to certain exceptions, any acquisition of a public company’s shares that results in the acquirer owning 10.0% or more, but less than 30.0%, of an issuer’s outstanding capital stock, must be publicly disclosed to the CNBV and the Mexican Stock Exchange by no later than one business day following the acquisition.

Any acquisition or disposition by an insider that results in the insider holding an additional 5% or more of a public company’s outstanding capital stock or that reduces such insider’s holdings by 5% or more, must also be publicly disclosed to the CNBV and the Mexican Stock Exchange no later than one business day following the acquisition or disposition. Some insiders must also notify the CNBV of share purchases or sales that occur within any three-month or five-day period and that exceed certain value thresholds. The Mexican Securities Market Law requires that convertible securities, warrants and derivatives to be settled in kind be taken into account in the calculation of share ownership percentages of public companies.

The Mexican Securities Market Law requires that convertible securities, warrants, and derivatives to be settled in kind be considered in determining whether any of the foregoing percentages is reached or affected.

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Tender Offers

The Mexican Securities Market Law contains provisions relating to public tender offers and certain other share acquisitions occurring in Mexico. Under the Securities Market Law, tender offers may be voluntary or mandatory. Voluntary tender offers, or offers where there is no requirement that they be initiated or completed, are required to be made pro rata. Any intended acquisition of a public company’s shares that results in the acquirer owning 30% or more, but less than a percentage that would result in the acquirer obtaining control, of a company’s voting shares requires the acquirer to make a mandatory tender offer for the greater of (a) the percentage of the capital stock intended to be acquired, or (b) 10% of the company’s outstanding capital stock. Finally, any intended acquisition of a public company’s shares that is aimed at obtaining control requires the potential acquirer to make a mandatory tender offer for 100% of the company’s outstanding capital stock (however, under certain circumstances, the CNBV may permit an offer for less than 100%). The tender offer must be made at the same price to all shareholders and classes of shares. The board of directors, with the advice of the audit committee, must issue its opinion in respect of the fairness of the price applicable to any tender offer resulting in a change of control, which opinion must take minority shareholder rights into account and which may be accompanied by an independent fairness opinion. Directors and officers of a public company, in respect of which a tender offer has been made, must disclose whether or not each of them will tender his respective shares in the tender offer.

Under the Mexican Securities Market Law, all tender offers must be open for at least 20 business days and purchases thereunder are required to be made pro rata to all tendering shareholders. The Mexican Securities Market Law also permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the board of directors, and paid solely in connection with non-compete or similar obligations. The law also provides exceptions to the mandatory tender offer requirements and specifically sets forth remedies for non-compliance with these tender offer rules (e.g., suspension of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.

Joint Trading of Common Shares and Limited or Non-Voting Shares

The Mexican Securities Market Law does not permit issuers to implement mechanisms for common shares and limited or non-voting shares to be jointly traded or offered to public investors, unless the limited or non-voting shares are convertible into common shares within a period of up to five years, or when, because of the nationality of the holder, the shares or the securities representing the shares limit the right to vote to comply with foreign investment laws. In addition, the aggregate amount of shares with limited or non-voting rights may not exceed 25% of the aggregate amount of publicly held shares. The CNBV may increase this 25% limit by an additional 25%, provided that the limited or non-voting shares exceeding 25% of the aggregate amount of publicly held shares are convertible into common shares within five years of their issuance.

Anti-Takeover Protections

The Mexican Securities Market Law provides that public companies may include anti-takeover provisions in their by-laws if such provisions (i) are approved by a majority of the shareholders, without shareholders representing 5% or more of the capital stock present at the meeting voting against such provision, (ii) do not exclude any shareholders or group of shareholders, (iii) do not restrict, in an absolute manner, a change of control, and (iv) do not contravene legal provisions related to tender offers or have the effect of disregarding the economic rights related to the shares held by the acquiring party.

Board of Directors and Committees

Under the Mexican Securities Market Law, public companies must have a board of directors comprised of no more than 21 members, of which at least 25% must be independent. Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether or not a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the CNBV. As a departure from legislative precedents, the Mexican Securities Market Law permits then-acting members of the board of directors (as opposed to shareholders) to select, under certain circumstances, on a temporary basis, new members of the board of directors.

Boards of directors of public companies are required to meet at least four times during each calendar year and have the following principal duties:

· determine general strategies applicable to the issuer;

· approve guidelines for the use of corporate assets;

· approve, on an individual basis, transactions with related parties, subject to certain limited exceptions;

· approve unusual or non-recurrent transactions and any transactions that imply the acquisition or sale of assets with a value equal to or exceeding 5% of the issuer’s consolidated assets or that imply the provision of collateral or guarantees or the assumption of liabilities equal to or exceeding 5% of the issuer’s consolidated assets;

· approve the appointment or removal of the chief executive officer;

· approve waivers in respect of corporate opportunities;

· approve accounting and internal control policies;

· approve the chief executive officers’ annual report and corrective measures for irregularities; and

· approve policies for disclosure of information.

Directors have the general duty to act for the benefit of the issuer, without favoring any shareholder or groups of shareholders.

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The Mexican Securities Market Law requires the creation of two committees, the audit committee and the corporate governance committee, each of which must maintain at least three members appointed by the board of directors and which members must all be independent (except for the corporate governance committee of corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock, where the majority must be independent). The audit committee (together with the board of directors, which has added duties) replaces the statutory auditor (comisario) that had been previously required under the Mexican Corporations Law.

The corporate governance committee is required to provide opinions to the board of directors, request and obtain opinions from independent third-party experts, call shareholders’ meetings, provide assistance to the board in the preparation of annual reports and provide a report to the board of directors.

The audit committee’s principal role is to supervise the external auditors of the issuer, analyze the external auditor’s reports, discuss yearly financial statements and, when applicable, recommend their approval, inform the board of directors in respect of existing internal controls, require the issuer’s executive to prepare reports when deemed necessary, inform the board of directors of any irregularities that it encounters, investigate breaches of operating policies internal control and internal audit systems, supervise the activities of the issuer’s chief executive officer, call shareholders’ meetings, and provide an annual report to the board of directors.

Disclosure of Shareholders’ Agreements

Any shareholders’ agreements containing non-compete clauses, any agreements related to the sale, transfer or exercise of preemptive rights, any agreements which allow for the sale and purchase of shares (including any tag-along, drag-along and put or call rights), voting rights, and sale of shares in a public offering, must be notified to the company within five business days following their execution, to allow the company to disclose such agreements to the investors through the stock exchanges on which its securities are traded and to be made public in an annual report prepared by the company. These agreements (i) will be available for the public to review at the company’s offices, (ii) will not be enforceable against the company and a breach of such agreements will not affect the validity of the vote at a shareholders’ meeting, and (iii) will only be effective among the relevant parties once they have been disclosed to the public.

Miscellaneous

The Mexican Securities Market Law also specifies that any transaction or series of transactions that, during any fiscal year, represent 20% or more of the consolidated assets of a public company, must be considered and approved by a meeting of shareholders.

In addition to the right granted to minority shareholders of a public company representing 5% or more of the outstanding shares to initiate a shareholder derivative suit against directors for a breach of the duty of care or the duty of loyalty, the Mexican Securities Market Law recognizes the right of shareholders representing 10% or more of the outstanding shares to appoint a director and call a shareholders’ meeting and request that vote on resolutions in respect of which they were not sufficiently informed be postponed. Holders of 20% or more of the outstanding voting shares may judicially oppose resolutions that were passed by a shareholders’ meeting and file a petition for a court order to suspend the resolution, if the claim is filed within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or the company’s by-laws, (ii) the opposing stockholders either did not attend the meeting or voted against the challenged resolution, and (iii) the opposing stockholders deliver a bond to the court to secure payment of any damages that the company may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing stockholder; these provisions have seldom been invoked in Mexico and, as a result, any action that may be taken by a competent court is uncertain.

The New York Stock Market

NYSE traces its origins to 1792, when 24 New York City stockbrokers and merchants signed the Buttonwood Agreement. This agreement set in motion the NYSE’s unwavering commitment to investors and issuers. NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V., was launched on April 4, 2007. NYSE Euronext (NYSE/New York and Euronext/Paris: NYX) operates the world’s largest and most liquid exchange group and offers the most diverse array of financial products and services. NYSE Euronext, which brings together six cash equities exchanges in five countries and six derivatives exchanges, is a world leader for listings, trading in cash equities, equity and interest rate derivatives, bonds and the distribution of market data. NYSE Euronext is a leading provider of securities listing, trading and market data products and services. To protect investors, the health of the financial system and the integrity of the capital-formation process, the SEC has designated the NYSE as the examining authority for its members and member firms. Listed companies, individual investors, institutional investors and member firms create the NYSE market. A member organization is a registered broker-dealer organized as a corporation, a partnership or an LLC, which is regulated by the Exchange. A member organization may, or may not, hold a trading license.

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At the NYSE, two types of members work on the Trading Floor, each playing a distinct role in the trade execution process: Floor Brokers and Specialists. NYSE is open from Monday through Friday 9:30 a.m. to 4:00 p.m. EST each business day of the year.

On June 19, 2008, the NYSE Regulation, Inc. announced that “eGovDirect.com” was being offered to non-U.S. foreign private issuers listed on NYSE, including companies that trade American Depositary Shares on the NYSE through their Depositary Bank. This password-protected website assists NYSE-listed companies to meet their corporate governance and compliance requirements and allows issuers to save time and resources by filing annual and interim financial reports, disclosing officer and audit committee member information, and publishing declarations of dividends, shareholder meeting dates, shares outstanding and press releases through this website.

On January 29, 2009, NYSE Euronext and BIDS Holdings, L.P., launched a joint venture, the New York Block Exchange (“NYBX”), an innovative new platform designed to maximize access to liquidity and improve execution quality in the U.S. equity block trading market. Institutional investors and other market participants can execute block trades on NYBX, the first venue of its kind to allow non-displayed liquidity to anonymously access both the displayed and reserve liquidity of the NYSE order book, creating an innovative platform to re-aggregate blocks of stock. BIDS Holdings and the NYSE Euronext each have a 50% ownership stake in NYBX.

On November 12, 2009, NYSE Euronext established its commission on corporate governance to address U.S. corporate governance and the overall proxy process. Consistent with the NYSE’s role as a leading advocate on governance issues, the commission brings together leading experts and representatives from public companies, institutional and individual investors, broker/dealers and other advisors.

On November 13, 2013, NYSE Euronext was acquired by IntercontinentalExchange Group, Inc. NYSE Euronext continues to operate under its brand name as a wholly-owned subsidiary of IntercontinentalExchange Group, Inc.

D.Selling Shareholders

Not Applicable.

E.Dilution

Not Applicable.

F.Expenses of the Issue

Not Applicable.

ITEM 10 ADDITIONAL INFORMATION

A.Share Capital

Not applicable.

B.Memorandum and Articles of Association

Register

Our by-laws were filed as an Exhibit 3.1 to our registration statement on Form F-1 filed with the SEC on September 16, 2013, and as of the date of this annual report have not been amended.

Corporate Object and Purpose

Article 2 of our by-laws state that our corporate purpose is, in general, to undertake any type of act, and execute any type of agreements, instruments and documents, including those of commercial and civil nature, permitted by the applicable law, in Mexico or in any other jurisdiction.

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Overview

Our capital stock is divided into two series of shares, Series A shares and Series B shares. Series A shares are common shares and may only be owned directly by Mexican individuals or entities controlled by Mexican individuals. Series B Shares are common shares and may be purchased by Mexican or non-Mexican individuals or entities.

Series B shares may be convertible at any time into Series A shares pursuant to a mechanism set forth in our by-laws. Series A shares may underlie CPOs, but while Series B shares are not transferable to third parties (other than our principal shareholders or their affiliates) as Series B shares, may not represent more than 49% of our outstanding capital stock that is not underlying CPOs. The Series B shares will be automatically converted into Series A shares upon their transfer to a third party (other than our principal shareholders or their affiliates).

Since we are a variable capital public stock corporation, our capital stock must have a fixed portion, currently represented by Series A shares and may have a variable portion currently represented both by Series A shares and Series B shares. Our by-laws set forth that Series B shares may not represent more than 49% of our outstanding capital stock that is not underlying CPOs at any time. As of the date of this annual report our outstanding capital stock consisted of 923,824,804 Series A shares and 88,051,873 Series B shares. All or a portion of our Series A shares may underlie CPOs and can be purchased by non-Mexican investors.

Upon the consummation of our initial public offering in September 2013, our non-Mexican shareholders at that time became the holders of all the outstanding Series B shares and a certain number of CPOs and our current Mexican shareholders at that time became holders of Series A shares directly.

Non-Mexican investors are only entitled to hold Series A shares through CPOs (including CPOs in the form of ADSs), which will give non-Mexican investors economic rights but not voting rights.

We have obtained authorization from the Mexican Ministry of Economy (Secretaría de Economía) to issue up to 90% of our outstanding shares representing capital stock in the form of CPOs.

Changes to Capital Stock

The fixed portion of our capital stock may be increased or decreased by a resolution adopted at a general extraordinary shareholders’ meeting and upon amendment of our by-laws. The variable portion of our capital stock may be increased or decreased by a resolution adopted at a general ordinary shareholders’ meeting without amending our by-laws. Increases or decreases in the fixed or variable portion of the capital stock must be recorded in our registry of capital variations. New shares cannot be issued unless the then-issued shares have been paid in full.

Registration and Transfer

Our shares are evidenced by share certificates in registered form. Our shareholders may hold their Series A shares in the form of physical certificates if they are Mexican, or through Series A shares (in the case of Mexican investors) or CPOs (in the case of non-Mexican investors) that are maintained in book-entry form with institutions which have accounts with the Mexican depositary institution, S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V., or Indeval. The CPO trustee is the holder of record of the Series A shares underlying our CPOs. Accounts may be maintained at Indeval by brokers, banks and other financial institutions and entities authorized for this purpose. We maintain a stock registry and only those persons listed in such stock registry and holding certificates issued in their name as registered holders, or persons holding Series A shares or CPOs through institutions that maintain accounts with Indeval, will be recognized as our shareholders.

Pursuant to Mexican law, any transfer of shares must be registered in our stock registry, if effected physically, or through book entries that may be traced back from our stock registry to the records of Indeval, if effected through book-entry CPOs or Series A shares.

Change of Control Provisions

Subject to certain exceptions (including those applicable to transfers or acquisitions or certain other transactions by or among our current shareholders), our by-laws require that any acquisition of our Series A shares (whether directly or by acquiring ADSs or CPOs), resulting in beneficial ownership of shares representing 5% or more of our outstanding capital stock, or any proposal by any person or group of persons to enter into an agreement among shareholders that would result in such person or group of persons effectively having control of the voting rights of 20% or more of our outstanding capital stock or will result in a change of control, will require the prior approval of our board of directors.

In the event that approval is not granted, our board of directors or our shareholders may decide, among other things, to require any such person or group of persons to reverse the transaction or to transfer the Series A shares (whether held directly or through ADSs or CPOs) to a third party interested in acquiring the securities at a reference price specified by our board of directors. In addition, such person or group of persons desiring to purchase 5% or more of our outstanding capital stock will be required to follow certain procedures, including observing certain time periods specified in our by-laws.

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Any potential purchaser who proposes to acquire our Series A shares (whether directly or by acquiring ADSs or CPOs), resulting in beneficial ownership of 20% or more of our outstanding capital stock, will be required to make a tender offer for 100% of our outstanding capital stock (including any Series A shares evidenced by CPOs or ADSs) at a price at least equal to the highest of (i) the most recent publicly reported book value per share, (ii) the highest trading price of our Series A shares on the Mexican Stock Exchange within the 365 days prior to the request for approval or approval of the board of directors of the relevant transaction, and (iii) the highest price per share or CPO, as the case may be, paid by the purchaser or, in the case of the ADSs the equivalent thereto, plus, in each case, a 30% premium or a different premium determined by our board of directors, considering the opinion of a reputable investment bank.

Any acquisition of our Series A shares, CPOs or ADSs in contravention of the procedures described above will result in the purchaser not having any voting rights in respect to the purchased securities. No transfer in breach of these provisions will be registered in our stock registry.

Shareholders’ Meetings

Calls. Under Mexican law and our by-laws, shareholders’ meetings may be called by:

· our board of directors, the chairman of our board of directors or the secretary of the board of directors;

· shareholders representing at least 10% of our outstanding capital stock who may request that the chairman of any of the board of directors or the audit and corporate governance committee call a shareholders’ meeting;

· any shareholder, provided that no annual ordinary meeting has been held for two consecutive years or the annual shareholders’ meeting did not address the matters required to be addressed in the annual shareholders’ meetings;

· a Mexican court of competent jurisdiction, in the event the board of directors does not comply with a valid request of the shareholders described in the two bullet points above; and

· the audit and corporate governance committee.

Calls for shareholders’ meetings will be required to be published in the electronic system implemented by the ministry of economy at least 15 days before the scheduled date of the shareholders’ meeting in the case of first call. Calls will have to contain the matters to be addressed at the meeting. From the date on which a call is published until the date of the corresponding meeting, all relevant information will be made available to the shareholders at our executive offices. To attend a shareholders’ meeting, shareholders will have to be either registered in the stock registry, present evidence of the deposit of their certificates with a financial institution or deposit them with our secretary, or present certificates issued by the custodian of the holder of our Series A shares, together with an Indeval certification. Investors holding our CPOs may not vote nor cause the underlying Series A shares to be voted by the CPO trustee.

Shareholders’ Meetings. General shareholders’ meetings may be general ordinary shareholders’ meetings or general extraordinary shareholders’ meetings. Shareholders may also hold special meetings for classes of shares outstanding (as for example, meetings of Series B shareholders, as a means to exercise their rights).

General ordinary shareholders’ meetings will be those called to discuss any issues not reserved for extraordinary meetings. General ordinary shareholders’ meetings will have to be held at least once a year, during the first four months following the end of each fiscal year to:

· approve financial statements for the preceding fiscal year;

· discuss and approve the audit and corporate governance committees’ annual reports, and determine how to allocate net profits for the preceding year (including, if applicable, the payment of dividends);

· elect directors;

· appoint the president of the audit committee and the corporate governance committees;

· approve any increase or decrease in the variable portion of our capital stock and the issuance of the corresponding shares;

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· approve the chief executive officer’s annual report together with the board of directors’ report and the board of directors’ opinion;

· determine the maximum amount of resources allocated to share repurchases; and

· approve any transaction representing 20% or more of our consolidated assets during any fiscal year.

General extraordinary shareholders’ meetings will be those called to consider:

· an extension of our duration or voluntary dissolution;

· an increase or decrease in the fixed portion of our capital stock and the issuance of the outstanding stock;

· issuance of shares for purposes of a public offering;

· any change in our corporate purpose or nationality;

· any merger or transformation into another type of company;

· any issuance of preferred stock;

· the redemption of shares with retained earnings;

· any amendments to our by-laws including amendments to provisions addressing change of control;

· any other matters provided for by law or our by-laws; and

· the cancellation of the registration of shares at the Mexican National Securities Registry.

A special shareholders’ meeting, comprising a single class of shares, may be called if an action is proposed to be taken that may only affect such class. The quorum for a special meeting of shareholders and the vote required to pass a resolution at a special Series B shareholders’ meeting are identical to those required for extraordinary meetings of shareholders, except that the calculations are based upon the number of outstanding Series B shares.

Except as described below, the attendance quorum for general ordinary shareholders’ meetings will be 51% of the outstanding capital stock, and resolutions may be taken by a majority of the capital stock represented therein. If the attendance quorum is not met upon the first call, a subsequent meeting may be called, the attendance quorum of which will also be 51% of the outstanding capital stock and resolutions may be taken by a majority of the capital stock represented at such meeting. Except as described below, the attendance quorum for general extraordinary shareholders’ meetings will be at least 75% of our outstanding capital stock. If an attendance quorum is not met upon the first call, a subsequent meeting may be called, at which at least 51% of the capital stock must be represented. In either case, resolutions must be taken by the vote of shares representing at least 50% plus one of the shares representing our outstanding capital stock, except for resolutions in respect to the cancellation of the registration of shares at the Mexican National Securities Registry which require that at least 95% of the outstanding capital stock vote in favor of such resolution.

Holders of our shares will not have cumulative voting rights.

Voting Rights

Holders of ADSs and CPOs will not be entitled to vote, at any time, the underlying Series A shares. Mexican holders of Series A shares will be entitled to vote their shares on all matters. Holders of Series B shares will be entitled to vote their shares on all matters and will have the specific voting rights described under “—Shareholders’ Meetings.”

Series A shares underlying the CPOs and CPOs underlying the ADSs will be voted by the CPO trustee in the same manner as the majority of Series A shares votes cast at the relevant shareholders’ meeting under all circumstances.

Provisions of our By-laws and Mexican Law Relating to Directors

Election of Directors

Our board of directors is currently comprised of eleven principal members and seven alternate members. Five members of our board of directors currently qualify as independent. Whether a director qualifies as independent must be determined by our shareholders (at the general shareholders’ meeting at which the director is elected), and such determination may be challenged by the CNBV within 30 days following the date in which the appointment of the director is notified to the CNBV. The CNBV may only challenge the appointment after a hearing with us and the affected director. Our officers, individuals who have a material influence on us or authority to direct our management or business decisions, and individuals who are part of our group of controlling shareholders may not be deemed independent directors.

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Under our by-laws and the Securities Market Law, any shareholder or group of shareholders representing 10% of our outstanding capital stock, have the right to appoint one director for each such 10% ownership stake.

Authority of the Board of Directors

Our management is entrusted to a chief executive officer and a board of directors. The board of directors sets forth the guidelines and general strategy for the conduct of our business and supervises the execution thereof.

Pursuant to the Mexican Securities Market Law and our by-laws, the board of directors must approve, among other matters:

· our general strategy;

· the monitoring of our management and that of our subsidiaries;

· with prior input from the audit or the corporate governance committee, on a case-by-case basis (i) transactions with related parties, subject to certain limited exceptions, (ii) the election of our chief executive officer, his compensation and removal, and policies for the description and comprehensive remuneration of other executive officers, (iii) our guidelines for internal controls and internal audits, including those for our subsidiaries (iv) our accounting policies, (v) our financial statements, (vi) unusual or non-recurring transactions and any transactions or series of related transactions during any calendar year that involve (a) the acquisition or sale of assets with a value equal to or exceeding 5% of our consolidated assets, or (b) the giving of collateral or guarantees or the assumption of liabilities, equal to or exceeding 5% of our consolidated assets, and (vii) the selection of the external auditors;

· calling shareholders’ meetings and taking action based upon their resolutions;

· the annual submission to our general shareholders’ meeting of (i) the chief executive officer’s report and (ii) the opinion of the board of directors in respect of such report;

· creation of special committees and granting authority to such committees, provided that the committees will not have the authority to take action which by law or under our by-laws is expressly reserved to our shareholders or our board of directors;

· determining how to vote the shares that we hold in our subsidiaries; and

· policies for disclosure of information.

Our by-laws provide that meetings of our board of directors are validly convened and held if a majority of the members or their respective alternates are present. Resolutions passed at these meetings will be valid if approved by a majority of the disinterested members of the board of directors (i.e. members that do not have a conflict of interest). The chairman of the board of directors will not have a tie-breaking vote.

Meetings of our board of directors may be called by (i) 25.0% of our board members, (ii) the president of the board of directors, and (iii) the president of the audit or the corporate governance committee.

Duty of Care and Duty of Loyalty

The Mexican Securities Market Law imposes duties of care and loyalty on directors.

The duty of care generally requires that our directors obtain sufficient information and be sufficiently prepared to act in our best interest. The duty of care is discharged, principally, by (i) requesting and obtaining from us all information that may be necessary to make decisions, (ii) obtaining information from third parties, (iii) requiring the attendance of, and information from, our officers that may be necessary to make decisions, and (iv) attending board meetings and disclosing to the board of directors material information in possession of the relevant director. Failure to act with care by a director subjects the relevant director to joint and several liability with other directors involved in the act, for damages and losses caused to us and our subsidiaries. An indemnity for claims related to a breach of a director’s duty of care has been incorporated into our by-laws. Furthermore, we carry insurance to protect our directors for breaches of their duty of care.

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The duty of loyalty consists, primarily, of a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties, to abstain from discussing or voting on matters where the director has a conflict of interest and to abstain from taking advantage of corporate opportunities resulting from its actions as a director. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored.

The duty of loyalty is also breached if the director uses corporate assets or approves the use of corporate assets in violation of our policies, discloses false or misleading information, orders not to or causes the failure to, register any transaction in our records that could affect our financial statements, or causes material information not to be disclosed or to be modified.

The violation of the duty of loyalty will render the breaching director jointly and severally liable with all breaching directors, for damages and losses caused to us and to the persons we control. Liability may also arise if damages and losses result from benefits obtained by the directors or third parties as a result of activities carried out by such directors.

Claims for breach of the duty of care and the duty of loyalty may be brought solely for our benefit (as a derivative suit), as opposed to for the benefit of the claimant, and may only be brought by us or by shareholders or groups of shareholders representing at least 5.0% of our outstanding shares. Claims may be exercised by the trustee issuing CPOs or by holders of CPOs, in each case holding underlying shares representing at least 5% of our outstanding Series A shares.

As a safe harbor for the benefit of directors, the Mexican Securities Market Law provides that liabilities arising from a breach of the duty of care or the duty of loyalty will not arise if the director acted in good faith and (i) complied with applicable law and our by-laws, (ii) acted based upon facts and information provided by officers, external auditors or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, and (iii) selected the more adequate alternative in good faith, or if the negative effects of the director’s decision could not have been reasonably foreseeable, based upon the then available information. Mexican courts have not yet interpreted the meaning of this provision and, as a result, the extent and enforceability of this safe harbor remains uncertain.

Under the Mexican Securities Market Law and our by-laws, our chief executive officer and our principal officers are also required to act for our benefit and not for the benefit of a shareholder or group of shareholders. Our officers are required to submit to the board of directors for approval, the principal strategies for our business and the business of the companies we control, to submit to the audit and corporate governance committee proposals relating to internal control systems, to prepare all material information related to our activities and the activities of the companies we control, to disclose all material information to the public, to maintain adequate accounting and registration systems and internal control mechanisms, to prepare and submit to the board the yearly financial statements, and to implement internal control mechanisms.

Committees of the Board of Directors

Like all public companies in Mexico, we are required to have an audit and corporate governance committee. The members of our audit and corporate governance committee must be independent members, elected by our board of directors except for the chairman who is elected by our shareholders. Our audit and corporate governance committee is required to prepare an annual report, to be submitted to our board of directors, that must include (i) a report of our internal control systems and our internal audit procedures and any deficiencies, (ii) the evaluation of our external auditors, (iii) the results arising from the review of our financial statements, and (iv) any amendments to our accounting policies. The quorum for any session of our audit and corporate governance committee is the majority of its members and decisions must be taken by majority of its members.

In addition, our audit and corporate governance committee has the following principal duties:

· supervising and evaluating our external auditors and analyzing their reports (including their audit opinion);

· analyzing and supervising the preparation of our financial statements and making a recommendation to the board of directors for their approval;

· informing the board of directors of the status of our internal controls and internal audit and their adequacy;

· supervising the execution of related party transactions and transactions representing 20% or more of consolidated assets being undertaken pursuant to applicable law;

· requesting reports from our executive officers or independent experts whenever it deems appropriate;

· investigating and informing the board of directors of any irregularities that it may encounter;

· receiving and analyzing recommendations and observations made by the shareholders, members of the board of directors, executive officers or any third party and taking necessary action;

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· calling shareholders’ meetings;

· supervising compliance by our chief executive officer of the instructions provided by our board or shareholders;

· providing an annual report to the board in respect of our accounting policies, their sufficiency and adequacy, and consistency;

· rendering opinions to the board of directors in connection with the designation, compensation and removal of our chief executive officer and policies for the description and comprehensive remuneration of other executive officers;

· supervising and reporting on the performance of our key officers;

· rendering its opinion to the board of directors in connection with transaction with related parties;

· requesting opinions from independent third-party experts;

· calling shareholders’ meetings; and

· providing assistance to the board of directors with the preparation of reports for the annual shareholders’ meeting.

We also maintain a compensation and nominations committee, which is comprised of, four non-independent members, as determined by our board of directors from time to time, appointed by our board of directors. We established a compensation and nominations committee pursuant to the unanimous resolutions adopted by our shareholders in June 2013.

The compensation committee is responsible for, among other things:

· submitting proposals to the board of directors relating to the removal of officers within the first two corporate levels;

· proposing the creation, amendment or termination of any incentive plan for officers;

· consulting with third-party experts in connection with any issues related to compensation, organizational development, and other related matters;

· proposing compensation packages for officers within the first four corporate levels;

· proposing to our board of directors the entering into, amendment or termination of any collective bargaining agreements;

· informing our board of directors of any material contingencies; and

· submitting periodic reports to our board of directors.

Preemptive Rights

Under Mexican law, our shareholders (holding shares directly or through CPOs) have preemptive rights for all share issuances except in the cases noted below. Generally, if we issue additional shares of capital stock, our shareholders will have the right to purchase the number of shares necessary (or CPOs, subject to applicable U.S. securities laws, representing such shares and subject to the CPO trustee being permitted to issue or release the necessary additional CPOs) to maintain their existing ownership percentage.

Shareholders must exercise their preemptive rights within the time period set forth by our shareholders at the meeting approving the relevant issuance of additional shares. This period must be equal to at least 15 days following the publication of notice of the issuance in the official newspaper or our corporate domicile and in the electronic system implanted by the ministry of economy. Under Mexican law, shareholders cannot waive their preemptive rights in advance, and preemptive rights may not be represented by an instrument that is negotiable separately from the corresponding share.

The preemptive rights specified in the prior paragraph will not apply (i) in the case of shares issued in connection with mergers, (ii) in the case of resale of shares held in our treasury, as a result of repurchases of shares conducted on the Mexican Stock Exchange or otherwise, (iii) in the event that holders of our shares entitled to vote approve the issuance of the unsubscribed shares for purposes of a public offering at an extraordinary shareholders’ meeting called for such purpose provided requirements specified in Article 53 of the Mexican Securities Market Law are satisfied, and (iv) in respect of shares issued for conversion of any convertible securities.

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If we issue new Series A shares for cash, in accordance with our by-laws and the CPO trust, non-Mexican holders of our CPOs (directly or through ADSs) may not exercise their preemptive rights, unless we cause the CPO trustee to issue additional CPOs (to the extent possible), to permit the non-Mexican holders of CPOs to exercise preemptive rights by purchasing and holding newly issued Series A shares through CPOs. Although we expect to take all measures necessary to maintain sufficient CPOs available to permit non-Mexican holders of CPOs to exercise preemptive rights in respect of underlying Series A shares, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuances of additional CPOs. Mexican holders of Series A shares may exercise their preemptive rights if we issue new Series A shares for cash. Non-Mexican holders of CPOs may suffer dilution if we issue new Series A shares in exchange for cash and CPOs are not available to represent the additional Series A shares.

Dividends

Our board of directors must submit our financial statements for the previous fiscal year, proposed and prepared by our chief executive officer and supplemented by a report of our board of directors, at our annual ordinary general shareholders’ meeting for approval. Once our shareholders approve our financial statements, they are required to allocate net profits for the previous fiscal year. Under Mexican law and our by-laws, prior to any distribution of dividends, 5% of our net earnings must be allocated to a legal reserve fund, until such legal reserve fund is equal to at least 20% of our paid-in capital stock. Additional amounts may be allocated to other reserve funds as the shareholders may determine, including the amount allocated to the reserve fund for the repurchase of shares. The remaining balance, if any, may be distributed as dividends. See also Item 8: “Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”

Redemption

In accordance with our by-laws, shares representing our capital stock are subject to redemption in connection with either (i) a reduction of capital stock, or (ii) a redemption with retained earnings, which in either case must be approved by our shareholders. In connection with a capital reduction, the redemption of shares will be made pro rata among the shareholders but in no case will the redemption price be less than the book value of such shares as determined pursuant to our latest statements of financial position approved at a general ordinary shareholders’ meeting or by means of a tender offer conducted on the Mexican Stock Exchange at prevailing market prices, in accordance with the Mexican Corporations Law, the Mexican Securities Market Law and our by-laws.

Dissolution or Liquidation

Upon our dissolution or liquidation, our shareholders will appoint one or more liquidators at an extraordinary general shareholders’ meeting to wind up our affairs. All fully paid and outstanding shares of capital stock will be entitled to participate equally in any liquidating distributions.

Certain Minority Protections

Pursuant to the Mexican Securities Market Law and the Mexican Corporations Law, our by-laws include a number of minority shareholder protections. These minority protections will include provisions that permit:

· holders of at least 10% of our outstanding capital stock:

· to request a call for a shareholders’ meeting;

· to request that resolutions with respect to any matter on which they were not sufficiently informed be postponed; and

· to appoint one member of our board of directors and one alternate member of our board of directors.

· holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders’ meeting and file a petition for a court order to suspend the resolution temporarily, within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or our by-laws, (ii) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution, and (iii) the opposing shareholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution, in the event that the court ultimately rules against the opposing shareholder; and

· holders of 5% of our outstanding capital stock may initiate a shareholder derivative suit against some or all of our directors, for violations of their duty of care or duty of loyalty, for the benefit of Volaris, in an amount equal to the damages or losses caused to us. Actions initiated on these grounds have a five year statute of limitations.

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Other Provisions

Foreign Investment Regulations

Mexico’s Foreign Investment Law restricts ownership by non-Mexicans of our capital stock to 49% of the capital stock not otherwise represented by CPOs. Our amended by-laws establish that only Mexican investors may acquire our Series A shares directly. Non-Mexican investors may acquire our Series B shares directly. As required by Mexican law, our by-laws provide that if a non-Mexican investor acquires a direct interest or participation in a Series A share representing the capital stock of our company at any time, such Series A share will be forfeited to the Mexican government. The Foreign Investment Law permits non-Mexican investors to hold our Series A shares indirectly through neutral shares or securities such as the CPOs.

Duration

Our corporate existence under our by-laws is indefinite.

Purchase of Shares by Us

We will be able to purchase our shares (or CPOs evidencing such shares) through the Mexican Stock Exchange at the prevailing market prices for the shares at the time of purchase. The economic and voting rights corresponding to repurchased shares will not be exercised during the period the shares are owned by us, and the shares will not be deemed outstanding for purposes of calculation any quorum or vote at any shareholders’ meeting. We will not be required to create a special reserve for the repurchase of shares and we will not require the approval of our board of directors to effect share repurchases. However, we will require the approval of our shareholders in respect of the maximum amount that may be used for share repurchases and our board of directors must appoint an individual or group of individuals for effecting share repurchases. Share repurchases will have to be made subject to the provisions of applicable law, including the Mexican Securities Market Law, and carried out, reported and disclosed in the manner specified by the CNBV. If we intend to repurchase shares representing more than 1% of our outstanding capital stock at a single trading session, we will be required to inform the public of such intention, at least ten minutes before submitting our bid.

