F-1/A 1 d500205df1a.htm AMENDMENT NO. 4 TO FORM F-1 Amendment No. 4 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on August 30, 2013

No. 333-189121

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Pre-Effective Amendment No. 4 to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

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   4512   None

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Av. Antonio Dovalí Jaime No. 70, 13 Floor, Tower B

Colonia Zedec Santa Fe

United Mexican States, D.F. 01210

+(52) 55-5261-6400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Corporation Service Company

1090 Vermont Avenue NW, Suite 430

Washington, DC 20005

1-800-927-9800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Antonia E. Stolper, Esq.

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

 

Michael L. Fitzgerald, Esq.

Paul Hastings LLP

75 East 55th Street

New York, New York 10022

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered   Proposed maximum
aggregate offering
price(1)(2)
  Amount of
registration fee

Ordinary Participation Certificates (Certificados de Participación Ordinarios) (“CPOs”)(3)

  U.S.$460,000,000   U.S.$62,744

Series A shares of common stock, no par value(4)

   

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes public offering price of CPOs which the underwriters may purchase to cover over-allotments, if any, and CPOs that are to be offered and sold outside the United States but that may be resold in the United States in transactions requiring registration under the Securities Act of 1933, as amended.
(3) American Depositary Shares evidenced by American Depositary Receipts issuable upon deposit of the CPOs registered hereby will be registered under a separate registration statement on Form F-6. Each such American Depositary Share represents ten CPOs and each CPO represents a financial interest in one share of the registrant’s Series A common stock, no par value.
(4) The Series A shares of common stock comprise the CPOs registered hereby and are not being offered hereby.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion, Dated August 30, 2013)

Ordinary Participation Certificates

in the form of American Depositary Shares

 

LOGO

 

 

We are offering 173,076,923 Series A shares of common stock and the selling shareholders are offering 115,384,615 Series A shares of common stock of Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (Volaris Aviation Holding Company), for a total of 288,461,538 Series A shares of common stock, in a global offering consisting of (i) an offering of Series A shares in Mexico and (ii) a concurrent international offering of Ordinary Participation Certificates (Certificados de Participación Ordinarios), or CPOs, in the form of American Depositary Shares, or ADSs, in the United States and other countries outside of Mexico. The ADSs will be evidenced by American Depositary Receipts, or ADRs. The CPOs will be issued by Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, or the CPO trustee. Each ADS represents ten CPOs and each CPO represents a financial interest in one Series A share. The CPOs will grant no voting rights and consequently the ADSs will grant no voting rights.

We are offering 129,757,198 CPOs and the selling shareholders are offering 86,588,956 CPOs, both in the form of ADSs, in the United States and other countries outside of the United Mexican States, or Mexico, through the international underwriters named in this prospectus. In addition, we are offering 43,319,725 Series A shares and the selling shareholders are offering 28,795,659 Series A shares in Mexico in a concurrent public offering, approved by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores), or CNBV, conducted by the lead Mexican underwriters named elsewhere in this prospectus. No Series A shares are being offered in the form of CPOs and the CPOs will not be listed on any stock exchange. The closings of the international and Mexican offerings are conditioned upon each other.

This is our initial public offering and no public market currently exists for the Series A shares, CPOs or ADSs. We anticipate that the initial public offering price will be between U.S.$12.00 and U.S.$14.00 per ADS and between U.S.$1.20 and U.S.$1.40 per CPO. We have applied to list the ADSs on the New York Stock Exchange under the symbol “VLRS” and the Series A shares on the Bolsa Mexicana de Valores, S.A.B. de C.V., or the Mexican Stock Exchange, under the symbol “VOLAR.”

Application has been made for the registration of the Series A shares underlying the CPOs in the Mexican National Securities Registry (Registro Nacional de Valores), or RNV, maintained by the CNBV. Such registration is expected to be obtained on or before the closing of this offer. Registration of the Series A shares will not be a certification as to the investment quality of the securities, the solvency of the issuer or the accuracy or completeness of the information contained in this prospectus. The CPOs are not required to be and will not be registered in the RNV.

Investing in the CPOs, in the form of ADSs, and Series A shares involves risks. See “Risk Factors” beginning on page 16.

 

 

 

     Price to public      Underwriting
discounts and
commissions
     Net proceeds to us      Net proceeds to
selling
shareholders
 

Per ADS

   U.S.$         U.S.$         U.S.$         U.S.$     

Per CPO

           

Per Series A share(1)

   U.S.$         U.S.$         U.S.$         U.S.$     

Total

   U.S.$         U.S.$         U.S.$         U.S.$     

 

(1) The price to public per Series A share in the Mexican prospectus is Ps.             . This peso amount was converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.             per U.S.$1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on             , 2013.

We have agreed to reimburse the international underwriters for certain expenses in connection with the offering. See “Underwriters.”

The selling shareholders have granted to the international underwriters and the Mexican underwriters independent options, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 43,269,230 additional CPOs in the form of ADSs and additional Series A shares at the public offering prices listed above, less underwriting discounts and commissions. The international underwriters and the Mexican underwriters may exercise these options solely for the purpose of covering over-allotments, if any, made in connection with the offering of the ADSs and Series A shares offered under this prospectus and the Mexican prospectus, respectively, on an independent but coordinated basis.

Neither the Securities and Exchange Commission, or the SEC, the CNBV nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

We expect that delivery of the CPOs, in the form of ADSs, to purchasers will be made on or about                     , 2013.

 

 

 

Deutsche Bank Securities    Morgan Stanley    UBS Investment Bank
Barclays   Cowen and Company   Evercore   Santander

The date of this prospectus is                     , 2013.


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

GLOSSARY OF AIRLINES AND AIRLINE TERMS

     iii   

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     vi   

PROSPECTUS SUMMARY

     1   

THE OFFERING

     7   

SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

     11   

RISK FACTORS

     16   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     43   

USE OF PROCEEDS

     45   

EXCHANGE RATES

     46   

CAPITALIZATION

     47   

DILUTION

     48   

SELECTED CONSOLIDATED FINANCIAL INFORMATION

     49   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     54   

REGULATION

     83   

INDUSTRY

     89   

BUSINESS

     94   

MANAGEMENT

     110   

PRINCIPAL AND SELLING SHAREHOLDERS

     122   

RELATED PARTY TRANSACTIONS

     125   

DESCRIPTION OF CAPITAL STOCK

     127   

DESCRIPTION OF CPOS

     138   

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     143   

MARKET INFORMATION

     149   

DIVIDEND POLICY

     158   

TAXATION

     159   

UNDERWRITERS

     167   

EXPENSES OF THE GLOBAL OFFERING

     173   

VALIDITY OF SECURITIES

     174   

EXPERTS

     175   

WHERE YOU CAN FIND MORE INFORMATION

     175   

ENFORCEABILITY OF CIVIL LIABILITIES

     176   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus. Neither we, the selling shareholders nor the international underwriters have authorized any other person to provide you with different or additional information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Neither we, the selling shareholders nor the international underwriters are making an offer to sell the ADSs in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, results of operations, financial condition and prospects may have changed since that date.

We and the selling shareholders are offering ADSs in the United States and countries other than Mexico solely on the basis of the information contained in this prospectus. No offer or sale of the ADSs may be made in Mexico.

 

i


Table of Contents

We and the selling shareholders are also offering Series A shares in Mexico through a Spanish-language Mexican prospectus. The Mexican prospectus, which will be filed with, and approved by, the CNBV, is in a format different from that of this prospectus and contains information substantially similar to the information contained in this prospectus.

The ADSs are being offered in the United States and other countries outside of the United Mexican States, or Mexico. Persons outside the United States who have come into possession of this prospectus must inform themselves about and observe restrictions relating to the offering of the ADSs and the distribution of this prospectus outside of the United States.

 

 

In this prospectus, 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. and “Servicios Administrativos” to refer to Servicios Administrativos Volaris, S.A. de C.V. Volaris Opco, Comercializadora, Servicios Corporativos and Servicios Administrativos are wholly-owned subsidiaries of Volaris. The terms “we,” “our” and “us” in this prospectus 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.

 

 

 

 

ii


Table of Contents

GLOSSARY OF AIRLINES AND AIRLINE TERMS

Set forth below is a glossary of industry terms used in this prospectus:

“Aerocalifornia” means Aerocalifornia, S.A. de C.V.

“Aeroméxico” means Aerovías de México, S.A. de C.V.

“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 AMR Corporation.

“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 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-TACA” means Avianca-TACA Ltd.

“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.

 

iii


Table of Contents

“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.

“DGAC” means the Mexican Civil Aeronautic Authority (Dirección General de Aeronáutica Civil).

“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.

“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-TACA, 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.

 

iv


Table of Contents

“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-TACA, Copa, Gol, Grupo Aeroméxico and LATAM.

“Passenger flight segments” means the total number of passengers flown on all flight segments.

“RASM” means passenger revenue divided by ASMs.

“Revenue passenger miles” or “RPMs” means the number of miles flown by passengers.

“Ryanair” means Ryanair Holdings plc.

“SCT” means the Mexican Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes).

“Southwest Airlines” means Southwest Airlines Co.

“Spirit” means Spirit Airlines, Inc.

“Tiger” means Tiger Airways Holdings Limited.

“Total operating revenue per ASM,” or “TRASM” means total revenue divided by ASMs.

“TSA” means the United States Transportation Security Administration.

“Trip” means TRIP Linhas Aéreas S.A.

“ULCC” or “ultra-low-cost carrier” means an airline that belongs to a subset of low-cost carriers, which distinguishes itself by using a business model with an intense focus on low-cost, efficient asset utilization, unbundled revenue sources aside from the base fares with multiple products and services offered for additional fees. In the United States, Spirit 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.

 

v


Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

This prospectus includes our audited consolidated financial statements at December 31, 2011 and 2012 and for each of the three years in the period ended December 31, 2012, and our unaudited interim condensed consolidated financial statements as of June 30, 2013 and for the six months ended June 30, 2012 and 2013, which have been prepared in accordance with International Financial Reporting Standards, or IFRS, including International Accounting Standard 34, or IAS 34, as issued by the International Accounting Standards Board, or IASB.

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.13.0235 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 June 30, 2013. 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. For more information on exchange rates, see “Exchange Rates.” Amounts presented in this prospectus may not add up due to rounding.

Industry and Market Data

We obtained the industry and market data used in this prospectus 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 Civil Aeronautic Authority (Dirección General de Aeronáutica Civil), or the DGAC, 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.

Other Information

Unless otherwise indicated, all information contained in this prospectus, including all references to the number of CPOs or ADSs outstanding or to the economic or voting interests of holders of CPOs or ADSs following the international and the Mexican offerings, as well as any information involving the computation of per CPO or ADS amounts or proceeds to us from the international and the Mexican offerings, assume no exercise of the over-allotment option granted to the international underwriters in respect of the international offering and the Mexican underwriters in respect of the Mexican offering.

 

vi


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information about us and this offering. It does not contain all of the information that may be important to you. Before investing in the ADSs, you should read the entire prospectus carefully for a more complete understanding of our business and this offering, including our financial statements and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

We are an ultra-low-cost carrier, or ULCC, based in Mexico. 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. We target passengers who are visiting friends and relatives, or VFR, cost-conscious business people and leisure travelers in Mexico and to select destinations in the United States. 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 had net income of Ps.203.3 million (U.S.$15.6 million) in 2012 and Ps.108.8 million (U.S.$8.4 million) for the six months ended June 30, 2013. In addition, our revenues were Ps.11,686.4 million (U.S.$897.3 million) in 2012 and Ps.6,097.1 million (U.S.$468.2 million) for the six months ended June 30, 2013.

Since we began operations in 2006, we have increased our routes from five to 80 and grown our cost-efficient Airbus A320 family aircraft from four to 43. We currently operate up to 235 daily flight segments on routes that connect 30 cities in Mexico and ten cities in the United States. 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 ten cities that we serve in the United States are home to some of the most populous Mexican communities based on data from the Pew Hispanic Research Center.