If we intend to repurchase shares representing 3% or more of our outstanding capital stock during any rolling period of twenty trading days, we will be required to conduct a public tender offer for such shares.

Purchases of Shares by our Subsidiaries

Our subsidiaries or other entities controlled by us may not purchase, directly or indirectly, shares representing our capital stock or shares of companies or entities that are our shareholders.

Conflicts of Interest

Under Mexican law, any shareholder that has an opposing interest to ours, must abstain from discussing and voting on the relevant matter. Any such shareholder that votes in a transaction in which its interests conflict with our interest may be liable for damages and losses, but only if the transaction would not have been approved without such shareholder’s vote.

A member of the board of directors that has an opposing interest to ours must disclose such opposing interest and abstain from any deliberation or vote in connection therewith. A breach by any member of the board of directors of any such obligations may result in the director being liable for damages and losses.

Exclusive Jurisdiction

Our by-laws provide that, in connection with any controversy between our shareholders and us, or between our shareholders, in connection with any matter related to us, both we and our shareholders must submit to the jurisdiction of the courts of Mexico City, Mexico.

Appraisal Rights

Whenever our shareholders approve a change in our corporate purpose, jurisdiction of organization or transformation from one corporate form to another, any shareholder entitled to vote that voted against the matters approved has the right to withdraw and receive the book value of its shares as set forth in the financial statements last approved by our shareholders, provided that the shareholder exercises this appraisal right within 15 days after the meeting at which the relevant matter was approved. Since holders of our CPOs may have no voting rights, appraisal rights generally will not be available to them.

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Cancellation of Registration in the Mexican National Securities Registry

In accordance with our by-laws, and as set forth in the Mexican Securities Market Law, we will be required to make a public tender offer for the purchase of stock held by minority shareholders, in the event that the registration of our Series A shares with the Mexican National Securities Registry is cancelled, either as a result of our determination or by an order of the CNBV. Our controlling shareholders will be secondarily liable for these obligations. A controlling shareholder will be deemed to be a shareholder that holds a majority of our capital stock, has the ability to control the outcome of decisions made at a shareholders or board of directors meeting, or has the ability to appoint a majority of the members of our board of directors. The price at which the stock must be purchased is the higher of

· the average quotation price on the Mexican Stock Exchange for the 30 days prior to the date of the tender offer, or

· the book value, as reflected in the report filed with the CNBV and the Mexican Stock Exchange.

If the tender for cancellation is requested by the CNBV, it must be initiated within 180 days from the date of the request. If initiated by us, under the Mexican Securities Market Law, the cancellation must be approved by 95% of our shareholders.

Our board of directors must make a determination with respect to fairness of the tender offer price, taking into consideration the minority shareholders’ interest, and disclose its opinion within 10 business days from the commencement of the offering.

The resolution of the board of directors may be accompanied by a fairness opinion issued by an expert selected by our audit and corporate governance committee. Directors and first level officers are required to disclose whether or not each of them will sell their shares in connection with the tender offer.

C.Material Contracts

For a description of material contracts relating to our indebtedness, see Item 5: “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Loan Agreements.”

D.Exchange Controls

Mexico has had a free market for foreign exchange since 1991, and the Mexican government has allowed the peso to float freely against the U.S. dollar since December 1994. We have no control over or influence on this exchange rate policy. The Mexican government has announced that it does not intend to change its floating exchange rate policy, but there is no guarantee that the Mexican government will not change this policy. See Item 3: “Key Information—Exchange Rates.”

E.Taxation

The following summary contains a general description of certain U.S. federal income tax consequences and Mexican federal tax consequences relating to the acquisition, ownership and disposition of ADSs and CPOs. This summary is based on laws and regulations now in effect in Mexico, laws, regulations, rulings and decisions now in effect in the United States, and the provisions of the tax treaty for the avoidance of double taxation between the United States and Mexico and protocols thereto, referred to herein as the “U.S.-Mexico Tax Treaty.” It is also based in part on representations by the CPO trustee and the ADS depositary and assumes that each obligation under the CPO trust agreement, the ADS deposit agreement and any related agreements will be performed in accordance with their terms.

This summary does not describe all of the tax considerations that may be relevant to a specific investor, including Mexican investors, particularly if such investor is subject to special tax rules. Prospective investors are encouraged to consult their own independent tax advisors with respect to the tax consequences to them of the acquisition, ownership and disposition of ADSs in light of their own particular circumstances, including the tax consequences under state, local, municipal, or other tax laws.

U.S. Federal Income Taxation

The following is a general discussion of certain U.S. federal income tax consequences relating to the acquisition, ownership and disposition of ADSs. This discussion deals only with U.S. Holders (as defined below) that hold ADSs as capital assets (generally, property held for investment). This discussion does not address the tax considerations that may be relevant to certain types of investors subject to special treatment under the U.S. federal income tax laws (such as banks or other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, partnerships or other pass-through entities or arrangements for U.S. federal income tax purposes or investors in such entities, investors liable for the alternative minimum tax, individual retirement accounts and other tax-deferred accounts, tax-exempt organizations, dealers in securities or currencies, investors that hold ADSs as part of a straddle or hedging, constructive sale, integrated or conversion transactions for U.S. federal income tax purposes, a person that actually or constructively owns 10% or more of the total combined voting power or value in Volaris stock, traders in securities that have elected the mark-to-market method of accounting for their securities, U.S. expatriates or persons whose functional currency is not the U.S. dollar).

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The discussion is based on the U.S. Internal Revenue Code of 1986, as amended through the date hereof, or the Code, its legislative history, existing and proposed U.S. Treasury regulations thereunder, published rulings and court decisions, all as of the date hereof and all subject to change at any time, perhaps with retroactive effect. No assurance can be given that the Internal Revenue Service, or the IRS, will agree with the views expressed in this discussion, or that a court will not sustain any challenge by the IRS in the event of litigation. This discussion does not include any description of the tax laws of any state, local, municipal or non-U.S. government (except for certain Mexican federal tax consequences, discussed below) that may be applicable to a particular investor and does not consider any aspects of U.S. federal tax law other than income taxation.

As used herein, the term “U.S. Holder” means a beneficial owner of an ADS that is, for U.S. federal income tax purposes: (a) an individual who is a citizen or resident of the United States; (b) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (d) a trust if (i) a court within the United States can exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of the substantial decisions of that trust or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

If a partnership or an entity or an arrangement that is treated as a partnership for U.S. federal income tax purposes holds ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. Partners in partnerships that hold ADSs are encouraged to consult their tax advisors.

Except where specifically described below, this discussion assumes that Volaris is not a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes. See the discussion under “—Passive Foreign Investment Company Considerations” below.

The discussion below assumes that the representations contained in the CPO trust agreement and ADS deposit agreement are true and that the obligations in the CPO trust agreement, ADS deposit agreement and any related agreements will be complied with in accordance with their terms. In general, for U.S. federal income tax purposes, U.S. Holders who own ADSs will be treated as the beneficial owners of the CPOs represented by those ADSs and each CPO should represent a beneficial interest in the Series A Shares represented by those CPOs. The U.S. Treasury Department has expressed concern that depositaries for ADRs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. Holders of such receipts or shares. These actions would also be inconsistent with claiming the reduced rate for “qualified dividend income” described below. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Mexican withholding taxes and availability of the reduced rate for qualified dividend income could be affected by future actions that may be taken by the ADS depositary and the U.S. Treasury Department.

For U.S. federal income tax purposes, U.S. Holders who own ADSs will be treated as the beneficial owners of the CPOs represented by those ADSs. Based on the nature of the CPO trust and the applicable legal authorities, a U.S. Holder who owns CPOs, or is treated as owning CPOs, should be treated as the beneficial owner of the Series A Shares represented by the CPOs. However, the U.S. federal income tax treatment of U.S. Holders that are beneficial owners of CPOs is not entirely clear. The IRS could assert that such U.S. Holders should be treated as owning an interest in an entity or arrangement treated as a foreign trust for U.S. federal income tax purposes. In that case, the U.S. federal income tax consequences to the U.S. Holder should be the same as outlined below; however, the U.S. Holder may also be subject to certain additional tax reporting obligations under the foreign trust rules. If these tax reporting obligations were determined to apply to a U.S. Holder and the U.S. Holder did not comply with such obligations, the U.S. Holder could be subject to substantial penalties. U.S. Holders seeking to obtain CPOs in exchange for ADSs are encouraged to consult their own tax advisors regarding the treatment of the CPOs, including the possibility, and U.S. federal income tax consequences of, the CPO trust being treated as a foreign trust.

EACH PERSON CONSIDERING THE ACQUISITION OF ADSs IS ENCOURAGED TO CONSULT ITS OWN INDEPENDENT TAX ADVISOR REGARDING THE SPECIFIC U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSIDERATIONS OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE ADSs.

Taxation of Dividends and Other Distributions

Subject to the “passive foreign investment company” rules discussed below, distributions of cash or property with respect to ADSs (including the amount of any Mexican taxes withheld on any such distribution, if any) will constitute ordinary dividend income to the extent of Volaris’ current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), which generally will be includible in a U.S. Holder’s gross income on the day on which the dividends are received by the CPO trustee. Any distributions in excess of such earnings and profits will constitute a nontaxable return of capital and reduce a U.S. Holder’s tax basis in such ADSs. To the extent such distributions exceed a U.S. Holder’s tax basis in its ADSs, such excess will constitute capital gain and generally will be treated as described below under “—Sale or Other Taxable Disposition of ADSs.” Dividends on ADSs will not be eligible for the dividends received deduction allowed to U.S. corporations. We do not currently intend to maintain calculations of our earnings and profits under U.S. federal income tax principles. Accordingly, U.S. Holders should expect that all distributions made with respect to the ADSs generally will be treated as dividends (as described above).

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A U.S. Holder may be entitled, subject to a number of complex limitations and conditions (including a minimum holding period requirement), to claim a U.S. foreign tax credit in respect of any Mexican income taxes withheld on dividends received in respect of the ADSs. A U.S. Holder who does not elect to claim a credit for any foreign income taxes paid during the taxable year may instead claim a deduction in respect of such income taxes provided the U.S. Holder elects to deduct (rather than credit) all foreign income taxes for that year. Dividends received in respect of ADSs generally will be treated as foreign-source income, subject to various classifications and other limitations and generally will be treated as passive category income for most U.S. Holders. The rules relating to computing foreign tax credits or deducting foreign taxes are extremely complex, and U.S. Holders are encouraged to consult their own tax advisors regarding the availability of foreign tax credits under their particular circumstances.

Dividends paid in pesos (including the amount of any Mexican taxes withheld therefrom, if any) will be includible in a U.S. Holder’s gross income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the pesos are actually or constructively received by the CPO trustee, regardless of whether the dividends are converted into U.S. dollars at that time. If the pesos are converted to U.S. dollars on the date of such receipt, a U.S. Holder generally will not recognize an exchange gain or loss. However, if the U.S. Holder converts the pesos into U.S. dollars on a later date, the U.S. Holder must include in gross income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount included in income when the dividend was received and (ii) the amount received on the conversion of the pesos into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in a U.S. Holder’s gross income to the date such payment is converted into U.S. dollars will be exchange gain or loss and will be treated as ordinary income or loss. Such gain or loss generally will be treated as income from sources within the United States. U.S. Holders are encouraged to consult their own independent tax advisors regarding the treatment of exchange gain or loss, if any, on any pesos received that are converted into U.S. dollars on a date subsequent to receipt by the CPO trustee.

Distributions treated as dividends that are received by a non-corporate U.S. Holder (including an individual) from “qualified foreign corporations” generally qualify for a reduced rate of taxation so long as certain holding period and other requirements are met. Dividends paid on ADSs should qualify for the reduced rate if Volaris is treated as a “qualified foreign corporation.” For this purpose, a qualified foreign corporation means any foreign corporation provided that: (i) the corporation was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a “passive foreign investment company” (as discussed below), (ii) certain holding period requirements are met and (iii) either (A) the corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules or (B) the stock with respect to which such dividend was paid is readily tradable on an established securities market in the United States. The ADSs should be considered to be readily tradable on an established securities market in the United States as they are listed on the NYSE. U.S. Holders are encouraged to consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to the ADSs.

Sale or Other Taxable Disposition of ADSs

Subject to the passive foreign investment company rules discussed below, upon the sale or other taxable disposition of ADSs, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and such U.S. Holder’s tax basis in such ADSs. The amount realized on a sale or other taxable disposition of ADSs generally will be equal to the sum of the amount of cash and the fair market value of any other property received. Gain or loss recognized by a U.S. Holder on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the time of the sale or other taxable disposition, the ADSs have been held for more than one year. Certain non-corporate U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deduction of a capital loss is subject to limitations for U.S. federal income tax purposes. Deposits and withdrawals of CPOs by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

If Mexican income tax is withheld on the sale or other taxable disposition of ADSs, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale or other taxable disposition before deduction of the Mexican income tax. A U.S. Holder who is eligible for the benefits of the U.S.-Mexican income tax treaty, can elect to treat capital gain or loss, if any, realized on the sale or other taxable disposition of ADSs that is subject to Mexican income tax as foreign source gain or loss for U.S. foreign tax credit purposes. Consequently, in the case of a gain from the disposition of an ADS that is subject to Mexican income tax, a U.S. Holder, subject to a number of complex limitations and conditions (including a minimum holding period requirement), may be able to benefit from the foreign tax credit for that Mexican income tax. Otherwise, any gain from the disposition of an ADS that is subject to Mexican income tax will be treated as a U.S. source gain and a U.S. Holder may not be able to benefit from the foreign tax credit for that Mexican income tax (i.e., because the gain from the disposition would be U.S. source), unless the U.S. Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. Alternatively, the U.S. Holder may elect to take a deduction for the Mexican income tax, provided that the U.S. Holder elects to deduct all foreign taxes paid or accrued for the taxable year. The rules governing foreign tax credits are complex, and a U.S. Holder is encouraged to consult its own tax advisor regarding the availability of foreign tax credits under its particular circumstances.

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Passive Foreign Investment Company Considerations

Special U.S. federal income tax rules apply to U.S. persons owning shares of a PFIC. A non-U.S. corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either:

· at least 75% of its gross income is passive income, or

· at least 50% of the gross value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income.

For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets (other than gains from the disposition of property that is inventory) and gains from commodities and securities transactions. In addition, if the non-U.S. corporation owns, directly or indirectly, at least 25%, by value, of the shares of another corporation, it will be treated as if it holds directly its proportionate share of the assets and receives directly its proportionate share of the income of such other corporation.

The determination as to whether a non-U.S. corporation is a PFIC is based on the application of complex U.S. federal income tax rules, which are subject to differing interpretations, the composition of the income and assets of the non-U.S. corporation from time to time and the nature of the activities performed by such non-U.S. corporation. Based on current estimates of Volaris’ gross income and gross assets, the nature of its business and its current business plans (all of which are subject to change), Volaris does not believe it was classified as a PFIC for its 2019 taxable year and it does not expect to be classified as such for its current taxable year (although the determination cannot be made until the end of such taxable year), and Volaris intends to continue its operations in such a manner that it does not expect to be classified as a PFIC in the foreseeable future. There can be no assurance in this regard, because the PFIC determination is made annually and is based on the portion of Volaris’ assets and income that is characterized as passive under the PFIC rules. Moreover, Volaris’ business plans may change, which may affect the PFIC determination in future years. Because of these uncertainties, it is possible that Volaris may be a PFIC for the current or any other taxable year.

If Volaris is or becomes a PFIC for any taxable year during which a U.S. Holder holds ADSs, the U.S. Holder will be subject to special tax rules with respect to any “excess distributions” that the U.S. Holder receives and any gain realized from a sale or other disposition of the ADSs, unless the U.S. Holder makes a “mark-to-market” election or a “qualified electing fund” election, as discussed below. Distributions received by a U.S. Holder in a taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the ADSs will be treated as excess distributions. Under these special tax rules:

· the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs;

· the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which Volaris became a PFIC, will be treated as ordinary income; and

· the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs cannot be treated as capital, even if a U.S. Holder holds the ADSs as capital assets. If Volaris were a PFIC, certain subsidiaries and other entities in which Volaris has a direct or indirect interest may also be PFICs, or Lower-tier PFICs. Under attribution rules, U.S. Holders would be deemed to own their proportionate shares of Lower-tier PFICs and would be subject to U.S. federal income tax according to the rules described above on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though such U.S. Holder had not received the proceeds of those distributions or dispositions.

If Volaris is a PFIC, a U.S. Holder may avoid taxation under the rules described above by making a “qualified electing fund” election to include such U.S. Holder’s share of Volaris’ income on a current basis, provided that Volaris furnishes such U.S. Holder annually with certain tax information. If Volaris concludes that it should be treated as a PFIC for any taxable year, Volaris intends to notify each U.S. Holder of such fact. However, there can be no guarantee that Volaris will be willing or able to provide the information needed by any U.S. Holder to make a “qualified electing fund” election with respect the ADSs.

If a U.S. Holder makes a “qualified electing fund” election, such U.S. Holder generally will be taxable currently on its pro rata share of Volaris’ ordinary earnings and net capital gains (at ordinary income and capital gain rates, respectively) for each taxable year during which Volaris is treated as a PFIC, regardless of whether or not such U.S. Holder receives distributions, so that the U.S. Holder will recognize taxable income without the corresponding receipt of cash from Volaris with which to pay the resulting tax obligation. The basis in the ADSs held by such U.S. Holder will be increased to reflect taxed but undistributed income. Distributions of income that were previously taxed will result in a corresponding reduction of basis in the ADSs, and will not be taxed again as distributions to the U.S. Holder.

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Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election with respect to such stock (but not for the shares of any Lower-tier PFIC) to elect out of the tax treatment discussed above. A U.S. Holder electing the mark-to-market regime generally would compute gain or loss at the end of each taxable year as if the ADSs had been sold at fair market value. Any gain recognized by the U.S. Holder under mark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of its ADSs as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value. Any loss on an actual sale of ADSs would be a capital loss to the extent it exceeds previously included mark-to-market income not offset by previously deducted decreases in value. A U.S. Holder’s basis in ADSs will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes such an election, the tax rules that apply to distributions by corporations that are not PFICs would apply to distributions by Volaris, except that the reduced rate discussed above under “—Taxation of Dividends and Other Distributions” would not apply.

The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. NYSE is a qualified exchange and, consequently, if the ADSs are regularly traded, the mark-to-market election would be available to a U.S. Holder of ADSs if Volaris were treated as a PFIC.

A U.S. Holder who owns ADSs during any taxable year that Volaris is treated as a PFIC would be required to file IRS Form 8621 in order to comply with an annual filing requirement. U.S. Holders are encouraged to consult their own tax advisors regarding the application of the PFIC rules to the ADSs, the availability and advisability of making a mark-to-market election to avoid the adverse tax consequences of the PFIC rules should Volaris be considered a PFIC for any taxable year and the application of the information reporting requirements to their particular situation.

Additional Tax on Net Investment Income

If a U.S. holder is not a corporation, a U.S. Holder generally will be subject to a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. Holder’s net investment income generally will include any dividend income on the ADSs and gain recognized by the U.S. holder with respect to the sale or other taxable disposition of the ADSs, unless such income or gain is derived in the ordinary course of the U.S. Holder’s trade or business (other than a trade or business that consists of certain passive or trading activities). U.S. Holders that are individuals, estates or trusts are encouraged to consult their own tax advisors regarding the applicability of the additional tax on net investment income to their income and gain in respect of the ADSs.

U.S. Information Reporting and Backup Withholding

Dividend payments with respect to ADSs and proceeds from the sale, exchange or redemption of ADSs may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding and establishes such exempt status. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund in a timely manner with the IRS and furnishing any required information. U.S. Holders are encouraged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

In addition, U.S. Holders should be aware that additional reporting requirements with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by certain financial institutions, if the aggregate value of all of such assets exceeds U.S. $50,000. U.S. Holders are encouraged to consult their own tax advisors regarding the application of the information reporting rules to ADSs and the application of these additional reporting requirements to their particular situations.

PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSULT THEIR OWN INDEPENDENT TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ADSs.

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Mexican Taxation

General

The following summary of certain Mexican federal income tax consequences of the purchase, ownership and disposition of ADSs or CPOs or the Series A shares underlying the CPOs, is based upon the federal tax laws of Mexico as in effect on the date of this annual report, which are subject to change. Prospective purchasers of ADSs or CPOs are encouraged to consult their own tax advisors as to the Mexican or other tax consequences of the purchase, ownership and disposition of ADSs or CPOs and indirectly the Series A shares underlying the CPOs, including, in particular, the effect of any foreign, state or municipal tax laws.

This summary is based upon the Mexican federal income tax laws in effect on the date of this annual report, which are subject to change and does not describe any tax consequences arising under the laws of any state or municipality, other than the federal laws of Mexico.

Holders of ADSs or CPOs are encouraged to consult their own tax advisors as to their entitlement to the benefits, if any, afforded by the U.S.-Mexico Tax Treaty regarding income tax.

Mexico has also entered into and is negotiating several other tax treaties with various countries, that may have an impact on the tax treatment of the purchase, ownership and disposition of ADSs, CPOs or the Series A shares underlying the CPOs. Prospective purchasers of the ADSs or CPOs are encouraged to consult their own tax advisors as to the tax consequences, if any, of any such treaties.

The following summary of the Mexican federal income tax consequences of the purchase, ownership or disposition of ADSs or CPOs is a general summary of the principal consequences, under Mexican tax law and the U.S.-Mexico Tax Treaty, as currently in effect, of such purchase, ownership or disposition of ADSs or CPOs by non-Mexican holders (but not by holders who are or may be deemed residents of Mexico for tax purposes), that will not hold ADSs or CPOs in connection with the conduct of a trade or business through a permanent establishment for tax purposes, in Mexico.

For purposes of Mexican taxation, individuals are residents of Mexico for tax purposes if they have established their place of residence in Mexico, unless they have a place of residence in a different country, in which case such individuals will only be considered residents of Mexico for tax purposes if they have their center of vital interests (centro de intereses vitales) in Mexico. Mexican law considers individuals to have their center of vital interests in Mexico if (i) at least 50% of their income is derived from Mexican sources or (ii) their principal center of professional activities is located in Mexico, among others. An individual will also be considered a resident of Mexico if such individual is a state employee, regardless of the location of such person’s core of vital interests. A legal entity is a resident of Mexico if it is incorporated under the laws of Mexico, or if it maintains the principal administration of its business or the effective location of its management in Mexico.

A permanent establishment in Mexico of a non-Mexican resident will be regarded as a resident of Mexico for tax purposes, and any and all income attributable to such permanent establishment will be required to pay taxes in Mexico in accordance with applicable law.

Dividends

Under the provisions of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta), dividends paid to non-Mexican holders with respect to ADSs or CPOs are currently not subject to Mexican withholding or similar taxes.

Dividends paid from distributable earnings that have not been subject to Mexican corporate income tax, are subject to a tax at the corporate level payable by us (and not by shareholders or holders of ADSs or CPOs). This corporate tax on the distribution of earnings is not final for us, and may be credited by us against income tax payable during the fiscal year in which the tax was paid and for the following two fiscal years. Dividends paid from distributable earnings, after corporate income tax has been paid with respect to those earnings, are not subject to this corporate tax.

Disposition of ADSs or CPOs

The sale or the disposition of ADSs or CPOs by a non-Mexican holder will not be subject to any Mexican tax, if the transaction is carried out through the Mexican Stock Exchange or other securities markets approved by the Ministry of Finance and Public Credit (Secretariá de Hacienda y Crédito Público).

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The exemption referred to in the previous paragraph would not be applicable (i) if the person or group of persons that directly or indirectly hold 10% or more of the shares of Volaris, in a period of 24 months, sell 10% or more of such shares, through one transaction or through more than one simultaneous or successive transactions, including transactions conducted through derivatives or in any other analogous or similar manner, and (ii) if a person or group of persons who control Volaris sell their control through one transaction or more than one simultaneous or successive transactions in a period of 24 months, including transactions conducted through derivatives or in any other analogous or similar manner. For purposes of the above, “control” and “group of persons” have the meaning ascribed to them in the Mexican Securities Market Law. Gains received by a non-resident holder arising out of the sale or other transfers of ADSs or CPOs made in any of the circumstances described in (i) and (ii) above, are deemed as income arising from Mexican source subject to Mexican income tax.

Gain on sales or other dispositions of ADSs or CPOs made in circumstances other than those described in the first paragraph of this section, generally would be subject to Mexican tax at a rate of 25% based on the aggregate proceeds received from the transaction or, subject to certain requirements applicable to the seller (including the appointment of a representative in Mexico for tax purposes to pay the applicable taxes), on any gain arising from a sale or other disposition as described in the next paragraph. If income of a non-resident holder is subject to a preferential tax regime (as defined by the Mexican Income Tax Law), the applicable rate may be up to 40% on the gross income obtained.

A non-resident holder may elect to pay taxes on the gains realized from the sale of our shares on a net basis (sales price less tax cost basis) at a rate of 30%, provided that the income of the non-resident holder is not subject to a preferential tax regime (as such terms are defined by the Mexican Income Tax Law), the non-resident holder appoints a legal representative in Mexico for purposes of the disposition of the shares and the representative files a tax notice claiming the election and a tax return coupled with a report issued by a public accountant.

Pursuant to the U.S.-Mexico Tax Treaty, gains realized by a holder of ADSs or CPOs that is eligible to claim benefits thereunder may be exempt from Mexican income tax on gains realized on a sale or other disposition of shares, if such holder owned, directly or indirectly, less than 25% of our outstanding capital stock during the 12-month period preceding such disposition provided certain requirements are met. These requirements include the obligation to (i) prove tax treaty residence, (ii) appoint a legal representative in Mexico for taxation purposes, and (iii) present tax reports prepared by authorized certified public accountants.

Value Added Tax

According to the provisions of the Value Added Tax Law (Ley del Impuesto al Valor Agregado), the disposition of the ADSs or CPOs made by non-resident holders would be exempt from the Value Added Tax.

Other Mexican Taxes

There are currently no Mexican estate, gift, inheritance or value added taxes applicable to the purchase, ownership or disposition of ADSs or CPOs. However, gratuitous transfers of ADSs or CPOs may result in the imposition of a Mexican federal income tax upon the recipient in certain circumstances.

There are currently no Mexican stamp, registration or similar taxes payable with respect to the purchase, ownership or disposition of ADSs or CPOs.

F.Dividends and Paying Agents

Not Applicable.

G.Statement by Experts

Not Applicable.

H.Documents on Display

We are subject to the informational requirements of the Exchange Act, applicable to foreign private issuers and, in accordance therewith, file reports and other information with the SEC. Accordingly, we will be required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information to be filed with the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov, from which you can electronically access the registration statement and its materials.

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As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. Registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we will be required to file annual reports on Form 20-F within the time period required by the SEC, which is currently four months from December 31, the end of our fiscal year. As a foreign private issuer, we are exempt from Exchange Act rules regarding proxy statements and short-swing profits.

We will provide the depositary with annual reports in English, which will include a review of operations and annual audited consolidated financial statements prepared according to IFRS.

You may request a copy of our SEC filings, at no cost, by contacting us at: Av. Antonio Dovalí Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México City, Mexico 01210, Attention: Investor Relations, Email: ir@volaris.com, Tel.: +52-55-5261-6400.

I.Subsidiary Information

Not Applicable.

ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are subject to certain market risks, including commodity prices, specifically fuel. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided below does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Fuel. Our results of operations can vary materially due to changes in the price and availability of fuel. Fuel expense for the years ended December 31, 2017, 2018 and 2019 represented approximately 31%, 38% and 38%, respectively, of our operating expenses. Increases in fuel prices or a shortage of supply could have a material adverse effect on our operations and operating results. We source a significant portion of our fuel from refining resources located in Mexico. Gulf Coast fuel is subject to volatility and supply disruptions, particularly during hurricane season when refinery shutdowns have occurred, or when the threat of weather-related disruptions has caused Gulf Coast fuel prices to spike above other regional sources.

During the year ended December 31, 2019, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 13,492 thousand gallons of fuel. Such hedges represented a portion of our fourth quarter 2019 projected consumption. Additionally, during the same period, we entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons of fuel. The latter hedges represented a portion of our projected third quarter 2019 and our 2020 consumption.

During the year ended December 31, 2018, we entered into US Gulf Coast Jet Fuel 54 Asian Call options and Zero-Cost Collars designated to hedge 45.6 million gallons of fuel. Additionally, as of December 31, 2017, we entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 61.1 million gallons of fuel.

US Gulf Coast Jet Fuel 54 is the crude utilized to determine the cost of the fuel produced by our suppliers. Based on our 2019 annual fuel consumption, a 3.6% increase in the average price per gallon of the US Gulf Coast Jet Fuel 54, would have increased our fuel budget expense for 2019 by approximately Ps. 420 million.

To attempt to manage fuel price risk, from time to time we use derivative financial instruments to mitigate the risk in cash flows attributable to changes in the fuel price. The fair value of our fuel call options as of December 31, 2017, 2018 and 2019 was a net asset position of Ps. 497.4 million, Ps. 48.2 million, and Ps. 0 million, respectively, and the fair value of our zero-cost collars as of December 31, 2017, 2018 and 2019 was Ps. 0, a loss of Ps. 122.9 million and a gain of Ps. 133.6 million and these were presented as part of the financial assets and financial liabilities line items in our consolidated statements of financial position.

We measure our derivative financial instruments at fair value. We measure the fair value of the derivative instruments based on quoted market prices. Outstanding derivative financial instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we do not expect the counterparties to fail to meet their obligations. As of December 31, 2019, we believe the credit exposure related to derivatives contracts was minor.

Our fuel hedging practices are dependent upon many factors, including our assessment of market conditions for fuel, our access to the capital necessary to support margin requirements under derivative agreements and the pricing of hedges and other derivative products in the market. As of December 31, 2019, we had hedged approximately 20% of our projected fuel requirements for the year ended December 31, 2020.

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Foreign Exchange. Our exposure to the risk of changes in foreign exchange rates relates primarily to our operating activities (when revenue or expense is denominated in a different currency from our functional currency). In order to mitigate such risk, we use from time to time derivative financial instruments. Although 30%, 32% and 29% of our revenues came from operations in the United States for the year ended December 31, 2017, 2018 and 2019, respectively, U.S. dollar denominated collections accounted for 40%, 38% and 43% of our total collections in 2017, 2018 and 2019, respectively. Our foreign exchange exposure as of December 31, 2017, 2018 and 2019 are a net monetary liability position by U.S. ($1.2) billion, U.S. ($1.7) million and U.S. ($1.7) million, respectively. During the year ended December 31, 2019, we did not enter into foreign currency forward contracts of derivative financial instruments.

As a result of the depreciation or appreciation of the peso against the U.S. dollar in the last three years, as applicable, we recorded a foreign exchange gain (loss), net of Ps. 0.6 billion, Ps. (0.1) billion, and Ps. 1.4 billion in 2017, 2018 and 2019, respectively.

Regarding the foreign currency risk effective since January 1, 2019, we implemented two hedging strategies for forecasted foreign exchange exposures using with non-derivative financial instruments. In the first hedging strategy, we have designated a hedge to mitigate the foreign exchange rate risk and foreign exchange variation fluctuation in U.S. dollars denominated forecasted revenues using the financial liabilities corresponding to the lease liability denominated in U.S. dollars over the term of the remaining leases term. We have at December 31, 2019 an amount equivalent to U.S. dollars 2.1 billion of lease liability designated as a hedging forecasted revenues over the remaining lease term.

Additionally, the second strategy consists of a hedging relationship for foreign exchange rate with non-derivative financial instruments in order to mitigate the exchange rate risk and foreign exchange variation (peso / U.S. dollar) intrinsic in U.S. dollar denominated Jet Fuel purchases. For this strategy, a portion of our Jet Fuel consumption over the next two years approximately has been designated as a hedge item; as hedging instrument we designated a portion of the guarantee deposits and cash and cash equivalents denominated in U.S. dollar. In this hedging relationship for foreign exchange rate with non-derivative financial instruments, we an amount equivalent to U.S. $410 million, which represents a portion of the financial assets denominated in U.S. dollar.

For both hedging strategies follow a Cash Flows Hedging Model, the accounting records corresponding to the recycling of the reserve for hedging of cash flows (called Other Comprehensive Income or OCI part of the stakeholder equity) will be done as it is indicated in IFRS 9, this means to reclassified to OCI through the accounts of results in the same period or periods in which the expected hedging for cash flows affect our results of period; when those sales are recognized as revenue – always adjusting them because of the hedging effects – for the program.

Interest Rates. We use derivative financial instruments to reduce our exposure to fluctuations in market interest rates. We had market risk associated with changes in variable interest rates due to the LIBOR-based rates in two of our aircraft leases which ended in 2017, and therefore, no further hedging of interest rates was made during 2017 or 2018. As of December 31, 2019, we had an outstanding hedging contract in the form of an interest rate cap with a notional amount of Ps. 1.5 billion and a fair value of Ps. 2.7 million. These instruments are included as assets in our consolidated statements of financial position. For the year ended December 31, 2017, the reported loss on the interest rate swaps was Ps. 13,827, which was recognized as part of rental expense in the consolidated statements of operations. All the Company’s positions in the form of interest rate swaps matured on March 31 and April 30, 2017. Consequently, there was no outstanding balance as of December 31, 2017 and 2018.

Our debt, as recognized in our consolidated statements of financial position, consists of the revolving line of credit with Banco Santander México and Bancomext, a short-term working capital facility with Sabadell, and an asset-backed trust notes (CEBUR) issued in the Mexican market. A hypothetical 100 bps increase in market interest rates during the year 2019 would have increased our debt interest payment in 2019 on our consolidated statements of financial position by Ps. 33.6 million.

ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.Debt Securities

Not Applicable.

B.Warrants and Rights

Not Applicable.

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C.Other Securities

Not Applicable.

D.American Depositary Shares

The Bank of New York Mellon, as depositary, will register and deliver American Depositary shares, also referred to as ADSs. Each ADS will represent ten CPOs (or a right to receive ten CPOs) deposited with Indeval, as custodian for the depositary. Each ADS will also represent any other securities, cash or other property which may be held by the depositary. The depositary’s office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286.

ADSs may be held either (a) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs, registered in the holder’s name, or (ii) by having ADSs registered in the holder’s name in the Direct Registration System, or DRS, or (b) indirectly by holding a security entitlement in ADSs through a broker or other financial institution.