We are the lowest cost carrier based on cost per available seat mile, or CASM, among publicly traded airlines in Latin America, which include Avianca-TACA, Copa, Gol, Grupo Aeroméxico and LATAM, or collectively the other Latin American publicly traded airlines. In 2012, our CASM was Ps.1.223 (U.S.$0.094), compared to an average CASM of U.S.$0.140 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 and United, which had an average CASM of U.S.$0.145 in 2012. 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 (a new large wingtip device, designed to improve fuel consumption, lower carbon emissions and expand the carrying capacity of the A320 family aircraft) 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 2012, our average base fare was Ps.1,374 (U.S.$106) and we regularly offer promotional base fares of Ps.499 (U.S.$38) or less. 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

 

 

1


Table of Contents

additional passenger demand, shift bus passengers to air travel and increase our load factor. In 2012, our average load factor was 82.9%, compared to an average load factor of 76.0% for the other Latin American publicly traded airlines and 83.6% 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 83.6% on-time performance rate in 2012. 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.

Our Markets and Growth Opportunities

Our principal target markets in Mexico and the United States are large and we believe present us with significant growth opportunities for VFR, cost-conscious business people and leisure travelers. Mexico has a population of approximately 112 million, with an estimated annual population growth rate of approximately 1.4%, according to the INEGI. In addition, Mexico is the fifth largest emerging economy worldwide and the second largest in Latin America, with an estimated gross domestic product, or GDP, of U.S.$1.30 trillion in 2012 and GDP growth of 3.9% in 2012, according to the INEGI. Mexico is projected to have GDP growth of 2.7% in 2013 and 4.0% in 2014, according to the Mexican Central Bank. This projected GDP growth is expected to result in an increase in the number of middle-income homes in Mexico. We believe these trends are likely to lead to significant long-term growth in passenger volumes due to the strong historical correlation between economic growth and increased airline traffic.

In 2012, Mexico had 28.1 million domestic air travelers as compared to 24.4 million in 2009, which represents a three-year compound annual growth rate, or CAGR, of 4.8%. In the international market, Mexico had 28.5 million travelers in 2012 as compared to 24.2 million in 2009, which represents a three-year CAGR of 5.6%. Of those international passengers, approximately 19.4 million or 68% travelled to the United States. However, we believe that the Mexican air transportation industry still remains under-developed. Domestic and international air trips per capita in 2011, adjusted for income, were 0.46 in Mexico, compared to 1.71 in the United States, 1.78 in Panama and 0.58 in Colombia, according to the DGAC in Mexico, the Bureau of Transportation Statistics in the United States, the Civil Aviation Authority (Autoridad Aeronáutica Civil) in Panama and the Civil Aviation Authority (Aeronáutica Civil) in Colombia, respectively. We believe that substantial investments made in airport infrastructure in Mexico over the last ten years will help to sustain this expected growth.

As a key growth market, we target executive and luxury bus passengers who travel more than five hours. We have been able to successfully stimulate demand for our services among long-distance bus passengers by offering fares that are low enough to make it economical for these passengers to switch from bus to air travel. There is a large bus industry in Mexico, with total passenger segments of approximately 2.8 billion in 2012, of which approximately 74.4 million were executive and luxury passenger segments, according to the Mexican Authority of Ground Transportation (Dirección General de Autotransporte Federal), including both long- and short-distance travel. We believe a small shift of bus passengers to air travel would dramatically increase the number of airline passengers and bring Mexico’s air trips per capita figures closer to those of other countries in the Americas. There are limited passenger rail services in Mexico.

In the face of substantial competition, we have been able to expand our business. Since we introduced our ULCC business model in 2006, eight airlines have gone out of business in Mexico, including Grupo Mexicana, which ceased operations in 2010. We believe that we will continue to compete successfully as a result of our ULCC business model, revenue unbundling strategy, and high quality customer focus that stimulate demand.

 

 

2


Table of Contents

Our Strengths

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 2012 we had the lowest cost structure of any of the other Latin American publicly traded airlines, with CASM of Ps.1.223 (U.S.$0.094), compared to Avianca-TACA at U.S.$0.179, Copa at U.S.$0.111, Gol at U.S.$0.136, Grupo Aeroméxico at U.S.$0.157 and LATAM at U.S.$0.117. We also have lower costs than our U.S.-based publicly traded target market competitors, including Alaska Air at U.S.$0.131, American at U.S.$0.149, Delta at U.S.$0.150 and United at U.S.$0.149 in 2012. We achieve our low operating costs in large part due to:

 

   

Efficient and Uniform Fleet. We operate a uniform and efficient fleet of Airbus A320 family aircraft, which is the youngest fleet in Mexico, with an average aircraft age of 4.0 years as of June 30, 2013.

 

   

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 12.4 block hours per day in 2012.

 

   

Direct Sales Distribution. We encourage our customers to purchase tickets via our website, call center or airport service desks as these distribution channels are the lowest cost to us. We sell 87% of our tickets through these channels. We do not use global distribution systems, 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.$7 in 2009 to U.S.$15 in 2012 by, among other things:

 

   

charging for excess baggage (over the 25 kilograms of free luggage required by Mexican regulations);

 

   

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

 

 

3


Table of Contents

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.499 (U.S.$38). 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 15,000 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 July 31, 2013, we had more than 50% passenger market share in 51 of our 80 routes, a 75% share in the Tijuana Airport and a 53% share in the North Pacific corridor, which consists of 12 airports in northwestern Mexico, according to DGAC. As of June 30, 2013, we faced no competition from any other carrier on 24% of our domestic seat capacity. We entered the U.S. market in July 2009 and by 2012 derived 24% of our passenger revenues from our U.S. routes and attributed 26% of our ASMs to U.S. routes.

Market Leading Efficiency and Performance. We believe we are one of the most efficient airline carriers in Latin America. In 2012, we achieved an average passenger load factor of 82.9% and an average aircraft utilization rate of 12.4 block hours per day with a standard turnaround time between flights of approximately 35 minutes. For our fleet type, our average aircraft utilization rate of 12.4 block hours per day was among the highest worldwide and was 46% higher than the industry average of 8.5 block hours per day for all Airbus A319 aircraft and 36% higher than the 9.1 block hours per day for all Airbus A320 aircraft, according to information for the year ended December 31, 2012 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 an 83.6% on-time performance rate, 99.7% flight completion rate and a mishandled baggage rate of only 1.92 bags per 1,000 passengers in 2012.

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. According to a 2011 study made with data obtained from Facebook and published in the magazine Merca 2.0®, we have one of the fastest growing fan bases and number of followers on social media sites in Mexico. As of July 31, 2013, we had approximately 626,615 total followers on Facebook and 380,393 total followers on Twitter, both of which we primarily use for marketing and promotion. In addition, according to a study of the most socially devoted brands and industries on Facebook by Socialbakers, we ranked first among airlines for customer care in social media in 2012. 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. Proceeds from the global offering will also further strengthen our balance sheet. 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.

 

 

4


Table of Contents

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. From 2009 through 2013, we were named a “Great Place to Work” by the Great Place to Work Institute de México, S.A. de C.V., or the Great Place to Work Institute in Mexico. Our management team, the majority of which has been with us since our inception, 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 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 and the United States.

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 plan to start selling in-flight products and 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 52,029 members as of June 30, 2013. 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 aggressively expand the cargo transportation services we provide on our aircraft. As we broaden our ancillary products and services and increase our non-ticket revenue, we believe that we will be able to further lower base fares and continue to stimulate demand.

Gain Additional Market Share by Stimulating Demand in our Existing Markets. We plan to continue to grow our existing markets by adding routes that connect cities in which we currently have operations and by adding capacity on existing routes where we believe we can continue to stimulate demand. We also intend to continue to aggressively target long-distance bus passengers who we believe may shift to airplane 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. We have firm commitments for 49 Airbus A320 aircraft equipped with sharklet technology that will be delivered over the next eight years, including 30 of the next generation Airbus A320 new engine option, or NEO. We have obtained committed financing for the pre-delivery payments for the deliveries through the second quarter of 2016. We also plan to grow our fleet to all Airbus A320 aircraft

 

 

5


Table of Contents

in 2020, each configured with 174 passenger seats, resulting in a 21% increase in the number of seats per aircraft as compared to the smaller A319 with 144 passenger seats. Consistent with our ULCC model, our new Airbus A320 aircraft offers 16% more passenger seats than Interjet, one of our competitors that offers 150 passenger seats per Airbus A320 aircraft. Our contracts provide that new aircraft will be equipped with fuel-saving sharklet technology and eventually NEOs, and will replace certain aircraft that are going off-lease. We believe that a disciplined ramp-up in young and efficient aircraft as our market share expands reduces the risk of over extension and our exposure to market conditions. We intend to maintain our commitment to a single 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 February 2013, we added two new routes from Mexico City to Mérida and Tuxtla Gutiérrez in response to strong market demographics and opportunities for market stimulation. 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 180 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 150 routes internationally that have stage lengths of at least 200 miles.

Corporate and Other Information

We are a sociedad anónima bursátil de capital variable, or a variable capital public stock corporation, organized under the laws of Mexico. Our headquarters are located at Av. Antonio Dovalí Jaime No. 70, 13th Floor, Tower B, Colonia Zedec Santa Fe, México, D.F. 01210 and our general phone number is +(52) 55-5261-6400. Our website address (the contents of which are not part of, and are not incorporated into, this prospectus) is www.volaris.com.

Although we currently meet the emerging growth company definition under the Jumpstart Our Business Startups Act, or the JOBS Act, we have decided not to avail ourselves of any benefits resulting therefrom. Under the JOBS Act, we will no longer be an emerging growth company (i) when our total annual gross revenues are U.S.$1 billion or more during our most recently completed fiscal year; (ii) after the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) after a three-year period when we issue more than U.S.$1 billion in non-convertible debt; and (iv) when we qualify as a large accelerated filer or any successor thereto.

 

 

6


Table of Contents

THE OFFERING

 

Issuer

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

 

Selling shareholders

Discovery Air Investments, L.P., HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, División Fiduciaria, Fideicomiso Irrevocable de Emisión de Certificados Bursátiles F/262374, Blue Sky Investments, S.à r.l., Emilio Diez Barroso Azcárraga, Ignacio Guerra Pellegaud, María Eugenia Braña Escalera, Indigo Mexico Coöperatief U.A., Long Bar LatAm LLC, Banco Invex, S.A., Institución de Banca Múltiple, Invex Grupo Financiero, Fiduciario, Fideicomiso de Administración y Custodia denominado como “DAIIMX/VOLARIS” e identificado bajo el número F/1405 and HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, División Fiduciaria, Fideicomiso Irrevocable de Administración número F/307750.

 

Global offering

The global offering consists of the international offering and the concurrent Mexican offering. The closing of the international and Mexican offerings are conditioned upon each other.

 

International offering

We are offering 129,757,198 CPOs in the form of ADSs, and the selling shareholders are offering 86,588,956 CPOs in the form of ADSs through the international underwriters in the United States and countries other than Mexico.

 

Mexican offering

Concurrently with the international offering, we are offering 43,319,725 Series A shares and the selling shareholders are offering 28,795,659 Series A shares in Mexico in a public offering approved by the CNBV conducted by the lead Mexican underwriters through a Spanish-language Mexican prospectus.

 

Offering price range

U.S.$12.00 and U.S.$14.00 per ADS, and U.S.$1.20 and U.S.$1.40 per CPO.

 

Share capital after global offering

Immediately after the global offering, we will have an aggregate of 877,856,219 Series A shares (some of which underlie CPOs and ADSs) and an aggregate of 134,020,471 Series B shares, totaling an aggregate of 1,011,876,690 shares outstanding. The Series B shares will be convertible into Series A shares at any time or upon their transfer to any person other than to our principal shareholders (or their affiliates) that originally held Series B shares or their affiliates. The Series A shares will represent 87% and the Series B shares will represent 13% of our outstanding capital stock (excluding Series A shares underlying CPOs) immediately after the global offering. CPOs may represent up to 90% of our outstanding capital stock and may only have Series A shares as underlying securities.

 

Over-allotment options

The selling shareholders have granted to each of the international underwriters and the Mexican underwriters independent options, exercisable for 30 days from the date of this prospectus, to purchase

 

 

7


Table of Contents
 

up to an aggregate of 43,269,230 additional CPOs in the form of ADSs and additional Series A shares at the public offering prices listed on the cover page of this prospectus, less underwriting discounts and commissions. The international underwriters and the Mexican underwriters may exercise these options solely for the purpose of covering over-allotments, if any, made in connection with the offering of the ADSs and Series A shares offered by this prospectus and the Mexican prospectus, respectively, on an independent but coordinated basis.