The DRS is a system administered by The Depository Trust Company, also referred to as DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership is confirmed by periodic statements sent by the depositary to the registered holders of uncertificated ADSs.

We will not treat ADS holders as one of our shareholders and ADS holders will not have shareholder rights under Mexican law and our by-laws. A deposit agreement among us, the depositary and ADS holders, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADSs.

Dividends and Other Distributions

The depositary has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian receives in respect of the underlying CPOs or other deposited securities, after deducting its fees and expenses described below. ADS holders will receive these distributions in proportion to the number of CPOs their ADRs represent.

Cash Dividends and Distributions. The depositary will convert any cash dividend or other cash distribution we pay on the shares underlying the applicable CPOs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any Mexican government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest. If the depositary can only convert a portion of the cash dividend into U.S. dollars, it can either distribute the unconverted portion in the foreign currency or hold the foreign currency on the account of the ADS holders. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, ADS holders may lose some or all of the value of the distributions. Before making a distribution, the depositary will deduct any withholding taxes that must be paid. See Item 10: “Additional Information—Taxation.” It will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent.

Share Dividends and Distributions. The depositary may distribute additional ADSs representing any additional CPOs issued as a result of our issuing a share dividend or distribution. The depositary will only distribute whole ADSs. It will sell CPOs or Series A Shares, which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new CPOs. The depositary may sell a portion of the distributed CPOs or Series A shares sufficient to pay its fees and expenses in connection with that distribution.

Rights to Purchase Additional CPOs. If the CPO trustee offers CPO holders any rights to subscribe for additional CPOs or any other rights, the depositary may make these rights available to ADS holders. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary will use reasonable efforts to sell the rights and distribute the proceeds in the same way as it does with cash. Under current Mexican law, preemptive rights with respect to our common stock may not be sold apart from the applicable shares. The depositary will allow rights that are not distributed or sold to lapse. In that case, ADS holders will receive no value for them. If the depositary makes rights to purchase CPOs available to ADS holders, it will exercise the rights and purchase the CPOs on their behalf. The depositary will then deposit the CPOs and deliver ADSs to the applicable holders. It will only exercise rights if holders pay it the exercise price and any other charges required by the terms of the rights. U.S. securities laws may restrict transfers and cancellation of the ADSs representing CPOs purchased upon exercise of rights. For example, holders may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.

Other Distributions. The depositary will send to ADS holders anything else the CPO trustee distributes on deposited securities by any means it determines to be legal, fair and practical. If the depositary determines that it cannot make the distribution in a legal, fair and practical manner, it may sell the distributed assets and distribute the net proceeds, in the same way as it does with cash or determine to hold the distributed assets, in which case ADSs will also represent the newly distributed assets. However, the depositary is not required to distribute any securities (other than ADSs) unless it receives satisfactory evidence from us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution.

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Unlawful or Impracticable Distributions. The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, CPOs, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, CPOs, rights or anything else to ADS holders. This means that ADS holders may not receive the distributions we make on our common stock or any value for such distributions if it is illegal or impractical for us to make them available to such holders.

Deposit, Withdrawal and Cancellation

The depositary will deliver ADSs upon the deposit of CPOs or evidence of rights to receive CPOs with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names requested and will deliver the ADSs to the persons requested.

Upon surrender of ADSs to the depositary, upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the CPOs and any other deposited securities underlying the surrendered ADSs to the person surrendering the ADSs or a person designated by them at the office of the custodian or, at the holder’s request, risk and expense, the depositary will deliver the deposited securities at its office, if feasible; provided, however, that non-Mexican holders may not hold Series A shares directly, but will hold CPOs representing a financial interest in such Series A shares as described in this prospectus.

Voting Rights

ADS holders have no voting rights and do not have the power to instruct the depositary to vote the shares underlying the CPOs underlying such ADSs.

Fees and Expenses

The following table sets forth the applicable fees for various services, transactions and activities related to the ADSs.

Persons Depositing CPOs or ADR Holders Must Pay:	For:
U.S. $ 5.00 (or less) per 100 ADSs (or portion of 100 ADSs)	Issuance of ADSs, including issuances resulting from a distribution of CPOs or rights or other property
	Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
U.S. $ 0.05 (or less) per ADS	Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities distributed to you had been CPOs and the CPOs had been deposited for issuance of ADSs	Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
U.S. $ 0.05 (or less) per ADS per calendar year	Depositary services
Registration or transfer fees	Transfer and registration of CPOs on our CPO register to or from the name of the depositary or its agent when you deposit or withdraw CPOs
Expenses of the depositary	Conversion of foreign currency to U.S. dollars
Expenses of the depositary	Cable, telex and facsimile transmission (when expressly provided in the deposit agreement)
Taxes and other governmental charges the depositary or the custodian have to pay on any ADSs or CPOs underlying ADSs, for example, stock transfer taxes, stamp duty or withholding taxes, any charges incurred by the depositary or its agents for servicing deposited securities The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them.  The depositary may collect any of its fees by deduction from any cash distribution payable to ADS holders that are obligated to pay those fees.  The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.	As necessary

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Persons Depositing CPOs or ADR Holders Must Pay:

For:

From time to time, the depositary may make payments to us to reimburse and / or share revenue from the fees collected from ADS holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS program.  In performing its duties under the deposit agreement, the depositary may use brokers, dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.

Payment of Taxes

The depositary may deduct the amount of any taxes owed from any payments to ADS holders. It may also sell deposited securities, by public or private sale, to pay any taxes owed. ADS holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay or distribute to applicable ADS holder any proceeds or property remaining after it has paid the taxes.

Reclassifications, Recapitalizations and Mergers

If We:	Then:
Change the nominal or par value of the CPOs	The cash, shares or other securities received by the depositary will become deposited securities.  Each ADS will automatically represent its equal share of the new deposited securities.
Reclassify, split up or consolidate any of the deposited securities	The depositary may distribute some or all of the cash, shares or other securities it received.  It may also deliver new ADRs or ask ADR holders to surrender their outstanding ADRs in exchange for new ADRs identifying the new deposited securities.
Distribute securities on the CPOs that are not distributed to ADS holders
Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action

Amendment and Termination

We may agree with the depositary to amend the deposit agreement and the ADRs for any reason without the consent of the ADS holders. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, ADS holders are considered, by continuing to hold ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended.

The depositary will terminate the deposit agreement if we ask it to do so. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary bank within 60 days. In either case, the depositary must notify ADS holders at least 30 days before termination.

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After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: (a) advise ADS holders that the deposit agreement is terminated, (b) collect distributions on the deposited securities, (c) sell rights and other property, and (d) deliver CPOs and other deposited securities upon surrender of ADSs. Four months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash. After termination our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay.

Shareholder Communications and Inspection of Register of Holders of ADSs

The depositary will make available for shareholders” inspection at its office all communications that it receives from us or the CPO trustee as a holder of deposited securities that we or the COP trustee make generally available to holders of deposited securities. The depositary will send shareholders copies of those communications if we ask it to. Shareholders have a right to inspect the register of holders of ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the ADSs.

Limitations on Obligations and Liability

The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:

· are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith;

· are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the deposit agreement;

· are not liable if either of us exercises discretion permitted under the deposit agreement;

· are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement, or for any special, consequential or punitive damages for any breach of the terms of the deposit agreement;

· have no obligation to become involved in a lawsuit or other proceeding related to the ADRs or the deposit agreement on an ADR holder’s behalf or on behalf of any other party; and

· may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party.

In the deposit agreement, we agree to indemnify the depositary for acting as depositary, except for losses caused by the depositary’s own negligence or bad faith, and the depositary agrees to indemnify us for losses resulting from its negligence or bad faith.

Requirements for Depositary Actions

Before the depositary will deliver or register a transfer of an ADS, make a distribution of ADSs, or permit withdrawal of CPOs, the depositary may require:

· payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any CPOs or other deposited securities;

· satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and

· compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents.

The depositary may refuse to deliver ADSs or register transfers of ADSs generally when the transfer books of the depositary, the CPO trustee or our transfer books are closed or at any time if the depositary or we think it advisable to do so.

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ADS Holders’ Right to Receive the CPOs Underlying ADSs

ADS holders have the right to surrender their ADSs and withdraw the underlying CPOs at any time except:

· when temporary delays arise because: (i) the depositary or the CPO trustee has closed its transfer books or we have closed our transfer books; (ii) the transfer of CPOs is blocked to permit voting at a shareholders’ meeting; or (iii) we are paying a dividend on our common stock or any other security deposited with the CPO trustee;

· if the ADS holder owes money to pay fees, taxes and similar charges; and

· when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of CPOs or other deposited securities.

This right of withdrawal may not be limited by any other provision of the deposit agreement.

Pre-release of ADSs

The deposit agreement permits the depositary to deliver ADSs before deposit of the underlying CPOs. This is called a pre-release of the ADSs. The depositary may also deliver CPOs upon cancellation of pre-released ADSs (even if the ADSs are surrendered before the pre-release transaction has been closed out).

A pre-release is closed out as soon as the underlying CPOs are delivered to the depositary. The depositary may receive ADSs instead of CPOs to close out a pre-release. The depositary may pre-release ADSs only under the following conditions: (a) before or at the time of the pre-release, the person to whom the pre-release is being made represents to the depositary in writing that it or its customer owns the CPOs or ADSs to be deposited; (b) the pre-release is fully collateralized with cash or other collateral that the depositary considers appropriate; and (c) the depositary must be able to close out the pre-release on not more than five business days’ notice. In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so.

Depositary Payments

During 2019, U.S. $514,468.44 was received by us from the depositary relating to our American Depositary Shares program, consisting of reimbursements for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (e.g., the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

Please refer to Exhibit 2.1(b) to this annual report for the remaining information relating to our American Depositary Shares as required under Item 12.D of Form 20-F.

Part II.

ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

A.Use of Proceeds

Not applicable.

ITEM 15 CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We carried out an evaluation under the supervision of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

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Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with IFRS, and it includes those policies and procedures that:

· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, effective control over financial reporting cannot, and does not, provide absolute assurance of achieving our control objectives. Also, projection of any evaluation of the effectiveness of the internal controls to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

As of the year ended December 31, 2019, our management conducted an assessment of the effectiveness of our internal control over financial reporting in accordance with the criteria established in 2013 in the publication “Internal Control—Integrated Framework,” issued by the Treadway Commission’s Committee of Sponsoring Organizations (COSO), as well as the rules prescribed by the SEC in its Final Rule “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports.”

Based on the assessment performed, management concluded that our internal control over financial reporting was effective as of the end of the period covered by this annual report.

Attestation Report of the Registered Public Accounting Firm

The attestation report of Mancera, S.C., an independent registered public accounting firm, on our internal control over financial reporting is included with the audit report accompanying our audited financial statements included in this annual report.

Changes in Internal Control over Financial Reporting

During the period covered by this annual report, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16 [Reserved]

ITEM 16A Audit Committee Financial Expert

Our board of directors has determined that José Luis Fernández Fernández, a member of our audit and corporate governance committee, meets the requirements of an “audit committee financial expert,” as defined by the SEC.

See Item 6: “Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors—Audit and Corporate Governance Committee.”

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ITEM 16B Code of Ethics

We currently have a code of ethics which has been accepted by all of our directors and executive officers and other personnel. Our Code of Ethics is available on our website at www.ir.volaris.com under the “Corporate Governance—Code of Ethics” tab. The information on our website is not incorporated into this annual report.

ITEM 16C Principal Accountant Fees and Services

Mancera, S.C., independent registered public accounting firm and a member practice of Ernst & Young Global, acted as our independent registered public accounting firm for the years 2019 and 2018. The table below sets forth the fees for services performed by Mancera, S.C. for the years 2019 and 2018 (including related expenses), and categorized by service in Pesos.

	Year Ended December 31,
	2019		2018
	(in Pesos)
Audit Fees(1)		14,367,854		15,409,207
Audit-Related Fees(2)		3,442,555		2,502,562
Tax Fees(3)		—		787,261
All Other Fees		—		—
Total		17,810,409		18,699,030

(1)	“Audit Fees” are the aggregate fees billed for professional services rendered by our auditors for the audit of our annual financial statements as well as in connection with audit services for SEC or other regulatory filings.
(2)	“Audit-Related Fees” are the aggregate fees billed for professional services rendered by our auditors for the assurance and related services, tax compliance reports and social security reports.
(3)	“Tax Fees” are the aggregate fees billed for professional services rendered by transfer pricing.

Our audit and corporate governance committee pre-approves all audit and non-audit services provided by our independent auditor pursuant to the Sarbanes-Oxley Act of 2002.

ITEM 16D Exemptions from the Listing Standards for Audit Committees

Not applicable.

ITEM 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

ITEM 16F Change in Registrant’s Certifying Accountant

During the years ended December 31, 2019, 2018 and 2017 and through the date of this annual report, Mancera, S.C., our independent registered public accounting firm and a member of Ernst & Young Global Limited, has not resigned, has not indicated that it will decline to stand for re-election after the completion of its current audit nor has it been dismissed. For each of the years ended December 31, 2019, 2018 and 2017, Mancera S.C. has not expressed reliance on another accountant or accounting firm in its report on our audited consolidated financial statements for such periods.

During the years ended December 31, 2019, 2018 and 2017 and through the date of this annual report, we have not engaged a new independent accountant as either the principal accountant to audit our financial statements, or as an independent accountant to audit a significant subsidiary and on whom the principal accountant is expected to express reliance in its report.

ITEM 16G Corporate Governance

As a foreign private issuer, we may follow our home country’s corporate governance practices in lieu of most of the NYSE’s corporate governance listing standards. Pursuant to Section 303A.11 of the Listed Company Manual of the New York Stock Exchange and Rule 4350(a)(1) of the NASDAQ Stock Market, Inc. Marketplace Rules, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE and NASDAQ listing standards. The table below discloses the significant differences between our corporate governance practices and the NYSE and NASDAQ standards.

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NYSE Standards	NASDAQ Standards	Our Corporate Governance Practices
Director Independence.  Majority of board of directors must be independent.  “Controlled companies,” which would include our company if we were a U.S. issuer, are exempt from this requirement.  A controlled company is one in which more than 50% of the voting power is held by an individual, group or another company, rather than the public.  §303A.01	Director Independence.  Majority of board of directors must be independent and directors deemed independent must be identified in a listed company’s proxy statement (or annual report on Form 10-K or 20-F if the issuer does not file a proxy statement).  “Controlled companies,” which would include our company if we were a U.S. issuer, are exempt from this requirement.  A controlled company is one in which more than 50% of the voting power is held by an individual, group or another company, rather than the public.  Rules 4350(c)(1) & (c)(5)	Director Independence.  Pursuant to the Mexican Securities Market Law and our by-laws, our shareholders are required to appoint the members of our board of directors comprised of no more than 21 members, 25% of whom must be independent.  Certain persons are per se non-independent, including insiders, control persons, major suppliers and relatives of such persons.  In accordance with the Mexican Securities Market Law, our shareholders’ meeting is required to make a determination as to the independence of our directors, though such determination may be challenged by the CNBV.  See Item 6: “Directors, Senior Management and Employees—Directors and Senior Management” and Item 10: “Additional Information— Memorandum and Articles of Association—Provisions of Our By-laws and Mexican Law Relating to Directors—Election of Directors.”
Executive Sessions.  Non-management directors must meet regularly in executive sessions without management.  Independent directors should meet alone in an executive session at least once a year.  §303A.03	Executive Sessions.  Independent directors must meet regularly in executive sessions at which only independent directors are present.  Rule 4350(c)(2)	Executive Sessions.  Non-management directors are not required to meet in executive sessions without management.
Nominating/Corporate Governance Committee.  Nominating/corporate governance committee of independent directors is required.  The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee.  “Controlled companies” are exempt from these requirements.  §303A.04 As a controlled company, we would be exempt from this requirement if we were a U.S. issuer.	Nominating Committee. Director nominees must be selected, or recommended for the board’s selection, either by a nominating committee comprised solely of independent directors or by a majority of independent directors. Each listed company also must certify that it has adopted a formal charter or board resolution addressing the nominations process. “Controlled companies” are exempt from this requirement. Rules 4350(c)(4)(A)-(B) & (c)(5) As a controlled company, we would be exempt from this requirement if we were a U.S. issuer.	Nominating Committee.  We are not required to have a nominating committee.  However, we maintain a compensation committee which may, among other things, submit proposals to our board of directors in respect of the appointment of principal officers, the inaction, amendment or formation of incentive plans for officers and compensation of officers within the first four corporate levels.  See Item 6: “Directors, Senior Management and Employees— Directors and Senior Management—Board of Directors” and Item 10: “Additional Information— Memorandum and Articles of Association—Provisions of Our By-laws and Mexican Law Relating to Directors” for further information.
Compensation Committee. Compensation committee of independent directors is required, which must evaluate and approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies” are exempt from this requirement. §303A.05 As a controlled company, we would be exempt from this requirement if we were a U.S. issuer.	Compensation Committee. CEO compensation must be determined, or recommended to the board for determination, either by a compensation committee comprised solely of independent directors or a majority of the independent directors and the CEO may not be present during voting or deliberations. Compensation of all other executive officers must be determined in the same manner, except that the CEO, and any other executive officers, may be present. “Controlled companies” are exempt from this requirement. Rules 4350(c)(3)(A)-(B) & (c)(5) As a controlled company, we would be exempt from this requirement if we were a U.S. issuer.	Compensation Committee.  We are not required to have a compensation committee.  However, we maintain a compensation committee that makes proposals to the board of directors in respect of compensation of officers within the first four corporate levels.  See Item 10: “Additional Information—Memorandum and Articles of Association— Provisions of Our By-laws and Mexican Law Relating to Directors” for further information.

125

NYSE Standards	NASDAQ Standards	Our Corporate Governance Practices
Audit Committee.  Audit committee satisfying the independence and other requirements of Exchange Act Rule 10A-3 and the more stringent requirements under the NYSE standards is required.  §§303A.06, 303A.07	Audit Committee.  Audit committee satisfying the independence and other requirements of Exchange Act Rule 10A-3 and the more stringent requirements under the NASDAQ standards is required.  Rule 4350(d)	Audit and Corporate Governance Committee.  We have an audit and corporate governance committee comprised of three members.  Each member of the audit and corporate governance committee is independent, as independence is defined under the Mexican Securities Market Law, and also meets the independence requirements of Exchange Act Rule 10A-3.  Our audit and corporate governance committee operates primarily pursuant to Mexican Securities Market Law and our by-laws.  For a detailed description of the duties of our audit committee, see Item 6: “Directors, Senior Management and Employees—Directors and Senior Management—Board of Directors—Audit and Corporate Governance Committee.”
Equity Compensation Plans.  Equity compensation plans require shareholder approval, subject to limited exemptions.  §§303A.08 & 312.03	Equity Compensation Plans.  Equity compensation plans require shareholder approval, subject to limited exemptions.  Rule 4350(i)(1)(A)	Equity Compensation Plans.  Shareholder approval is required for the adoption and amendment of an equity-compensation plan based upon the recommendation of our board of directors and the opinion of our compensation committee.
Shareholder Approval for Issuance of Securities.  Issuances of securities (1) that will result in a change of control of the issuer, (2) that are to a related party or someone closely related to a related party, (3) that have voting power equal to at least 20% of the outstanding common stock voting power before such issuance or (4) that will increase the number of shares by at least 20% of the number of outstanding shares before such issuance require shareholder approval.  §§312.03(b)-(d)	Shareholder Approval for Issuance of Securities.  Issuances of securities (1) that will result in a change of control of the issuer, (2) in connection with certain acquisitions of the stock or assets of another company or (3) in connection with certain transactions other than public offerings require shareholder approval.  Rules 4350(i)(1)(B)-(D)	Shareholder Approval for Issuance of Securities.  Mexican law and our by-laws require our shareholders to authorize any share issuance.  Any issuance of shares is subject to mandatory preemptive rights, except in the event of a public offering and other limited circumstances.  Shares issued that have cleared preemptive rights or that are the subject of public offerings, may be allocated as a result of a resolution from our directors.  Shares repurchased by us in the open market may be placed again based upon resolutions by our directors.
Code of Business Conduct and Ethics.  Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver for directors or executive officers.  The code must contain compliance standards and procedures that will facilitate the effective operation of the code.  §303A.10	Code of Business Conduct and Ethics.  Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver and the reasons for such waiver for directors or executive officers.  The code must include an enforcement mechanism.  Rule 4350(n)	Code of Business Conduct and Ethics.  We have adopted a code of ethics, which has been accepted by all of our directors and executive officers and other personnel.
Conflicts of Interest.  Determination of how to review and oversee related party transactions is left to the listed company.  The audit committee or comparable body, however, could be considered the forum for such review and oversight.  §307.00.  Certain issuances of common stock to a related party require shareholder approval.  §312.03(b)	Conflicts of Interest. Appropriate review of all related party transactions for potential conflict of interest situations and approval by an audit committee or another independent body of the board of directors of such transactions is required. Rule 4350(h)	Conflicts of Interest.  In accordance with Mexican law and our by-laws, our board of directors is required to approve, on a case-by-case basis, transactions involving a conflict of interest (other than transactions in the ordinary course of business that satisfy our procedures), based upon the opinion of our corporate governance committee, that may request the opinion of a third-party expert.  Pursuant to the Mexican Securities Market Law, our board of directors may establish guidelines regarding related party transactions that do not require the board of directors’ approval.

126

NYSE Standards	NASDAQ Standards	Our Corporate Governance Practices
Solicitation of Proxies.  Solicitation of proxies and provision of proxy materials is required for all meetings of shareholders.  Copies of such proxy solicitations are to be provided to NYSE.  §§402.00 & 402.04	Solicitation of Proxies.  Solicitation of proxies and provision of proxy materials is required for all meetings of shareholders.  Copies of such proxy solicitations are to be provided to NASDAQ.  Rule 4350(g)	Solicitation of Proxies.  We are required under Mexican law to solicit proxies and provide proxy materials for meetings of shareholders.  In accordance with Mexican law and our by-laws, we are also required to inform shareholders of all meetings by notice provided in newspapers of wide distribution in Mexico, and which specify the requirements for admission to the meeting, provides a mechanism by which shareholders can vote by proxy, and makes proxies available.  Shareholders that are Mexican investors and are entitled to vote, may attend a shareholders’ meeting and cast votes at such meeting.  Under the deposit agreement relating to the ADSs, holders of the ADSs receive notices of shareholders’ meetings.  As foreign investors, holders of ADSs (or CPOs underlying the securities) are not entitled to vote at our shareholders’ meetings.
	Peer Review. A listed company must be audited by an independent public accountant that (i) has received an external quality control review by an independent public accountant (“peer review”) that determines whether the auditor’s system of quality control is in place and operating effectively and whether established policies and procedures and applicable auditing standards are being followed or (ii) is enrolled in a peer review program and within 18 months receives a peer review that meets acceptable guidelines. Rule 4350(k)	Peer Review.  Under Mexican law we must be audited by a public accountant that qualifies as independent, and satisfies the requirements specified under applicable law, maintaining certain quality standards.

ITEM 16H MINE SAFETY DISCLOSURE

Not applicable.

127

Part III.

ITEM 17 FINANCIAL STATEMENTS

Not applicable.

ITEM 18 FINANCIAL STATEMENTS

See pages F-1 through F-90.

128

ITEM 19             EXHIBITS 

EXHIBIT INDEX

Exhibit Number	Exhibit
1.1	By-laws of the Company (estatutos) (English translation) (incorporated by reference to Exhibit 3.1 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
2.1(b)	Form of Deposit Agreement among the Company, The Bank of New York Mellon, as Depositary, and all Owners and Holders from time to time of American Depositary Shares issued thereunder (incorporated by reference to Exhibit 1(1) of the Company’s registration statement on Form F-6 filed with the SEC on August 30, 2013 (File No. 333-190940))
4.1†	Engine Lease Agreement, dated as of November 24, 2009, between the Company, RRPF Engine Leasing Limited and Rolls-Royce & Partners Finance Limited (incorporated by reference to Exhibit 10.1 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.2†	Engine Lease Agreement, dated as of June 28, 2007, between the Company and Celestial Aviation Trading 50 Limited, as amended by the Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013 between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.2 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.3†	Lease Agreement, dated as of August 21, 2008, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.4 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.4†	Fleet Hour Agreement, dated as of June 8, 2007, between the Company and IAE International Aero Engines AG including Side Letter dated as of May 31, 2012 (incorporated by reference to Exhibit 10.5 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.5†	Lease Agreement, dated as of April 28, 2006, between the Company and Engine Lease Finance Corporation, as amended by the Lease Extension and Amendment Agreement No. 1, dated as of September 30, 2011, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.6 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.6†	Lease Agreement, dated as of April 28, 2006, between the Company and Engine Lease Finance Corporation (incorporated by reference to Exhibit 10.7 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.7†
4.8†	General Terms of Sale Agreement, dated as of December 8, 2006, between the Company and IAE International Aero Engines AG (incorporated by reference to Exhibit 10.9 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.9†	A320 Family Purchase Agreement, dated as of October 28, 2005, between the Company and Airbus S.A.S., including Amendment No. 1, dated as of June 22, 2007, Amendment No. 2, dated as of July 11, 2008, Amendment No. 3, dated as of January 30, 2009, Amendment No. 4, dated as of October 28, 2010, Amendment No. 5, dated as of December 15, 2010, Amendment No. 6, dated as of December 15, 2010, Amendment No. 7, dated as of January 4, 2011 and Amendments Nos. 8 and 9 both dated as of December 28, 2011 (incorporated by reference to Exhibit 10.10 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.10†	Lease Agreement, dated as of March 9, 2007, between the Company Concesionaria Vuela and International Lease Finance Corporation (incorporated by reference to Exhibit 10.11 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.11†	Lease Agreement, dated as of March 9, 2007, between the Company Concesionaria Vuela and International Lease Finance Corporation (incorporated by reference to Exhibit 10.12 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.12†	Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited (incorporated by reference to Exhibit 10.13 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))

129

4.13†	Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited (incorporated by reference to Exhibit 10.14 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.14†	Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited Amendment Agreement, dated as of September 17, 2007, between Company and RBS Aerospace Limited with Wells Fargo Northwest, National Association (incorporated by reference to Exhibit 10.15 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.15†	Lease Agreement, dated as of March 12, 2007, between the Company and RBS Aerospace Limited Amendment Agreement, dated as of October 10, 2007, between Company and RBS Aerospace Limited with Wells Fargo Northwest, National Association (incorporated by reference to Exhibit 10.16 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.16†
4.17†	Lease Agreement, dated as of April 20, 2007, between the Company and International Lease Finance Corporation (incorporated by reference to Exhibit 10.18 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.18†
4.19†	Lease Agreement, dated as of January 25, 2008, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.20 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.20†	Lease Agreement, dated as of January 25, 2008, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.21 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.21†	Lease Agreement, dated as of November 30, 2009, between the Company and CIT Aerospace International (incorporated by reference to Exhibit 10.23 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.22†	Lease Agreement, dated as of November 30, 2009, between the Company and CIT Aerospace International (incorporated by reference to Exhibit 10.24 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.23†	Lease Agreement, dated as of August 23, 2010, as amended between the Company and Macquarie Airfinance Acquisitions (Ireland) Limited (incorporated by reference to Exhibit 10.25 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.24†	Lease Agreement, dated as of August 23, 2010, as amended between the Company and Macquarie Aerospace Ireland Limited (incorporated by reference to Exhibit 10.26 of the Company’s registration statement on Form F-1 filed with the SEC on September 12, 2013 (File No. 333-189121))
4.25†	Lease Agreement, dated as of April 7, 2011, between the Company and MASL Ireland (22) Limited (incorporated by reference to Exhibit 10.30 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.26†	Lease Agreement, dated as of April 13, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.31 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.27†	Lease Agreement, dated as of April 29, 2011, between the Company and Amentum Leasing No. Three Limited (incorporated by reference to Exhibit 10.32 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.28†	Lease Agreement, dated as of April 29, 2011, between the Company and Amentum Leasing No. Three Limited (incorporated by reference to Exhibit 10.33 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.29†	Common Terms Agreement, dated as of June 28, 2007, between the Company and GE Commercial Aviation Services Limited, as amended by the Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.34 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))

130

4.30†	Fuel Sales Agreement, dated as of January 1, 2012, between the Company and World Fuel Services, Inc., as amended (incorporated by reference to Exhibit 10.35 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
4.31†	Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.36 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.32†	Lease Agreement, dated as of June 26, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.37 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.33†	Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.38 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.34†	Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.39 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.35†	Lease Agreement, dated as of April 14, 2011, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.40 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.36†	Lease Agreement, dated as of March 15, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.41 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.37†	Lease Agreement, dated as of June 26, 2012, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.42 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.38†	Aircraft Lease Agreement “A”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.43 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.39†	Aircraft Lease Agreement “B”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.44 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.40†	Aircraft Lease Agreement “C”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.45 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.41†	Aircraft Lease Agreement “D”, dated as of April 12, 2011, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.46 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.42†	Agreement on Technical Services for A319/A320 Aircraft, dated as of August 15, 2012 between the Company and Lufthansa Technik AG; Attachment 1: Total Component Support to Agreement on Technical Services for A310/320 Aircraft between Concesionaria Vuela Compañía de Aviación S.A.P.I. de C.V. and Lufthansa Technik AG dated August 15, 2012 (incorporated by reference to Exhibit 10.47 of the Company’s registration statement on Form F-1 filed with the SEC on September 12, 2013 (File No. 333-189121))
4.43†	Aircraft Lease Agreement “A”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.48 of the Company’s registration statement on Form F-1 filed with the SEC on September 12, 2013 (File No. 333-189121))
4.44†	Aircraft Lease Agreement “B”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.49 of the Company’s registration statement on Form F-1 filed with the SEC on September 12, 2013 (File No. 333-189121))
4.45†	Aircraft Lease Agreement “C”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.50 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))

131

4.46†	The Engine Lease Extension & Amendment Agreement, dated as of March 27, 2013, between the Company and Wells Fargo Bank Northwest, National Association (incorporated by reference to Exhibit 10.51 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.47†	Revolving Credit Line Agreement dated July 27, 2011, as amended among the Company, Deutsche Bank México, S.A., Institución de Banca Múltiple, División Fiduciaria, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander Mexico and Banco Nacional de Comercio Exterior, S.N.C., as amended (incorporated by reference to Exhibit 10.52 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.48†	Master Agreement, dated as of July 20, 2009, between the Company and Sabre, Inc. (incorporated by reference to Exhibit 10.53 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.49†	Navitaire Hosted Services Agreement, dated January 29, 2013 (incorporated by reference to Exhibit 10.54 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
4.50†	Aircraft Lease Agreement “D”, dated as of December 31, 2012, between Wells Fargo Bank Northwest, National Association and the Company (incorporated by reference to Exhibit 10.55 of the Company’s registration statement on Form F-1 filed with the SEC on August 16, 2013 (File No. 333-189121))
8.1	List of the Subsidiaries of the Company
12.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1	Concession Title, dated as of May 9, 2005, as amended from time to time, granted to the Company by the Ministry of Communications and Transportation (Secretaria de Comunicaciones y Transportes) (incorporated by reference to Exhibit 99.1 of the Company’s registration statement on Form F-1 filed with the SEC on June 20, 2013 (File No. 333-189121))
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

† Portions of the exhibit were omitted pursuant to a request for confidential treatment

132

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Controladora Vuela Compañía de Aviación, S.A.B. de C.V.
	By:	/s/ Enrique Beltranena
	Name:	Enrique Beltranena
	Title:	President and Chief Executive Officer
	By:	/s/ Sonia Jerez
	Name:	Sonia Jerez
	Title:	Vice President and Chief Financial Officer
	By:	/s/ Jaime Pous
	Name:	Jaime Pous
	Title:	Senior Vice President - Chief Legal Officer and Corporate Affairs
Date: April 27, 2020

133

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN,
S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

with Independent Auditor’s Reports

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN,

S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Financial Statements

Years Ended December 31, 2019, 2018 and 2017

Contents:

Independent Auditor’s Reports	F-2
Audited Consolidated Financial Statements:
Consolidated Statements of Financial Position	F-9
Consolidated Statements of Operations	F-10
Consolidated Statements of Comprehensive Income	F-11
Consolidated Statements of Changes in Equity	F-12
Consolidated Statements of Cash Flows	F-13
Notes to Consolidated Financial Statements	F-14

F-1

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

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

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial position of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Mexico according to the “Codigo de Etica Profesional del Instituto Mexicano de Contadores Publicos” (“IMCP Code”), and the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

F-2

	Lease return condition provision
Description of the Matter	As described in Note 1 p) to the consolidated financial statements, the Company’s lease agreements require that the underlying aircraft and engines be returned to lessors either in a specific condition or to make a payment in lieu of performance of the maintenance and repair activities necessary to meet these conditions. The Company adopted IFRS 16 under the full retrospective approach, which required the initial assessment of all lease contracts from their beginning and restatement of each prior reporting period presented. The Company performed an assessment of the return condition provision for leased aircraft, which required management to estimate the cost of those maintenance obligations to be included in connection with aircraft lease return. Maintenance obligation performed at the end of the lease which does not benefit the Company is viewed as variable payments under IFRS 16 and recognized in profit or loss based on the aircraft utilization over the period starting upon the completion of the major maintenance event occurring prior to lease return. The maintenance provision covers the cost to fulfill return condition that must be satisfied at the expiration of the related leases primarily related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed at the return of the lease. The maintenance return condition also considers deposits paid to the lessor considered as supplemental rental. At December 31, 2019, the Company´s provision for return condition amounted Ps.1,852,688. Auditing management´s lease return condition provision was complex as it is based on significant management´s judgement in estimating the amount and timing of future costs, aircraft usage, timing of recognition of the provision, and certain other assumptions, therefore we have determined this to be a critical audit matter.
How We Addressed the Matter in Our Audit	We obtained an understanding and evaluated the design and operating effectiveness of the Company’s internal controls over the return condition provision. For example, we tested controls over management´s review of the return cost, the discount rate calculation, timing of recognition, the significant assumptions and the data inputs used in the calculation. To test the provision for return condition, our procedures included, among others, reviewing the accuracy and completeness of the lease agreements and underlying data, assessing the methodology applied in the calculation of the provision and testing the period in which the event or condition that triggers the payments occurs and critical assumptions, for example, the aircraft usage projections based on the scheduled flight plan and the projected costs of maintenance for which we compared to historical trends and actual costs incurred in connection with aircraft returned to the lessor or maintenance costs paid at lease return as specified in the lease agreements. Furthermore, we assessed the reasonableness of the related disclosure made in Note 1 p) and 15 c) of the consolidated financial statements.

F-3

	Aircraft and engine leases
Description of the Matter	The Company adopted 1FRS 16 and applied full retrospective approach that required to determine the carrying amounts of all leases in existence at the earliest comparative period as if those leases had always been accounted for applying IFRS 16 and to restate comparative information. As described in Note 1 x) to the consolidated financial statements, as a result of initial recognition of IFRS 16 there was an amount recorded as right of use asset by Ps.23,500,081, a lease liability of Ps.32,711,793 and a retrospective effect in retained earnings by Ps. 7,365,758 as of January 1st, 2017. Additionally, the Company obtains substantially its entire fleet of aircraft and most of its engines under lease agreements, which in accordance with current standards, at inception of a contract, the Company assesses whether the contract is, or contains, a lease as a result of applying IFRS 16. Then at the commencement date of a lease, the Company recognizes a liability to make lease payments (lease liability) and an asset representing the right to use the underlying asset during the lease term (right-of-use asset). Based on the unique terms and usage conditions of each lease as specified in the related agreements, the potential impacts of the proper classification of the leases, the assumptions applied to calculate incremental borrowing rate, the determination of lease terms and in light of the fact that in 2019 the Company entered into lease agreements for 7 aircraft and 2 spare engines, as well as an extension of 1 spare engine, we have determined this to be a critical audit matter.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s IFRS 16 adoption process, for example, we tested controls over management’s review of the significant assumptions described above and the data inputs used by management in the calculation of right of use assets and lease liabilities. To test the completeness and accuracy of the underlying data used to calculate the right of use asset and lease liabilities, our procedures included reading the lease agreements and reviewing their terms and conditions, including their payment terms, the rates of established lease payment, among other procedures. Additionally, we evaluated management’s assessment performed for each component of the lease within the contracts as a lease separately from the components of the contract that do not constitute a lease as well as the assumptions used to apply the requirements for depreciating the right of use asset. Furthermore, we involved our specialists to assist in evaluating assumptions and the methodology used by management in calculating the incremental borrowing rate. We assessed the Company’s disclosure of this matter in Notes 1 p) and 14 to the consolidated financial statements.

F-4

	Aircraft maintenance deposits paid to lessors
Description of the Matter	Certain of the Company’s lease agreements require the payment of maintenance deposits to lessors during the lease term for the underlying aircraft and engines. The Company has booked aircraft maintenance deposits to lessors of Ps. 6,430,429 as of December 31, 2019. Related disclosure is included in Note 11 of the consolidated financial statements. Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as collateral in advance of the Company’s performance of the related major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs of the specific maintenance event. The Company considers as supplemental rental those maintenance deposits paid for which a maintenance event is not expected to be performed during the term of the aircraft lease, then such deposits are considered as not recoverable by the Company since will be kept by the lessor to cover future maintenance costs. Maintenance deposits are recorded as recoverable to the extent qualifying maintenance costs are expected to be incurred during the lease term. Any excess is recognized as additional lease expense in the consolidated income statement as supplemental rental. Auditing management’s aircraft maintenance deposits was complex as it is based on significant management´s judgements and assumptions for example, in estimating the recoverability of these deposits, the estimated time between the maintenance events, the costs of future maintenance and the number of flight hours the aircraft is estimated to be flown before it is returned to the lessor, among others, therefore we have determined this to be a critical audit matter.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process of aircraft maintenance deposits, including controls over management´s review of the significant assumptions described above and the data inputs used by management in the determination of the recoverability of maintenance deposits. To test the recoverability of the maintenance deposits, we performed audit procedures that included, among others, inspecting the lease agreements and testing the analysis of the estimates prepared by management to determine the recoverability of the maintenance deposits and the recognition of the unrecoverable amounts as part of supplemental rental, for example, we assessed the estimation of the major maintenance costs expected to be incurred by comparing them to historical amounts and/or costs of aircraft and engines maintenance specified in agreements with vendors, as well as the usage projections applied to determine the timing of the maintenance by comparing them with the Company’s scheduled flight plans and the term of the lease agreement. We assessed the Company’s disclosure in Notes 1j and 11 to the consolidated financial statements.

F-5

	Subsequent events (COVID-19 assessment)
Description of the Matter	In March 2020 Mexico as well as the rest of the world was impacted by the effects of COVID-19, declared a pandemic by the World Health Organization. The Company and the entire aviation industry began to experience a significant drop in the demand for air travel, as evidenced by a significant reduction in forward sales over the next few months, due to this global pandemic. In addition, governmental travel restrictions have significantly reduced the demand for global air transportation. Furthermore, on April 21, 2020, the General Health Council (GHG) announced that Mexico is in "Phase 3" of the spread of the COVID-19, the most serious stage, as transmission of the virus is intensifying. As a result of and considering this matter might be a material uncertainty predicated by the COVID 19 outbreak, the Company has assessed the entity´s ability to continue as a going concern through December 31, 2020 as required by IFRS 1. When making that assessment, management has taken into consideration the existing and anticipated effects of the outbreak on the Company´s activities in its assessment of the appropriateness of the use of going concern basis. The Company has taken several actions including decreasing capacity as measured by available seat miles (ASMs) for the rest of April and May 2020 by approximately 80% and 90%, respectively, of total operation versus the originally published schedule, establishing payment deferrals to the lease and aircraft purchase contracts and other supplier’s payment deferral, reducing management’s compensations and other salaries, deferring capital expenditures and certain other measures. Based on complexity in auditing the judgements and assumptions applied by management in assessing the capability of operating on a going concern basis, we have determined this to be a critical audit matter and we focused on the Company´s assumptions used in such assessment to estimate future demand and revenue as well as the recovery period for operations in order to conclude whether a material uncertainty exist.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process of completing the evaluation including updated inputs into the forecast of results and cash flows and consideration of management plans. As described above, we tested the Company´s forecasted results, cash flows and balance sheet figures and stress tested critical assumptions as to the severity, duration and recovery period used to build up such figures and testing as compared to historical activity and financial relationships. In addition, we have tested the critical actions implemented, (such as keep low expenses level, negotiating with vendors and suppliers for differing payments, etc.), inspection of updated contracts with lessors and equipment supplier´s as needed, labor contracts and other supporting evidence. We assessed the Company’s disclosure in Note 25 to the consolidated financial statements.

Mancera, S.C.

A member practice of

Ernst & Young Global Limited

/s/ MANCERA, S.C.

We have served as the Company’s auditor since 2005.

Mexico City, Mexico

April 27, 2020

F-6

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

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

Opinion on Internal Control over Financial Reporting

We have audited Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes, and our report dated April 27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Mexico according to the “Codigo de Etica Profesional del Instituto Mexicano de Contadores Publicos” (“IMCP Code”), and the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

F-7

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standard Board (IFRS). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS as issued by the International Accounting Standard Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Mancera, S.C.

A member practice of

Ernst & Young Global Limited

/s/ MANCERA, S.C.

Mexico City, Mexico

April 27, 2020

F-8

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Statements of Financial Position

(In thousands of Mexican pesos)

	(Thousands of			At December 31,
	U.S. dollars*) 2019			2019			2018 Adjusted			2017 Adjusted
Assets
Current assets:
Cash and cash equivalents (Note 6)	US$	423,449		Ps.	7,979,972		Ps.	5,862,942		Ps.	6,950,879
Accounts receivable:
Related parties (Note 7)		1,244			23,442			8,266			-
Other accounts receivable, net (Note 8)		48,978			923,000			508,479			478,467
Recoverable value added tax and others		49,802			938,532			612,146			400,464
Recoverable income tax		23,102			435,360			337,799			570,361
Inventories (Note 9)		16,020			301,908			297,271			294,850
Prepaid expenses and other current assets (Note 10)		41,450			781,131			442,791			500,754
Financial instruments (Notes 3 and 5)		7,088			133,567			62,440			497,403
Guarantee deposits (Note 11)		31,856			600,327			790,635			1,352,893
Total current assets		642,989			12,117,239			8,922,769			11,046,071
Non-current assets:
Rotable spare parts, furniture and equipment, net (Note 12)		391,895			7,385,334			5,782,282			4,375,697
Right-of-use assets (Note 14)		1,811,006			34,128,766			31,882,053			24,893,882
Intangible assets, net (Note 13)		8,883			167,397			179,124			190,420
Financial instruments (Notes 3 and 5)		143			2,695			-			-
Deferred income taxes (Note 19)		81,853			1,542,536			3,392,240			3,222,228
Guarantee deposits (Note 11)		405,643			7,644,421			6,337,496			6,098,252
Other assets		8,785			165,546			154,757			126,423
Other long-term assets		7,492			141,193			73,962			-
Total non-current assets		2,715,700			51,177,888			47,801,914			38,906,902
Total assets	US$	3,358,689		Ps.	63,295,127		Ps.	56,724,683		Ps.	49,952,973
Liabilities and equity
Short-term liabilities:
Unearned transportation revenue	US$	195,271		Ps.	3,679,926		Ps.	2,438,516		Ps.	2,293,309
Suppliers		84,748			1,597,099			1,085,499			1,077,438
Related parties (Note 7)		3,107			58,554			17,775			40,931
Accrued liabilities (Note 15a)		134,355			2,531,861			2,267,596			1,967,926
Lease liabilities (Note 14)		250,488			4,720,505			4,976,454			4,213,417
Other taxes and fees payable (Note 1q)		111,564			2,102,455			1,932,082			1,245,247
Income taxes payable		7,461			140,609			4,065			111,292
Financial instruments (Notes 3 and 5)		-			-			122,948			-
Financial debt (Note 5)		110,692			2,086,017			1,212,259			2,403,562
Other liabilities (Note 15c)		21,608			407,190			25,835			202,250
Total short-term liabilities		919,294			17,324,216			14,083,029			13,555,372
Long-term liabilities:
Financial debt (Note 5)		153,352			2,889,952			2,310,939			1,079,152
Accrued liabilities (Note 15b)		4,818			90,796			75,503			92,448
Lease liabilities (Note 14)		1,899,504			35,796,540			34,588,692			28,310,287
Other liabilities (Note 15c)		77,982			1,469,595			1,820,194			1,454,790
Employee benefits (Note 16)		2,027			38,206			18,153			19,289
Deferred income taxes (Note 19)		8,285			156,139			1,123,020			1,616,282
Total long-term liabilities		2,145,968			40,441,228			39,936,501			32,572,248
Total liabilities		3,065,262			57,765,444			54,019,530			46,127,620
Equity (Note 18):
Capital stock		157,789			2,973,559			2,973,559			2,973,559
Treasury shares		(9,006	)		(169,714	)		(122,661	)		(85,034	)
Contributions for future capital increases		-			1			1			1
Legal reserve		15,451			291,178			291,178			291,178
Additional paid-in capital		99,761			1,880,007			1,837,073			1,804,528
Retained earnings (losses)		23,264			438,412			(2,200,651	)		(1,257,769	)
Accumulated other comprehensive income (loss)		6,168			116,240			(73,346	)		98,890
Total equity		293,427			5,529,683			2,705,153			3,825,353
Total liabilities and equity	US$	3,358,689		Ps.	63,295,127		Ps.	56,724,683		Ps.	49,952,973

*Convenience translation to U.S. dollars (Ps.18.8452) – Note 1y.

The accompanying notes are an integral part of these consolidated financial statements.

F-9

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Statements of Operations

(In thousands of Mexican pesos, except for earnings per share expressed in Mexican pesos)

	(Thousands of U.S.
	dollars*,except
	for				For the years ended
	earnings			December 31,
	per share)						2018			2017
	2019			2019			Adjusted			Adjusted
Operating revenues (Notes 1d and 24):
Passenger revenues:
Fare revenues	US$	1,227,368		Ps.	23,129,991		Ps.	18,487,858		Ps.	17,791,317
Other passenger revenues		560,844			10,569,208			7,892,497			6,098,504
		1,788,212			33,699,199			26,380,355			23,889,821
Non- passenger revenues
Other non-passenger revenues (Note 1d)		47,629			897,586			697,357			727,392
Cargo		12,143			228,836			227,438			170,973
Non-derivatives financial instruments		(3,871	)		(72,949	)		-			-
		1,844,113			34,752,672			27,305,150			24,788,186
Other operating income (Note 20)		(17,363	)		(327,208	)		(621,973	)		(96,765	)
Fuel expense, net		616,925			11,626,069			10,134,982			7,255,636
Landing, take-off and navigation expenses		271,076			5,108,489			4,573,319			4,002,744
Depreciation of right of use assets (Note 14)		249,558			4,702,971			4,043,691			3,437,903
Salaries and benefits		191,071			3,600,762			3,125,393			2,823,647
Maintenance expenses		78,982			1,488,431			1,497,989			1,418,253
Sales, marketing and distribution expenses		76,818			1,447,637			1,501,203			1,691,524
Aircraft and engine variable lease expenses		51,030			961,657			956,010			1,429,595
Other operating expenses (Note 20)		59,056			1,112,927			1,059,098			1,034,258
Depreciation and amortization (Notes 12 and 13)		35,845			675,514			500,641			548,687
Operating income		231,115			4,355,423			534,797			1,242,704
Finance income (Note 21)		11,027			207,799			152,603			105,795
Finance cost (Note 21)		(120,446	)		(2,269,829	)		(1,876,312	)		(1,515,281	)
Foreign exchange gain (loss), net		76,439			1,440,501			(103,790	)		683,039
Income (loss) before income tax		198,135			3,733,894			(1,292,702	)		516,257
Income tax (expense) benefit (Note 19)		(58,096	)		(1,094,831	)		349,820			(237,586	)
Net income (loss)	US$	140,039		Ps.	2,639,063		Ps.	(942,882	)	Ps.	278,671
Earnings (loss) per share basic:	US$	0.138		Ps.	2.608		Ps.	(0.932	)	Ps.	0.275
Earnings (loss) per share diluted:	US$	0.138		Ps.	2.608		Ps.	(0.932	)	Ps.	0.275

*Convenience translation to U.S. dollars (Ps.18.8452) – Note 1y.

The accompanying notes are an integral part of these consolidated financial statements.

F-10

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Statements of Comprehensive Income

(In thousands of Mexican pesos)

	(Thousands of			For the years ended December 31,
	U.S. dollars*)						2018			2017
	2019			2019			Adjusted			Adjusted
Net income (loss) for the year	US$	140,039		Ps.	2,639,063		Ps.	(942,882	)	Ps.	278,671
Other comprehensive income (loss):
Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods:
Net gain (loss) on cash flow hedges (Note 22)		13,982			263,495			(283,691	)		(42,148	)
Income tax effect (Note 19)		(3,970	)		(74,820	)		85,107			12,017
Exchange differences on translation of foreign operations		427			8,045			22,156			(7,178	)
Other comprehensive (loss) income not to be reclassified to profit or loss in subsequent periods:
Remeasurement gain (loss) of employee benefits (Note 16)		(541	)		(10,192	)		5,989			(1,776	)
Income tax effect (Note 19)		162			3,058			(1,797	)		533
Other comprehensive income (loss) for the year, net of tax	US$	10,060		Ps.	189,586		Ps.	(172,236	)	Ps.	(38,552	)
Total comprehensive income (loss) for the year, net of tax	US$	150,099		Ps.	2,828,649		Ps.	(1,115,118	)	Ps.	240,119

*Convenience translation to U.S. dollars (Ps.18.8452) – Note 1y.

The accompanying notes are an integral part of these consolidated financial statements.

F-11

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Statements of Changes in Equity

For the years ended December 31, 2019, 2018 (adjusted) and 2017 (adjusted)

(In thousands of Mexican pesos)

	Capital stock		Treasury shares			Contributions for future capital increases		Legal reserve		Additional paid-in capital			Retained earnings (Accumulated losses)			Other comprehensive income (loss)			Total equity
Balance as of December 31, 2016	Ps.	2,973,559	Ps.	(83,365	)	Ps.	1	Ps.	38,250	Ps.	1,800,613		Ps.	(1,283,512	)	Ps.	137,442		Ps.	3,582,988
Legal reserve increase (Note 18)		-		-			-		252,928		-			(252,928	)		-			-
Treasury shares		-		(10,108	)		-		-		10,108			-			-			-
Exercised of stock options (Note 17)		-		638			-		-		-			-			-			638
Long-term incentive plan cost (Note 17)		-		7,801			-		-		(6,193	)		-			-			1,608
Net loss for the period		-		-			-		-		-			(594,599	)		-			(594,599	)
IFRS 15 adoption		-		-			-							(57,189	)					(57,189	)
IFRS 16 adoption (Note 1x)		-		-			-		-		-			930,459			-			930,459
Other comprehensive (loss) income items		-		-			-		-		-			-			(38,552	)		(38,552	)
Total comprehensive income (loss)		-		-			-		-		-			278,671			(38,552	)		240,119
Balance as of December 31, 2017		2,973,559		(85,034	)		1		291,178		1,804,528			(1,257,769	)		98,890			3,825,353
Treasury shares		-		(57,320	)		-		-		41,590			-			-			(15,730	)
Exercise of stock options (Note 17)		-		10,648			-		-		-			-			-			10,648
Long-term incentive plans cost (Note 17)		-		9,045			-		-		(9,045	)		-			-			-
Net loss for the period		-		-			-		-		-			(682,500	)		-			(682,500	)
IFRS 16 adoption (Note 1x)		-		-			-		-		-			(260,382	)		-			(260,382	)
Other comprehensive loss items		-		-			-		-		-			-			(172,236	)		(172,236	)
Total comprehensive loss items		-		-			-		-		-			(942,882	)		(172,236	)		(1,115,118	)
Balance as of December 31, 2018		2,973,559		(122,661	)		1		291,178		1,837,073			(2,200,651	)		(73,346	)		2,705,153
Treasury shares		-		(75,375	)		-		-		56,483			-			-			(18,892	)
Exercise of stock options (Note 17)		-		14,773			-		-		-			-			-			14,773
Long-term incentive plan cost (Note 17)		-		13,549			-		-		(13,549	)		-			-			-
Net income for the period		-		-			-		-		-			2,639,063			-			2,639,063
Other comprehensive income items		-		-			-		-		-			-			189,586			189,586
Total comprehensive income		-		-			-		-		-			2,639,063			189,586			2,828,649
Balance as of December 31, 2019	Ps.	2,973,559	Ps.	(169,714	)	Ps.	1	Ps.	291,178	Ps.	1,880,007		Ps.	438,412		Ps.	116,240		Ps.	5,529,683
	US$	157,789	US$	(9,006	)	US$	-	US$	15,451	US$	99,761		US$	23,264		US$	6,168		US$	293,427

Convenience translation to U.S. dollars 18.8452) – Note 1y.

The accompanying notes are an integral part of these consolidated financial statements.

F-12

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN, S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Consolidated Statements of Cash Flows

(In thousands of Mexican pesos)

	(Thousands of			For the years ended December 31,
	U.S. dollars*)						2018			2017
	2019			2019			Adjusted			Adjusted
Operating activities
Income (loss) before income tax	US$	198,135		Ps.	3,733,894		Ps.	(1,292,702)		Ps.	516,257
Non-cash adjustment to reconcile income before tax to net cash flows from operating activities:
Depreciation and amortization (including right-of-use-assets) (Notes 12 and 13)		285,403			5,378,485			4,544,332			3,986,590
Provision for doubtful accounts (Note 8)		2,143			40,393			10,621			4,720
Finance income (Note 21)		(11,027	)		(207,799	)		(152,603	)		(105,795	)
Finance cost (Note 21 and 1x)		120,203			2,265,242			1,876,312			1,515,281
Net foreign exchange differences		(91,428	)		(1,722,985	)		171,874			(972,523	)
Financial instruments (Notes 4 and 22)		3,589			67,629			(455,009	)		50,007
Amortized Cost (CEBUR)		175			3,306			-			-
Net gain on disposal of rotable spare parts, furniture and equipment and gain on sale of aircraft (Note 20)		(14,635	)		(275,805	)		(606,812	)		(64,978	)
Employee benefits (Note 16)		535			10,086			6,401			4,657
Aircraft and engine lease extension benefit and other benefits from service agreements		(564	)		(10,634	)		(12,693	)		(12,356	)
Management incentive and long-term incentive plans (Note 17)		1,712			32,257			12,919			8,783
Cash flows from operating activities before changes in working capital		494,241			9,314,069			4,102,640			4,930,643
Changes in operating assets and liabilities:
Related parties		1,359			25,603			(31,422	)		(24,091	)
Other accounts receivable		(19,506	)		(367,603	)		1,711			139,774
Recoverable and prepaid taxes		(22,574	)		(425,410	)		19,168			(438,966	)
Inventories		(246	)		(4,637	)		(2,421	)		(50,966	)
Prepaid expenses		(19,626	)		(369,860	)		(6,001	)		726,020
Other assets		(573	)		(10,789	)		(11,228	)		21,941
Guarantee deposits		(62,007	)		(1,168,537	)		232,019			57,425
Suppliers		27,497			518,189			14,022			196,082
Accrued liabilities		18,703			352,475			540,471			515,436
Other taxes and fees payable		6,352			119,700			558,174			353,014
Unearned transportation revenue		65,874			1,241,410			145,207			65,258
Financial instruments		(1,005	)		(18,943	)		807,644			126,053
Other liabilities		10,139			191,099			(38,875	)		11,198
		498,628			9,396,766			6,331,109			6,628,821
Interest received		11,027			207,799			152,602			105,795
Income tax paid		(5,037	)		(94,922	)		(207,004	)		(715,849	)
Net cash flows provided by operating activities		504,618			9,509,643			6,276,707			6,018,767
Investing activities
Acquisitions of rotable spare parts, furniture and equipment (Note 12)		(184,841	)		(3,483,368	)		(2,743,155	)		(2,521,752	)
Acquisitions of intangible assets (Note 13)		(4,103	)		(77,325	)		(71,007	)		(130,908	)
Pre-delivery payments reimbursements (Note 12)		37,402			704,852			668,365			213,947
Proceeds from disposals of rotable spare parts, furniture and equipment		51,817			976,500			756,402			178,273
Net cash flows used in investing activities		(99,725	)		(1,879,341	)		(1,389,395	)		(2,260,440	)
Financing activities
Proceeds from exercised stock options (Note 17)		784			14,773			10,648			638
Treasury shares purchase		(4,000	)		(75,375	)		(57,320	)		(10,108	)
Interest paid		(11,515	)		(217,018	)		(175,170	)		(105,388	)
Other finance interest paid		(3,228	)		(60,824	)		(28,567	)		-
Payments of principal portion of lease liabilities		(344,905	)		(6,499,802	)		(5,710,907	)		(5,032,898	)
Payments of financial debt		(62,707	)		(1,181,726	)		(1,193,589	)		(924,867	)
Proceeds from financial debt		147,578			2,781,132			1,208,846			2,438,025
Net cash flows used in financing activities		(277,993	)		(5,238,840	)		(5,946,059	)		(3,634,598	)
Increase (decrease) in cash and cash equivalents		126,900			2,391,462			(1,058,747	)		123,729
Net foreign exchange differences on cash balance		(14,562	)		(274,432	)		(29,190	)		(244,101	)
Cash and cash equivalents at beginning of year		311,111			5,862,942			6,950,879			7,071,251
Cash and cash equivalents at end of year	US$	423,449		Ps.	7,979,972		Ps.	5,862,942		Ps.	6,950,879

*Convenience translation to U.S. dollars (18.8452) – Note 1y.

The accompanying notes are an integral part of these consolidated financial statements.

F-13

CONTROLADORA VUELA COMPAÑÍA DE AVIACIÓN,

S.A.B. DE C.V. AND SUBSIDIARIES

(d.b.a. VOLARIS)

Notes to Consolidated Financial Statements

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Mexican pesos and thousands of U.S. dollars,
except when indicated otherwise)

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

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

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

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

Concesionaria’s concession was granted by the Mexican federal government through the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes) on May 9, 2005 initially for a period of five years and was extended on February 17, 2010 for an additional period of ten years. On February 21, 2020, Concesionaria’s concession was extended for a 20-year term starting on May 9, 2020.

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

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

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

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

F-14

The accompanying consolidated financial statements and notes were approved by the Company´s Board of Directors and by the Shareholders on April 22, 2020. These consolidated financial statements were also approved for issuance in the Company´s annual report on Form 20-F by the Company´s President and Chief Executive Officer, Enrique Beltranena, and Vice-President and Chief Financial Officer, Sonia Jerez Burdeus on April 27, 2020 and subsequent events were considered through that date (Note 25).

a)Relevant events

Issuance asset backed trust notes

On June 20, 2019, the Company, through its subsidiary Concesionaria, issued 15,000,000 asset backed trust notes (certificados bursátiles fiduciarios; the “Trust Notes”), under the ticker symbol VOLARCB 19 for the amount of Ps.1.5 billion Mexican pesos by CIBanco, S.A., Institución de Banca Multiple, acting as Trustee under the Irrevocable Trust number CIB/3249 created by Concesionaria in the first issuance under a program approved by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) for an amount of up to Ps.3.0 billion Mexican pesos. The Trust Notes are backed by future receivables under agreements entered into with credit card processors with respect to funds received from the sale of airplane tickets and ancillaries denominated in Mexican pesos, through credit cards VISA and Mastercard, via the Company’s website, mobile app and travel agencies. The Trust Notes were listed on the Mexican Stock Exchange, have a maturity of five years and will pay an interest rate of TIIE 28 plus 175 basis points.

Shares conversion

On February 16, 2018, one of the Company´s shareholders concluded the conversion of 45,968,598 Series B Shares for the equivalent number of Series A Shares. This conversion has no impact either on the total number of outstanding shares nor on the earnings-per-share calculation. (Note 18).

New code-share agreement

On January 16, 2018, the Company and Frontier Airlines (herein after Frontier) entered into a code-share operations agreement, which started operations in September.

Through this alliance, the Company´s customers gain access to additional cities in the U.S. beyond the current available destinations as the Company’s customers are able to buy a ticket throughout any of Frontier’s actual destinations; and Frontier customers gain first-time access to new destinations in Mexico through Volaris presence in Mexican airports. Tickets from Frontier can be purchased directly from the Volaris’ website.

Purchase of 80 A320 New Engine Option (“NEO”) aircraft

On December 28, 2017, the Company amended the agreement with Airbus, S.A.S. (“Airbus”) for the purchase of additional 80 A320NEO family aircraft to be delivered from 2022 to 2026, to support the Company’s targeted growth markets in Mexico, United States and Central America. The related commitments for the acquisitions of such aircraft are disclosed in Note 23.

F-15

b) Basis of preparation

Statement of compliance

These consolidated financial statements comprise the financial statements of the Company and its subsidiaries at December 31, 2019, 2018 and 2017 and for each of the three years in the period then ended, and were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). The presentation currency of the Company’s consolidated financial statements is the Mexican peso, which is used also for compliance with its legal and tax obligations. All values in the consolidated financial statements are rounded to the nearest thousand (Ps.000), except when otherwise indicated.

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

The Company presents an additional statement of financial position at January 1, 2017, due to a retrospective application of accounting policies as a result of the adoption of IFRS 16 “Leases” see Note 1 p) and x).

Basis of measurement and presentation

The accompanying consolidated financial statements have been prepared under the historical-cost convention, except for derivative financial instruments that are measured at fair value and investments in marketable securities measured at fair value through profit and loss (“FVTPL”).

The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.

F-16

c) Basis of consolidation

The accompanying consolidated financial statements comprise the financial statements of the Company and its subsidiaries. At December 31, 2019, 2018 and 2017, for accounting purposes the companies included in the consolidated financial statements are as follows:

			% Equity interest
Name	Principal Activities	Country	2019	2018	2017
Concesionaria	Air transportation services for passengers, cargo and mail throughout Mexico and abroad	Mexico	100%	100%	100%
Vuela Aviación, S.A.	Air transportation services for passengers, cargo and mail in Costa Rica and abroad	Costa Rica	100%	100%	100%
Vuela, S.A. (“Vuela”) *	Air transportation services for passengers, cargo and mail in Guatemala and abroad	Guatemala	100%	100%	100%
Vuela El Salvador, S.A. de C.V.*	Air transportation services for passengers, cargo and mail in El Salvador and abroad	El Salvador	100%	100%	-
Comercializadora Volaris, S.A. de C.V.	Merchandising of services	Mexico	100%	100%	100%
Servicios Earhart, S.A.*	Recruitment and payroll	Guatemala	100%	100%	100%
Servicios Corporativos Volaris, S.A. de C.V. (“Servicios Corporativos”)	Recruitment and payroll	Mexico	100%	100%	100%
Servicios Administrativos Volaris, S.A. de C.V. (“Servicios Administrativos”)	Recruitment and payroll	Mexico	100%	100%	100%
Comercializadora V Frecuenta, S.A. de C.V. (“Loyalty Program”) **	Loyalty Program	Mexico	100%	100%	-
Viajes Vuela, S.A. de C.V. (“Viajes Vuela”) (1)	Travel agency	Mexico	100%	100%	100%
Deutsche Bank México, S.A., Trust 1710	Pre-delivery payments financing (Note 5)	Mexico	100%	100%	100%
Deutsche Bank México, S.A., Trust 1711	Pre-delivery payments financing (Note 5)	Mexico	100%	100%	100%
Irrevocable Administrative Trust number F/307750 “Administrative Trust”	Share administration trust (Note 17)	Mexico	100%	100%	100%
Irrevocable Administrative Trust number F/745291 “Administrative Trust”	Share administration trust (Note 17)	Mexico	100%	100%	100%
Irrevocable Administrative Trust number CIB/3081 “Administrative Trust”	Share administration trust (Note 17)	Mexico	100%	100%	-
Irrevocable Administrative Trust number CIB/3249 “Administrative Trust”	Asset backed securities trustor & administrator (Note 5)	Mexico	100%	-	-

*The Companies have not started operations yet in Guatemala and El Salvador.

**The Company has not started operations yet

⁽¹⁾ With effect from July 16, 2018, the name of the Company was changed from Operaciones Volaris, S.A. de C.V. to Viajes Vuela, S.A. de C.V.

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

Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee if, and only if, the Company has:

(i)	Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee).
(ii)	Exposure, or rights, to variable returns from its involvement with the investee.
(iii)	The ability to use its power over the investee to affect its returns.

When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(i)	The contractual arrangement with the other vote holders of the investee.
(ii)	Rights arising from other contractual arrangements.
(iii)	The Company’s voting rights and potential voting rights.

F-17

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

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

On consolidation, the assets and liabilities of foreign operations are translated into Mexican pesos at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in profit or loss.

d) Revenue recognition

Passenger revenues

Revenues from the air transportation of passengers are recognized at the earlier of when the service is provided or when the non-refundable ticket expires at the date of the scheduled travel.

Ticket sales for future flights are initially recognized as contract liabilities under the caption “unearned transportation revenue” and, once the transportation service is provided by the Company or when the non-refundable ticket expires at the date of the scheduled travel, the earned revenue is recognized as passenger ticket revenues and the unearned transportation revenue is reduced by the same amount. All the Company’s tickets are non-refundable and are subject to change upon a payment of a fee. Additionally, the Company does not operate a frequent flier program.

The most significant passenger revenue includes revenues generated from: (i) fare revenue and (ii) other passenger revenues. Other passenger services include but are not limited to fees charged for excess baggage, bookings through the call center or third-party agencies, advanced seat selection, itinerary changes and charters. They are recognized as revenue when the obligation of passenger transportation service is provided by the Company or when the non-refundable ticket expires at the date of the scheduled travel.

The Company also classifies as other passenger revenue “V Club” and other similar services, which are recognized as revenue over time when the service is provided, as a modification of the tickets sold to V Club members.

Tickets sold by other airlines where the Company provides the transportation are recognized as passenger revenue when the service is provided.

The Company sells certain tickets with connecting flights with one or more segments operated by its other airline partner. For segments operated by its other airline partners, the Company has determined that it is acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract (i.e. transportation of the passenger). The Company, as the agent, recognizes revenue within Other operating revenue at the time of the travel for the net amount retained by the Company for any segments flown by other airlines.

F-18

Non-passenger revenues

The most significant non-passenger revenues include revenues generated from: (i) revenues from other non-passenger services described below and (ii) cargo services.

Revenues from other non-passenger services mainly include but are not limited to commissions charged to third parties for the sale of hotel reservations, trip insurance, rental cars and advertising spaces to third parties. They are recognized as revenue at the time the service is provided.

The Company also evaluated the principal versus agent considerations as it relates to certain non-air travel services arrangements with third party providers. No changes were identified under this analysis as the Company is agent for those services provided by third parties.

Other considerations analyzed as part of revenue from contracts with customers

All revenues offered by the Company including sales of tickets for future flights, other passenger related services and non-passenger revenue must be paid through a full cash settlement. The payment of the transaction price is equal to the cash settlement from the client at the sales time (using different payment options like credit or debit cards, paying through a third party or directly at the counter in cash). There is little or no judgment to determine the point in time of the revenue recognition, and the amount of it. Even if mainly all the sales of services are initially recognized as contract liabilities, there is no financing component in these transactions.

The cost to obtain a contract is represented by the commissions paid to the travel agencies and the bank commissions charged by the financial institutions for processing electronic transactions (Note 10). The Company does not incur any additional costs to obtain and fulfill a contract that is eligible for capitalization.

Trade receivables are mainly with financial institutions due to transactions with credit and debit cards, and therefore they are non-interest bearing and are mainly on terms of 24 to 48 hours.

The Company has the right of collection at the beginning of the contracts and there are no discounts, payment incentives, bonuses or other variable considerations subsequent to the purchase that could modify the amount of the transaction price.

The Company does not have any obligations for returns, refunds and other similar obligations. All revenues from the Company related to future services, or services are rendered through a period of time less than 12 months.