 

CPOs

Each CPO represents a financial interest in one Series A share. The CPO trustee, Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, or NAFIN, will issue the CPOs as trustee under the CPO trust agreement and pursuant to a CPO trust deed.

 

ADSs

Each ADS represents ten CPOs. The ADSs initially will be evidenced by one or more ADRs. The ADSs will be issued under a deposit agreement among us, The Bank of New York Mellon, as depositary, and the registered holders and beneficial owners from time to time of ADSs issued thereunder.

 

Use of proceeds

The net proceeds to us from the sale of the Series A shares and ADSs in the global offering are expected to be approximately U.S.$211.8 million after deducting estimated discounts and commissions and expenses payable by us and assuming an initial public offering of U.S.$13.00 per ADS, the midpoint of the range set forth on the cover of this prospectus. We currently intend to use the net proceeds from the global offering for the repayment of indebtedness and for general corporate purposes, including pre-delivery payments of aircraft. We will not receive any proceeds from the sale of Series A shares or ADSs by the selling shareholders. See “Use of Proceeds.”

 

Listing and registry

We have applied to list the ADSs on the New York Stock Exchange under the symbol “VLRS.” We have applied to list the Series A shares on the Mexican Stock Exchange under the symbol “VOLAR.” We have applied to register the Series A shares in the RNV maintained by the CNBV. Our Series B Shares will not be listed or registered, and the CPOs will only be registered with the SEC and will not be listed.

 

Voting rights of our shares

Holders of ADSs or 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. The CPO trustee will vote the CPOs in accordance with the vote of the majority of the outstanding Series A shares voted by Mexicans at the relevant shareholders’ meeting.

 

 

Holders of Series B shares will be entitled to vote their shares on all matters and, for so long as such Series B shares represent 12% or more of our outstanding capital stock, their affirmative vote will be

 

 

8


Table of Contents
 

required to approve any matters related to (i) by-law amendments affecting Series B shares, (ii) delisting of Series A shares from any stock exchange, (iii) mergers or spinoffs affecting us, (iv) incurring indebtedness or granting guarantees if the Lease-Adjusted Net Debt to EBIDTAR ratio exceeds 4.25 times in 2013 and 3.25 times thereafter (Lease-Adjusted Net Debt is the sum of short-term and long-term debt, 7.0 times the aircraft rentals for the last four quarters, less cash and cash equivalents at the end of the last quarter for which financial statements have been prepared), and (v) material change of accounting policies. See “Description of Capital Stock—Shareholders’ Meetings.”

 

  Holders of Series B shares have the right to elect three directors, so long as such Series B shares represent 12% or more of our outstanding capital stock.

 

  Holders of Series A shares have the right to elect one director for each 10% block of our outstanding capital stock.

 

Ownership limitations

As required by Mexican law, our by-laws provide that no transfer of shares of our capital stock to or acquisition or subscription of shares of our capital stock by an investor deemed to be non-Mexican will be permitted if such transfer, acquisition or subscription would result in non-Mexicans holding directly (not considering non-Mexicans holding ADSs or CPOs having underlying Series A shares) in excess of 49% of the total number of shares of our capital stock then outstanding not held by the CPO trustee (i.e., both Series A and Series B shares). Series B shares do not exceed such limit and are held by our non-Mexican principal shareholders. Immediately following the global offering, our outstanding capital stock will consist exclusively of common stock comprised of Series A shares and Series B shares. Series B shares are convertible, at any time, into Series A shares. Non-Mexicans will not be entitled to directly hold Series A shares. Mexican holders of ADSs will be entitled to withdraw the underlying CPOs and exchange such CPOs for Series A shares. See “Description of Capital Stock—Ownership Restrictions,” “Description of Capital Stock—Other Provisions—Foreign Investment Regulations” and “Description of CPOs.”

 

Change of Control

Provisions of Mexican law and our by-laws may make it difficult and costly for a third-party to pursue a tender offer or takeover attempt resulting in a change of control. Our by-laws contain provisions which, among other things, require approval of our board of directors 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 our board of directors, based upon the advice of a financial advisor. These provisions could

 

 

9


Table of Contents
 

substantially impede the ability of a third party to control us, and could be detrimental to shareholders willing to benefit from any change of control premium paid on the sale of the company in connection with a tender offer. See “Description of Capital Stock—Change of Control Provisions,” “Description of Capital Stock—Ownership Restrictions,” “Description of Capital Stock—Voting Rights” and “Description of Capital Stock—Other Provisions—Foreign Investment Regulations.”

 

Dividends

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. In addition, our revolving line of credit with Banco Santander (México) S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, or Banco Santander México, and Banco Nacional de Comercio Exterior, S.N.C., or Bancomext, may limit our ability to declare and pay dividends in the event that we fail to comply with the payment terms thereunder. See “Dividend Policy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loan Agreements.”

 

Taxation

Under current Mexican law, dividends paid to holders of ADSs who are not residents of Mexico for tax purposes, and the sale of ADSs by holders who are not residents of Mexico for tax purposes are generally not subject to any Mexican withholding or other similar tax if the sale is conducted on a recognized stock exchange. See “Taxation.”

 

Lock-up agreement

We, the selling shareholders, our executive officers and certain of our directors and other shareholders, who beneficially own substantially all of the shares of our common stock, have agreed that, subject to certain limited exceptions, we and they will not offer, pledge, sell, lend or otherwise transfer until 180 days after the date of this prospectus any ADSs, CPOs, Series A shares or Series B shares or any options or warrants to purchase the ADSs, CPOs, Series A shares or Series B shares, or any securities convertible into, or exchangeable for, or that represent the right to receive, ADSs, CPOs, Series A shares or Series B shares. In addition, in the event that either (i) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (ii) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC and UBS Securities LLC waive in writing such an extension. See “Underwriting.”

 

Risk factors

See “Risk Factors” beginning on page 16 and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in the ADSs.

 

 

10


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

The following tables summarize the financial and operating data for our business for the periods presented. You should read this summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus. We prepare our consolidated financial statements in accordance with IFRS and IAS 34.

We derived the summary consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the summary consolidated statements of financial position data as of December 31, 2011 and 2012 from our audited financial statements included in this prospectus. We derived the summary consolidated statements of financial position data as of December 31, 2010 from our historical consolidated financial statements not included herein. We derived the summary consolidated statements of operations data for the six months ended June 30, 2012 and 2013 and the summary consolidated statements of financial position data as of June 30, 2013 from our unaudited interim condensed consolidated financial statements included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

    For the Years ended December 31,     Six Months Ended June 30,  
    2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
   

(in thousands of pesos, except share and

per share data and operating data)

    (in thousands of
U.S. dollars)(1)
    (unaudited in thousands of
pesos, except share and per
share data and operating data)
    (unaudited in
thousands of  U.S.
dollars)(1)
 

CONSOLIDATED STATEMENTS OF OPERATIONS

             

Operating revenues:

             

Passenger

    6,278,469        8,036,275        10,176,747        781,414        4,470,871        5,166,279        396,689   

Non-ticket

    498,921        842,341        1,509,668        115,919        646,099        930,772        71,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,777,390        8,878,616        11,686,415        897,333        5,116,970        6,097,051        468,158   

Other operating income

    (158     (73,831     (68,800     (5,283     (42,572     (25,917     (1,990

Fuel

    2,146,011        3,823,232        4,730,089        363,196        2,213,848        2,316,419        177,865   

Aircraft and engine rent expense

    1,197,022        1,508,135        1,885,696        144,792        908,707        1,030,781        79,148   

Salaries and benefits

    852,123        1,120,359        1,302,971        100,048        608,884        746,688        57,334   

Landing, take-off and navigation expenses

    867,690        1,281,583        1,639,945        125,922        749,675        918,921        70,559   

Sales, marketing and distribution expenses(2)

    615,431        750,474        751,919        57,735        349,228        345,879        26,558   

Maintenance expenses(3)

    276,128        379,626        498,836        38,303        213,393        291,862        22,410   

Other operating expenses

    255,413        359,046        356,517        27,375        155,243        196,715        15,105   

Depreciation and amortization(4)

    56,572        102,977        211,002        16,202        87,106        135,351        10,393   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,266,232        9,251,601        11,308,175        868,290        5,243,512        5,956,699        457,382   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    511,158        (372,985     378,240        29,043        (126,542     140,352        10,776   

Finance income

    5,091        5,539        13,611        1,045        5,245        12,770        981   

Finance cost

    (52,221     (57,718     (89,731     (6,890     (43,279     (36,407     (2,795

Exchange (loss) gain, net

    (56,144     110,150        (95,322     (7,319     5,780        19,246        1,478   

Other financing cost

    (3,455     —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (106,729     57,971        (171,442     (13,164     (32,254     (4,391     (336

Income (loss) before income tax

    404,429        (315,014     206,798        15,879        (158,796     135,961        10,440   

Income tax benefit (expense)

    238,684        (476     (3,481     (266     2,668        (27,138     (2,084
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

             

Equity holders of the parent

    572,234        (293,540     215,239        16,527        (125,961     112,209        8,616   

Non-controlling interest

    70,879        (21,950     (11,922     (914     (30,167     (3,386     (260
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

11


Table of Contents
    For the Years ended December 31,     Six Months Ended June 30,  
    2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
   

(in thousands of pesos, except share and

per share data and operating data)

    (in thousands of
U.S. dollars)(1)
    (unaudited in thousands of
pesos, except share and per
share data and operating data)
    (unaudited in
thousands of  U.S.
dollars)(1)
 

Weighted average shares outstanding

             

Basic and diluted(5)

    727,595,544        727,595,544        732,441,216        —          727,595,544        803,382,392        —     

Earnings (loss) per share

             

Basic and diluted(5)

    0.000786        (0.000403     0.000294        0.000023        (0.000173     0.000140        0.000011   

Pro forma weighted average shares outstanding

             

Basic(6)

    —          —          905,518,139        —          —          976,459,315        —     

Diluted(7)

    —          —          947,401,526        —          —          1,011,876,690        —     

Pro forma earnings per share

             

Basic(6)

    —          —          0.000293        0.000023        —          0.000142        0.000011   

Diluted(7)

    —          —          0.000281        0.000022        —          0.000137        0.000011   

Pro forma earnings per ADS

    —          —              —         

Basic(8)

    —         —         0.002935        0.000225        —         0.001423        0.000109   

Diluted(9)

    —          —          0.002805        0.000215        —          0.001373        0.000105   

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

             

Cash and cash equivalents

    676,913        441,068        822,076        63,123        618,223        1,125,503        86,421   

Accounts receivable, net

    202,525        238,939        387,316        29,740        264,906        571,513        43,883   

Guarantee deposits—current portion

    330,071        169,647        238,242        18,293        226,327        413,757        31,770   

Total current assets

    1,396,808        1,130,547        1,815,018        139,365        1,475,939        2,538,293        194,901   

Total assets

    3,700,631        5,061,681        5,701,558        437,790        5,719,339        6,248,965        479,822   

Total short-term liabilities

    1,927,096        3,178,922        3,721,897        285,783        3,800,727        4,341,485        333,356   

Long-term liabilities

    547,528        1,023,020        904,994        69,489        1,210,874        710,640        54,567   

Total liabilities

    2,474,624        4,201,942        4,626,891        355,272        5,011,601        5,052,125        387,923   

Capital stock

    1,966,313        1,966,313        2,376,098        182,447        1,966,313        2,464,945        189,269   

Total equity

    1,226,007        859,739        1,074,667        82,518        707,738        1,196,840        91,899   

CASH FLOW DATA

             

Net cash flows provided by (used in) operating activities

    539,001        (147,705     497,448        38,196        319,311        626,339        48,093   

Net cash flows (used in) provided by investing activities

    (321,347     (628,030     187,161        14,371        (151,577     138,494        10,634   

Net cash flows (used in) provided by financing activities

    (90,065     562,373        (271,898     (20,877     13,071        (450,483     (34,590

OTHER FINANCIAL DATA

             

EBITDA(10)

    513,250        (159,858     493,920        37,926        (33,656     294,949        22,647   

Adjusted EBITDA(10)

    572,849        (270,008     589,242        45,245        (39,436     275,703        21,169   

Adjusted EBITDAR(10)

    1,769,871        1,238,127        2,474,938        190,037        869,271        1,306,484        100,317   

OPERATING DATA(11)

             

Aircraft at end of period

    26        34        41        —          36        43        —     

Average daily aircraft utilization (block hours)

    12.99        13.38        12.40        —          11.99        11.97        —     

Average daily aircraft utilization (flight hours)

    11.33        11.38        10.42        —          10.15        10.00        —     

Airports served at end of period

    29        31        37        —          32        38        —     

Departures

    38,740        51,255        58,806        —          26,940        31,823        —     

Average stage length (miles)

    1,038        1,042        1,023        —          1,031        1,003        —     

Passenger flight segments (thousands)

    4,200        5,644        7,037        —          3,216        3,860        —     

Booked passengers (thousands)

    4,416        5,934        7,408        —          3,406        4,050        —     

 

 

12


Table of Contents
    For the Years ended December 31,     Six Months Ended June 30,  
    2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
   

(in thousands of pesos, except share and

per share data and operating data)

    (in thousands of
U.S. dollars)(1)
    (unaudited in thousands of
pesos, except share and per
share data and operating data)
    (unaudited in
thousands of  U.S.
dollars)(1)
 

Revenue passenger miles (RPMs) (thousands)

    4,628,014        6,290,707        7,668,202        —          3,547,037        4,100,899        —     

Available seat miles (ASMs) (thousands)

    5,853,823        7,939,365        9,244,425        —          4,240,933        5,014,609        —     

Load factor

    79     79     83     —          84     82     —     

Average ticket revenue per booked passenger

    1,422        1,354        1,374        105.5        1,313        1,275        97.9   

Total operating revenue per ASM (TRASM) (cents)

    115.8        111.8        126.4        9.7        120.7        121.6        9.3   

Passenger revenue per ASM (RASM) (cents)

    107.3        101.2        110.1        8.5        105.4        103.0        7.9   

Operating expenses per ASM (CASM) (cents)

    107.0        116.5        122.3        9.4        123.6        118.8        9.1   

CASM ex fuel (cents)

    70.4        68.4        71.2        5.5        71.4        72.6        5.6   

Fuel gallons consumed (thousands)

    74,075        97,970        112,225        —          51,449        59,400        —     

Average economic fuel cost per gallon

    29.0        39.0        42.1        3.2        43.0        39.0        3.0   

Employees per aircraft at end of period

    71        67        63        —          65        62        —     

 

* We decided to restate our consolidated financial statements as detailed in note 1(u) to our audited consolidated financial statements included elsewhere in this prospectus.
(1) Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.13.0235 per U.S.$1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on June 30, 2013. 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) Business alliance amortization expense for the year ended December 31, 2010 (year in which it was fully amortized) was Ps.5.1 million. These amounts were recognized in sales, marketing and distribution expenses. See note 11 to our audited consolidated financial statements included elsewhere in this prospectus.
(3) Includes routine and ordinary maintenance expenses only. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Our Principal Line Items.”
(4) Includes, among other things, major maintenance expenses, which are capitalized and subsequently amortized. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Our Principal Line Items.”
(5) Unvested shares awarded under the management incentive plan and our swap shares are deemed treasury shares and non-dilutive until December 31, 2012, and accordingly, they have been excluded in the determination of weighted average diluted shares outstanding and disregarded in the calculation of diluted earnings per share. Unvested shares awarded under the management incentive plan are deemed treasury shares and non-dilutive at June 30, 2013, and accordingly, they have been excluded in the determination of weighted average diluted shares outstanding and disregarded in the calculation of diluted earnings per share.
(6) The basis used for the computation of the pro forma information in respect of basic shares for the year ended December 31, 2012 is as follows: (i) Ps.215.2 million of net income attributed to equity holders of the parent in 2012 plus an aggregate of Ps.50.5 million in accrued interest in 2012 under the loans with Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa, or Banco Inbursa, International Finance Corporation, or IFC, and Pasprot, S.A. de C.V., or Pasprot, for an aggregate principal amount of Ps.390.5 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 905,518,139, which is the weighted average of basic shares outstanding in 2012 equal to 732,441,216 plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,333 ADSs to repay such aggregate principal amount of Ps.390.5 million.
     The basis used for the computation of the pro forma information in respect of basic shares for the six months ended June 30, 2013 is as follows: (i) Ps.112.2 million of net income attributed to equity holders of the parent for the six months ended June 30, 2013 plus an aggregate of Ps.26.8 million in accrued and paid interest for the six months ended June 30, 2013 under the loans with Banco Inbursa, IFC and Pasprot for an aggregate principal amount of Ps.390.6 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 976,459,315 which is the pro forma weighted average of basic shares outstanding for the six months ended June 30, 2013 equal to 803,382,392 plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,910 ADSs to repay such aggregate principal amount of Ps.390.6 million.
(7) The basis used for the computation of the pro forma information in respect of diluted shares for the year ended December 31, 2012 additionally gives effect to the shares subject to the management incentive plan and our swap shares and is as follows: (i) Ps.215.2 million of net income attributed to equity holders of the parent in 2012 plus an aggregate of Ps.50.5 million in accrued interest in 2012 under the loans with Banco Inbursa, IFC, and Pasprot, for an aggregate principal amount of Ps.390.5 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 947,401,526, which is the pro forma weighted average of diluted shares outstanding in 2012 equal to 774,324,603 (i.e., the unvested shares awarded under the management incentive plan and our swap shares are deemed treasury shares and have been included in the determination of the pro forma weighted average diluted shares outstanding and in the calculation of pro forma diluted earnings per share) plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,333 ADSs to repay such aggregate principal amount of Ps.390.5 million.

 

 

13


Table of Contents
     The basis used for the computation of the pro forma information in respect of diluted shares for the six months ended June 30, 2013 additionally gives effect to the shares subject to the management incentive plan and is as follows: (i) Ps.112.2 million of net income attributed to equity holders of the parent for the six months ended June 30, 2013 plus an aggregate of Ps.26.8 million in accrued and paid interest for the six months ended June 30, 2013 under the loans with Banco Inbursa, IFC and Pasprot for an aggregate principal amount of Ps.390.6 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 1,011,876,690, which is the weighted average of diluted shares outstanding for the six months ended June 30, 2013 equal to 838,799,767 (i.e., the unvested shares awarded under the management incentive plan are deemed treasury shares and have been included in the determination of the pro forma weighted average diluted shares outstanding and in the calculation of pro forma diluted earnings per share) plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,910 ADSs to repay such aggregate principal amount of Ps.390.6 million.
(8) The basis used for the computation of the pro forma information is to multiply the pro forma earnings per basic share obtained pursuant to footnote (6) 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.
(9) The basis used for the computation of the pro forma information is to multiply the pro forma earnings per diluted share obtained pursuant to footnote (7) 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.
(10) EBITDA, Adjusted EBITDA and Adjusted EBITDAR are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are well recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. However, because derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not determined in accordance with IFRS, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR as presented may not be directly comparable to similarly titled measures presented by other companies.
(11) See “Glossary of Airlines and Airline Terms” elsewhere in this prospectus for definitions of terms used in this table.

 

 

14


Table of Contents

The following table represents the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net (loss) income for the periods indicated below:

 

    For the Years ended December 31,     Six Months Ended June 30,  
    2010     2011
(Restated)(*)
    2012     2012     2012     2013     2013  
    (in thousands of pesos)     (in thousands of
U.S. dollars)(1)
    (unaudited in thousands
of pesos, except per
share and share
amounts)
    (unaudited
in thousands
of U.S.
dollars)(1)
 

Reconciliation:

             

Net income (loss)

    643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   

Plus (minus):

             

Finance cost

    52,221        57,718        89,731        6,890        43,279        36,407        2,795   

Finance income

    (5,091     (5,539     (13,611     (1,045     (5,245     (12,770     (981

(Benefit)/provision for income tax

    (238,684     476        3,481        266        (2,668     27,138        2,084   

Depreciation and amortization

    56,572        102,977        211,002        16,202        87,106        135,351        10,393   

Business alliance amortization

    5,119        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    513,250        (159,858     493,920        37,926        (33,656     294,949        22,647   

Exchange (gain) loss, net

    56,144        (110,150     95,322        7,319        (5,780     (19,246     (1,478

Other financing cost

    3,455        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    572,849        (270,008     589,242        45,245        (39,436     275,703        21,169   

Aircraft and engine rent expense

    1,197,022        1,508,135        1,885,696        144,792        908,707        1,030,781        79,148   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR

    1,769,871        1,238,127        2,474,938        190,037        869,271        1,306,484        100,317   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  * We decided to restate our consolidated financial statements as detailed in note 1(u) to our audited consolidated financial statements included elsewhere in this prospectus.

 

 

15


Table of Contents

RISK FACTORS

An investment in the ADSs involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, results of operations and financial condition could be materially and adversely affected by any of these risks. The trading price of the ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment.

The risks described below are those that we currently believe may adversely affect us or the ADSs. In general, investing in the securities of issuers in emerging market countries, such as Mexico, involves risks that are different from the risks associated with investing in the securities of U.S. companies and companies located in other countries with developed capital markets. Any of these risks could materially and adversely affect our business and results of operations.

To the extent that information relates to, or is obtained from sources related to, the Mexican government or Mexican macroeconomic data, the following information has been extracted from official publications of the Mexican government and has not been independently verified by us.

Risks related to Mexico

Political and social events in Mexico as well as changes in Mexican federal governmental policies may have an adverse effect on our business, results of operations, financial condition and prospects.

Our business, results of operations and financial condition are affected by economic, political or social developments in Mexico, including, among others, any political or social instability in Mexico, changes in the rate of economic growth or contraction, changes in the exchange rate between the peso and the U.S. dollar, an increase in inflation or interest rates, changes in Mexican taxation and any amendments to existing Mexican laws, federal governmental policies and regulations.

Adverse social or political developments in or affecting Mexico could negatively affect us and Mexican financial markets generally, thereby affecting our ability to obtain financing. Presidential and federal congressional elections took place in July 2012. The candidate from the Partido Revolucionario Institucional, or PRI, Enrique Peña Nieto won the presidential election and took office on December 1, 2012. In his economic platform, President Peña Nieto proposed energy and fiscal reforms, among others, in order to foster economic growth. However, since the PRI did not win a majority in Congress, the approval of these reforms would require the approval of representatives of other parties, besides the PRI, and negotiations between the political parties. The absence of a clear majority and the lack of alignment between the legislative branch and the administration could result in deadlock and prevent the timely implementation of such reforms, which in turn could have an adverse effect on the Mexican economic policy and economy. 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. The recent global credit crisis and the economic recession has had significant adverse

 

16


Table of Contents

consequences on the Mexican economy, which contracted by 6.0% in terms of GDP in 2009, according to the INEGI. In 2010, 2011 and 2012, the Mexican economy grew 5.3%, 3.9% and 3.9%, respectively, in terms of 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 4.40% for 2010, 3.82% for 2011 and 3.57% for 2012. 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 and accounts receivable). Because historically our U.S. dollar-denominated monetary assets (including cash, security deposits and non-finance reserves) have exceeded our U.S. dollar-denominated liabilities, the devaluation and appreciation of the peso resulted in exchange gains and losses, 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%, 5.17% and 6.9%, respectively, against the U.S. dollar in nominal terms, and in 2011 the peso depreciated 12.9% against the U.S. dollar in nominal terms. As of June 30, 2013, the peso depreciated 0.10% against the U.S. dollar in nominal terms since December 31, 2012.

In 2012, approximately 69% of our total operating costs and 34% of our collections were U.S. dollar-linked or denominated. The remainder of our expenses were 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, 77% of our outstanding financial debt and 100% of our lease payments as of the date of this prospectus 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.

 

17


Table of Contents

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 sharpened 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). As a result, economic downturns in the United States, the termination of NAFTA or other related events, could have a material adverse effect on the Mexican economy, which, in turn, could affect our financial condition and results of operations. Terrorist acts in the United States and elsewhere could depress economic activity in the United States and globally, including Mexico. 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) and then issue regulations governing the fares that may be charged for air transportation services by airlines operating in Mexico. Such regulations will be maintained only during the existence of the conditions that resulted in their establishment. The imposition of fare regulations by the SCT could materially affect our business, results of operations and financial condition.