F-19

Breakdown of revenues:

As of December 31, 2019, 2018 and 2017, the revenues from customers of contracts is described as follows:

	At the flight time				At the sale				Total
Revenue recognition as of December 31, 2019	Domestic		International		Domestic		International		Revenues
Passenger Revenues
Fare Revenues	Ps.	15,833,878	Ps.	7,296,113	Ps.	-	Ps.	-	Ps.	23,129,991
Other Passenger Revenues	7,531,725		2,865,555		119,466		52,462		10,569,208
	23,365,603		10,161,668		119,466		52,462		33,699,199
Non-Passenger Revenues
Other Non-Passenger revenues	888,353		9,233		-		-		897,586
Cargo	221,375		7,461		-		-		228,836
Total	Ps.	24,475,331	Ps.	10,178,362	Ps.	119,466	Ps.	52,462	Ps.	34,825,621
Non-derivative financial instruments									(72,949		)
									Ps.	34,752,672

	At the flight time				At the sale				Total
Revenue recognition as of December 31, 2018	Domestic		International		Domestic		International		Revenues
Passenger Revenues
Fare Revenues	Ps.	12,336,095	Ps.	6,151,763	Ps.	-	Ps.	-	Ps.	18,487,858
Other Passenger Revenues	5,182,572		2,598,375		68,264		43,286		7,892,497
	17,518,667		8,750,138		68,264		43,286		26,380,355
Non-Passenger Revenues
Other Non-Passenger revenues	685,219		12,138		-		-		697,357
Cargo	221,324		6,114		-		-		227,438
Total	Ps.	18,425,210	Ps.	8,768,390	Ps.	68,264	Ps.	43,286	Ps.	27,305,150

	At the flight time				At the sale				Total
Revenue recognition as of December 31, 2017	Domestic		International		Domestic		International		Revenues
Passenger Revenues
Fare Revenues	Ps.	12,284,795	Ps.	5,506,522	Ps.	-	Ps.	-	Ps.	17,791,317
Other Passenger Revenues	4,087,664		1,992,696		11,283		6,861		6,098,504
	16,372,459		7,499,218		11,283		6,861		23,889,821
Non-Passenger Revenues
Other Non-Passenger revenues	723,297		4,095		-		-		727,392
Cargo	165,907		5,066		-		-		170,973
Total	Ps.	17,261,663	Ps.	7,508,379	Ps.	11,283	Ps.	6,861	Ps.	24,788,186

Transactions from unearned transportation revenues.

	2019				2018				2017
January 1,		Ps.	2,438,516			Ps.	2,293,309			Ps.	2,228,051
Deferred		34,940,609				26,525,562				23,955,079
Recognized in revenue during the year		(33,699,199		)		(26,380,355		)		(23,889,821		)
December 31,		Ps.	3,679,926			Ps.	2,438,516			Ps.	2,293,309

The performance obligations related to contract liability are recognized over the following 12 months and are related to the scheduled flights and other passenger services purchased by the client in advance.

F-20

e) Cash and cash equivalents

Cash and cash equivalents are represented by bank deposits and highly liquid investments with maturities of 90 days or less at the original purchase date. For the purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash and short-term investments as defined above.

The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. These credit card processing agreements doesn’t have significant cash reserve requirements.

f) Financial instruments -initial recognition and subsequent measurement

A financial instrument is any contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.

i) Financial assets

Initial recognition

Classification of financial assets and initial recognition

The Company determines the classification and measurement of financial assets, in accordance with IFRS 9, which are based on both: the characteristics of the contractual cash flows of these assets and the business model objective for holding them.

Financial assets include those carried at FVTPL, whose objective to hold them is for trading purposes (short-term investments), or at amortized cost, for accounts receivables held to collect the contractual cash flows, which are characterized by solely payments of principal and interest (“SPPI”). Derivative financial instruments are also considered financial assets when these represent contractual rights to receive cash or another financial asset. All the Company’s financial assets are initially recognized at fair value, including derivative financial instruments.

Subsequent measurement

The subsequent measurement of financial assets depends on their initial classification, as is described below:

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

2. Financial assets at amortized cost, whose characteristics meet the SPPI criterion and were originated to be held to collect principal and interest in accordance with the Company’s business model.

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

F-21

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

a) The rights to receive cash flows from the asset have expired;

b) The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (i) the Company has transferred substantially all the risks and rewards of the asset, or (ii) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset; or

c) When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset.

In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

ii) Impairment of financial assets

The Company assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired in the Cash Generating Units (CGU). An impairment exists if one or more events has occurred since the initial recognition of an asset (an incurred ‘loss event’), that has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in receivable, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Further disclosures related to impairment of financial assets are also provided in Note 8.

For trade receivables, the Company records allowance for credit losses in accordance with the objective evidence of the incurred losses.

Based on this evaluation, allowances are taken into account for the expected losses of these receivables. For the years ended December 31, 2019, 2018 and 2017, the Company recorded expected credit losses on accounts receivable of Ps.40,393, Ps.10,621 and Ps.4,720, respectively (Note 8).

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iii) Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at FVTPL, loans and borrowings, accounts payables to suppliers, unearned transportation revenue, other accounts payable and financial instruments.

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

Subsequent measurement

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

Financial liabilities at amortized cost

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

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

Amortized cost is calculated by taking into account any discount or premium on issuance and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the consolidated statements of operations. This amortized cost category generally applies to interest-bearing loans and borrowings (Note 5).

Financial liabilities at FVTPL

Financial liabilities at FVTPL include financial liabilities under the fair value option, which are classified as held for trading, if they are acquired for the purpose of selling them in the near future. This category includes derivative financial instruments that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. During the years ended December 31, 2019, 2018 and 2017 the Company has not designated any financial liability as at FVTPL.

Derecognition

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability.

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

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Offsetting of financial instruments

Financial assets and financial liabilities are offset, and the net amount is reported in the consolidated statement of financial position if there is:

(i)	A currently enforceable legal right to offset the recognized amounts, and
(ii)	An intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.

g) Other accounts receivable

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

h) Inventories

Inventories consist primarily of flight equipment expendable parts, materials and supplies, and are initially recorded at acquisition cost. Inventories are carried at the lower of cost and their net realization value. The cost is determined on the basis of the method of specific identification and expensed when used in operations.

i) Intangible assets

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

The Company records impairment charges on intangible assets used in operations when events and circumstances indicate that the assets or related cash generating unit may be impaired and the carrying amount of a long-lived asset or cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell, and (ii) its value in use.

The value in use calculation is based on a discounted cash flow model, using our projections of operating results for the near future. The recoverable amount of long-lived assets is sensitive to the uncertainties inherent in the preparation of projections and the discount rate used in the calculation. For the years ended December 31, 2019, 2018 and 2017, the Company did not record any impairment loss in the value of its intangible assets.

j) Guarantee deposits

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

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Aircraft maintenance deposits paid to lessors

Most of the Company’s lease agreements require the Company to pay maintenance deposits to aircraft lessors to be held as collateral in advance of the Company’s performance of major maintenance activities. These lease agreements provide that maintenance deposits are reimbursable to the Company upon completion of the maintenance event in an amount equal to the lesser of (i) the amount of the maintenance deposits held by the lessor associated with the specific maintenance event, or (ii) the qualifying costs related to the specific maintenance event.

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

Maintenance deposits expected to be recovered from lessors are reflected as guarantee deposits in the accompanying consolidated statement of financial position. These deposits are recorded as a monetary asset and are revaluated in order to record the foreign currency changes at each reported period. The Company makes certain assumptions at the inception of the lease and at each consolidated statement of financial position date to determine the recoverability of maintenance deposits. These assumptions are based on various factors such as the estimated time between the maintenance events, the date the aircraft is due to be returned to the lessor, and the number of flight hours the aircraft and engines is estimated to be utilized before it is returned to the lessor.

Some other aircraft lease agreements do not require the obligation to pay maintenance deposits to lessors in advance in order to ensure major maintenance activities, so the Company does not record guarantee deposits regarding these aircraft. However, certain of these lease agreements include the obligation to make a maintenance adjustment payment to the lessors at the end of the lease period. These maintenance adjustments cover maintenance events that are not expected to be made before the termination of the lease; for such agreements the Company accrues a liability related to the amount of the costs to be incurred at the lease term, since no maintenance deposits had been made, Note 15c). The portion of prepaid maintenance deposits that is deemed unlikely to be recovered and accruals in lien of maintenance deposits, are recorded as a variable lease payment and is presented as supplemental rent in the consolidated statements of operations. For the years ended December 31, 2019, 2018 and 2017, the Company expensed as supplemental rent Ps.295,720, Ps.299,601 and Ps.265,756, respectively.

During the year ended December 31, 2019, 2018 and 2017, the Company added seven, ten and five new net leases aircraft to its fleet, respectively (Note 14).

During the years ended December 31, 2019, 2018 and 2017, the Company extended the lease term of one, two and three aircraft agreements, respectively. Additionally, the Company extended the lease term of one spare engines in 2019, two spare engines in 2018 and two spare engines during 2017. These extensions made available to the Company maintenance deposits that were recognized in prior periods in the consolidated statements of operations as supplemental rent of Ps.0, Ps.0 and Ps.65,716 during 2019, 2018 and 2017, respectively. The maintenance event for which the maintenance deposits were previously expensed was scheduled to occur after the original lease term and as such the supplemental rental payments were expensed. However, when the leases were amended the maintenance deposits amounts became probable of recovery due to the longer lease term and as such they are being recognized as an asset.

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The effect of these lease extensions was recognized as a lease incentive reducing the right of use asset (Note 14).

k) Aircraft and engine maintenance

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

Fleet maintenance requirements may involve short cycle engineering checks, for example, component checks, monthly checks, annual airframe checks and periodic major maintenance and engine checks.

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

(i) Routine maintenance requirements consist of scheduled maintenance checks on the Company’s aircraft, including pre-flight, daily, weekly and overnight checks, any diagnostics and routine repairs and any unscheduled tasks performed as required. These type of maintenance events are currently serviced by Company mechanics and are primarily completed at the main airports that the Company currently serves.

All other maintenance activities are sub-contracted to qualified maintenance business partner, repair and overhaul organizations. Routine maintenance also includes scheduled tasks that can take from seven to 14 days to accomplish and typically are required approximately every 22 months. All routine maintenance costs are expensed as incurred.

(ii) Major maintenance consists of a series of more complex tasks that can take up to six weeks to accomplish and typically are required approximately every five to six years.

Major maintenance is accounted for under the deferral method, whereby the cost of major maintenance and major overhaul and repair is capitalized (leasehold improvements to flight equipment) and amortized over the shorter of the period to the next major maintenance event or the remaining contractual lease term. The next major maintenance event is estimated based on assumptions including estimated usage. The United States Federal Aviation Administration (“FAA”) and the Mexican Federal Civil Aviation Agency (Agencia Federal de Aviación Civil) mandate maintenance intervals and average removal times as suggested by the manufacturer.

These assumptions may change based on changes in the utilization of aircraft, changes in government regulations and suggested manufacturer maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage an airframe, engine, or major component to a level that would require a heavy maintenance event prior to a scheduled maintenance event. To the extent the planned usage increases, the estimated life would decrease before the next maintenance event, resulting in additional expense over a shorter period.

During the years ended December 31, 2019, 2018 and 2017, the Company capitalized major maintenance events as part of leasehold improvements to flight equipment for an amount of Ps.659,082, Ps.676,457 and Ps.529,331, respectively (Note 12). For the years ended December 31, 2019, 2018 and 2017, the amortization of major maintenance leasehold improvement costs was Ps.450,371, Ps.313,464 and Ps.382,745 respectively (Note 12). The amortization of deferred maintenance costs is recorded as part of depreciation and amortization in the consolidated statements of operations.

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

The Company has an engine flight hour agreement (component repair agreement), that guarantees a cost per overhaul, provides miscellaneous engines coverage, caps the cost of foreign objects damage events, ensures there is protection from annual escalations, and grants an annual credit for scrapped components. The cost associated with the miscellaneous engines’ coverage is recorded monthly as incurred in the consolidated statements of operations.

l) Rotable spare parts, furniture and equipment, net

Rotable spare parts, furniture and equipment, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method.

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

Pre-delivery payments refer to prepayments made to aircraft and engine manufacturers during the manufacturing stage of the aircraft. The borrowing costs related to the acquisition or construction of a qualifying asset are capitalized as part of the cost of that asset.

During the years ended December 31, 2019, 2018 and 2017, the Company capitalized borrowing costs which amounted to Ps.456,313 Ps.357,920 and Ps.193,389, respectively (Note 21). The rate used to determine the amount of borrowing cost was 5.10%, 4.41% and 3.30%, for the years ended December 31, 2019, 2018 and 2017, respectively.

Depreciation rates are as follows:

	Annual depreciation rate
Flight equipment	4.0-16.7%
Constructions and improvements	Remaining contractual lease term
Computer equipment	25%
Workshop tools	33.3%
Electric power equipment	10%
Communications equipment	10%
Workshop machinery and equipment	10%
Motorized transport equipment platform	25%
Service carts on board	20%
Office furniture and equipment	10%
Leasehold improvements to flight equipment	The shorter of: (i) remaining contractual lease
	term, or (ii) the next major maintenance event

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

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The Company assesses, at each reporting date, whether there is an objective evidence that rotable spare parts, furniture and equipment and right of use asset are impaired in the Cash Generating Unit (CGU). The Company identified only one CGU, which is the fleet. The Company records impairment charges on rotable spare parts, furniture and equipment and right of use assets used in operations when events and circumstances indicate that the assets may be impaired or when the carrying amount of a long-lived asset or related cash generating unit exceeds its recoverable amount, which is the higher of (i) its fair value less cost to sell and (ii) its value in use.

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

During 2019, the Company performed its annual impairment test. The recoverable amount of rotable spare parts, furniture and equipment assets was determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management, covering a five-year period. The projected cash flows have been updated to reflect the future operating cashflows. It was concluded that the fair value less costs of disposal did not exceed the value in use. Consequently, for the years ended December 31, 2019, 2018 and 2017, there were no impairment charges recorded in respect of the Company’s value of rotable spare parts, furniture and equipment.

m) Foreign currency transactions and exchange differences

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

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

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

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

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

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

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

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

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For the year ended December 31, 2019, 2018 and 2017, the exchange rates of local currencies translated to functional currencies are as follows:

			Exchange rates of local currencies translated to functional currencies					Exchange rates of local currencies translated to functional currencies				Exchange rates of local currencies translated to functional currencies
Country	Local currency	Functional currency	Average exchange rate for 2019		Exchange rate as of 2019			Average exchange rate for 2018		Exchange rate as of 2018		Average exchange rate for 2017		Exchange rate as of 2017
Costa Rica	Colon	U.S. dollar	₵.	590.9574		₵.	573.4400	₵.	580.8534	₵.	609.6100	₵.	572.2000	₵.	572.5600
Guatemala	Quetzal	U.S. dollar	Q.	7.7066		Q.	7.6988	Q.	7.5337	Q.	7.7440	Q.	7.3509	Q.	7.3448
El Salvador	U.S Dollar	U.S. dollar	$.	19.2618		$.	18.8452	$.	-	$.	-	$.	-	$.	-

The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2019, 2018 and 2017, were Ps.18.8452, Ps.19.6829 and Ps.19.7354, respectively, per U.S. dollar.

Foreign currency differences arising on translation into the presentation currency are recognized in OCI. Exchange differences on translation of foreign entities for the year ended December 31, 2019, 2018 and 2017, were Ps.8,045, Ps.22,156 and Ps. (7,178), respectively.

n) Liabilities and provisions

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

o) Employee benefits

i) Personnel vacations

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

ii) Termination benefits

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

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

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

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

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For the years ended December 31, 2019, 2018 and 2017, no termination benefits provision has been recognized.

iii) Seniority premiums

In accordance with Mexican Labor Law, the Company provides seniority premium benefits to the employees which rendered services to its Mexican subsidiaries under certain circumstances. These benefits consist of a one-time payment equivalent to 12 days’ wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit.

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

The latest actuarial computation was prepared as of December 31, 2019. Remeasurement gains and losses are recognized in full in the period in which they occur in OCI. Such remeasurement gains and losses are not reclassified to profit or loss in subsequent periods.

The defined benefit asset or liability comprises the present value of the defined benefit obligation using a discount rate based on government bonds, less the fair value of plan assets out of which the obligations are to be settled.

For entities in Costa Rica, Guatemala and El Salvador there is no obligation to pay seniority premium, these countries have Post- Employee Benefits.

iv) Incentives

The Company has a quarterly incentive plan for certain personnel whereby cash bonuses are awarded for meeting certain performance targets. These incentives are payable shortly after the end of each quarter and are accounted for as a short-term benefit under IAS 19, Employee Benefits. A provision is recognized based on the estimated amount of the incentive payment. During the years ended December 31, 2019, 2018 and 2017 the Company expensed Ps.62,825, Ps.67,680 and Ps.48,384, respectively, as quarterly incentive bonuses, recorded under the caption salaries and benefits.

The Company has a short-term benefit plan for certain key personnel whereby cash bonuses are awarded when certain Company’s performance targets are met. These incentives are payable shortly after the end of each year and also are accounted for as a short-term benefit under IAS 19. A provision is recognized based on the estimated amount of the incentive payment. During the years ended December 31, 2019, 2018 and 2017 the Company recorded an expense for an amount of Ps.80,634, Ps.50,000, and Ps.0, respectively, under the caption salaries and benefits.

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v) Long-term incentive plan (“LTIP”) and long-term retention plan (LTRP)

The Company has adopted a Long-term incentive plan (“LTIP”). This plan consists of a share purchase plan (equity-settled) and a share appreciation rights “SARs” plan (cash settled), and therefore accounted under IFRS 2 “Shared based payments”. This incentive plan has been granting annual extensions in the same terms from the original granted in 2014.

During 2019 and 2018, the Company approved a new long-term retention plan (“LTRP”), which consisted in a purchase plan (equity-settled). This plan does not include cash compensations granted through appreciation rights on the Company’s shares. The retention plans granted in previous periods will continue in full force and effect until their respective due dates and the cash compensation derived from them will be settled according to the conditions established in each plan.

vi) Share-based payments

a) LTIP

- Share purchase plan (equity-settled)

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

During the years ended December 31, 2019, 2018 and 2017, the Company expensed Ps.49,659, Ps.19,980 and Ps.13,508, respectively, related to RSUs granted under the LTIP and LTRP. The expenses were recorded under the caption salaries and benefits.

- SARs plan (cash settled)

The Company granted SARs to key employees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share price of the Company between the grant date and the time of exercise. The liability for the SARs is measured, initially and at the end of each reporting period until settled, at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). During the years ended December 31, 2019, 2018 and 2017, the Company recorded an expense (benefit) for Ps.2,964, Ps.(186), Ps.(8,999), respectively, related to the SARs included in the LTIP. These amounts were recorded under the caption salaries and benefits.

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b) Management incentive plan (“MIP”)

- MIP I

Certain key employees of the Company receive additional benefits through a share purchase plan, which has been classified as an equity-settled share-based payment. The equity-settled compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17). The total cost of this plan has been totally recognized during the required service period.

- MIP II

On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees, this plan was named MIP II. In accordance with this plan, the Company granted SARs to key employees, which entitle them to a cash payment after a service period. The amount of the cash payment is determined based on the increase in the share price of the Company between the grant date and the time of exercise. The liability for the SARs is measured initially and at the end of each reporting period until settled at the fair value of the SARs, taking into account the terms and conditions on which the SARs were granted. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits, over the requisite service period (Note 17).

During the years ended December 31, 2019, 2018 and 2017, the Company recorded an expense (benefit) for Ps.37,760, Ps.(5,052) and Ps.(16,499), respectively, related to MIP II into the consolidated statement of operations.

c) Board of Directors Incentive Plan (BoDIP)

Certain members of the Board of Directors of the Company receive additional benefits through a share-based plan, which has been classified as an equity-settled share-based payment and therefore accounted under IFRS 2 “Shared based payments”.

In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during a four years period with an exercise price share at Ps.16.12, which was determined on the grant date. Under this plan, no service or performance conditions are required to the board members for exercise the option to acquire shares, and therefore, they have the right to request the delivery of those shares at the time they pay for them.

vii) Employee profit sharing

The Mexican Income Tax Law (“MITL”), establishes that the base for computing current year employee profit sharing shall be the taxpayer’s taxable income of the year for income tax purposes, including certain adjustments established in the Income Tax Law, at the rate of 10%. For the years ended December 2019, 2018 and 2017, the employee profit sharing is Ps.22,134, Ps.14,106 and Ps.8,342, respectively, and is presented as an expense in the consolidated statements of operations. Subsidiaries in Central America do not have such profit-sharing benefit, as it is not required by local regulation.

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p) Leases

The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

i) Right-of-use assets

The Company recognize right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, an estimate of costs to be incurred by the Company in dismantling and removing the underlying asset to the condition required by the terms and conditions of the lease, and lease payments made at or before the commencement date less any lease incentives received.

Components of the right-of-use assets are depreciated on a straight-line basis over the shorter of the remining lease term and the estimated useful lives of the assets, as follows:

Aircraft and engines	up to 18 years
Spare engines	up to 14 years
Buildings leases	one to ten years
Maintenance component	up to eight years

ii) Lease Liabilities

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees.

Variable lease payments that do not depend on an index or a rate are recognized as expenses in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments or a change in the assessment of an option to purchase the underlying asset.

The short-term leases and leases of low value assets are recognized as expense on a straight-line basis over the lease term.

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During the years ended December 31, 2019, 2018 and 2017, there were no impairment charges recorded in respect of the company right-of-use asset.

iii) Sale and leaseback

The Company enters into sale and leaseback agreements whereby an aircraft or engine is sold to a lessor upon delivery and the lessor agrees to lease such aircraft or engine back to the Company.

Since January 1, 2019, the Company measures the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly, the Company recognizes in the Statement of Operations only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. The rest of the gain is amortized over the lease term.

Before the IFRS 16 adoption, the profit or loss related to a sale transaction followed by an operating lease, is accounted for as follows:

(i)      Profit or loss was recognized immediately when it was clear that the transaction was established at fair value.

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

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

iv) Return obligations

The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in most cases are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of variable rent expenses and the provision is included as part of other liabilities, through the remaining lease term. The Company estimates the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2019, 2018 and 2017, the Company expensed as variable rent of Ps.680,964, Ps.659,106 and Ps.851,410, respectively.

q) Other taxes and fees payable

The Company is required to collect certain taxes and fees from customers on behalf of government agencies and airports and to remit these to the applicable governmental entity or airport on a periodic basis. These taxes and fees include federal transportation taxes, federal security charges, airport passenger facility charges, and foreign arrival and departure fees. These charges are collected from customers at the time they purchase their tickets but are not included in passenger revenue. The Company records a liability upon collection from the customer and discharges the liability when payments are remitted to the applicable governmental entity or airport.

r) Income taxes

Current income tax

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Current income tax relating to items recognized directly in equity is recognized in equity. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

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Deferred tax

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

Deferred tax liabilities are recognized for all taxable temporary differences, except, in respect of taxable temporary differences associated with investments in subsidiaries when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any available tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and available tax losses can be utilized, except, in respect of deductible temporary differences associated with investments in subsidiaries deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilized.

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

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

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

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

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

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

s) Derivative and non-derivative financial instruments and hedge accounting

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

In accordance with IFRS 9, derivative financial instruments and non-derivative financial instruments are recognized in the consolidated statement of financial position at fair value. At inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which it wishes to apply hedge accounting, as well as the risk management objective and strategy for undertaking the hedge. The documentation includes the hedging strategy and objective, identification of the hedging instrument, the hedged item or transaction, the nature of the risks being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk(s).

Only if such hedges are expected to be effective in achieving offsetting changes in fair value or cash flows of the hedge item(s) and are assessed on an ongoing basis to determine that they have been effective throughout the financial reporting periods for which they were designated, hedge accounting treatment can be used.

Under the cash flow hedge (CFH) accounting model, the effective portion of the hedging instrument’s changes in fair value is recognized in OCI, while the ineffective portion is recognized in current year earnings. During the years ended December 31, 2019, 2018 and 2017, there was no ineffectiveness with respect to derivative financial instruments. The amounts recognized in OCI are transferred to earnings in the period in which the hedged transaction affects earnings.

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

Accounting for the time value of options

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

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t) Financial instruments – Disclosures

IFRS 7 requires a three-level hierarchy for fair value measurement disclosures and requires entities to provide additional disclosures about the relative reliability of fair value measurements (Notes 4 and 5).

u) Treasury shares

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

v) Operating segments

Management of Controladora monitors the Company as a single business unit that provides air transportation and related services, accordingly it has only one operating segment.

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

w) Current versus non-current classification

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

x) Impact of new International Financial Reporting Standards

New and amended standards and interpretations already effective

The Company applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2019. The Company has not early adopted any other standard interpretation or amendment that has been issued but is not yet effective. Although these new standards and amendments applied for the first time in 2019, except for IFRS 16, that have a material impact on the annual consolidated financial statements of the Company. The nature and the impact of these changes to each new standard and amendment are described below:

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IFRIC 22 — Foreign Currency Transactions and Advance Considerations

IFRIC 22 clarifies that the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non- monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non- monetary asset or non-monetary liability arising from the advance consideration.

This interpretation does not have any impact on the Company’s consolidated financial statements.

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

The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met.

The Company’s accounting policy for cash-settled share-based payments is consistent with the approach clarified in the amendments. In addition, the Company has no share-based payment transaction with net settlement features for withholding tax obligations and had not made any modifications to the terms and conditions of its share-based payment transaction. Therefore, these amendments do not have any impact on the consolidated financial statements.

IFRIC 23 Uncertainty over Income Tax Treatment

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

§ Whether an entity considers uncertain tax treatments separately

§ The assumptions an entity makes about the examination of tax treatments by taxation authorities

§ How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

§ How an entity considers changes in facts and circumstances

The Company determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty.

The Company applies significant judgement in identifying uncertainties over income tax treatments. Since the Company operates in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements.

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Upon adoption of the Interpretation, the Company considered whether it has any uncertain tax positions. The Company’s and the subsidiaries’ tax filings in different jurisdictions include deductions related to transfer pricing and the taxation authorities may challenge those tax treatments. The Company determined, based on its tax compliance and transfer pricing study, that it is probable that its tax treatments (including those for the subsidiaries) will be accepted by the taxation authorities.

The Interpretation did not have an impact on the consolidated financial statements of the Company.

Amendments to IFRS 9 Prepayment Features with Negative Compensation

Under IFRS 9, a debt instrument can be measured at amortized cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract.

These amendments had no impact on the consolidated financial statements of the Company.

Amendments to IAS 19 Plan Amendment, Curtailment or Settlement

The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event.

An entity is also required to determine the net interest for the remainder of the period after the plan amendment, curtailment or settlement using the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net defined benefit liability (asset).

The amendments had no impact on the consolidated financial statements of the Company as it did not have any plan amendments, curtailments, or settlements during the period.

IFRS 16 Leases

IFRS 16 is effective for annual periods beginning on or after January 1, 2019 and supersedes 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 recognize most leases on the balance sheet.

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The Company adopted IFRS 16 using the full retrospective method of adoption, with the date of initial application of January 1, 2019. The Company elected to use the transition provision allowing it to opt not to reassess whether a contract is, or contains, a lease at January 1, 2019. Instead, the Company applied the standard only to contracts that were previously identified as leases according to IAS 17 and IFRIC 4 at the date of initial application.

The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).

Impact of adoption on the consolidated statements of financial position

The effect of adopting IFRS 16 is, as follows:

Impact on the consolidated statement of financial position (increase/(decrease)):

	As of December 31, 2018			As of December 31, 2017			As of January 1, 2017
Assets
Non-current assets
Right-of-use-assets	Ps.	31,882,053		Ps.	24,893,882		Ps.	23,500,081
Deferred income tax		2,725,037			2,636,821			3,042,344
Prepaid expenses		(266,959	)		(266,959	)		(266,959	)
Liabilities
Short-term liabilities:
Lease liabilities		4,976,454			4,213,417			4,237,065
Other liabilities		(91,889	)		(78,494	)		(68,548	)
Long-term liabilities:
Lease liabilities		34,588,692			28,310,287			28,474,728
Other liabilities		1,492,260			1,238,088			997,979
Equity
Retained losses	Ps.	(6,625,386	)	Ps.	(6,419,554	)	Ps.	(7,365,758	)

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Impact on the consolidated statement of profit or loss (increase/(decrease)):

	For the year ended December 31, 2018			For the year ended December 31, 2017
Depreciation expense	Ps.	4,043,691		Ps.	3,437,903
Lease benefit		(5,543,655	)		(4,807,378	)
Operating income		(1,499,964	)		(1,369,475	)
Finance cost		1,755,978			1,428,924
Foreign exchange loss (gain), net		31,315			(1,476,893	)
Income tax (benefit) expense		(88,216	)		405,523
Net loss (income) for the period	Ps.	199,113		Ps.	(1,011,921	)

Impact on consolidated statement of cash flows (increase/(decrease)):

	For the year ended December 31, 2018			For the year ended December 31, 2017
Lease payments		(5,710,907	)		(5,032,898	)
Net cash flows from operating activities	Ps.	5,710,907		Ps.	5,032,898
Payment of principal portion of lease liabilities		5,710,907			5,032,898
Net cash flows from financing activities	Ps.	(5,710,907	)	Ps.	(5,032,898	)

Due to the adoption of IFRS 16, it is expected that the Company operating profit should improve, while its interest expense should increase. This is due to the change in the accounting for expenses of leases that were classified as operating leases under IAS 17.

Upon adoption of IFRS 16, the Company applied a single recognition and measurement approach for all leases for which it is the lessee, except for short-term leases and leases of low-value assets. The Company recognized lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. In accordance with the full retrospective method of adoption, the Company applied IFRS 16 at the date of initial application as if it had already been effective at the commencement date of existing lease contracts.

IAS 12 Income Taxes

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where it originally recognized those past transactions or events. An entity applies the amendments for annual reporting periods beginning on or after January 1^st, 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period. Since the Company’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Company.

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IAS 23 Borrowing Costs

The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all the activities necessary to prepare that asset for its intended use or sale are complete.

The entity applies the amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after January 1^st, 2019, with early application permitted.

Since the Company’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Company.

Standards issued but not yet effective

Amendments to IAS 1 and IAS 8: Definition of Material in October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of “material” across the standards and to clarify certain aspects of the definition. The new definition states that, “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purposes financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The amendments to the definition of material is not expected to have a significant impact on the Company’s consolidated financial statements.

y) Convenience translation

U.S. dollar amounts at December 31, 2019 shown in the consolidated financial statements have been included solely for the convenience of the reader and are translated from Mexican pesos, using an exchange rate of Ps.18.8452 per U.S. dollar, as reported by the Mexican Central Bank (Banco de México) as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on December 31, 2019. Such translation should not be construed as a representation that the peso amounts have been or could be converted into U.S. dollars at this or any other rate. The referred information in U.S. dollars is solely for information purposes and does not represent that the amounts are in accordance with IFRS or the equivalent in U.S. dollars in which the transactions were conducted or in which the amounts presented in Mexican pesos can be translated or realized.

2. Significant accounting judgments, estimates and assumptions

The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Note 1 to the Company’s consolidated financial statements provides a detailed discussion of the significant accounting policies. Certain of the Company’s accounting policies reflect significant judgments, assumptions or estimates about matters that are both inherently uncertain and material to the Company’s financial position or results of operations.

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

For Leases significant accounting judgments, estimates and assumptions refer to Note 1p (iv).

i) LTIP, LTRP and MIP (equity settled)

The Company measures the cost of its equity-settled transactions at fair value at the date the equity benefits are conditionally granted to employees. The cost of equity-settled transactions is recognized in earnings, together with a corresponding increase in treasury shares, over the period in which the performance and/or service conditions are fulfilled. For grants that vest on meeting performance conditions, compensation cost is recognized when it becomes probable that the performance condition will be met. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the share option, volatility and dividend yield, and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in (Note 17).

SARs plan (cash settled)

The cost of the SARs plan is measured initially at fair value at the grant date, further details of which are given in (Note 17). This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is remeasured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognized in salaries and benefits expense together with the grant date fair value. As with the equity settled awards described above, the valuation of cash settled award also requires using similar inputs, as appropriate.

ii) Deferred taxes

Deferred tax assets are recognized for all available tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management’s judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning opportunities to advance taxable profit before expiration of available tax losses.

Tax losses relate to operations of the Company on a stand-alone basis, in conformity with current Tax Law and may be carried forward against taxable income generated in the succeeding years at each country and may not be used to offset taxable income elsewhere in the Company’s consolidated group (Note 19).

During the years ended December 31, 2019, 2018 and 2017, the Company used Ps.214,460, Ps.154,353 and Ps.16,378, respectively, of the available tax loss carry-forwards (Note 19).

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iii) Fair value measurement of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

The judgments include considerations of inputs such as liquidity risk, credit risk and expected volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (Note 4).

iv) Impairment of long-lived assets

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

v) Allowance for expected credit loss

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

vi) Leases - Estimating the incremental borrowing rate

The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).

3. Financial instruments and risk management

Financial risk management

The Company’s activities are exposed to different financial risks stemmed from exogenous variables which are not under their control but whose effects might be potentially adverse such as: (i) market risk, (ii) credit risk, and (iii) liquidity risk.

F-44

The Company’s global risk management program is focused on uncertainty in the financial markets and tries to minimize the potential adverse effects on net earnings and working capital requirements. The Company uses derivative financial instruments to hedge part of such risks. The Company does not enter into derivatives for trading or speculative purposes. The sources of these financial risks exposures are included in both “on balance sheet” exposures, such as recognized financial assets and liabilities, as well as in “off-balance sheet” contractual agreements and on highly expected forecasted transactions. These on and off-balance sheet exposures, depending on their profiles, do represent potential cash flow variability exposure, in terms of receiving less inflows or facing the need to meet outflows which are higher than expected, therefore increase the working capital requirements.

Since adverse movements erode the value of recognized financial assets and liabilities, as well some other off-balance sheet financial exposures, there is a need for value preservation, by transforming the profiles of these fair value exposures. The Company has a Finance and Risk Management department, which identifies and measures financial risk exposures, in order to design strategies to mitigate or transform the profile of certain risk exposures, which are taken up to the corporate governance level for approval.

Market risk

a) Jet fuel price risk

Since the contractual agreements with jet fuel suppliers include reference to jet fuel index, the Company is exposed to fuel price risk which might have an impact on the forecasted consumption volumes. The Company’s jet fuel risk management policy aims to provide the Company with protection against increases in jet fuel prices. In an effort to achieve the aforesaid, the risk management policy allows the use of derivative financial instruments available on over the counter (“OTC”) markets with approved counterparties and within approved limits. Aircraft jet fuel consumed in the years ended December 31, 2019, 2018 and 2017 represented 38%, 38% and 31%, of the Company’s operating expenses, respectively. The foreign currency risk is disclosed within subsection b) in this note.

During the year ended December 31, 2019, the Company entered into US Gulf Coast Jet fuel 54 Asian call options designated to hedge 13,492 thousand gallons. Such hedges represented a portion of the projected consumption for the 4Q 2019. Additionally, during the same period, the Company entered into US Gulf Coast Jet Fuel 54 Asian Zero-Cost collar options designated to hedge 70,136 thousand gallons. Such hedges represent a portion of the projected consumption for the 3Q19 and the year 2020.