Violent crime in Mexico has adversely impacted, and may continue to adversely impact, the Mexican economy and may have a negative effect on our business, results of operations or financial condition.

Mexico has experienced high levels of violent crime over the past few years relating to illegal drug trafficking, particularly in Mexico’s northern states near the U.S. border. This violence has had an adverse impact on the economic activity in Mexico. In addition, violent crime may further affect travel within Mexico and between Mexico and other countries, including the United States, affect the airports or cities in which we operate, including airports or cities in the north of Mexico in which we have significant operations, and increase our insurance and security costs. We cannot assure you that the levels of violent crime in Mexico or their expansion to a larger portion of Mexico, over which we have no control, will not increase or decrease and will have no further adverse effects on the country’s economy and on our business, results of operations or financial condition.

 

18


Table of Contents

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.

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 34%, 41% and 42% of our total operating costs in 2010, 2011 and 2012, respectively. The cost of fuel accounted for 42% and 39% of our total operating costs for the six months ended June 30, 2012 and 2013, 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.

 

19


Table of Contents

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. 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). Although we expect to apply for, and to comply with, all necessary conditions to renew our Concession from time to time and as may be required, we cannot assure you that our Concession will be renewed, or what terms will apply to the renewal, as the SCT has discretion over the final approval and may determine for any reason or without reason, not to extend our Concession. 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 “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;

 

20


Table of Contents
   

higher levels of unemployment and varying levels of disposable or discretionary income;

 

   

health outbreaks and concerns with safety;

 

   

depressed housing and stock market prices; and

 

   

lower levels of actual or perceived consumer confidence.

These factors can adversely affect our results of operations and financial condition, our ability to obtain financing on acceptable terms and our liquidity generally. Current unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market, housing-related pressures and increased focus on reducing business operating costs can reduce spending for leisure, VFR and business travel. For many travelers, in particular the leisure and VFR travelers we serve, air transportation is a discretionary purchase that they can eliminate from their spending in difficult economic times. Unfavorable economic conditions could affect our ability to raise prices to counteract increased fuel, labor or other costs, which could result in a material adverse effect on our business, results of operations and financial condition. In addition, we are currently striving to increase demand for our flights among the portion of the population in Mexico that has traditionally used ground transportation for travel due to price constraints, by offering lower fares that compete with bus fares on similar routes. Unfavorable economic conditions could affect our ability to offer these lower fares and could affect this population segment’s discretionary spending in a more adverse manner than other travelers.

The airline industry is heavily regulated and our financial condition and results of operations could be materially adversely affected if we fail to maintain the required U.S. and Mexican 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 DGAC, and the U.S. Federal Aviation Administration, or FAA, 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 DGAC or FAA 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 DGAC and FAA, 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. and Mexican 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

 

21


Table of Contents

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 both Mexico and the United States may increase our costs significantly in the future.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs. In the last several years, the U.S. Congress has passed laws, and the DOT, FAA and TSA have issued regulations, relating to the operation of airlines that have required significant expenditures. FAA requirements cover, among other things, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. We expect to continue to incur expenses in connection with complying with government regulations. Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. If adopted, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs. For example, the DOT finalized rules, taking effect on April 29, 2010, requiring new procedures for customer handling during long onboard tarmac delays, as well as additional reporting requirements for airlines that could increase the cost of airline operations or reduce revenues.

The DOT released additional rules, most of which became effective beginning in August 2011, that address, among other things, concerns about how airlines handle interactions with passengers through advertising, the reservations process, at the airport and on board the aircraft, including requirements for disclosure of base fares plus a set of regulatory mandated options and limits on cancellations and change fees. Failure to remain in full compliance with these rules, or new rules as enacted from time to time, may subject us to fines or other enforcement action, which could have a material effect on our business, results of operations and financial condition.

In addition, the TSA mandates the federalization of certain airport security procedures in the United States and imposes additional security requirements on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines. The U.S. federal government has on several occasions proposed a significant increase in the per ticket tax. The proposed ticket tax increase, if implemented, could negatively impact our business, results of operations and financial condition.

Our ability to operate as an airline in the United States is dependent on maintaining our certifications issued to us by the DOT and the FAA. The FAA has the authority to issue mandatory orders relating to, among other things, the grounding of aircraft, inspection of aircraft, installation of new safety-related items and removal and replacement of aircraft parts that have failed or may fail in the future. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, our aircraft, for any reason, could negatively affect our business, results of operations and financial condition. U.S. federal law requires that air carriers operating large aircraft be continuously ‘fit, willing and able’ to provide the services for which they are licensed. Our “fitness” is monitored by the DOT, which considers factors such as unfair or deceptive competition, advertising, baggage liability and disabled passenger transportation. While the DOT has seldom revoked a carrier’s certification for lack of fitness, such an occurrence would render it impossible for us to continue operating as an airline in the United States. The DOT may also institute investigations or administrative proceedings against airlines for violations of regulations.

 

22


Table of Contents

Furthermore, we cannot assure you that airline industry regulations enacted in the future in Mexico 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, 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 and the United States control all Mexican and U.S. airspace, respectively, and airlines are completely dependent on the DGAC and FAA 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 and the FAA in the United States, 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, 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 recently seen a sharp contraction, with the exit of seven Mexican airlines since 2007 (Aerocalifornia, Aladia, Alma, Aviacsa, Avolar, Azteca and Nova Air) and the cessation of operations of Grupo Mexicana when it filed for reorganization (concurso mercantil) in August 2010. Prior to ceasing operations, Grupo Mexicana was one of our most significant competitors. We cannot predict the outcome of Grupo Mexicana’s reorganization, its future financial condition or whether we will be awarded any of its routes and/or slots, some of which we currently operate. In late 2010 and 2011, we began operating 15 routes that had been primarily operated by Grupo Mexicana prior to it ceasing operations. If Grupo Mexicana exits reorganization and resumes operations, we may not be able to continue operating these routes, which could lower our profitability. Successful completion of Grupo Mexicana’s reorganization could also lower its operating costs through renegotiation of labor, supply and financing contracts. In addition, air carriers involved in reorganizations have historically engaged in substantial fare discounting in order to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could lower yields for all carriers, including us.

Because the airline industry is characterized by high fixed costs and relatively elastic revenues, airlines cannot quickly reduce their costs to respond to shortfalls in expected revenue.

The airline industry is characterized by low gross profit margins, high fixed costs and revenues that generally exhibit substantially greater elasticity than costs. The operating costs of each flight do not vary significantly with the number of passengers flown and, therefore, a relatively small change in the number of passengers, fare pricing or traffic mix could have a significant effect on operating and financial results. These fixed costs cannot be adjusted quickly to respond to changes in revenues and a shortfall from expected revenue levels could have a material adverse effect on our results of operations and financial condition.

 

23


Table of Contents

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 less 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) and other highly communicable diseases, affect travel behavior and could have a material adverse effect on the airline industry.

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. It is impossible to determine if and when health threats, similar to the H1N1 flu, or perceived health threats, will occur, when the resulting adverse effects will abate and the extent to which they will further decrease demand for air travel, which could materially and negatively affect our business, results of operations and financial condition.

 

24


Table of Contents

Risks related to our business

We may not be able to implement our growth strategy.

Our growth strategy includes increasing the flights to markets we currently serve, expanding the number of markets served where we expect our ultra-low-cost structure to be successful and acquiring additional aircraft. Effectively implementing our growth strategy is critical for our business to achieve economies of scale and to sustain or increase our profitability.

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

 

   

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 and the United States. In the future, we also intend to target markets in 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.

 

25


Table of Contents

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 June 30, 2013, we had hedged approximately 11.5% and 1.2% of our projected fuel requirements for the third and fourth quarters of 2013, respectively. However, we cannot provide any assurance that our fuel hedging program is sufficient to protect us against significant increases in the price of fuel. 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 low-cost, low-fare business model.

We have a significant amount of fixed obligations that could impair our liquidity and thereby harm our business, results of operations and financial condition.

The airline business is capital intensive and, as a result, many airline companies are highly leveraged. All of our aircraft and spare engines are leased, and we paid the lessors rent and maintenance reserves aggregating U.S.$135.6 million and U.S.$54.2 million, respectively, in 2012, and have future operating lease obligations aggregating approximately U.S.$817.6 million over the next 11 years. In addition, we have significant obligations for aircraft and engines that we have ordered from Airbus and IAE International Aero Engines AG, or IAE, respectively, for delivery over the next three 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

 

26


Table of Contents
   

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, which account for 65% of all departing ASMs for the first half of 2013. Routes through Mexico City, Tijuana, Guadalajara and Cancún make up a large portion of the balance of our routes, accounting for 19%, 22%, 17% and 7% of our ASM capacity, respectively. Our slots in Mexico City have currently been granted on a temporary basis and could be withdrawn in the future. Any significant increase in competition, redundancy in demand for air transportation or disruption in service or the fuel supply at these airports, could have a material adverse impact on our business, results of operations and financial condition. In addition, conditions affecting services at these airports or our slots, such as adverse changes in local economic or political conditions, negative public perception of these destinations, unfavorable weather conditions, violent crime or drug related activities, could also have a material adverse impact on our business, results of operations and financial condition.

Our maintenance costs will increase as our fleet ages.

As of December 31, 2012, the average age of our 41 aircraft in service was approximately 4.1 years according to the DGAC. 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 our lease agreements require us to pay supplemental rent, also known as maintenance reserves, to be paid to the lessor in advance of

 

27


Table of Contents

the performance of major maintenance, resulting in our recording significant prepaid 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

 

28


Table of Contents

our insurance coverage will be adequate in the event such circumstances arise and any such event could cause a substantial increase in our insurance premiums. See “—Increases in insurance costs and/or significant reductions in coverage would harm our business, results of operations and financial condition.” In addition, any future aircraft emergency, accident or similar incident, even if fully covered by insurance or even if it does not involve our airline, may create a public perception that our airline or the equipment we fly is less safe or reliable than other transportation alternatives, which could have an adverse impact on our reputation and could have a material adverse effect on our business, results of operations and financial condition.

We are exposed to certain risks against which we do not have insurance.

In line with industry practice, we leave some business risks uninsured including business interruption, loss of profit or revenue and consequential business losses arising from mechanical breakdown. To the extent that uninsured risks materialize, we could be materially and adversely affected. There can also be no assurance that our insurance coverage will cover actual losses incurred. To the extent that actual losses incurred by us exceed the amount insured, we may have to bear substantial losses which could have a material adverse effect on our financial condition and results of operations.

A failure to comply with covenants contained in our aircraft or engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and our financial condition and results of operations.

We have entered into aircraft and engine operating lease agreements and sale and leaseback arrangements with various lessors. These agreements contain certain events of default and also require us to comply with certain covenants, including covenants triggered by a change of control, during the term of each agreement. The lease agreements generally provide for events of default if (i) we fail to obtain or maintain the insurance required, (ii) we breach any covenant or representation and warranty and do not cure it within the agreed time periods, (iii) we do not have unencumbered control or possession of the aircraft or engines, (iv) we discontinue (temporarily or otherwise) business or sell or otherwise dispose of all or substantially all of our assets, (v) we no longer possess the licenses, certificates and permits required for the conduct of our business as a certificated air carrier, (vi) Volaris Opco experiences a change of control, or (vii) we fail to pay when due any airport or navigation charges or any landing fees assessed with respect to the aircraft or any aircraft operated by us which, if unpaid, may give rise to any lien, right of detention, right of sale or other security interest in relation to the aircraft or parts thereof. The lease agreements also provide for events of default in case of certain insolvency events and if a material adverse change occurs in our financial condition which, in lessor’s reasonable opinion, would materially and adversely affect our ability to perform our obligations under the lease agreements and related documents. Failure to comply with covenants could result in a default under the relevant agreement, and ultimately in a re-possession of the relevant aircraft or engine. Certain of these agreements also contain cross default clauses, as a result of which defaults under one agreement may be treated as defaults under other lease agreements. As such, a failure to comply with the covenants in our aircraft and engine lease agreements, or the occurrence of an event of default thereunder, could have a negative impact on us and, as a result, on our financial condition and results of operations.

We rely on maintaining a high daily aircraft utilization rate to implement our ultra-low-cost structure, which makes us especially vulnerable to flight delays or cancellations or aircraft unavailability.

One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate. Our average daily aircraft utilization was 12.99 block hours in 2010, 13.38 block hours in 2011, and 12.40 block hours in 2012. Aircraft utilization is the average amount of time per day that our aircraft spend carrying passengers in flight. 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,

 

29


Table of Contents

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 Mexico’s continued favorable safety assessment.

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 DGAC in particular, will continue to meet international safety standards, and we have no direct control over their compliance with IASA guidelines. If Mexico’s IASA rating were to be downgraded in the future, it could restrict our ability to maintain or increase service to the United States, which would in turn adversely affect our business, results of operations and financial condition.

We rely heavily on technology and automated systems to operate our business and any failure of these technologies or systems or failure by their operators could harm our business.

We are highly dependent on technology and automated systems to operate our business and achieve low operating costs. These technologies and systems include our computerized airline reservation system, flight operations system, financial planning, management and accounting system, telecommunications systems, website, maintenance systems and check-in kiosks. For our operations to work efficiently, our website and reservation system must be able to accommodate a high volume of traffic, maintain secure information and deliver flight information. Substantially all of our tickets are issued to passengers as electronic tickets. We depend on our reservation system, which is hosted and maintained by third-party service providers, to be able to issue, track and accept these electronic tickets. If our reservation system fails or experiences interruptions 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. In addition, we are currently implementing new systems for the management and sale of non-ticket items. 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 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

 

30


Table of Contents

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 and have disaster recovery plans; however, we cannot assure you that these measures are adequate to prevent disruptions. Disruption in, changes to or a breach of, these systems could result in the disruption to our business and the loss of important data. These disruptions may also result in adverse economic consequences. Any of the foregoing could result in a material adverse effect on our business, results of operations and financial condition.

We rely on third-party service providers to perform functions integral to our operations.

We have entered into agreements with third-party service providers to furnish certain facilities and services required for our operations, including Lufthansa Technik AG for certain technical services and Aeromantenimiento S.A., or Aeroman, a FAA-approved maintenance provider, for our heavy airframe and engine maintenance, as well as other third-party service providers, including the concessionaries’ of the Mexican airports in which we operate, for ground handling, catering, passenger handling, engineering, refueling and airport facilities as well as administrative and support services. We are likely to enter into similar service agreements in new markets we decide to enter, and there can be no assurance that we will be able to obtain the necessary services at acceptable rates.

Although we seek to monitor the performance of third-party service providers, their efficiency, timeliness and quality of contract performance are often beyond our control, and any failure by any of them to perform their contracts may have an adverse impact on our business and operations. We expect to be dependent on such third-party arrangements for the foreseeable future.

Furthermore, our agreements with third parties are subject to termination upon short notice. The loss or expiration of these contracts or any inability to renew them or negotiate and enter into contracts with other providers at comparable rates could harm our business. Our reliance upon others to provide essential services on our behalf also gives us less control over costs, and the efficiency, timeliness and quality of contract services.

Our processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation.

In the processing of our customer transactions, we receive, process, transmit and store a large volume of identifiable personal data, including financial data such as credit card information. This data is subject to legislation and regulation, intended to protect the privacy of personal data that is collected, processed and transmitted. More generally, we rely on consumer confidence in the security of our system, including our internet site on which we sell the majority of our tickets. Our business, results of operations and financial condition could be adversely affected if we are unable to comply with existing privacy obligations or legislation or regulations are expanded to require changes in our business practices. Furthermore, lawsuits may be initiated against us and our reputation may be negatively affected if we fail to comply with applicable law and privacy obligations.

We depend on our non-ticket revenue to remain profitable, and we may not be able to maintain or increase our non-ticket revenue base.

Our business strategy significantly relies upon our portfolio of non-ticket revenues, including ancillary products and services and cargo revenue, on which we depend to remain profitable due to our ULCC strategy of low base fares. There can be no assurance that passengers will pay for additional ancillary products and services

 

31


Table of Contents

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 fees for, among other things, baggage, advance seat selection, change fees, and sales of onboard products and other items sold in conjunction with our scheduled air service. 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 oversales. 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 Mexico and the United States in the future may increase our costs significantly”.

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;

 

32


Table of Contents
   

the adoption of statutes or regulations that impact customer service standards, including security and health standards and termination of licenses or concessions to operate airports; and

 

   

the adoption of more restrictive locally-imposed noise regulations or curfews.

In general, any changes in airport operations could have a material adverse effect on our business, results of operations and financial condition.

We rely on a number of single suppliers for our fuel, aircraft and engines.

We purchase fuel from Aeropuertos y Servicios Auxiliares, or ASA, which also supplies fuel and fills our aircraft tanks in Mexico, where we do most of the fillings. In the United States, we have entered into fuel supply agreements with suppliers such as World Fuel Services, or WFS, pursuant to which WFS or its affiliates sell fuel to us at various airports as specified in the agreements. The agreement with ASA expires in March 2015 and may be terminated by us with 60-days prior notice and by ASA only if we do not pay for the fuel provided. The agreement with WFS expires in October 2013 and may be terminated by either party with 30-days prior notice. If either ASA or WFS offers 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 either of ASA or WFS terminates its agreement with us, is unwilling to renew it upon termination or is unable or unwilling to cover our fuel needs, we would have to seek an alternative source 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 WFS. 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 and A320 aircraft, narrow body aircraft, powered by engines manufactured by IAE. We currently intend to continue to rely exclusively on these aircraft and engine manufacturers for the foreseeable future. If Airbus or IAE 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 engines could adversely affect our operations.

We operate a uniform fleet of Airbus A319 and A320 aircraft, which belong to the Airbus A320 family aircraft. Our aircraft also exclusively use IAE engines. Our dependence on the Airbus A319 and A320 aircraft and IAE 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 engines due to real or perceived safety concerns or other problems.

 

33


Table of Contents

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 14%, 12% and 12% of our total operating costs for the fiscal years 2010, 2011 and 2012, respectively. As of June 30, 2013, approximately 73% 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 expire in February 2015. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. We cannot assure you that our labor costs going forward will remain competitive because in the future our labor agreements may be amended and new agreements could have terms with higher labor costs or more onerous conditions, one or more of our competitors may significantly reduce their labor costs, thereby reducing or eliminating our comparative advantages as to one or more of such competitors, or our labor costs may increase in connection with our growth. Traditionally, the relationship between Mexican legacy carriers and their unions has been complex. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize or unionized workers may decide to join a different union. If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions or stoppages. Any such action or other labor dispute with unionized employees (including negotiation of more onerous conditions), or the deterioration of the relationship between unions and businesses in Mexico, could disrupt our operations, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.

Our business, results of operations and financial condition could be materially adversely affected if we lose the services of our key personnel.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager or other key employee without adequate replacement or the inability to

 

34


Table of Contents

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.

Because we have a limited operating history, it is difficult to evaluate an investment in the ADSs.

We began flight operations in March 2006. It is difficult to evaluate our future prospects and an investment in the ADSs because of our limited operating history. Our prospects are uncertain and must be considered in light of the risks, uncertainties and difficulties frequently encountered by companies in the early stage of operations. Historically, there has been a high failure rate among start-up airlines, particularly in Mexico. Our future performance will depend upon a number of factors, including our ability to implement our growth strategy, choose new markets successfully, maintain our ultra-low-cost structure, provide high-quality customer service at low prices, attract, retain and motivate qualified personnel, hedge against fuel price, react to customer and market demands, operate at airports providing adequate service, and maintain the safety of our operations. We cannot assure you that we will successfully address any of these factors, and our failure to do so could adversely affect our business, financial condition, results of operations and the market price of the ADSs.

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 prospectus, 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 will not maintain a control group after the global offering.

Upon completion of the global offering, we will not have a control group and corporate decisions requiring shareholder approval, such as the election of a majority of the board of directors, will be made by the majority of our Series A shareholders, which shares are required to be owned by Mexican nationals. We will not have a control group after completion of the global offering because holders of ADSs and CPOs will have no voting rights, and the CPOs and ADSs will be 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 will be no large groups holding a large block. Furthermore, it is unlikely that a significant block of shareholders will form in the future because

 

35


Table of Contents

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.

We require the affirmative vote of our principal shareholders to make certain corporate decisions.

Our current principal non-Mexican shareholders, Discovery Air, Blue Sky Investments and Indigo, will own Series B shares, that are convertible into Series A shares, subsequent to the offering. Series A shares that are converted may be deposited in the CPO trust. The Series B shares are not and are not intended to be listed on any exchange and will initially represent 49% of our outstanding capital stock that is not represented by CPOs (including ADSs). Holders of Series B shares will be entitled to vote their shares on all matters and, for so long as such Series B shares represent 12% or more of our outstanding capital stock, their affirmative vote will be required to approve any matters related to (i) by-law amendments affecting Series B shares, (ii) delisting of Series A shares from any stock exchange, (iii) mergers or spinoffs affecting us, (iv) incurring indebtedness or granting guarantees if the Lease-Adjusted Net Debt to EBIDTAR ratio exceeds 4.25 times in 2013 and 3.25 times thereafter (Lease-Adjusted Net Debt is the sum of short-term and long-term debt, 7.0 times the aircraft rentals for the last four quarters, less cash and cash equivalents at the end of the last quarter for which financial statements have been prepared), and (v) change of material accounting policies. The exercise of any such consent rights may conflict with the interests of our majority shareholders. Likewise, together, the Series B shareholders shall have the right to appoint and revoke the designation of three members of the Board of Directors and their respective alternates, as long as the Series B shares represent at least 12% of our outstanding capital stock.

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.

Risks related to our securities and the global offering

A public market for the ADSs and our Series A shares does not currently exist and may not develop.

Prior to the global offering, there has been no public market for the ADSs or our Series A shares. We have applied to list the ADSs on the New York Stock Exchange under the symbol “VLRS” and the Series A shares on the Mexican Stock Exchange under the symbol “VOLAR.” However, we cannot predict the extent to which investor interest in the ADSs or Series A shares will lead to the development of an active trading market in the United States, Mexico or elsewhere. If the trading volume of the ADSs on the New York Stock Exchange or our Series A shares on the Mexican Stock Exchange were to decline below certain levels, the ADSs or the Series A shares could be delisted or deregistered, further reducing liquidity of the ADSs and Series A shares.

The trading prices for the ADSs and our Series A shares may fluctuate significantly after the global offering.

The initial offering price for the ADSs and Series A shares will be determined by negotiations between us, the selling shareholders, the underwriters and the Mexican underwriters based upon a number of factors. The initial offering price may not be indicative of prices that will prevail in the market after completion of the global offering. 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;

 

36


Table of Contents
   

industry conditions or trends;

 

   

availability of routes and airport space;

 

   

the introduction of new services by us or by our competitors;

 

   

our historical and anticipated quarterly and annual operating results;

 

   

variations between our actual or anticipated results and analyst and investor expectations;

 

   

announcements by us or others and developments affecting our business;

 

   

changes in technology affecting our aircraft;

 

   

announcements, results or actions taken by our competitors;

 

   

investors’ perceptions of our company or the services we provide;

 

   

changes in financial or economic estimates by securities analysts;

 

   

our announcement of significant transactions or capital commitments;

 

   

currency devaluations and imposition of capital controls;

 

   

additions or departures of key management;

 

   

future sales of the ADSs and Series A shares;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

accidents, health concerns 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.

Many of these factors are beyond our control. Broad market and industry factors could materially and adversely affect the market price of the ADSs and Series A shares, regardless of our actual operating performance.

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 common stock. 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 similar 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. 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

 

37


Table of Contents

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.

You will likely suffer dilution in the book value of your investment.

The initial public offering price of the ADSs and Series A shares is considerably more than the adjusted net tangible book value per share of our outstanding common stock. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because our earlier investors in our shares of common stock paid substantially less than the initial public offering price of the ADSs or Series A shares when they purchased their shares. Investors purchasing ADSs in this offering (as well as investors purchasing Series A shares in the Mexican offering) will incur immediate dilution of U.S.$10.07 in as adjusted net tangible book value per ADS, based on the initial public offering price of U.S.$13.00 per ADS, the midpoint of the price range on the front cover of this prospectus. In addition, if we raise funds by issuing additional securities, the newly issued shares will further dilute your percentage ownership of us. See “Dilution.”