During the year ended December 31, 2018, the Company entered into US Gulf Coast Jet Fuel 54 Asian Call options and Zero-Cost Collars designated to hedge 45.6 million gallons. Such hedges represent a portion of the projected consumption for the next twelve months. Additionally, as of December 31, 2017, the Company entered into US Gulf Coast Jet Fuel 54 Asian call options designated to hedge 61.1 million gallons. Such hedges represented a portion of the projected consumption for the next nine months of operations.

In accordance with IFRS 9 the Company separates the intrinsic value from the extrinsic value of an option contract; as such, the change in the intrinsic value can be designated as hedge accounting. Because extrinsic value (time and volatility values) of the Asian call options is related to a “transaction related hedged item”, it is required to be segregated and accounted for as a cost of hedging in OCI and accrued as a separate component of stockholders’ equity until the related hedged item matures and therefore impacts profit and loss.

F-45

The underlying (US Gulf Coast Jet Fuel 54) of the options held by the Company is a consumption asset (energy commodity), which is not in the Company’s inventory. Instead, it is directly consumed by the Company’s fleet at different airport terminals. Therefore, although a non-financial asset is involved, its initial recognition does not generate a book adjustment in the Company’s inventories.

Rather, it is initially accounted for in the Company’s OCI and a reclassification adjustment is made from OCI to profit and loss and recognized in the same period or periods in which the hedged item is expected to be allocated to profit and loss. Furthermore, the Company hedges its forecasted jet fuel consumption month after month, which is congruent with the maturity date of the monthly serial Asian call and Zero-Cost Collar options.

As of December 31, 2018 and 2017, the fair value of the outstanding US Gulf Coast Jet Fuel Asian call options was Ps.48,199 and Ps.497,403, respectively. As of December 31, 2019 and 2018 for the Zero-Cost Collars it was Ps.133,567 and a (loss) of Ps.(122,948), respectively and are presented as part of the financial assets and financial liabilities in the consolidated statement of financial position. (See Note 5). The Company did not hold any position in Zero-Cost Collars for the period ended 2017.

During the year ended December 31, 2019, the intrinsic value of the Zero-Cost Collars recycled to the fuel cost was an expense of Ps.9,477. As of December 31, 2018, the Company did not have intrinsic value recycled to the fuel cost as settlements started taking place on 2019.

The amount of positive cost of hedging derived from the extrinsic value changes of the jet fuel hedged position as of December 31, 2019 recognized in other comprehensive income totals Ps.133,567 (the positive cost of hedging in December 2018 and 2017 totals Ps.134,096 and Ps.163,836, respectively), and will be recycled to the fuel cost during 2020, as these options expire on a monthly basis and the jet fuel is consumed. During the years ended December 31, 2019, 2018 and 2017, the net (positive) /negative cost of these options recycled to the fuel cost was Ps.61,067, Ps.(402,493) and Ps.26,980, respectively.

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

	Position as of December 31, 2019
	Jet fuel Zero-Cost Collar collars option contracts maturities
	1 Half 2020			2 Half 2020			2020 Total
Jet fuel risk Zero-Cost collars
Notional volume in gallons (thousands)*		34,480			22,164			56,644
Strike price agreed rate per gallon (U.S. dollars)**	US$	1.63/1.82		US$	1.65/1.81		US$	1.64/1.82
Approximate percentage of hedge (of expected consumption value)		25	%		15	%		20	%
All-in
Approximate percentage of hedge (of expected consumption value)		25	%		15	%		20	%

* US Gulf Coast Jet 54 as underlying asset

** Weighted average

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	Position as of December 31, 2018
	Jet fuel Asian call and Zero-Cost collars option contracts maturities
	1 Half 2019			2 Half 2019			2019 Total
Jet fuel risk Asian Calls
Notional volume in gallons (thousands)*		12,790			13,842			26,632
Strike price agreed rate per gallon (U.S. dollars) **	US$	1.84			1.84		US$	1.84
Approximate percentage of hedge (of expected consumption value)		10	%		10	%		10	%
Jet fuel risk Zero-Cost collars
Notional volume in gallons (thousands)*		18,963			-			18,963
Strike price agreed rate per gallon (U.S. dollars) **	US$	1.91/2.46		US$	-		US$	1.91/2.46
Approximate percentage of hedge (of expected consumption value)		15	%		-	%		15	%
All-in
Approximate percentage of hedge (of expected consumption value)		25	%		10	%		18	%

* US Gulf Coast Jet 54 as underlying asset

** Weighted average

	Position as of December 31, 2017
	Jet fuel Asian call option contracts maturities
	1 Half 2018			2 Half 2018			2018 Total
Jet fuel risk Asian Calls
Notional volume in gallons (thousands)*		69,518			61,863			131,381
Strike price agreed rate per gallon (U.S. dollars) **	US$	1.6861		US$	1.8106		US$	1.7447
Approximate percentage of hedge (of expected consumption value)		60	%		50	%		55	%

* US Gulf Coast Jet 54 as underlying asset

** Weighted average

The following table illustrates the sensitivity of US Gulf Coast Jet Fuel 54 Zero Cost Collars to a reasonably possible change in fuel prices, with all other variables held constant, on the caption of accumulated other comprehensive income.

The calculations were made considering a parallel movement of +/-5% in the spot price of the US Gulf Coast Jet 54 as of December 31, 2019:

	Sensitivity of position as of December 31, 2019
	effect on equity (U.S. dollars)
US Gulf Coast Jet Fuel 54
spot level
+5%		+4.52M
-5%		-4.52M

Please note this sensitivity was calculated with the net position delta of the portfolio, as change on the underlying price is small enough to be a good proxy

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b) Foreign currency risk

Though the Mexican peso is the functional currency of the Company, a significant portion of its operating expenses are denominated in U.S. dollar; thus, Volaris relies on sustained U.S. dollar cash flows coming from operations in the United States of America and Central America to support part of its commitments in such currency, however there’s still a mismatch.

Foreign currency risk arises from possible unfavorable movements in the exchange rate which could have a negative impact in the Company’s cash flows. To mitigate this risk, the Company may use foreign exchange derivative financial instruments and non-derivative financial instruments.

While most of the Company’s revenue is generated in Mexican pesos, although 29% of its revenues came from operations in the United States of America and Central America for the year ended at December 31, 2019 (32% at December 31, 2018 and 30% at December 31, 2017) and U.S. dollar denominated collections accounted for 43%, 38% and 40%, of the Company’s total collections in 2019, 2018 and 2017, respectively.

Company’s expenditures, particularly those related to aircraft leasing and acquisition, are denominated in U.S. dollar. In addition, although jet fuel for those flights originated in Mexico are paid in Mexican pesos, the price formula is impacted by the Mexican peso /U.S. dollar exchange rate.

The Company’s foreign exchange exposure as of December 31, 2019, 2018 and 2017 is as set forth below:

	Thousands of U.S. dollars
	2019			2018			2017
Assets:
Cash and cash equivalents	US$	373,099		US$	279,829		US$	344,038
Other accounts receivable, net		23,620			10,957			13,105
Guarantee deposits		437,499			362,149			377,485
Derivative financial instruments		7,088			3,172			25,204
Total assets	US$	841,306		US$	656,107		US$	759,832
Liabilities:
Financial debt (Note 5)	US$	176,927		US$	155,455		US$	128,296
Lease liabilities		2,263,849			2,099,218			1,727,890
Suppliers		76,471			51,012			53,729
Other taxes and fees payable		22,486			14,823			10,304
Derivative financial instruments		-			6,246			-
Total liabilities		2,539,733			2,326,754			1,920,219
Net foreign currency position	US$	(1,698,427	)	US$	(1,670,647	)	US$	(1,160,387	)

At April 27, 2020, date of issuance of these financial statements, the exchange rate was Ps.24.6230 per U.S. dollar.

F-48

In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which the Company initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Company determines the transaction date for each payment or receipt of advance consideration.

As of December 31, 2019, the Company did not enter foreign exchange rate derivatives financial instruments. All the Company’s remaining position in FX plain vanilla forwards matured throughout the first quarter of 2019 (January).

During the year ended December 31, 2018 and 2017, the Company entered into foreign currency forward contracts in U.S. dollars to hedge approximately, 20% and 9% of its future 12 and 6 months of aircraft rental expenses. A portion of the Company’s foreign currency forwards position matured throughout the fourth quarter of 2018 (November & December), all of the Company’s position in foreign currency forward contracts from 2017 matured throughout the second half of the year (August, September, November and December), therefore there was no outstanding balance as of December 31, 2017.

As of December 31, 2018, the unrealized gains of Ps.14,241, respectively relating to the foreign currency forward contracts is included in OCI.

For the years ended December 31, 2019, 2018 and 2017, the net gains (loss) on the foreign currency forward contracts were Ps.4,199, Ps.52,516 and Ps.(11,290), respectively, which were recognized as part of rental expense in the consolidated statements of operations.

i) Hedging relationships with non-derivative financial instruments

Regarding the foreign currency risk effective since January 1^st, 2019, the Company implemented two hedging strategies for forecasted foreign exchange exposures using with non-derivatives financial instruments. In the first hedging strategy the Company has designated a hedge to mitigate the foreign exchange rate risk and foreign exchange variation fluctuation in US dollar denominated forecasted revenues using the financial liabilities corresponding to the leases liability denominated in USD over the term of the remaining leases term. The Company has at December 31, 2019 an amount equivalent to USD$2.1 billion of lease liability designated as hedging forecasted revenues over the remaining lease term.

Additionally, the second strategy consists on a hedging relationship for foreign exchange rate with non- derivative financial instruments in order to mitigate the exchange rate risk and foreign exchange variation (MXN/USD) intrinsic in the US dollar denominated Jet Fuel purchases. For this strategy a portion of the Jet Fuel consumption over the next two years approximately has been designated as hedge item; as hedging instrument the company designated a portion of the guaranteed deposits and cash and cash equivalents denominated in USD. In this hedging relationship for foreign exchange rate with non-derivative financial instruments, the Company designated an amount equivalent to USD$410 million, which represent a portion of the financial assets denominated in USD.
 

F-49

For both hedging relationships follow a Cash Flow Hedging Model, the accounting records corresponding to the recycling of the reserve for hedging of cash flows (called Other Comprehensive Income or OCI, part of the Stakeholders Equity) will be done as it is indicated on IFRS 9, this mean to reclassify the OCI through the accounts of Results in the same period or periods in which the expected hedging for cash flows affect the result of the period; when those sales are recognized as revenue- always adjusting them because of the hedging effects- for the program.

c) Interest rate risk

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

The Company’s results are affected by fluctuations in certain benchmark market interest rates due to the impact that such changes may have on operational lease payments indexed to the London Inter Bank Offered Rate (“LIBOR”).

The Company uses derivative financial instruments to reduce its exposure to fluctuations in market interest rates and accounts for these instruments as an accounting hedge.

In most cases, when a derivative can be tailored within the terms and it perfectly matches cash flows of a leasing agreement, it may be designated as a CFH and the effective portion of fair value variations are recorded in equity until the date the cash flow of the hedged lease payment is recognized in the consolidated statements of operations.

The Irrevocable Trust number CIB/3249, whose trustor is the Company, entered a cap to mitigate the risk due to interest rate increases on the CEBUR coupon payments. The floating rate coupons reference referring to TIIE 28 are limited under the cap to 10% on the reference rate for the life of the CEBUR and haves the same amortization schedule. Thus, the cash flows of the CEBUR are perfectly matched by the hedging instrument. The cap start date was July 19, 2019, and the maturity date is June 20, 2024; consisting of 59 caplets with the same specifications as the CEBUR coupons for reference rate determination, coupon term, and fair value.

At December 31, 2019, the Company’s outstanding hedging contracts in the form of interest rate caps with notional amount of Ps.1.5 billion had fair value of Ps.2,695 recorded in assets.

During the years ended December 31, 2018 and 2017, the Company did not have any outstanding interest rate derivatives.

For the years ended December 31, 2017, the reported loss on the interest rate swaps was Ps.13,827, which was recognized as part of rental expense in the consolidated statements of operations. All the Company’s position in the form of interest rate swaps matured on March 31 and April 30, 2017 consequently there is no outstanding balance as of December 31, 2018 and 2017.

F-50

d) Liquidity risk

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

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

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

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

	December 31, 2019
	Within one year		One to five years		Total
Interest-bearing borrowings:
Pre-delivery payments facilities (Note 5)	Ps.	1,855,956	Ps.	1,452,553	Ps.	3,308,509
Short-term working capital facilities (Note 5)		200,000		-		200,000
Asset backed trust note (Note 5)		-		1,500,000		1,500,000
Lease liabilities:
Aircraft, engines, land and buildings leases		4,720,505		35,796,540		40,517,045
Aircraft and engine lease return obligation		383,093		1,469,595		1,852,688
Total	Ps.	7,159,554	Ps.	40,218,688	Ps.	47,378,242

	December 31, 2018
	Within one year		One to five years		Total
Interest-bearing borrowings:
Pre-delivery payments facilities (Note 5)	Ps.	734,635	Ps.	2,310,939	Ps.	3,045,574
Short-term working capital facilities (Note 5)		461,260		-		461,260
Derivative financial instruments:
Jet fuel Asian Zero-Cost collars options contracts		122,948		-		122,948
Lease liabilities:
Aircraft, engines, land and buildings leases		4,976,454		34,588,692		39,565,146
Aircraft and engine lease return obligation		10,851		1,820,194		1,831,045
Total	Ps.	6,306,148	Ps.	38,719,825	Ps.	45,025,973

F-51

	December 31, 2017
	Within one year		One to five years		Total
Interest-bearing borrowings:
Pre-delivery payments facilities (Note 5)	Ps.	1,449,236	Ps.	1,079,152	Ps.	2,528,388
Short-term working capital facilities (Note 5)		948,354		-		948,354
Lease liabilities:
Aircraft, engines, land and buildings leases		4,213,417		28,310,287		32,523,704
Aircraft and engine lease return obligation		193,187		1,454,790		1,647,977
Total	Ps.	6,804,194	Ps.	30,844,229	Ps.	37,648,423

e) Credit risk

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

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

Credit risk on accounts receivable relates primarily to amounts receivable from the major international credit card companies. The Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, which have a large portion of their sales settled in credit cards.

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

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

To manage credit risk, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty and monitors the market position with each counterparty. The Company does not purchase or hold derivative financial instruments for trading purposes. At December 31, 2019, the Company concluded that its credit risk related to its outstanding derivative financial instruments is low, since it has no significant concentration with any single counterparty and it only enters into derivative financial instruments with banks with high credit-rating assigned by international credit-rating agencies.

f) Capital management

Management believes that the resources available to the Company are enough for its present requirements and will be sufficient to meet its anticipated requirements for capital expenditures and other cash requirements for the 2019 fiscal year.

F-52

The primary objective of the Company’s capital management is to ensure that it maintains healthy capital ratios to support its business and maximize the shareholder’s value. No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2019, 2018 and 2017. The Company is not subject to any externally imposed capital requirement, other than the legal reserve
(Note 18).

4. Fair value measurements

The only financial assets and liabilities recognized at fair value on a recurring basis are the derivative financial instruments. Fair value is the price that would be received from sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

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

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

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

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

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

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

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

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

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

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

F-53

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

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

	Carrying amount									Fair value
	2019			2018			2017			2019			2018			2017
Assets
Derivative financial instruments	Ps.	136,262		Ps.	62,440		Ps.	497,403		Ps.	136,262		Ps.	62,440		Ps.	497,403
Liabilities
Financial debt	(5,008,509		)	(3,506,834		)	(3,476,742		)	(5,194,316		)	(3,515,550		)	(3,481,741		)
Derivative financial instruments	-			(122,948		)	-			-			(122,948		)	-
Total	Ps.	(4,872,247	)	Ps.	(3,567,342	)	Ps.	(2,979,339	)	Ps.	(5,058,054	)	Ps.	(3,576,058	)	Ps.	(2,984,338	)

The following table summarizes the fair value measurements at December 31, 2019:

	Fair value measurement
	Quoted prices in active markets Level 1		Significant observable inputs Level 2			Significant unobservable inputs Level 3		Total
Assets
Derivatives financial instruments:
Jet fuel Zero-Cost collar options contracts*	Ps.	-	Ps.	133,567		Ps.	-	Ps.	133,567
Interest rate Caps	-		2,695			-		2,695
Liabilities for which fair values are disclosed:
Interest-bearing loans and borrowings**	-		(5,194,316		)	-		(5,194,316		)
Net	Ps.	-	Ps.	(5,058,054	)	Ps.	-	Ps.	(5,058,054	)

* Jet fuel forwards levels and LIBOR curve.

** LIBOR curve and TIIE Mexican interbank rate. Includes short-term and long-term debt.

There were no transfers between level 1 and level 2 during the period.

F-54

The following table summarizes the fair value measurements at December 31, 2018:

	Fair value measurement
	Quoted prices in active markets Level 1		Significant observable inputs Level 2			Significant unobservable inputs Level 3		Total
Assets
Derivatives financial instruments:
Jet fuel Asian call options contracts*	Ps.	-	Ps.	48,199		Ps.	-	Ps.	48,199
Foreign currency forward	-		14,241			-		14,241
Liabilities
Derivatives financial instruments:
Jet fuel Asian Zero-Cost collars options contracts*	-		(122,948		)	-		(122,948		)
Liabilities for which fair values are disclosed:
Interest-bearing loans and borrowings**	-		(3,515,550		)	-		(3,515,550		)
Net	Ps.	-	Ps.	(3,576,058	)	Ps.	-	Ps.	(3,576,058	)

* Jet fuel forwards levels and LIBOR curve.

** LIBOR curve and TIIE Mexican interbank rate. Includes short-term and long-term debt.

There were no transfers between level 1 and level 2 during the period.

F-55

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

	Fair value measurement
	Quoted prices in active markets Level 1		Significant observable inputs Level 2			Significant unobservable inputs Level 3		Total
Assets
Derivatives financial instruments:
Jet fuel Asian call options contracts*	Ps.	-	Ps.	497,403		Ps.	-	Ps.	497,403
Liabilities for which fair values are disclosed:
Interest-bearing loans and borrowings**		-		(3,481,741	)		-		(3,481,741	)
Net	Ps.	-	Ps.	(2,984,338	)	Ps.	-	Ps.	(2,984,338	)

* Jet fuel forwards levels and LIBOR curve.

** LIBOR curve and TIIE Mexican interbank rate. Includes short-term and long-term debt.

There were no transfers between level 1 and level 2 during the period.

The following table summarizes the (loss) gain from derivatives financial instruments recognized in the consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017:

Instrument	Financial statements line	2019			2018		2017
Jet fuel Asian call options contracts	Fuel	Ps.	(61,069	)	Ps.	402,493	Ps.	(26,980	)
Jet fuel Zero-Cost collars contracts	Fuel		(9,477	)		-		-
Foreign currency forward	Aircraft and engine rent expenses		4,199			52,516		(11,290	)
Interest rate swap contracts	Aircraft and engine rent expenses		-			-		(13,827	)
Interest rate cap	Finance cost		(1,282	)		-		-
Total		Ps.	(67,629	)	Ps.	455,009	Ps.	(52,097	)

The following table summarizes the net gain (loss) on CFH before taxes recognized in the consolidated statements of comprehensive income for the years ended December 31, 2019, 2018 and 2017:

Consolidated statements of other comprehensive gain (loss) income

Instrument	Financial statements line	2019			2018			2017
Jet fuel Asian call options contracts	OCI	Ps.	11,148		Ps.	(174,984	)	Ps.	(54,202	)
Jet fuel Zero cost collars	OCI		256,515			(122,948	)		-
Interest rate swap contracts	OCI		-			-			14,144
Foreign currency contracts	OCI		(14,241	)		14,241			(2,090	)
Interest rate cap	OCI		(4,023	)		-			-
Non derivative financial instruments	OCI		14,096			-			-
Total		Ps.	263,495		Ps.	(283,691	)	Ps.	(42,148	)

The exchange rates used to translate the above amounts to Mexican pesos at December 31, 2019, 2018 and 2017 were Ps.18.8452, Ps.19.6829 and Ps.19.7354, respectively, per U.S. dollar.

F-56

5. Financial assets and liabilities

At December 31, 2019, 2018 and 2017, the Company’s financial assets are represented by cash and cash equivalents, trade and other accounts receivable, accounts receivable with carrying amounts that approximate their fair value.

a) Financial assets

	2019		2018		2017
Derivative financial instruments designated as cash flow hedges (effective portion recognized within OCI)
Jet fuel Asian call options	Ps.	-	Ps.	48,199	Ps.	497,403
Jet fuel Zero-Cost collars		133,567		-		-
Foreign currency forward contracts		-		14,241		-
Interest rate cap		2,695		-		-
Total financial assets	Ps.	136,262	Ps.	62,440	Ps.	497,403
Presented on the consolidated statements of financial position as follows:
Current	Ps.	133,567	Ps.	62,440	Ps.	497,403
Non-current	Ps.	2,695	Ps.	-	Ps.	-

b) Financial debt

(i) At December 31, 2019, 2018 and 2017, the Company’s short-term and long-term debt consists of the following:

	2019			2018		2017
I.    Revolving line of credit with Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander (“Santander”) and Banco Nacional de Comercio Exterior, S.N.C. (“Bancomext”), in U.S. dollars, to finance pre-delivery payments, maturing on May 31, 2022, bearing annual interest rate at the three-month LIBOR plus a spread of 260 basis points.	Ps.	3,308,509		Ps.	3,045,574	Ps.	2,528,388
II. The Company issued in the Mexico market Asset backed trust notes (“CEBUR”), in Mexican pesos, maturing on June 20th, 2024 bearing annual interest rate at TIIE 28 days plus 175 basis points.		1,459,871			-		-
III. In December 2016, the Company entered into a short-term working capital facility with Banco Nacional de México S.A. (“Citibanamex”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a 90 basis points.		-			461,260		948,354
IV. In December 2019, the Company entered into a short-term working capital facility with Banco Sabadell S.A., Institución de Banca Multiple (“Sabadell”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a 120 basis points.		200,000			-		-
V.  Amortized transaction costs		(22,472	)		-		-
VI. Accrued interest and other financial cost		30,061			16,364		5,972
		4,975,969			3,523,198		3,482,714
Less: Short-term maturities		2,086,017			1,212,259		2,403,562
Long-term	Ps.	2,889,952		Ps.	2,310,939	Ps.	1,079,152

TIIE: Mexican interbank rate

F-57

(ii) The following table provides a summary of the Company’s scheduled principal payments of financial debt and accrued interest at December 31, 2019:

	2020		2021		2022		2023		2024			Total
Santander/Bancomext	Ps.	1,881,676	Ps.	1,428,534	Ps.	24,019	Ps.	-	Ps.	-		Ps.	3,334,229
CEBUR		4,341		250,000		500,000		500,000		209,871	(1)		1,464,212
Banco Sabadell		200,000		-		-		-		-			200,000
Total	Ps.	2,086,017	Ps.	1,678,534	Ps.	524,019	Ps.	500,000	Ps.	209,871		Ps.	4,998,441

⁽¹⁾ This amount includes the repurchase of asset backed trust notes

iii) Since 2011, the Company has financed the pre-delivery payments with Santander/Bancomext for the acquisition of its aircraft through a revolving financing facility.

The “Santander/Bancomext” loan agreement provides for certain covenants, including limits to the ability to, among others:

i)	Incur debt above a specified debt basket unless certain financial ratios are met.
ii)	Create liens.
iii)	Merge with or acquire any other entity without the previous authorization of the Banks.
iv)	Dispose of certain assets.
v)	Declare and pay dividends or make any distribution on the Company’s share capital unless certain financial ratios are met.

At December 31, 2019, 2018 and 2017, the Company was in compliance with the covenants under the above-mentioned loan agreement.

For purposes of financing the pre-delivery payments, Mexican trusts were created whereby, the Company assigned its rights and obligations under the Airbus Purchase Agreement with Airbus S.A.S. (“Airbus”), including its obligation to make pre-delivery payments to the Mexican trusts, and the Company guaranteed the obligations of the Mexican trusts under the financing agreement (Deutsche Bank Mexico, S.A. Trust 1710 and 1711).

At December 31, 2019, the Company have available credit lines totaling Ps.9,005,008, of which Ps.6,649,358 were related to financial debt (Ps.1,640,849 were undrawn) and Ps.2,355,650 were related to letters of credit (Ps.86,066 were undrawn). At December 31, 2018, the Company have available credit lines totaling Ps.6,721,139, of which Ps.4,063,947 were related to financial debt and Ps.2,657,192 were related to letters of credit (Ps.1,048,241 were undrawn). At December 31, 2017, the Company had available credit lines totaling Ps.7,368,346, of which Ps.4,616,861 were related to financial debt and Ps.2,751,485 were related to letters of credit (Ps.1,739,775 were undrawn).

On June 20, 2019, the Company, through its subsidiary Concesionaria issued 15,000,000 asset backed trust notes under the ticket VOLARCB 19 for the amount of Ps.1.5 billion Mexican pesos through the Irrevocable Trust number CIB/3249 created by Concesionaria. The issuance amount is part of a program approved by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) for an amount of up to Ps.3.0 billion Mexican pesos.

The notes have a five year maturity annual reductions of Ps.250,000, Ps.500,000, Ps.500,000 and Ps.250,000 in 2021, 2022, 2023 and 2024, respectively, with a floating one-month coupon rate referenced to TIIE 28 plus with a 175 basis point spread. The notes starts amortizing at the end of the second year.

The asset backed trust notes structure operate on specific rules and provide a DSCR “Debt Service Coverage Ratio” which is computed by comparing the Mexican Peso collections over the previous six months to the next 6 months of debt service. In general, there is a found retention event if the ratio is less than 2.5 and or equal to 1.75 times. The amortization of the debt of the asset backed trust notes begins in July of 2021. In addition, early amortization applies if:

i) The Debt Coverage Ratio is less than 1.75 on any of the determination dates;

ii) A retention event that is not rectified in a period of 90 consecutive days;

iii) The debt service reserve account of the Series of any Series maintains an amount less than the balance required in the service account of the debt of the Series of that Series on two or more consecutive payment dates. (at the close of business on that payment dates);

iv) The update of a new insolvency event in relation to the Concesionaria Vuela;

v) Updating a new event of default.

In December 2019, the Company entered into a short-term working capital facility with Banco Sabadell S.A., Institución de Banca Multiple (“Sabadell”) in Mexican pesos, bearing annual interest rate at TIIE 28 days plus a 120 basis points. The “Sabadell” working capital facility has the following covenant:

i) Joint obligor (Concesionaria) must represent 85% of EBITDA of the holding.

In 2019, we were in compliance with the covenants under the terms and conditions of the asset backed trusted notes and short-term working capital facilities.

Changes in liabilities arising from financing activities

At December 31, 2019, 2018 and 2017, the changes in liabilities from financing activities from the Company are summarized in the following table:

	January 1, 2019		Net cash Flows			Accrued Interest		Foreign exchange movement			Current vs non- current reclassification and other			December 31, 2019
Current interest-bearing loans and borrowings	Ps.	1,212,259	Ps.	(633,609	)	Ps.	13,698	Ps.	(41,173	)	Ps.	1,534,842		Ps.	2,086,017
Non-current interest - bearing loans and borrowings		2,310,939		2,273,143			-		(122,466	)		(1,571,664	)		2,889,952
Total liabilities from financing activities	Ps.	3,523,198	Ps.	1,639,534		Ps.	13,698	Ps.	(163,639	)	Ps.	(36,822	)	Ps.	4,975,969

	January 1, 2018		Net cash Flows			Accrued Interest		Foreign exchange movement			Current vs non- current reclassification and other			December 31, 2018
Current interest-bearing loans and borrowings	Ps.	2,403,562	Ps.	(793,363	)	Ps.	10,392	Ps.	71,380		Ps.	(479,712	)	Ps.	1,212,259
Non-current interest - bearing loans and borrowings		1,079,152		808,620			-		(56,945	)		480,112			2,310,939
Total liabilities from financing activities	Ps.	3,482,714	Ps.	15,257		Ps.	10,392	Ps.	14,435		Ps.	400		Ps.	3,523,198

F-58

	January 1, 2017		Net cash Flows		Accrued Interest			Foreign exchange movement			Current vs non- current reclassification and other			December 31, 2017
Current interest-bearing loans and borrowings	Ps.	1,051,237	Ps.	419,350	Ps.	(130	)	Ps.	25,924		Ps.	907,181		Ps.	2,403,562
Non-current interest - bearing loans and borrowings		943,046		1,093,808		-			(50,521	)		(907,181	)		1,079,152
Total liabilities from financing activities	Ps.	1,994,283	Ps.	1,513,158	Ps.	(130	)	Ps.	(24,597	)	Ps.	-		Ps.	3,482,714

c) Other financial liabilities

		2019		2018		2017
Derivative financial instruments designated as CFH (effective portion recognized within OCI):
Zero-Cost Collar options	Ps.	-	Ps.	122,948	Ps.	-
Total financial liabilities	Ps.	-	Ps.	122,948	Ps.	-
Presented on the consolidated statements of financial position as follows:
Current	Ps.	-	Ps.	122,948	Ps.	-
Non-current	Ps.	-	Ps.	-	Ps.	-

6. Cash and cash equivalents

An analysis of this caption is as follows:

	2019		2018		2017
Cash in banks	Ps.	4,612,927	Ps.	1,061,150	Ps.	963,162
Short-term investments		3,231,125		4,796,554		5,982,314
Cash on hand		44,880		5,238		5,403
Restricted funds held in trust related to debt service reserves		91,040		-		-
Total cash and cash equivalents	Ps.	7,979,972	Ps.	5,862,942	Ps.	6,950,879

As of December 31, 2019, the Company recorded a portion of advance ticket sales by an amount of Ps.91,040 as a restricted fund (Note 1 and 6). The restricted funds held in Trust are used to constitute the debt service reserves and cannot be used for purposes other than those established in the contract of the Trust.

7. Related parties

a) An analysis of balances due from/to related parties at December 31, 2019, 2018 and 2017 is provided below.

All companies are considered affiliates, since the Company’s primary shareholders or directors are also direct or indirect shareholders of the related parties:

F-59

	Type of transaction	Country of origin	2019		2018		2017		Terms
Due from:
Frontier Airlines Inc. (“Frontier”)	Code-share	USA	Ps.	23,442	Ps.	8,266	Ps.	-	30 days
			Ps.	23,442	Ps.	8,266	Ps.	-
Due to:
One Link, S.A. de C.V. (“One Link”)	Call center fees	El Salvador	Ps.	39,838	Ps.	-	Ps.	24,980	30 days
Frontier Airlines Inc. (“Frontier”)	Code-share	USA		16,246		2,751		-	30 days
Aeromantenimiento, S.A. (“Aeroman”)	Aircraft and engine maintenance	Mexico/El Salvador		1,474		15,024		15,951	30 days
Mijares, Angoitia, Cortés y Fuentes, S.C.	Professional fees	Mexico		996		-		-	30 days
			Ps.	58,554	Ps.	17,775	Ps.	40,931

b) During the years ended December 31, 2019, 2018 and 2017, the Company had the following transactions with related parties:

Related party transactions	Country of origin	2019		2018		2017
Revenues:
Transactions with affiliates
Frontier Airlines Inc
Code-share	USA	Ps.	208,968	Ps.	8,358	Ps.	-
Expenses:
Transactions with affiliates
Aeromantenimiento, S.A.
Aircraft and engine maintenance	Mexico/El Salvador	Ps.	201,624	Ps.	341,726	Ps.	249,266
Servprot, Human Capital Int., Onelink, MACF
Call center fees and other professional fees	Mexico/El Salvador		41,467		4,800		202,689
Aeromantenimiento, S.A.
Technical support	Mexico/El Salvador		5,815		4,796		8,088

Frontier started having transactions with the Company in September 2018. During the years ended December 31, 2017 the Company did not have any revenue transactions with related parties.

As of December 31, 2019, 2018 and 2017, there have been no guarantees provided or received for any related party receivables or payables. For the years ended December 31, 2019, 2018 and 2017, no provision for expected credit losses had been recognized.

c) Servprot

Servprot S.A. de C.V. (“Servprot”) is a related party because Enrique Beltranena, the Company’s President and Chief Executive Officer, and Rodolfo Montemayor, who served as an alternate member of our board of directors until April 19, 2018, are shareholders of such company. Servprot provides security services for Mr. Beltranena and his family, as well as for Mr. Montemayor. As of December 31, 2019, 2018 and 2017 Servprot did not have net balance under this agreement. During the years ended December 31, 2019, 2018 and 2017 the Company expensed Ps.3,120, Ps.2,804 and Ps.1,838, respectively for this concept.

F-60

d) Aeroman

Aeroman was a related party until July 24, 2019, because Roberto José Kriete Ávila, former member of the Company’s board of directors is shareholder of Aeroman. The Company entered into an aircraft repair and maintenance service agreement with Aeroman on January 1, 2017. This agreement provides that the Company must use Aeroman, exclusively for aircraft repair and maintenance services, subject to availability. Under this agreement, Aeroman provides inspection, maintenance, repair and overhaul services for aircraft. The Company makes payments under this agreement depending on the services performed. This agreement is for a 5 years term. As of December 31, 2019, 2018 and 2017, the balances due under the agreement with Aeroman were Ps.1,474, Ps.15,024 and Ps.15,951, respectively. The Company incurred expenses in aircraft, engine maintenance and technical support under this agreement of Ps.207,439, Ps.346,522 and Ps.251,731 for the years ended December 31, 2019, 2018 and 2017, respectively.

e) Human Capital International

Human Capital International HCI, S.A. de C.V. (“Human Capital International”), was a related party until April 19, 2018, because Rodolfo Montemayor Garza, a former member of the Company’s board of directors, is founder and chairman of the board of directors of Human Capital International. Human Capital International provided the Company with services regarding the selection and hiring of executives. As of December 31, 2019, 2018 and 2017, Human Capital International did not have net balance under this agreement. For the years ended December 31, 2019, 2018 and 2017, the Company recognized an expense under this agreement of Ps.0, Ps.324 and Ps.816, respectively.

f) OneLink

Onelink, S.A. de C.V. (“Onelink”) was a related party until December 31, 2017, because Marco Baldocchi, a member of the board, was a director of Onelink. As of October 24, 2019 Onelink, Holdings, S.A. (“Onelink Holdings”) and its subsidiary Onelink are once again related parties, because Mr. Rodrigo Antonio Escobar Nottebohm, an alternate board member of Onelink Holdings, became an alternate Director of the Company. Pursuant to this agreement, Onelink received calls from the customers to book flights and provides customers with information about fares, schedules and availability.