Provisions of Mexican law and our by-laws make a takeover more difficult, which may impede the ability of holders of Series A shares or ADSs to benefit from a change in control or to change our management and board of directors.

Provisions of Mexican law and our by-laws may make it difficult and costly for a third party to pursue a tender offer or other takeover attempt resulting in a change of control. Holders of ADSs may desire to participate in one of these transactions, but may not have an opportunity to do so. For example, our by-laws contain provisions which, among other things, require board approval prior to any person or group of persons acquiring, directly or indirectly, (i) 5% or more of our shares (whether directly or by acquiring ADSs or CPOs), or (ii) 20% or more of our shares (whether directly or by acquiring ADSs or CPOs) and in the case of this item (ii) if such approval is obtained, require the acquiring person to make a tender offer to purchase 100% of our shares and CPOs (or other securities that represent them) at a substantial premium over the market price of our shares to be determined by the board of directors, based upon the advice of a financial advisor.

These provisions could substantially impede the ability of a third party to control us, and be detrimental to shareholders desiring to benefit from any change of control premium paid on the sale of the company in connection with a tender offer. See “Description of Capital Stock—Change of Control Provisions,” “Description of Capital Stock—Ownership Restrictions,” “Description of Capital Stock—Voting Rights” and “Description of Capital Stock—Other Provisions—Foreign Investment Regulations.”

 

38


Table of Contents

Substantial sales of the ADSs or Series A shares after the global offering could cause the price of the ADSs or Series A shares to decrease.

We, the selling shareholders, our executive officers and certain of our directors and other shareholders, who beneficially own substantially all of the shares of our common stock, have agreed that, subject to certain limited exceptions, we and they will not offer, pledge, sell, lend or otherwise transfer until 180 days after the date of this prospectus any ADSs, CPOs, Series A shares or Series B shares or any options or warrants to purchase the ADSs, CPOs, Series A shares or Series B shares, or any securities convertible into, or exchangeable for, or that represent the right to receive, ADSs, CPOs, Series A shares or Series B shares. In addition, in the event that either (i) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (ii) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC and UBS Securities LLC waive in writing, such an extension. After these lock-up agreements expire, their ADSs and Series A shares will be eligible for sale in the public market. The market price of the ADSs and Series A shares could drop significantly if the holders of the ADSs or Series A shares sell them or the market perceives that they intend to sell them. 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, after the global offering, our principal shareholders will be entitled to rights with respect to registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, pursuant to a registration rights agreement. Please see “Principal and Selling Shareholders—Registration Rights.” If they exercise their registration rights with respect to such shares, then there will be additional 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). See “Description of CPOs.” 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 will have no voting rights.

Holders of the ADSs and CPOs will not be entitled to vote the underlying Series A shares. As a result, holders of the ADSs and CPOs will not have any influence over the decisions made relating to our company’s business or operations, nor will they be protected from the results of any such corporate action taken by our

 

39


Table of Contents

holders of Series A shares and Series B shares. Mexican investors will determine the outcome of substantially all shareholder matters, subject to the rights of the holders of Series B shares that are required to vote affirmatively to approve certain limited matters. For a more complete description of the circumstances under which holders of our securities may vote, see “Description of Capital Stock.”

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 generally grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs and CPOs in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act. Similar restrictions may apply to holders of ADSs and CPOs in other jurisdictions. We cannot assure you that we will file a registration statement with the SEC, or any other regulatory authority, to allow holders of ADSs and CPOs in the United States, or any other jurisdiction, to participate in a preemptive rights offering. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether we will file such a registration statement. Under Mexican law, sales by the depositary of preemptive rights and distribution of the proceeds from such sales to you, the ADS holders, is not possible.

In addition, additional CPOs may be issued only if the CPO deed permits the issuance of a number of CPOs sufficient to represent the shares to be issued to and held by the CPO trustee upon the exercise of preemptive rights. Because non-Mexican holders of ADSs and CPOs are not entitled to acquire direct ownership of the underlying Series A shares in respect of such ADSs and CPOs, they may not be able to exercise their preemptive rights if the CPO deed will not permit additional CPOs to be delivered in an amount sufficient to represent the shares of common stock to be issued as a result of the exercise of preemptive rights on behalf of non-Mexican ADS or CPO holders, unless the CPO deed is modified, or a new CPO deed is entered into, which permits delivery of the number of CPOs necessary to represent the shares to be subscribed and paid as a result of the exercise of such preemptive rights. Although we expect to take all measures necessary to maintain sufficient CPOs available to permit non-Mexican holders of ADSs and CPOs to exercise preemptive rights, if and when applicable, no assurances can be made that we will be able to do so, particularly because regulatory approvals in Mexico are necessary for the issuance and delivery of CPOs. As a result of the limitations described above, if we issue additional shares in the future in connection with circumstances giving rise to preemptive rights, the equity interests of holders of ADSs and CPOs may be diluted. See “Description of Capital Stock—Preemptive Rights” and “Description of CPOs—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 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 “Dividend Policy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loan Agreements.”

 

40


Table of Contents

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 this duty, 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). 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, 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.

We will be required to assess our internal control over financial reporting on an annual basis and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, and significant expenses to remediate any internal control deficiencies and could ultimately have an adverse effect on the market price of the ADSs and Series A shares.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, and beginning with our Annual Report on Form 20-F for the year ending December 31, 2014, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, although our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 because we currently meet the emerging growth company definition under the JOBS Act, we have determined that we will not avail ourselves of the exemption to Section 404 for emerging growth companies under Section 404(b) and that, consequently, we intend to cause our independent registered public accounting firm to provide such attestation. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented

 

41


Table of Contents

by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Series A shares and ADSs, fines, sanctions and other regulatory action and potentially civil litigation.

 

42


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. 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. Important factors that could cause such differences include, but are not limited to:

 

   

the competitive environment in our industry;

 

   

ability to keep cost 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 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;

 

   

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 the union representing our flight attendants;

 

   

ability to attract and retain qualified personnel;

 

   

loss of key personnel;

 

   

aircraft-related fixed obligations;

 

   

dependence on cash balances and operating cash flows;

 

   

our aircraft utilization rate;

 

   

maintenance costs;

 

   

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

 

   

use of personal data;

 

   

lack of marketing alliances;

 

   

government regulation 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;

 

43


Table of Contents
   

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 markets;

 

   

insurance costs;

 

   

environmental regulations; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

In addition, in this prospectus, the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus 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 prospectus. 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.

 

44


Table of Contents

USE OF PROCEEDS

The net proceeds to us from the sale of the Series A shares and ADSs in the global offering are expected to be approximately U.S.$211.8 million after deducting estimated discounts and commissions and expenses payable by us and assuming an initial public offering of U.S.$13.00 per ADS, the midpoint of the range set forth on the cover of this prospectus. We currently intend to use a portion of the net proceeds from the global offering to prepay principal and interest under our loans with:

(a) Banco Inbursa, dated May 12, 2009, in an aggregate principal amount outstanding of Ps.257.1 million. Interest under this loan is payable semi-annually at an annual rate of the Mexican Interbank Rate of Equilibrium (Tasa de Interés Interbancaria de Equilibrio) plus ten percentage points, which has increased by 2.5 percentage points since May 14, 2012. Currently, the principal may be prepaid subject to certain conditions including a prepayment premium equivalent to 25% of the amount to be prepaid (Ps.64.3 million). Also, 50% of any principal balance has to be paid on May 12, 2015 and any remaining principal balance has to be paid on May 12, 2016;

(b) Pasprot, dated May 12, 2009, in an aggregate principal amount outstanding of Ps.3.3 million. Interest under this loan is payable semi-annually at an annual rate of the Mexican Interbank Rate of Equilibrium (Tasa de Interés Interbancaria de Equilibrio) plus ten percentage points, which has increased by 2.5 percentage points since May 14, 2012. The prepayment premium is Ps.0.8 million. This loan agreement has substantially the same terms as the loan agreement with Banco Inbursa, including the terms relating to prepayments; and

(c) IFC, dated June 23, 2006, in an aggregate principal amount outstanding of U.S.$10.0 million under tranche C. Interest is payable semi-annually at the six-month London Interbank Offered Rate, or LIBOR, plus six percentage points. Principal may be prepaid subject to certain conditions. The final maturity under tranche C is June 15, 2014.

As of June 30, 2013, we were current with principal and interest payments and in compliance with the covenants under our loan agreements.

The remaining net proceeds will be used for general corporate purposes, including pre-delivery payments of aircraft.

We will not receive any proceeds from the sale of Series A shares or ADSs by the selling shareholders.

For every U.S.$1.00 increase or decrease in the price per ADS in the global offering, the amount of proceeds to us will increase or decrease by approximately U.S.$17.3 million.

 

45


Table of Contents

EXCHANGE RATES

The following table sets forth, for the periods indicated, the high, low period-end and average buying rates, in each case for the purchase of U.S. dollars, all expressed in nominal pesos per U.S. dollar. We make no representation that the peso amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all.

 

     Rate(1)  
     High      Low      Period  End(2)      Average(3)  

2006

     11.4809         10.4303         10.8755         10.9010   

2007

     11.2676         10.6639         10.8662         10.9269   

2008

     13.9183         9.9180         13.5383         11.1383   

2009

     15.3650         12.5969         13.0587         13.5095   

2010

     13.1819         12.1575         12.3571         12.6367   

2011

     14.2443         11.5023         13.9787         12.4273   

2012

     14.3949         12.6299         13.0101         13.1685   

January 2013

     12.9880         12.5868         12.7134         12.7128   

February 2013

     12.8680         12.6294         12.8680         12.7164   

March 2013

     12.8322         12.3546         12.3546         12.5490   

April 2013

     12.3612         12.0691         12.1550         12.2156   

May 2013

     12.6328         11.9807         12.6328         12.2394   

June 2013

     13.4041         12.6916         13.0235         12.9502   

July 2013

     13.0567         12.4976         12.7321         12.7692   

August 2013 (through August 29)

     13.3366         12.5666         13.3366         12.8525   

 

(1) Mexican Central Bank.
(2) As published by the Mexican Central Bank as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on the period end.
(3) Average of month-end rates or daily rates, as applicable.

Except for the period from September through December 1982, during a liquidity crisis, the Mexican Central Bank has consistently made foreign currency available to Mexican private-sector entities (such as us) to meet their foreign currency obligations, although amounts made available have, from time to time, been limited. Nevertheless, in the event of renewed shortages of foreign currency, there can be no assurance that foreign currency would continue to be available to private-sector companies or that foreign currency needed by us to service foreign currency obligations or to import goods could be purchased in the open market without substantial additional cost.

On August 29, 2013 the rate for the payment of obligations denominated in foreign currency payable in Mexico as published by the Mexican Central Bank for pesos was Ps.13.3366 per U.S.$1.00.

 

46


Table of Contents

CAPITALIZATION

The following table sets forth our consolidated capitalization at June 30, 2013 on an actual basis and as adjusted to reflect the receipt of U.S.$211.8 million in net proceeds from the issuance and sale of the Series A shares and ADSs in the global offering after deducting estimated discounts and commissions and expenses payable by us and the application of such net proceeds to our outstanding indebtedness as described in “Use of Proceeds”. These adjustments are based on our assumed initial price of U.S.$13.00 per ADS, the midpoint of the range set forth on the cover of this prospectus. This table should be read in conjunction with, and is qualified in its entirety by reference to, “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Information,” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

     June 30, 2013  
     Actual     As Adjusted  
     Pesos     Dollars     Pesos     Dollars  
    

(In thousands of pesos and thousands of

U.S. dollars)(1)

 

Cash and cash equivalents

     1,125,503        86,421        3,483,437        267,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Short-term liabilities—financial debt:

        

Financial debt

     259,698        19,940        —          —     

Accrued interest

     7,524        578        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term debt

     267,222        20,518        —          —     

Long-term liabilities—financial debt:

        

Financial debt

     464,265        35,648        337,735 (2)      25,933 (2) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total debt

     731,487        56,166        337,735        25,933   

Equity:

        

Capital stock

     2,464,945        189,269        2,973,559        228,323   

Treasury shares

     (133,723     (10,268     (133,723     (10,268

Contributions for future capital increases

     1        —          1        —     

Legal reserve

     38,250        2,937        38,250        2,937   

Additional paid-in capital

     (260,608     (20,010     2,047,560        157,220   

Accumulated losses

     (817,436     (62,766     (882,533 )(3)      (67,765 )(3) 

Other accumulated comprehensive losses

     (94,589     (7,263     (94,589     (7,263
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity attributable to equity holders of the parent

     1,196,840        91,899        3,948,525        303,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity(4)

     1,196,840        91,899        3,948,525        303,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

     1,928,327        148,065        4,286,260        329,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.13.0235 per U.S.$1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on June 30, 2013. 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) Contemplates repayment of loans with Banco Inbursa in an aggregate principal amount outstanding of Ps.257.1 million, with Pasprot in an aggregate principal amount outstanding of Ps.3.3 million and with IFC in an aggregate principal amount outstanding of U.S.$10.0 million (Ps.130.2 million). See “Use of Proceeds.”
(3) Includes prepayment premium of the loans with Banco Inbursa of Ps.64.3 million and with Pasprot of Ps.0.8 million. See “Use of Proceeds.”
(4) For every U.S.$1.00 increase or decrease in the price per ADS in the global offering, total equity will increase or decrease by approximately U.S.$17.3 million.