As of December 31, 2019, 2018 and 2017, the account payable under this agreement was Ps.39,838, Ps.0 and Ps.24,980, respectively. For the years ended December 31, 2019, 2018 and 2017, Company recognized an expense under this agreement of Ps.37,026, Ps.0 and Ps.200,035, respectively.

g) SearchForce

SearchForce was a related party because William Dean Donovan, a member of the board, is a director of the Company. Pursuant to this agreement, SearchForce provided until 2017 consultation services, reports, findings, analysis or other deliverables to us regarding the software and the implementation of the internet marketing strategy developed to the Company at its request. As of December 31, 2019, 2018 and 2017, SearchFroce did not have net balance under this agreement. The Company recognized an expense under this agreement of Ps.0, Ps.0 and Ps.1,946 for the years ended December 31, 2019, 2018 and 2017, respectively.

F-61

h) Mijares, Angoitia, Cortés y Fuentes

Mijares, Angoitia, Cortés y Fuentes, S.C. (“MACF”) is a related party because Ricardo Maldonado Yañez and Eugenio Macouzet de León, member and alternate member, respectively, of the board of the Company since April 2018, are partners of the Company. As of December 31, 2019, MACF, the balance due under the agreement was Ps.996. As of December 31, 2018, and 2017, MACF did not have net balance under this agreement. For the year ended December 31, 2019, 2018 and 2017, the Company expensed Ps.1,321, Ps.1,672 and Ps.0, respectively, for this concept.

i) Frontier

Frontier is a related party because Mr. William A. Franke and Brian H. Franke are members of the board of the Company and Frontier as well as Indigo Partners have significant investments in both Companies. As of December 31, 2019, and 2018, the account receivable under this agreement was Ps.23,442 and Ps.8,266, respectively. Additionally, as of December 31, 2019, and 2018, the account payable under this agreement was Ps.16,246 and Ps.2,751, respectively. For the year ended December 31, 2019 and 2018 the Company recognized revenue under this agreement of Ps.208,968 and Ps.8,358, respectively.

j) Directors and officers

During the year ended December 31, 2019, 2018 and 2017, the chairman and the independent members of the Company’s board of directors received an aggregate compensation of approximately Ps.8,085, Ps.7,178 and Ps.8,993, respectively, and the rest of the directors received a compensation of Ps.4,367, Ps.5,217 and Ps.7,834, respectively.

During the years ended December 31, 2019, 2018 and 2017, all the Company’s senior managers received an aggregate compensation of short and long-term benefits of Ps.237,846, Ps.180,001 and Ps.134,370, respectively, these amounts were recognized in salaries and benefits in the consolidated statement of operations.

For the years ended December 31, 2019, 2018 and 2017 the cost of the share-based payments transactions (MIP and LTIP) were Ps.49,659, Ps.19,980 and Ps.13,508, respectively. The cost (benefit) of the cash-settled payments transactions MIP II and SARs were Ps.40,724, Ps. (5,238) and Ps. (25,498), respectively (Note 17).

The Company has a short-term benefit plan for certain personnel whereby cash bonuses are awarded for meeting certain Company’s performance target. During the years ended December 31, 2019, 2018 and 2017, the Company recorded a provision in the amount of Ps.80,634, Ps.50,000 and Ps.0 respectively.

F-62

8. Other accounts receivable, net

An analysis of other accounts receivable at December 31, 2019, 2018 and 2017, is detailed below:

	2019			2018			2017
Current:
Credit cards	Ps.	389,634		Ps.	96,646		Ps.	191,322
Other accounts receivable		189,904			101,487			117,582
Other points of sales		102,002			71,054			54,719
Travel agencies and insurance commissions		76,975			39,806			27,925
Affinity credit card		49,040			55,172			40,517
Cargo clients		46,600			41,408			34,655
Airport services		42,894			9,991			5,898
Employees		29,681			27,274			8,878
Benefits from suppliers		26,989			68,946			-
Marketing services receivable		7,024			7,999			13,435
Settlement receivable		2,422			-			-
Insurance claims		143			-			1,345
		963,308			519,783			496,276
Allowance for credit losses		(40,308	)		(11,304	)		(17,809	)
	Ps.	923,000		Ps.	508,479		Ps.	478,467

Accounts receivable have the following aging:

Days		2019 Impaired		2019 Not impaired		Total 2019		2018 Impaired		2018 Not impaired		Total 2018		2017 Impaired		2017 Not impaired		Total 2017
	0–30	Ps.	5,804	Ps.	722,651	Ps.	728,455	Ps.	8,725	Ps.	388,644	Ps.	397,369	Ps.	16,962	Ps.	415,847	Ps.	432,809
	31–60		-		64,983		64,983		-		69,648		69,648		-		38,705		38,705
	61–90		-		19,274		19,274		-		27,138		27,138		-		17,918		17,918
	91–120		34,504		116,092		150,596		2,579		23,049		25,628		847		5,997		6,844
		Ps.	40,308	Ps.	923,000	Ps.	963,308	Ps.	11,304	Ps.	508,479	Ps.	519,783	Ps.	17,809	Ps.	478,467	Ps.	496,276

The movement in the allowance for credit losses from January 1, 2017 to December 31, 2019 is as follows:

Balance as of January 1, 2017	Ps.	(19,317	)
Write-offs		6,228
Increase in allowance		(4,720	)
Balance as of December 31, 2017		(17,809	)
Write-offs		17,126
Increase in allowance		(10,621	)
Balance as of December 31, 2018		(11,304	)
Write-offs		11,389
Increase in allowance		(40,393	)
Balance as of December 31, 2019	Ps.	(40,308	)

F-63

9. Inventories

An analysis of inventories at December 31, 2019, 2018 and 2017 is as follows:

	2019		2018		2017
Spare parts and accessories of flight equipment	Ps.	294,390	Ps.	289,737	Ps.	285,185
Miscellaneous supplies		7,518		7,534		9,665
	Ps.	301,908	Ps.	297,271	Ps.	294,850

The inventory items are consumed during or used mainly in delivery of in-flight services and for maintenance services by the Company and are valued at the lower of cost or replacement value. During the years ended as of December 31, 2019, 2018 and 2017, the amount of consumption of inventories, recorded as an operating expense as part of maintenance expense was Ps.284,687, Ps.290,206 and Ps.242,265, respectively.

10. Prepaid expenses and other current assets

An analysis of prepaid expenses and other current assets at December 31, 2019, 2018 and 2017 is as follows:

	2019		2018		2017
Advances to suppliers	Ps.	283,340	Ps.	198,174	Ps.	87,536
Advances to components suppliers		209,557		67,446		220,095
Other prepaid expenses		115,054		40,655		56,146
Prepaid insurance		88,941		76,896		68,712
Sales commission to travel agencies (Note 1d)		84,239		59,620		54,501
Advances for constructions of aircraft and engines		-		-		13,764
	Ps.	781,131	Ps.	442,791	Ps.	500,754

11. Guarantee deposits

An analysis of this caption at December 31, 2019, 2018 and 2017 is as follows:

	2019		2018		2017
Current asset:
Aircraft maintenance deposits paid to lessors (Note 1j)	Ps.	576,505	Ps.	729,899	Ps.	1,317,663
Deposits for rental of flight equipment		-		1,220		17,178
Other guarantee deposits		23,822		59,516		18,052
		600,327		790,635		1,352,893
Non-current asset:
Aircraft maintenance deposits paid to lessors (Note 1j)		5,853,924		5,765,122		5,631,304
Deposits for rental of flight equipment		1,750,966		531,261		441,110
Other guarantee deposits		39,531		41,113		25,838
		7,644,421		6,337,496		6,098,252
	Ps.	8,244,748	Ps.	7,128,131	Ps.	7,451,145

F-64

12. Rotable spare parts, furniture and equipment, net

	Gross value							Accumulated depreciation and impairment									Net carrying value
	At December 31, 2019			At December 31, 2018		At December 31, 2017		At December 31, 2019			At December 31, 2018			At December 31, 2017			At December 31, 2019			At December 31, 2018		At December 31, 2017
Leasehold improvements to flight   equipment	Ps.	4,220,672		Ps.	3,424,778	Ps.	2,575,495	Ps.	(2,679,884	)	Ps.	(2,210,189	)	Ps.	(1,882,996	)	Ps.	1,540,788		Ps.	1,214,589	Ps.	692,499
Pre-delivery payments		4,507,770		3,672,090		2,783,303		-			-			-			4,507,770			3,672,090		2,783,303
Flight equipment		1,287,102		932,642		830,145		(553,852		)	(268,320		)	(199,223		)	733,250			664,322		630,922
Construction and improvements in   process		474,240		142,738		193,607		-			-			-			474,240			142,738		193,607
Constructions and improvements		172,460		132,446		131,503		(131,510		)	(117,211		)	(106,335		)	40,950			15,235		25,168
Computer equipment		47,566		44,563		30,113		(34,495		)	(28,016		)	(20,790		)	13,071			16,547		9,323
Workshop tools		26,875		23,454		20,500		(22,023		)	(20,085		)	(18,229		)	4,852			3,369		2,271
Electric power equipment		20,412		15,438		15,439		(11,400		)	(10,316		)	(9,185		)	9,012			5,122		6,254
Communications equipment		14,099		12,305		11,229		(8,322		)	(7,394		)	(6,502		)	5,777			4,911		4,727
Workshop machinery and equipment		16,301		9,530		8,405		(6,092		)	(5,049		)	(4,345		)	10,209			4,481		4,060
Motorized transport equipment   platform		15,026		5,496		5,587		(5,392		)	(5,050		)	(4,701		)	9,634			446		886
Service carts on board		7,675		5,403		5,403		(5,554		)	(5,277		)	(5,021		)	2,121			126		382
Office furniture and equipment		70,709		66,546		44,749		(34,049		)	(28,240		)	(22,454		)	36,660			38,306		22,295
Allowance for obsolescence		(3,000	)	-		-		-			-			-			(3,000		)	-		-
Total	Ps.	10,877,907		Ps.	8,487,429	Ps.	6,655,478	Ps.	(3,492,573	)	Ps.	(2,705,147	)	Ps.	(2,279,781	)	Ps.	7,385,334		Ps.	5,782,282	Ps.	4,375,697

*During the years ended December 31, 2019, 2018 and 2017, the Company capitalized borrowing costs of Ps.456,313, Ps.357,920 and Ps.193,389, respectively. The amount of this line is net of disposals of capitalized borrowing costs related to sale and leaseback transactions of Ps.328,571, Ps.242,678 and Ps.110,274, respectively.

F-65

	Flight equipment				Constructions and improvements				Computer equipment				Office furniture and equipment				Electric power equipment				Workshop Tools				Motorized transport equipment platform				Communications equipment				Workshop machinery and equipment				Service carts on board				Allowance for obsolescence				Pre-delivery payments				Construction and improvements in process				Leasehold improvements to flight equipment				Total
Net book amount as of December 31, 2016		Ps.	577,498			Ps.	35,013			Ps.	7,200			Ps.	17,657			Ps.	6,928			Ps.	4,585			Ps.	1,357			Ps.	3,555			Ps.	3,618			Ps.	758			Ps.	-			Ps.	1,206,330			Ps.	255,374			Ps.	405,135			Ps.	2,525,008
Additions		115,558				-				1,845				6,805				-				-				-				-				123				-				-				1,707,805				206,932				545,164				2,584,232
Disposals and transfers		(930		)		-				-				(15		)		-				-				-				-				-				-				-				(213,947		)		(3,555		)		(101,224		)		(319,671		)
Borrowing costs, net*		-				-				-				-				-				-				-				-				-				-				-				83,115				-				-				83,115
Other movements		-				10,371				4,087				1,649				620				-				-				1,968				1,041				-				-				-				(265,144		)		244,712				(696		)
Depreciation		(61,204		)		(20,216		)		(3,809		)		(3,801		)		(1,294		)		(2,314		)		(471		)		(796		)		(722		)		(376		)		-				-				-				(401,288		)		(496,291		)
As of December 31, 2017		630,922				25,168				9,323				22,295				6,254				2,271				886				4,727				4,060				382				-				2,783,303				193,607				692,499				4,375,697
Cost		830,145				131,503				30,113				44,749				15,439				20,500				5,587				11,229				8,405				5,403				-				2,783,303				193,607				2,575,495				6,655,478
Accumulated depreciation		(199,223		)		(106,335		)		(20,790		)		(22,454		)		(9,185		)		(18,229		)		(4,701		)		(6,502		)		(4,345		)		(5,021		)		-				-				-				(1,882,996		)		(2,279,781		)
Net book amount as of December 31, 2017		630,922				25,168				9,323				22,295				6,254				2,271				886				4,727				4,060				382				-				2,783,303				193,607				692,499				4,375,697
Additions		366,371				689				5,316				652				-				2,673				-				1,050				1,040				-				-				1,485,643				142,703				687,260				2,693,397
Disposals and transfers		(261,866		)		-				-				-				-				-				-				-				(2		)		-				-				(712,098		)		(89		)		-				(974,055		)
Borrowing costs, net*		-				-				-				-				-				-				-				-				-				-				-				115,242				-				-				115,242
Other movements		-				67				9,123				21,568				-				281				42				26				110				-				-				-				(193,483		)		162,023				(243		)
Depreciation		(71,105		)		(10,689		)		(7,215		)		(6,209		)		(1,132		)		(1,856		)		(482		)		(892		)		(727		)		(256		)		-				-				-				(327,193		)		(427,756		)
As of December 31, 2018		664,322				15,235				16,547				38,306				5,122				3,369				446				4,911				4,481				126				-				3,672,090				142,738				1,214,589				5,782,282
Cost		932,642				132,446				44,563				66,546				15,438				23,454				5,496				12,305				9,530				5,403				-				3,672,090				142,738				3,424,778				8,487,429
Accumulated depreciation		(268,320		)		(117,211		)		(28,016		)		(28,240		)		(10,316		)		(20,085		)		(5,050		)		(7,394		)		(5,049		)		(5,277		)		-				-				-				(2,210,189		)		(2,705,147		)
Net book amount as of December 31, 2018		664,322				15,235				16,547				38,306				5,122				3,369				446				4,911				4,481				126				-				3,672,090				142,738				1,214,589				5,782,282
Additions		692,186				5,596				1,730				1,461				2,487				3,137				-				355				4,278				2,273				(3,000		)		1,412,790				525,556				661,954				3,310,803
Disposals and transfers		(538,370		)		-				(131		)		(10		)		-				-				-				(2		)		(35		)		-				-				(704,852		)		(3,957		)		-				(1,247,357		)
Borrowing costs, net*		-				-				-				-				-				-				-				-				-				-				-				127,742				-				-				127,742
Other movements		-				34,840				1,999				2,757				2,487				284				9,529				1,446				2,529				-				-				-				(190,097		)		133,939				(287		)
Depreciation		(84,888		)		(14,721		)		(7,074		)		(5,854		)		(1,084		)		(1,938		)		(341		)		(933		)		(1,044		)		(278		)		-				-				-				(469,694		)		(587,849		)
As of December 31, 2019		733,250				40,950				13,071				36,660				9,012				4,852				9,634				5,777				10,209				2,121				(3,000		)		4,507,770				474,240				1,540,788				7,385,334
Cost		1,287,102				172,460				47,566				70,709				20,412				26,875				15,026				14,099				16,301				7,675				(3,000		)		4,507,770				474,240				4,220,672				10,877,907
Accumulated depreciation		(553,852		)		(131,510		)		(34,495		)		(34,049		)		(11,400		)		(22,023		)		(5,392		)		(8,322		)		(6,092		)		(5,554		)		-				-				-				(2,679,884		)		(3,492,573		)
Net book amount as of December 31, 2019		Ps.	733,250			Ps.	40,950			Ps.	13,071			Ps.	36,660			Ps.	9,012			Ps.	4,852			Ps.	9,634			Ps.	5,777			Ps.	10,209			Ps.	2,121			Ps.	(3,000	)		Ps.	4,507,770			Ps.	474,240			Ps.	1,540,788			Ps.	7,385,334

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a) Depreciation expense for the years ended December 31, 2019, 2018 and 2017, was Ps.587,849, Ps.427,756 and Ps.496,291, respectively. Depreciation charges for the year are recognized as a component of operating expenses in the consolidated statements of operations.

b) In October 2005 and December 2006, the Company entered into purchase agreements with Airbus and International Aero Engines AG (“IAE”) for the purchase of aircraft and engines, respectively. Under such agreements and prior to the delivery of each aircraft and engine, the Company agreed to make pre-delivery payments, which were calculated based on the reference price of each aircraft and engine, and following a formula established for such purpose in the agreements.

In 2011, the Company amended the agreement with Airbus for the purchase of 44 A320 family aircraft to be delivered from 2015 to 2020. The new order includes 14 A320CEO (“Current Engine Option Aircraft”) and 30 A320NEO. Additionally, during December 2017, the Company amended the agreement with Airbus for the purchase of 80 A320 family aircraft to be delivered from 2022 to 2026. The new order includes 46 A320NEO and 34 A321NEO. Under such agreement and prior to the delivery of each aircraft, the Company agreed to make pre-delivery payments, which shall be calculated based on the reference price of each aircraft, and following a formula established for such purpose in the agreement.

In November 2018, the Company amended the agreement with Airbus to reschedule the remaining 26 fleet deliveries between 2019 and 2022. Also, in this amendment Volaris used its rights on the Airbus Purchase Agreement to convert six A320NEO into A321NEO.

On August 16, 2013, the Company entered into certain agreements with IAE and United Technologies Corporation Pratt & Whitney Division (“P&W”), which included the purchase of the engines for 14 A320CEO and 30 A320NEO respectively, to be delivered between 2014 and 2022. This agreement also included the purchase of one spare engine for the A320CEO fleet (which was received during the fourth quarter of 2016) and six spare engines for the A320NEO fleet to be received from 2017 to 2022. In November 2015, the Company amended the agreement with the engine supplier to provide major maintenance services for the engines of sixteen aircrafts (10 A320NEO and 6 A321NEO). This agreement also includes the purchase of three spare engines, two of them for the A320NEO fleet, and one for the A321NEO fleet.

The Company received credit notes from P&W in December 2017 of Ps.58,530 (US$3.06 million), which are being amortized on a straight-line basis, prospectively during the term of the agreement. As of December 31, 2018, and 2017, the Company amortized a corresponding benefit from these credit notes of Ps.4,878 and Ps.1,219, respectively, which is recognized as an offset to maintenance expenses in the consolidated statements of operations.

During the years ended December 31, 2019, 2018 and 2017, the amounts paid for aircraft and spare engine pre-delivery payments were of Ps.1,412,790 (US$75.0 million), Ps.1,485,643 (US$77.1 million) and Ps.1,707,805 (US$90.0 million), respectively.

The current purchase agreement with Airbus requires the Company to accept delivery of 103 Airbus A320 family aircraft during the following six years (from January 2020 to November 2026). The agreement provides for the addition of 103 Aircraft to its fleet as follows: eight in 2020, thirteen in 2021, thirteen in 2022, sixteen in 2023, thirteen in 2024, fifteen in 2025 and twenty-five in 2026.

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Commitments to acquisitions of property and equipment are disclosed in Note 23.

During the years ended December 31, 2019, 2018 and 2017 the Company entered into aircraft and spare engines sale and leaseback transactions, resulting in a gain of Ps.284,759, Ps.609,168 and Ps.65,886, respectively, that was recorded under the caption other income in the consolidated statement of operations, only the amount of gains that relates to the rights transferred to the buyer-lessor. The rest of the gains are amortized under the lease term (Note 20).

c) During December 2017, the Company entered into an updated total support agreement with Lufthansa for 66 months, with an effective date on July 1, 2018. This agreement includes similar terms and conditions as the original agreement.

As part of this agreement, the Company received credit notes of Ps.28,110 (US$1.5 million), which are being amortized on a straight-line basis, prospectively during the term of the agreement. As of December 31, 2019, and 2018, the Company amortized a corresponding benefit from these credit notes of Ps.5,230 and Ps.7,191, respectively, recognized as an offset to maintenance expenses in the consolidated statements of operations.

d) On September 5, 2019, the Company acquired one previously leased A319 aircraft from the lessor, which was accounted for a cost for a total amount of Ps. 392,076 (US$19,600). This transaction did not generate any gain or loses in our consolidated statements of operations.

The Company identified the major components as separate parts at their respective cost. These major components of the aircraft are presented as part of the aircraft and depreciated over their useful life.

During the month of December, the Company sold the recently acquire aircraft engines in by a sale and lease back transaction. As of December 31, 2019, the carry amount of the remaining owned aircraft and the depreciation was Ps.54,771 and Ps.1,787, respectively.

13. Intangible assets, net

The composition and movement of intangible assets is as follows:

	Useful		Gross value								Accumulated amortization									Net carrying amount
	life		At December 31,
	years	2019		2018		2017			2019				2018			2017			2019		2018			2017
Software	1 – 4	Ps.	579,360	Ps.	503,467		Ps.	441,803		Ps.	(411,963	)	Ps.	(324,343	)	Ps.	(251,383	)	Ps.	167,397		Ps.	179,124	Ps.	190,420

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Balance as of January 1, 2017	Ps.	114,041
Additions		130,908
Disposals		(1,976	)
Amortization		(52,396	)
Exchange differences		(157	)
Balance as of December 31, 2017		190,420
Additions		71,007
Disposals		(9,368	)
Amortization		(72,885	)
Exchange differences		(50	)
Balance as of December 31, 2018		179,124
Additions		77,325
Disposals		-
Amortization		(87,667	)
Exchange differences		(1,385	)
Balance as of December 31, 2019	Ps.	167,397

Software amortization expense for the years ended December 31, 2019, 2018 and 2017 was Ps.87,667, Ps.72,885 and Ps.52,396, respectively. These amounts were recognized in depreciation and amortization in the consolidated statements of operations.

14. Leases

The most significant leases are as follows:

a) Aircraft and engine represent the Company´s most significant lease agreements. At December 31, 2019, the Company leases 81 aircraft (77 and 71 as of December 31, 2018 and 2017, respectively) and 14 spare engines under operating leases (10 and eighth as of December 31, 2018 and 2017, respectively) that have maximum terms through 2033. These leases are generally guaranteed by either deposit in cash or letters of credits.

Composition of the fleet and spare engines, leases*:

Aircraft Type	Model		At December 31, 2019		At December 31, 2018		At December 31, 2017
A319		132		3		4		6
A319		133		4		4		6
A320		233		39		39		39
A320		232		2		4		4
A320NEO		271N		17		12		6
A321		231		10		10		10
A321NEO		271N		6		4		-
				81		77		71

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Engine spare Type	Model		At December 31, 2019		At December 31, 2018		At December 31, 2017
V2500		V2524-A5		2		-		-
V2500		V2527M-A5		3		3		3
V2500		V2527E-A5		3		3		3
V2500		V2527-A5		2		2		2
PW1100		PW1127G-JM		3		2		-
PW1100		PW1133G-JM		1		-		-
				14		10		8

* Certain of the Company’s aircraft and engine lease agreements include an option to extend the lease term period. Terms and conditions are subject to market conditions at the time of renewal.

During the year ended December 31, 2019, the Company added seven new leased aircraft to its fleet (three A320 NEO´s acquired through sale and leaseback transactions under our existing Airbus purchase agreement and four obtained directly from the lessor´s). Also, the Company extended the lease term of one spare engine (effective from 2019) and returned two aircraft to their respective lessors. All the aircraft incorporated through the lessor´s aircraft order book was not subject to sale and leaseback transactions.

During the year ended December 31, 2019, the Company also leased two NEO spare engines (based on the terms of the Pratt and Whitney purchase agreement FMP) and two CEO spare engines to its fleet. These four engines incorporated were subject to sale and leaseback transactions and their respective lease agreements were accounted as leases. Additionally, during 2019 the Company extended the lease term of one spare engine (effective from November 2019).

During the year ended December 31, 2018, the Company added ten new leased aircraft to its fleet (acquired three A320 NEO’s through sale leaseback transactions under our existing Airbus purchase agreement and seven obtained directly from the lessors). Also, the Company extended the lease term of Aircraft (effective from 2019) and two spare engines (effective from February and April 2018), and returned four aircraft to their respective lessors.

During the year ended December 31, 2018, the Company also added two NEO spare engines to its fleet based on the terms of the Pratt and Whitney purchase agreement (FMP). These two engines incorporated were subject to sale and leaseback transactions.

During the year ended December 31, 2017, the Company added five aircraft to its fleet (acquired one A320 NEO’s through sale leaseback transactions under our existing Airbus purchase agreement and four obtained directly from the lessors). Also, the Company returned three aircraft to their respective lessors. All the aircraft incorporated through the lessor´s aircraft order book were not subject to sale and leaseback transactions. Additionally, during 2017 the Company extended the lease term of three aircraft (effective from 2018) and two spare engines (effective from July 2017 and September 2017, respectively). Such leases were not subject to sale and leaseback transactions.

Set out below are the carrying amounts of right-of-use assets recognized and the movements during the period:

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	Aircraft leases			Spare engine leases			Land and building leases			Total
As at 1 January 2017 (adjusted)	Ps.	23,047,879		Ps.	220,554		Ps.	231,648		Ps.	23,500,081
Additions		4,665,330			157,225			9,149			4,831,704
Depreciation on right of use assets		(3,306,249	)		(77,750	)		(53,904	)		(3,437,903	)
As at 31 December 2017 (adjusted)		24,406,960			300,029			186,893			24,893,882
Additions		10,585,188			387,480			59,194			11,031,862
Depreciation on right of use assets		(3,865,979	)		(107,813	)		(69,899	)		(4,043,691	)
As at 31 December 2018 (adjusted)		31,126,169			579,696			176,188			31,882,053
Additions		6,676,492			230,200			42,992			6,949,684
Depreciation on right of use assets		(4,490,572	)		(132,698	)		(79,701	)		(4,702,971	)
As at 31 December 2019	Ps.	33,312,089		Ps.	677,198		Ps.	139,479		Ps.	34,128,766

Set out below are the carrying amounts of lease liabilities and the movements during the period:

	2019			2018 (Adjusted)			2017 (Adjusted)
As at 1 January	Ps.	39,565,146		Ps.	32,523,704		Ps.	32,711,793
Additions		7,186,613			11,038,578			4,897,420
Accretion of interest		2,037,540			1,683,330			1,381,680
Foreign exchange effect		(1,772,452	)		30,441			(1,434,291	)
Payments		(6,499,802	)		(5,710,907	)		(5,032,898	)
As at 31 December	Ps.	40,517,045		Ps.	39,565,146		Ps.	32,523,704
Current		4,720,505			4,976,454			4,213,417
Non-current		35,796,540			34,588,692			28,310,287

The following are the amounts recognized in profit or loss:

	As of December 31, 2019			As of December 31, 2018 (Adjusted)			As of December 31, 2017 (Adjusted)
Depreciation of right-of-use assets	Ps.	(4,702,971	)	Ps.	(4,043,691	)	Ps.	(3,437,903	)
Interest expense on lease liabilities		(2,128,162	)		(1,755,978	)		(1,428,924	)
Aircraft and engine variable expenses		(961,657	)		(956,010	)		(1,429,595	)
Total amount recognized in profit or loss	Ps.	(7,792,790	)	Ps.	(6,755,679	)	Ps.	(6,296,422	)

The Company had total cash outflows for leases of Ps.6,499,802 in 2019 (Ps.5,710,907 in 2018 and Ps.5,032,898 in 2017).

i) Return obligations

The aircraft lease agreements of the Company also require that the aircraft and engines be returned to lessors under specific conditions of maintenance. The costs of return, which in no case are related to scheduled major maintenance, are estimated and recognized ratably as a provision from the time it becomes likely such costs will be incurred and can be estimated reliably. These return costs are recognized on a straight-line basis as a component of supplemental rent and the provision is included as part of other liabilities, through the remaining lease term.

F-71

The Company estimates the provision related to airframe, engine overhaul and limited life parts using certain assumptions including the projected usage of the aircraft and the expected costs of maintenance tasks to be performed. For the years ended December 31, 2019, 2018 and 2017, the Company expensed as supplemental rent Ps.680,964, Ps.659,106 and Ps.851,410, respectively.

15. Accrued liabilities

a) An analysis of accrued liabilities short - term at December 31, 2019, 2018 and 2017 is as follows:

	2019		2018		2017
Fuel and traffic accrued expenses	Ps.	1,507,659	Ps.	1,315,363	Ps.	1,106,913
Maintenance and aircraft parts accrued expenses	120,254		79,280		194,366
Sales, marketing and distribution accrued expenses	230,935		283,538		143,758
Maintenance deposits	132,085		141,371		132,519
Salaries and benefits	296,829		187,072		114,781
Accrued administrative expenses	81,124		67,306		90,459
Deferred revenue from V Club membership	35,465		59,557		76,261
Information and communication accrued expenses	67,808		45,008		44,638
Supplier services agreement	10,634		10,634		10,634
Benefits from suppliers	-		-		1,473
Advances from travel agencies	542		482		650
Others	48,526		77,985		51,474
	Ps.	2,531,861	Ps.	2,267,596	Ps.	1,967,926

b) Accrued liabilities long-term at December 31, 2019, 2018 and 2017 is as follows:

	2019		2018		2017
Supplier services agreement	Ps.	55,905	Ps.	66,539	Ps.	77,174
Benefits from suppliers	19,439		-		-
Other	15,452		8,964		15,274
	Ps.	90,796	Ps.	75,503	Ps.	92,448

c) An analysis of other liabilities is as follows:

	Balance as of January 1, 2019		Increase for the year		Payments		Balance as of December 31, 2019
Aircraft and engine lease return obligation	Ps.	1,831,045	Ps.	725,506	Ps.	703,863	Ps.	1,852,688
Employee profit sharing (Note 16)	14,984		22,134		13,021		24,097
	Ps.	1,846,029	Ps.	747,640	Ps.	716,884	Ps.	1,876,785
Short-term maturities							Ps.	407,190
Long-term							Ps.	1,469,595

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	Balance as of January 1, 2018		Increase for the year		Payments		Balance as of December 31, 2018
Aircraft and engine lease return obligation (Adjusted)	Ps.	1,647,977	Ps.	1,015,391	Ps.	832,323	Ps.	1,831,045
Employee profit sharing (Note 16)	9,063		14,106		8,185		14,984
	Ps.	1,657,040	Ps.	1,029,497	Ps.	840,508	Ps.	1,846,029
Short-term maturities							Ps.	25,835
Long-term							Ps.	1,820,194

	Balance as of January 1, 2017		Increase for the year		Payments		Balance as of December 31, 2017
Aircraft and engine lease return obligation (Adjusted)	Ps.	1,408,039	Ps.	1,099,597	Ps.	859,659	Ps.	1,647,977
Employee profit sharing (Note 16)	10,695		8,342		9,974		9,063
	Ps.	1,418,734	Ps.	1,107,939	Ps.	869,633	Ps.	1,657,040
Short-term maturities							Ps.	202,250
Long-term							Ps.	1,454,790

During the years ended December 31, 2019, 2018 and 2017 no cancellations or write-offs related to these liabilities were recorded.

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16. Employee benefits

The components of net period cost recognized in the consolidated statement of operations and the obligations for seniority premium for the years ended December 31, 2019, 2018 and 2017, are as follows:

	2019		2018		2017
Analysis of net period cost:
Current service cost	Ps.	8,214	Ps.	4,977	Ps.	3,657
Interest cost on benefit obligation	1,872		1,424		1,000
Net period cost	Ps.	10,086	Ps.	6,401	Ps.	4,657

Changes in the defined benefit obligation are as follows:

	2019			2018			2017
Defined benefit obligation at January 1,	Ps.	18,153		Ps.	19,289		Ps.	13,438
Net period cost charged to profit or loss:
Current service cost	8,214			4,977			3,657
Interest cost on benefit obligation	1,872			1,424			1,000
Remeasurement losses in other comprehensive income:
Actuarial changes arising from changes in assumptions	10,192			(5,989		)	1,776
Payments made	(225		)	(1,548		)	(582		)
Defined benefit obligation at December 31,	Ps.	38,206		Ps.	18,153		Ps.	19,289

The significant assumptions used in the computation of the seniority premium obligations are shown below:

	2019	2018	2017
Financial:
Discount rate	7.18%	9.91%	7.72%
Expected rate of salary increases	5.50%	5.65%	5.50%
Annual increase in minimum salary	4.00%	4.15%	4.00%
Biometric:
Mortality (1)	EMSSA 09, CEPAL* 2010 EL SALVADOR, CEPAL*2010 COSTA RICA	EMSSA 09	EMSSA 09
Disability (2)	IMSS-97	IMSS-97	IMSS-97

(1) Mexican Experience of social security (EMSSA), Economic Commission for Latin America and the Caribbean (CEPAL for its Spanish acronym).

(2) Mexican Experience of Instituto Mexicano del Seguro Social (IMSS).

Accruals for short-term employee benefits at December 31, 2019, 2018 and 2017, respectively, are as follows:

	2019		2018		2017
Employee profit-sharing (Note 15c)	Ps.	24,097	Ps.	14,984	Ps.	9,063

The key management personnel of the Company include the members of the Board of Directors (Note 7).

17. Share-based payments

a) LTRP

On November 6, 2014, the shareholders of the Company and the shareholders of its subsidiary Servicios Corporativos, approved an amendment to the current LTRP for the benefit of certain key employees, based on the recommendations of the Board of Directors of the Company at its meetings held on July 24 and August 29, 2014. For such purposes on November 10, 2014 an irrevocable Administrative Trust was created by Servicios Corporativos and the key employees. The new plan was restructured and named LTIP, which consists of a share purchase plan (equity-settled transaction) and SARs plan (cash settled).

On October 18, 2018, the Board of Directors of the Company approved a new long-term retention plan LTRP for certain executives of the Company, through which the beneficiaries of the plan, will receive shares of the Company once the service conditions are met. This plan does not include cash compensations granted through appreciation rights on the Company's shares. The retention plans granted in previous periods under LTRP will continue in full force and effect until their respective due dates and the cash compensation derived from them will be settled according to the conditions established in each plan.

b) LTIP

- Share purchase plan (equity-settled)

Under the share purchase plan (equity- settled), in November 2014 certain key employees of the Company were granted with a special bonus by an amount of Ps.10,831, to be used to purchase Company’s shares. The plan consisted in:

F-74

(i) Servicios Corporativos granted a bonus to each key executive;

(ii) The bonus amount by Ps.7,059, net of withheld taxes, was transferred on November 11, 2014, as per the written instructions of each key employees, to the Administrative Trust for the acquisition of Series A shares of the Company through an intermediary authorized by the BMV based on the Administration Trust’s Technical Committee instructions;

(iii) Subject to specified terms and conditions set forth in the Administrative Trust, the acquired shares were in escrow under the Administrative Trust for its administration until the vesting period date for each key executive, date as of which the key executive can fully dispose of the shares and instruct as desired.

(iv) The share purchase plan provides that if the terms and conditions are not met by the vesting period date, then the shares would be sold in the BMV, and Servicios Corporativos would be entitled to receive the proceeds of the sale of shares.

(v) The key employees’ account balance will be tracked by the Administrative Trust. The Administrative Trust’s objectives are to acquire Series A shares on behalf of the key employees and to manage the shares granted to such key executive based on instructions set forth by the Technical Committee.

As the Administrative Trust is controlled and therefore consolidated by Controladora, shares purchased in the market and held within the Administrative Trust are presented for accounting purposes as treasury stock in the consolidated statement of changes in equity.

In November 2019, 2018 and 2017, the extensions to the LTIP were approved by the Company’s shareholder’s and Company’s Board of Directors, respectively. The total cost of the extensions approved were Ps.86,772 (Ps.56,407 net of withheld taxes), Ps.63,961 (Ps.41,590 net of withheld taxes), Ps.15,765 (Ps.10,108 net of withheld taxes), respectively. Under the terms of the incentive plan, certain key employees of the Company were granted a special bonus that was transferred to the Administrative Trust for the acquisition of Series A shares of the Company.

As of December 31, 2019, 2018 and 2017, the number of shares into the Administrative Trust associated with the Company’s share purchase payment plans is as follows:

	Number of Series A shares
Outstanding as of January 1st, 2017		618,048	*
Purchased during the year		547,310
Granted during the year		-
Exercised/vested during the year		(345,270	)
Forfeited during the year		-
Outstanding as of December 31, 2017		820,088	*
Purchased during the year		3,208,115
Granted during the year		-
Exercised/vested during the year		(353,457	)
Forfeited during the year		(121,451	)
Outstanding as of December 31, 2018		3,553,295	*
Purchased during the year		2,694,600
Granted during the year		-
Exercised/vested during the year		(959,614	)
Forfeited during the year		(173,090	)
Outstanding as of December 31, 2019		5,115,191	*

*These shares are presented as treasury shares in the consolidated statement of financial position as of December 31, 2019, 2018 and 2017.

F-75

The vesting period of the shares granted under the Company’s share purchase plans is as follows:

Number of Series A shares	Vesting period
2,211,269		November 2019 – 2020
2,005,716		November 2020 – 2021
898,206		November 2021 – 2022
5,115,191

In accordance with IFRS 2, the share purchase plans are classified as equity-settled transactions on the grant date. This valuation is the result of multiplying the total number of Series A shares deposited in the Administrative Trust and the price per share, plus the balance in cash deposited in the Administrative Trust.

For the years ended December 31, 2019, 2018 and 2017, the compensation expense recorded in the consolidated statement of operations amounted to Ps.49,659, Ps.19,980 and Ps.13,508, respectively. All shares held in the Administrative Trust are considered outstanding for both basic and diluted (loss) earnings per share purposes, since the shares are entitled to dividend if and when declared by the Company.

During 2019 and 2018, some key employees left the Company; therefore, the vesting conditions were not fulfilled. In accordance with the terms of the plan, Servicios Corporativos is entitled to receive the proceeds of the sale of such shares, the number of forfeited shares as of December 31, 2019 and 2018, were (173,090) and (121,451), respectively.

- SARs (cash settled)

On November 6, 2014, the Company granted 4,315,264 SARs to key employees that entitle them to a cash payment and vest as long as the employee continues to be employed by the Company at the end of each anniversary, during a 3 years period. The total amount of the appreciation rights granted under this plan at the grant date was Ps.10,831 at such date.

Under the LTIP extensions, the number of SARs granted to certain key executives of the Company were Ps.0, Ps.0 and 3,965,351, which amounts to Ps.0, Ps.0 and Ps.15,765, for the years ended December 31, 2019, 2018 and 2017, respectively. The SARs vest as long as the employee continues to be employed by the Company at the end of each anniversary, during a three years period.

Fair value of the SARs is measured at each reporting date. The carrying amount of the liability relating to the SARs as of December 31, 2019, 2018 and 2017 were Ps.1,901, Ps.537 and Ps.723, respectively.

The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits over the service period. During the years ended December 31, 2019, 2018 and 2017, the Company recorded a expense (benefit) of Ps.2,964, Ps.(186) and Ps.(8,999), respectively, in the consolidated statement of operations.

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The fair value of these SARs is estimated at the grant date and at each reporting date using the Black-Scholes option pricing model, taking into account the terms and conditions on which the SARs were granted (vesting schedule in tables below).

Number of SARs		Exercisable date
	725,193	November 2020
	725,193*

* Includes forfeited SARs of 32,616, 484,656 and 145,769 for the years ended December 31, 2019, 2018 and 2017, respectively.

During the years ended December 31, 2019, 2018 and 2017, the Company made a cash payment to key employees related to the SARs plan in the amount of Ps.2,395, Ps.0 and Ps.6,021, respectively.

Such payments were determined based on the increase in the share price of the Company from the grant date to the exercisable date.

c) MIP

- MIP I

In April 2012, the Board of Directors authorized a MIP for the benefit of certain key employees, subject to shareholders’ approval. On December 21, 2012, the shareholders approved the MIP consisting of: (i) the issuance of an aggregate of 25,164,126 Series A and Series B shares, representing 3.0% of the Company’s fully diluted capital stock; (ii) a grant of options to acquire shares of the Company or CPOs having shares as underlying securities for which, as long as certain conditions occur, the employees will have the right to request the delivery of those shares (iii) the creation of an Administrative Trust to deposit such shares in escrow until they are delivered to the officers or returned to the Company in the case that certain conditions do not occur; and (iv) the execution of share sale agreements setting forth the terms and conditions upon which the officers may exercise its shares at Ps.5.31 (five Mexican pesos 31/100) per share.

On December 24, 2012, the Administrative Trust was created and the share sale agreements were executed. On December 27, 2012, the trust borrowed Ps.133,723 from the Company and immediately after; the trust paid the Company the same amount borrowed as purchase price for the shares.

The share sale agreements provide that the officers may pay for the shares at the same price upon the occurrence of either an initial public offering of the Company’s capital stock or a change of control and as long as they remain employees until the options are exercised, with a maximum term of ten years. Upon payment of the shares by the officers to the Management Trust, it must pay such amount back to the Company as repayment of the loan, for which the Company charges no interest.

The MIP has been classified as equity-settled, by which, the grant date, fair value is fixed and is not adjusted by subsequent changes in the fair value of capital instruments. Equity-settled transactions are measured at fair value at the date the equity benefits are conditionally granted to employees. The total cost of the MIP determined by the Company was Ps.2,722 to be recognized from the time it becomes probable the performance condition will be met over the vesting period. Total cost of the MIP related to the vested shares has been fully recognized in the consolidated statements of operations during the vesting years.

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This cost was determined by using the improved Binomial valuation model from Hull and White, on the date in which the plan had already been approved by the shareholders and a shared understanding of the terms and conditions of the plan was reached with the employees (December 24, 2012, defined as the grant date), with the following assumptions:

	2012
Dividend yield (%)		0.00	%
Volatility (%)		37.00	%
Risk–free interest rate (%)		5.96	%
Expected life of share options (years)		8.8
Exercise share price (in Mexican pesos Ps.)		5.31
Exercise multiple		1.1
Fair value of the stock at grant date		1.73

The expected volatility reflects the assumption that the historical volatility of comparable companies is indicative of future trends, which may not necessarily be the actual outcome.

Under the methodology followed by the Company, at the grant date and December 31, 2012, the granted shares had no positive intrinsic value.

In 2019, 2018 and 2017, the key employees exercised 2,780,000, 2,003,876 and 120,000 Series A shares. As a result, the key employees paid to the Management Trust Ps.14,773, Ps.10,654 and Ps.638 corresponding to the exercised shares for the years ended December 31, 2019, 2018 and 2017, respectively.

Thereafter, the Company received from the Management Trust the payment related to the exercised shares by the key employees as a repayment of the loan between the Company and the Management Trust.

Movements in share options

The following table illustrates the number of shares options and fixed exercise prices during the year:

	Number of share options			Exercise price in Mexican pesos		Total in thousands of Mexican pesos
Outstanding as of December 31, 2016		12,557,857		Ps.	5.31	Ps.	66,733
Granted during the year		-		-		-
Forfeited during the year		-		-		-
Exercised during the year		(120,000	)	5.31		(638		)
Outstanding as of December 31, 2017		12,437,857		Ps.	5.31	Ps.	66,095
Granted during the year		-		-		-
Forfeited during the year		-		-		-
Exercised during the year		(2,003,876	)	5.31		(10,654		)
Outstanding as of December 31, 2018		10,433,981		Ps.	5.31	Ps.	55,441
Granted during the year		-		-		-
Forfeited during the year		-		-		-
Exercised during the year		(2,780,000	)	5.31		(14,773		)
Outstanding as of December 31, 2019		7,653,981		Ps.	5.31	Ps.	40,668

At December 31, 2019, 2018 and 2017, 7,653,981, 10,433,981 and 12,437,857 share options pending to exercise were considered as treasury shares, respectively.

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- MIP II

On February 19, 2016, the Board of Directors of the Company authorized an extension to the MIP for certain key employees. Such extension was modified as of November 6, 2016. Under MIP II, 13,536,960 share appreciation rights of our Series A shares were granted to be settled annually in cash in a period of five years in accordance with the established service conditions. In addition, a five-year extension to the period in which the employees can exercise MIP II once the SARs are vested was approved.

Fair value of the SARs is measured at each reporting period using a Black-Scholes option pricing model, taking into consideration the terms and conditions granted to the employees. The amount of the cash payment is determined based on the increase in our share price between the grant date and the settlement date.

The carrying amount of the liability relating to the SARs as of December 31, 2019, 2018 and 2017 was Ps.70,567, Ps.32,807 and Ps.37,858, respectively. The compensation cost is recognized in the consolidated statement of operations under the caption of salaries and benefits over the service period.

During the years ended December 31, 2019, 2018 and 2017, the Company recorded a (benefit) expense of Ps.37,760, Ps. (5,052) and Ps. (16,499), respectively, in the consolidated statement of operations. No SARs were exercised during 2018.

The vesting schedule is summarized in the table below:

Number of SARs	Vesting date
2,825,840	February 2020
3,391,020	February 2021
6,216,860*

* Includes forfeited SARs of 0, 1,563,520 and 0, for the years ended December 31, 2019, 2018 and 2017, respectively.

The expense (benefit) recognized for the Company’s retention plans during the year is shown in the following table:

	2019		2018		2017
(Benefit) expense arising from cash-settled share-based payments transactions	Ps.	40,724	Ps.	(5,238)	Ps.	(25,498	)
Expense arising from equity-settled share-based payments transactions	49,659		19,980			13,508
Total expense (benefit) arising from share-based payments transactions	Ps.	90,383	Ps.	14,742	Ps.	(11,990	)

d) Board of Directors Incentive Plan (BoDIP)

Certain members of the Board of Directors of the Company receive additional benefits through a share-based plan, which has been classified as an equity-settled share-based payment and therefore accounted under IFRS 2 “Shared based payments”.

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In April 2018, the Board of Directors of the Company authorized a Board of Directors Incentive Plan “BoDIP”, for the benefit of certain board members. The BoDIP grants options to acquire shares of the Company or CPOs during a four years period with an exercise price share at Ps.16.80, Ps.16.12 and Ps.26.29 for the years ended 2019, 2018 and 2017, respectively, which was determined on the grant date. Under this plan, no service or performance conditions are required to the board members for exercise the option to acquire shares, and therefore, they have the right to request the delivery of those shares at the time they pay for them.

For such purposes on August 29, 2018 the Trust Agreement number CIB/3081 was created by Controladora Vuela, Compañia de Aviación S.A.B de C.V as trustee and CIBanco, S.A., Institucion de Banco Multiple as trustor. The number of shares hold as of December 31, 2019 available to be exercised is 2,072,344.

18. Equity

As of December 31, 2019, the total number of the Company’s authorized shares was 1,011,876,677; represented by common registered shares, issued and with no par value, fully subscribed and paid, comprised as follows:

	Shares
	Fixed Class I		Variable Class II			Total shares
Series A shares (1)		10,478		923,814,326			923,824,804
Series B shares (1)		13,702		88,038,171			88,051,873
		24,180		1,011,852,497			1,011,876,677
Treasury shares (Note 17)		-		(15,136,057	)		(15,136,057	)*
		24,180		996,716,440			996,740,620

*The number of forfeited shares as of December 31, 2019 were 294,541, which are include in treasury shares.

As of December 31, 2018, the total number of the Company’s authorized shares was 1,011,876,677; represented by common registered shares, issued and with no par value, fully subscribed and paid, comprised as follows:

	Shares
	Fixed Class I		Variable Class II			Total shares
Series A shares (1)		10,478		923,814,326			923,824,804
Series B shares (1)		13,702		88,038,171			88,051,873
		24,180		1,011,852,497			1,011,876,677
Treasury shares (Note 17)		-		(15,212,365	)		(15,212,365	)*
		24,180		996,640,132			996,664,312

*The number of forfeited shares as of December 31, 2018 were 121,451, which are include in treasury shares.

⁽¹⁾ On February 16, 2018, one of the Company´s shareholders converted 45,968,598 Series B Shares for the equivalent number of Series A Shares. This conversion has no impact either on the total number of outstanding shares nor on the earnings-per-share calculation.

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As of December 31, 2017, the total number of the Company’s authorized shares was 1,011,876,677; represented by common registered shares, issued and with no par value, fully subscribed and paid, comprised as follows:

	Shares
	Fixed Class I		Variable Class II			Total shares
Series A shares		3,224		877,852,982			877,856,206
Series B shares		20,956		133,999,515			134,020,471
		24,180		1,011,852,497			1,011,876,677
Treasury shares (Note 17)		-		(13,257,945	)		(13,257,945	)
		24,180		998,594,552			998,618,732

All shares representing the Company’s capital stock, either Series A shares or Series B shares, grant the holders the same economic rights and there are no preferences and/or restrictions attaching to any class of shares on the distribution of dividends and the repayment of capital. Holders of the Company’s Series A common stock and Series B common stock are entitled to dividends when, and if, declared by a shareholders’ resolution. The Company’s revolving line of credit with Santander and Bancomext limits the Company’s ability to declare and pay dividends in the event that the Company fails to comply with the payment terms thereunder. Only Series A shares from the Company are listed.

During the years ended December 31, 2019, 2018 and 2017, the Company did not declare any dividends.

a)     Earnings (loss) per share

Basic earnings (loss) per share (“EPS or LPS”) amounts are calculated by dividing the net income (loss) for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS or LPS amounts are calculated by dividing the profit (loss) attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares, if any), by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares (to the extent that their effect is dilutive).

The following table shows the calculations of the basic and diluted earnings (loss) per share for the years ended December 31, 2019, 2018 and 2017.

	At December 31,
	2019		2018 (Adjusted)			2017 (Adjusted)
Net income (loss) for the period	Ps.	2,639,063	Ps.	(942,882	)	Ps.	278,671
Weighted average number of shares outstanding (in thousands):
Basic		1,011,877		1,011,877			1,011,877
Diluted		1,011,877		1,011,877			1,011,877
EPS - LPS:
Basic		2.608		(0.932	)		0.275
Diluted		2.608		(0.932	)		0.275

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There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorization of these financial statements.

b) In accordance with the Mexican Corporations Act, the Company is required to allocate at least 5% of the net income of each year to increase the legal reserve. This practice must be continued until the legal reserve reaches 20% of capital stock. As of December 31, 2019, 2018 and 2017, the Company’s legal reserve was Ps.291,178 or 9.8% our capital stock.

At an ordinary general shareholders’ meeting held on April 19, 2017 the shareholders approved to increase legal reserve in the amount of Ps.252,928. As of December 31, 2019, 2018 and 2017 the Company’s legal reserve has not reached the 20% of its capital stock.

c) Any distribution of earnings in excess of the net tax profit account (Cuenta de utilidad fiscal neta or “CUFIN”) balance will be subject to corporate income tax, payable by the Company, at the enacted income tax rate at that time. A 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders from earnings generated starting January 1, 2014.

d) Shareholders may contribute certain amounts for future increases in capital stock, either in the fixed or variable capital. Said contributions will be kept in a special account until the shareholders meeting authorizes an increase in the capital stock of the Company, at which time each shareholder will have a preferential right to subscribe and pay the increase with the contributions previously made. As it is not strictly regulated in Mexican law, the shareholders meeting may agree to return the contributions to the shareholders or even set a term in which the increase in the capital stock has to be authorized.

19. Income tax

a) In accordance with the MITL, the Company and its Mexican subsidiaries are subject to income tax and each files its tax returns on an individual entity basis and the related tax results are included in the accompanying consolidated financial statements. The income tax is computed taking into consideration the taxable and deductible effects of inflation, such as depreciation calculated on Adjusted assets values. Taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the annual inflation adjustment.

(i) Based on the approved law, corporate income tax rate for 2019 and thereafter is 30%.

(ii) The tax rules include limits in the deductions of the exempt compensation amount certain items, as follows: Wages and benefits paid to workers 47% of income paid to workers and in certain cases up to 53% (holiday bonus, savings fund, employee profit sharing, seniority premiums) will be deductible for employers. As a result, certain wage and salary provisions have difference between tax and book values at year-end.

(iii) The MITL sets forth criteria and limits for applying some deductions, such as: the deduction of payments which, in turn, are exempt income for workers, contributions for creating or increasing provisions for pension funds, contributions to the Mexican Institute of Social Security payable by the worker that are paid by the employer, as well as the possible non-deduction of payments made to related parties in the event of failing to meet certain requirements.

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(iv) Taxable income for purposes of the employee profit sharing is the same used for the Corporate Income Tax except for certain items.

(v) A 10% withholding tax is imposed on dividends distributions to individuals and foreign shareholders from earnings generated starting January 1, 2014.

The income tax rates for 2019, 2018 and 2017 in Guatemala, Costa Rica and El Salvador are 25%, 30%, and 30% respectively.

b) For the years ended December 31, 2019, 2018 and 2017, the Company reported on a consolidated basis taxable income of Ps.938,304, Ps.777,513 and Ps.171,046, respectively, which was partially offset by tax losses from prior years.

In accordance with the MITL and Costa Rican Income Tax Law (CRITL), tax losses may be carried forward against taxable income generated in the succeeding ten and three years, respectively. Carryforward tax losses are Adjusted based on inflation.

c) An analysis of consolidated income tax expense for the years ended December 31, 2019, 2018 and 2017 is as follows:

Consolidated statements of operations

	2019			2018			2017
Current year income tax expense	Ps.	(281,491	)	Ps.	(232,824	)	Ps.	(51,313	)
Deferred income tax (expense) benefit		(813,340	)(1)		582,644	(2)		(186,273	)(3)
Total income tax (expense) benefit	Ps.	(1,094,831	)	Ps.	349,820		Ps.	(237,586	)

⁽¹⁾ Includes translation effect by Ps.(2,278)

⁽²⁾ Includes translation effect by Ps.2,680

⁽³⁾ Includes translation effect by Ps.936

Consolidated statements of comprehensive income

	2019		2018			2017
Deferred tax related to items recognized in OCI during the year
Net (loss) gain on cash flow hedges	Ps.	(74,820)	Ps.	85,107		Ps.	12,017
Remeasurement gain (loss) of employee benefits		3,058		(1,797	)		533
Deferred tax charged to OCI	Ps.	(71,762)	Ps.	83,310		Ps.	12,550

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d) A reconciliation of the statutory corporate income tax rate to the Company’s effective tax rate for financial reporting purposes is as follows:

	2019			2018			2017
Statutory income tax rate		30.00	%		30.00	%		30.00	%
Non-deductible expenses		0.19	%		(2.51	)%		5.71	%
Unrecorded deferred taxes on tax losses		0.27	%		(3.96	)%		21.31	%
Foreign countries difference with Mexican statutory rate		0.11	%		(0.02	)%		0.48	%
Inflation of tax losses		(0.21	)%		1.16	%		(2.20	)%
Amendment tax return effects and other tax adjustments		(0.51	)%		0.05	%		3.78	%
Inflation on furniture, intangible and equipment		(0.48	)%		2.08	%		(7.19	)%
Annual inflation adjustment		(0.05	)%		0.26	%		(5.87	)%
		29.32	%		27.06	%		46.02	%

Mexican income tax matters

For Mexican purposes, corporate income tax is computed on accrued basis. MITL requires taxable profit to be determined by considering revenue net of tax deductions. Prior years' tax losses can be utilized to offset current year taxable income. Income tax is determined by applying the 30% rate on the net amount after tax losses utilization.

For tax purposes, income is considered taxable at the earlier of: (i) the time the revenue is collected, (ii) the service is provided or (iii) the time of the issuance of the invoice. Expenses are deductible for tax purposes generally on accrual basis, with some exceptions, once the requirements established in the tax law are fulfilled.

Central America (Guatemala, Costa Rica and El Salvador)

According to Guatemala Corporate Income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2019 and 2018, the Company obtained a net operating (loss) income of Ps.(1,085) and Ps.8,549, respectively.

According to Costa Rica Corporate Income tax law, under the regime on profits from business activities, net operating losses can offset taxable income in a term of three years. For the years ended December 31, 2019, 2018 and 2017, the Company generated net operating losses for an amount of Ps.50,246, Ps.170,731 and Ps.300,613, respectively, for which no deferred tax asset has been recognized.

According to El Salvador Corporate Income tax law, under the regime on profits from business activities, net operating losses cannot offset taxable income in prior or future years. For the year ended December 31, 2019, the Company obtained a net operating loss of Ps.32,494.

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e) An analysis of consolidated deferred taxes is as follows:

	2019						2018					2017
	Consolidated statement of financial position			Consolidated statement of operations			Consolidated statement of financial position		Consolidated statement of operations			Consolidated statement of financial position			Consolidated statement of operations
							Adjusted					Adjusted
Deferred income tax assets:
Lease liability	Ps.	12,155,114		Ps.	313,137		Ps.	11,841,977	Ps.	2,108,422		Ps.	9,733,555		Ps.	(59,235	)
Unearned transportation revenue		797,063			61,708			735,355		699,414			35,941			(29,814	)
Extension lease agreement		459,343			(137,639	)		596,982		82,421			514,562			113,443
Intangible		446,849			(13,741	)		460,590		(2,621	)		463,211			(18,415	)
Provisions		351,345			60,655			290,690		(4,175	)		294,865			(48,439	)
Tax losses available for offsetting against future taxable income		303,970			(5,350	)		309,320		(33,759	)		343,079			309,758
Allowance for doubtful accounts		14,089			9,187			4,902		(2,422	)		7,324			433
Employee benefits		11,463			2,958			5,446		1,456			5,786			1,222
Employee profit sharing		7,227			2,734			4,493		1,777			2,716			(490	)
Non derivative financial instruments		4,229			4,229			-		-			-			-
Financial instruments		(38,865	)		-			35,956		-			(49,151	)		-
		14,511,827			297,878			14,285,711		2,850,513			11,351,888			268,463
Deferred income tax liabilities:
Right of use asset|		10,236,929			672,311			9,564,618		2,096,458			7,468,160			354,352
Supplemental rent		1,706,949			111,430			1,595,519		32,156			1,563,363			223,753
Rotable spare parts, furniture and equipment, net		884,476			239,452			645,024		168,107			476,917			108,890
Prepaid expenses and other assets		179,061			88,683			90,378		(25,686	)		116,064			(239,586	)
Inventories		90,287			1,392			88,895		726			88,169			15,286
Other prepayments		27,728			(4,329	)		32,057		(1,212	)		33,269			(7,023	)
		13,125,430			1,108,939			12,016,491		2,270,549			9,745,942			455,672
	Ps.	1,386,397		Ps.	(811,061	)	Ps.	2,269,220	Ps.	579,964		Ps.	1,605,946		Ps.	(187,209	)

Reflected in the consolidated statement of financial position as follows:

	2019			2018			2017
Deferred tax assets	Ps.	1,542,536		Ps.	3,392,240		Ps.	3,222,228
Deferred tax liabilities		(156,139	)		(1,123,020	)		(1,616,282	)
Deferred tax assets, net	Ps.	1,386,397		Ps.	2,269,220		Ps.	1,605,946

A reconciliation of deferred tax asset, net is as follows:

	2019			2018		2017
Opening balance as of January 1,	Ps.	2,269,220		Ps.	1,605,946	Ps.	1,780,605
Deferred income tax (expense) benefit during the current year recorded on profits		(811,061	)		579,964		(187,209	)
Deferred income tax (expense) benefit during the current year recorded in accumulated other comprehensive income (loss)		(71,762	)		83,310		12,550
Closing balance as of December 31,	Ps.	1,386,397		Ps.	2,269,220	Ps.	1,605,946

At December 31, 2019, 2018 and 2017, the table shown above includes deferred income tax asset recognized by Concesionaria and Operaciones Volaris (2018), Comercializadora (2017) for tax losses carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.

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According to IAS 12, Income Taxes, a deferred tax asset should be recognized for the carry-forward of available tax losses to the extent that it is probable that future taxable income will be available against which the available tax losses can be utilized. In these regards, the Company has recognized at December 31, 2019, 2018 and 2017 a deferred tax asset for tax losses of Ps.303,970, Ps.309,320 and Ps.343,079 respectively.

During 2017, the Company recognized a deferred tax asset for the carry-forward of available tax losses of Concesionaria, Comercializadora and Operaciones Volaris, based on the positive evidence of the Company to generate taxable profit related to the same taxation authority against which the available tax losses can be utilized before they expire. Positive evidence includes Concesionaria’s actions to increase its aircraft fleet in the following years, increase in flight frequencies, and routes, inside and outside of Mexico; the profit of Comercializadora and Operaciones Volaris, respectively, is derived directly from Concesionaria’s operations.

An analysis of the available tax losses carry-forward of the Company at December 31, 2019 is as follows:

Year of loss		Historical loss		Adjusted tax loss		Utilized		Total remaining amount		Year of expiration
	2016	Ps.	26,658	Ps.	26,658	Ps.	26,658	Ps.	-		2019
	2017		228,413		228,413		88,752		139,661		2020
	2017		1,068,498		1,176,068		218,110		957,958		2027
	2018		170,049		170,049		-		170,049		2021
	2018		3,192		3,299		3,299		-		2028
	2019		50,246		50,246		-		50,246		2024
	2019		4,922		5,028		-		5,028		2029
		Ps.	1,551,978	Ps.	1,659,761	Ps.	336,819	Ps.	1,322,942

A breakdown of available tax loss carry-forward of Controladora and its subsidiaries at December 31, 2019 is as follows:

							Total
	Historical loss		Adjusted tax loss		Utilized		remaining amount
Comercializadora	Ps.	4,922	Ps.	5,028	Ps.	-	Ps.	5,028
Concesionaria		1,067,836		1,175,351		217,393		957,958
Operaciones Volaris		3,853		4,016		4,016		-
Vuela Aviación		475,367		475,366		115,410		359,956
	Ps.	1,551,978	Ps.	1,659,761	Ps.	336,819	Ps.	1,322,942
Unrecognized NOLs								(309,710	)
							Ps.	1,013,232
Tax rate								30	%
Deferred income tax							Ps.	303,970

f) At December 31, 2019 the Company had the following tax balances:

	2019
Adjusted contributed capital account (Cuenta de capital de aportación or “CUCA”)	Ps.	4,028,022
CUFIN*		3,847,209

^*The calculation comprises all the subsidiaries of the Company.

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20. Other operating income and expenses

An analysis of other operating income is as follows:

	2019			2018			2017
Gain on sale and leaseback	Ps.	284,759		Ps.	609,168		Ps.	65,886
Loss on sale of rotable spare parts furniture and equipment		(8,954	)		(2,356	)		(908	)
Administrative benefits		-			-			27,180
Other income		51,403			15,161			4,607
	Ps.	327,208		Ps.	621,973		Ps.	96,765

An analysis of other operating expenses is as follows:

	2019		2018		2017
Administrative and operational support expenses	Ps.	581,181	Ps.	536,079	Ps.	539,101
Technology and communications		381,055		385,841		373,394
Passenger services		65,477		70,337		59,261
Insurance		74,661		60,892		54,569
Others		10,553		5,949		7,933
	Ps.	1,112,927	Ps.	1,059,098	Ps.	1,034,258

21. Finance income and cost

An analysis of finance income is as follows:

	2019		2018		2017
Interest on cash and equivalents	Ps.	201,191	Ps.	152,437	Ps.	105,151
Interest on asset backed trust notes		6,525		-		-
Interest on recovery of guarantee deposits		83		166		644
	Ps.	207,799	Ps.	152,603	Ps.	105,795

An analysis of finance cost is as follows:

	2019		2018		2017
Leases financial cost	Ps.	2,128,162	Ps.	1,755,978	Ps.	1,428,924
Interest on asset backed trust notes		80,314		-		-
Cost of letter credit notes		49,856		57,277		42,294
Bank fees and others		3,607		6,141		5,279
Interest on debts and borrowings*		1,660		56,916		37,565
Other finance costs		6,230		-		1,219
	Ps.	2,269,829	Ps.	1,876,312	Ps.	1,515,281

* The borrowing costs related to the acquisition or construction of qualifying assets are capitalized as part of the cost of the asset (Note 12). Interest expense not capitalized is related to the short-term working capital facility from Citibanamex.

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	2019			2018			2017
Interest on debts and borrowings	Ps.	457,973		Ps.	414,836		Ps.	230,954
Capitalized interest (Note 12)		(456,313	)		(357,920	)		(193,389	)
Net interest on debts and borrowing in the consolidated statements of operations	Ps.	1,660		Ps.	56,916		Ps.	37,565

22. Components of other comprehensive income (loss)

An analysis of the other comprehensive income for the years ended December 31, 2019, 2018 and 2017 is as follows:

	2019			2018			2017
Derivative financial instruments:
Reclassification of call options and forwards during the year to profit or loss (Note 4)	Ps.	-		Ps.	(455,009	)	Ps.	52,097
Extrinsic value of changes on jet fuel Asian call options		11,148			227,509			(81,182	)
Extrinsic value of changes on jet fuel Zero cost collars		256,515			(122,948	)		-
(Loss) gain of the matured foreign currency forward contracts		(14,241	)		66,757			(13,380	)
Gain of the not-yet matured interest rate swap contracts		-			-			317
Loss of the interest rate Cap		(4,023	)		-			-
Non derivative financial instruments		14,096			-			-
Total	Ps.	263,495		Ps.	(283,691	)	Ps.	(42,148	)

23. Commitments and contingencies

Aircraft related commitments and financing arrangements

Committed expenditures for aircraft purchase and related flight equipment related to the Airbus purchase agreement, including estimated amounts for contractual prices escalations and pre-delivery payments, will be as follows:

	Commitment expenditures in U.S. dollars		Commitment expenditures equivalent in Mexican pesos (1)
2020	US$	141,218	Ps.	2,661,281
2021		164,856		3,106,744
2022		606,842		11,436,059
2023		793,967		14,962,467
2024 and thereafter		2,688,321		50,661,947
	US$	4,395,204	Ps.	82,828,498

(1) Using the exchange rate as of December 31, 2019 of Ps.18.8452.

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All aircraft acquired by the Company through the Airbus purchase agreement through December 31, 2019 have been executed through sale and leaseback transactions.

In addition, we have commitments to execute sale and leaseback over the next three years. The estimated proceeds from these commitments are as follows:

	Aircraft sale prices estimated
	in U.S. dollars		in Mexican pesos
2020	US$	396,470	Ps.	7,471,556
2021		691,940		13,039,748
2022		102,400		1,929,748
	US$	1,190,810	Ps.	22,441,052

The future lease payments for these non-cancellable sale and leaseback contracts are as follows:

	Aircraft leases
	in U.S. dollars		in Mexican pesos
2020	US$	20,847	Ps.	392,866
2021		57,190		1,077,757
2022		86,025		1,621,158
2023		88,259		1,663,259
2024 and thereafter		806,786		15,204,044
	US$	1,059,107	Ps.	19,959,084

Litigation

The Company is a party to legal proceedings and claims that arise during the ordinary course of business. The Company believes the ultimate outcome of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

24. Operating segments

The Company is managed as a single business unit that provides air transportation services. The Company has two geographic segments identified below:

	2019			2018		2017
Operating revenues:
Domestic (Mexico)	Ps.	24,594,797		Ps.	18,493,476	Ps.	17,272,946
International:
United States of America and Central America*		10,230,824			8,811,674		7,515,240
Non-derivative financial instruments		(72,949	)		-		-
Total operating revenues	Ps.	34,752,672		Ps.	27,305,150	Ps.	24,788,186

*United States of America represents approximately 29%, 31% and 29% of total revenues from external customers in 2019, 2018 and 2017, respectively.

Revenues are allocated by geographic segments based upon the origin of each flight. The Company does not have material non-current assets located in foreign countries.

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25. Subsequent events

Subsequent to December 31, 2019 and through April 27, 2020:

a) On February 21, 2020, the Mexican federal government through the Mexican Communications and Transportation Ministry granted to the Company, through its subsidiary Concesionaria Vuela Compañía de Aviación, S.A.P.I. de C.V. the renewal of the Concession to provide air transportation services for passengers, cargo and mail throughout Mexico and abroad, contained in the Title TAN-OR-VCV, for a period of twenty (20) years starting from May 9, 2020.

b) Subsequent to the closing date of the financial statements as of December 31, 2019, there has been a significant variation in the exchange rate from Ps.18.8452 to Ps.24.6230 per dollar to April 27, 2020 which represent a depreciation of 30.7% of the Mexican Peso.

c) 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, growing into a global pandemic. Since the outbreak began, countries have responded by taking various measures including imposing quarantines and medical screenings, restricting travel, limiting public gatherings and suspending certain activities. The Company decreased capacity as measured by available seat miles (ASMs) for the month of April 2020 by approximately 80% of total operation versus the originally published schedule, due to the negative effects of COVID-19, declared a pandemic by the World Health Organization, and related governmental travel restrictions, which have significantly reduced the demand for global air transportation.

On April 21, 2020, the General Health Council (GHG)  announced that Mexico is in "Phase 3" of the spread of the COVID-19, the most serious stage, as transmission of the virus is intensifying. Mexico has extended governmental restrictions to contain the COVID-19 until May 30, 2020 and plans to begin easing up restrictions from June 1, 2020 onwards if the current measures are successful. As result, Volaris will carry out a capacity reduction for the month of May 2020 of approximately 90% versus the originally scheduled capacity.

d) The Company has taken actions to preserve liquidity and sustain its operations during the period, establishing supplier's payment deferral agreements, reducing management´s and operational staff compensation under temporary and voluntary leaves of absence, deferring and cutting capital expenditures to the minimum and non-essential operational expenses and other certain measures, while the operations are significantly reduced as a result of the COVID-19 pandemic.

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