 

47


Table of Contents

DILUTION

As of June 30, 2013, our total shareholders’ equity was Ps.1,196.8 million. At June 30, 2013, we had a net tangible book value under IFRS of Ps.1.35 per Series A share or U.S.$1.02 per ADS based on the ratio of one Series A share of common stock per CPO and ten CPOs per ADS. Net tangible book value represents the amount of our total tangible assets less total liabilities, divided by the total number of equity shares outstanding at June 30, 2013. After giving effect to the sale of the ADSs offered by us in the international offering and the Series A shares offered in the Mexican offering, and, assuming no exercise of the underwriters’ over-allotment options, at a price of U.S.$13.00 per ADS, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value estimated at June 30, 2013 would have been approximately Ps.3,952.5, representing Ps.3.91 per Series A share or U.S.$2.93 per ADS. At an assumed initial public offering price of U.S.$13.00 per ADS, this represents an immediate increase in net tangible book value of Ps.2.55 per Series A share or U.S.$1.91 per ADS, to existing shareholders and an immediate dilution in net tangible book value of U.S.$10.07 per ADS to new investors purchasing ADSs in this offering. Dilution for this purpose represents the difference between the price per Series A share or ADS paid by these purchasers and net tangible book value per Series A share or ADS immediately after the completion of the global offering.

The following table illustrates the dilution in net tangible book value per ADS to purchasers of ADSs in the global offering as of June 30, 2013:

 

     U.S.$  

Assumed initial public offering price per ADS(1)

     13.00   

Net tangible book value per ADS at June 30, 2013

     1.02   

Increase in net tangible book value per ADS attributable to new investors

     1.91   
  

 

 

 

Pro forma net tangible book value per ADS after this offering

     2.93   
  

 

 

 

Dilution per ADS to new investors(2)

     10.07   
  

 

 

 

 

(1) Taking into consideration the sale of ADSs offered by us in the international offering, assuming no exercise of the over-allotment options, at a price of U.S.$13.00 per ADS, the midpoint of the range set forth on the cover of this prospectus.
(2) A U.S.$1.00 increase (decrease) in the assumed initial offering price of U.S.$13.00 per ADS would increase (decrease) the dilution in the net tangible book value to investors in this offering by U.S.$0.83 per ADS.

The following table summarizes on a pro forma basis the difference between our existing shareholders and new investors with respect to the number of shares issued by us, the total consideration paid and the average price per share paid as of June 30, 2013.

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     Number      Percentage     Amount      Percentage    
     (in thousands)  

Existing Shareholders

     838,799,767         82.9     Ps.1,196,800         28.5     Ps.1.43   

New Investors

     173,076,923         17.1     3,000,735         71.5     17.34   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     1,011,876,690         100.0     Ps.4,197,535         100.0     Ps.4.15   

The foregoing discussions and tables are based upon 1,011,876,690 shares of our common stock issued and outstanding as of June 30, 2013, after giving pro forma effect to the stock split and capital increase related to the global offering.

To the extent outstanding options, or options or warrants we may issue in the future with exercise prices below the initial public offering price, are exercised, there will be further dilution to new public investors.

 

48


Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables summarize the financial and operating data for our business for the periods presented. You should read this summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus. We prepare consolidated financial statements in accordance with IFRS.

We derived the selected consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the summary consolidated statements of financial position data as of December 31, 2011 and 2012 from our audited financial statements included in this prospectus. We derived the selected consolidated statements of operations data for the years ended December 31, 2008 and 2009 and the selected consolidated statements of financial position data as of December 31, 2008, 2009 and 2010 from our historical consolidated financial statements not included herein. We derived the selected consolidated statements of operations data for the six months ended June 30, 2012 and 2013 and the selected consolidated statements of financial position data as of June 30, 2013 from our unaudited interim condensed consolidated financial statements included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

    For the Years ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
    (in thousands of pesos,
except share and per share data and operating data)
   

(in thousands

of U.S.

dollars)(1)

    (unaudited in thousands
of pesos, except share
and per share data and
operating data)
   

(unaudited in
thousands
of U.S.

dollars)(1)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

                 

Operating revenues:

                 

Passenger

    4,090,854        4,717,225        6,278,469        8,036,275        10,176,747        781,414        4,470,871        5,166,279        396,689   

Non-ticket

    328,306        328,650        498,921        842,341        1,509,668        115,919        646,099        930,772        71,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    4,419,160        5,045,875        6,777,390        8,878,616        11,686,415        897,333        5,116,970        6,097,051        468,158   

Other operating income

    (113,474     (78,966     (158     (73,831     (68,800     (5,283     (42,572     (25,917     (1,990

Fuel

    1,904,038        1,479,190        2,146,011        3,823,232        4,730,089        363,196        2,213,848        2,316,419        177,865   

Aircraft and engine rent expense

    825,980        1,211,401        1,197,022        1,508,135        1,885,696        144,792        908,707        1,030,781        79,148   

Salaries and benefits

    608,549        687,713        852,123        1,120,359        1,302,971        100,048        608,884        746,688        57,334   

Landing, take-off and navigation expenses

    503,883        569,919        867,690        1,281,583        1,639,945        125,922        749,675        918,921        70,559   

Sales, marketing and distribution expenses(2)

    454,275        445,317        615,431        750,474        751,919        57,735        349,228        345,879        26,558   

Maintenance expenses(3)

    136,219        177,778        276,128        379,626        498,836        38,303        213,393        291,862        22,410   

Other operating expenses

    178,695        198,532        255,413        359,046        356,517        27,375        155,243        196,715        15,105   

Depreciation and amortization(4)

    41,182        45,929        56,572        102,977        211,002        16,202        87,106        135,351        10,393   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    4,539,347        4,736,813        6,266,232        9,251,601        11,308,175        868,290        5,243,512        5,956,699        457,382   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (120,187     309,062        511,158        (372,985     378,240        29,043        (126,542     140,352        10,776   

Finance income

    4,624        4,821        5,091        5,539        13,611        1,045        5,245        12,770        981   

Finance cost

    (31,523     (86,856     (52,221     (57,718     (89,731     (6,890     (43,279     (36,407     (2,795

Exchange gain (loss), net

    256,060        (12,820     (56,144     110,150        (95,322     (7,319     5,780        19,246        1,478   

Other financing (costs) income, net(5)

    (1,077,791     9,283        (3,455     —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (848,630     (85,572     (106,729     57,971        (171,442     (13,164     (32,254     (4,391     (336

(Loss) income before income tax

    (968,817     223,490        404,429        (315,014     206,798        15,879        (158,796     135,961        10,440   

Income tax benefit (expense)

    4,495        (2,218     238,684        (476     (3,481     (266     2,668        (27,138     (2,084
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (964,322     221,272        643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

                 

Equity holders of the parent

    (829,350     196,655        572,234        (293,540     215,239        16,527        (125,961     112,209        8,616   

Non-controlling interest

    (134,972     24,617        70,879        (21,950     (11,922     (914     (30,167     (3,386     (260
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (964,322     221,272        643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

49


Table of Contents
    For the Years ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
    (in thousands of pesos,
except share and per share data and operating data)
   

(in thousands

of U.S.

dollars)(1)

   

(unaudited in thousands

of pesos, except share
and per share data and
operating data)

   

(unaudited in
thousands
of U.S.

dollars)(1)

 

Weighted average shares outstanding

                 

Basic and diluted(6)

    331,788,288        658,684,962        727,595,544        727,595,544        732,441,216        —          727,595,544        803,382,392        —     

Earnings (loss) per share

                 

Basic and diluted(6)

    (0.002500     0.000299        0.000786        (0.000403     0.000294        0.000023        (0.000173     0.000140        0.000011   

Pro forma weighted average share outstanding

                 

Basic(7)

    —          —          —          —          905,518,139        —          —          976,459,315        —     

Diluted(8)

    —          —          —          —          947,401,526        —          —          1,011,876,690        —     

Pro forma earnings per share

                 

Basic(7)

    —          —          —          —          0.000293        0.000023        —          0.000142        0.000011   

Diluted(8)

    —          —          —          —          0.000281        0.000022        —          0.000137        0.000011   

Pro forma earnings per ADS

                —         

Basic(9)

    —          —          —          —          0.002935        0.000225        —          0.001423        0.000109   

Diluted(10)

    —          —          —          —          0.002805        0.000215        —          0.001373        0.000105   

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

                 

Cash and cash equivalents

    113,513        574,584        676,913        441,068        822,076        63,123        618,223        1,125,503        86,421   

Accounts receivable, net

    149,684        272,184        202,525        238,939        387,316        29,740        264,906        571,513        43,883   

Guarantee deposits – current portion

    —          64,090        330,071        169,647        238,242        18,293        226,327        413,757        31,770   

Total current assets

    388,358        1,059,499        1,396,808        1,130,547        1,815,018        139,365        1,475,939        2,538,293        194,901   

Total assets

    2,167,028        2,818,532        3,700,631        5,061,681        5,701,558        437,790        5,719,339        6,248,965        479,822   

Total short-term liabilities

    1,805,583        1,421,886        1,927,096        3,178,922        3,721,897        285,783        3,800,727        4,341,485        333,356   

Total long-term liabilities

    284,355        722,602        547,528        1,023,020        904,994        69,489        1,210,874        710,640        54,567   

Total liabilities

    2,089,938        2,144,488        2,474,624        4,201,942        4,626,891        355,272        5,011,601        5,052,125        387,923   

Capital stock

    1,718,007        1,966,313        1,966,313        1,966,313        2,376,098        182,447        1,966,313        2,464,945        189,269   

Total equity

    77,090        674,044        1,226,007        859,739        1,074,667        82,518        707,738        1,196,840        91,899   

CASH FLOW DATA

                 

Net cash flows (used in) provided by operating activities

    (567,747     (31,310     539,001        (147,705     497,448        38,196        319,311        626,339        48,093   

Net cash flows (used in) provided by investing activities

    (250,395     40,507        (321,347     (628,030     187,161        14,371        (151,577     138,494        10,634   

Net cash flows provided by (used in) financing activities

    553,368        459,859        (90,065     562,373        (271,898     (20,877     13,071        (450,483     (34,590

OTHER FINANCIAL DATA

                 

EBITDA(11)

    (900,736     359,645        513,250        (159,858     493,920        37,926        (33,656     294,949        22,647   

Adjusted EBITDA(11)

    (79,005     363,182        572,849        (270,008     589,242        45,245        (39,436     275,703        21,169   

Adjusted EBITDAR(11)

    746,975        1,574,583        1,769,871        1,238,127        2,474,938        190,037        869,271        1,306,484        100,317   

OPERATING DATA(12)

                 

Aircraft at end of period

    21        21        26        34        41        —          36        43        —     

Average daily aircraft utilization (block hours)

    13.09        11.72        12.99        13.38        12.40        —          11.99        11.97        —     

 

50


Table of Contents
    For the Years ended December 31,     Six Months Ended June 30,  
    2008     2009     2010     2011
(Restated)(*)
    2012
(Restated)(*)
    2012
(Restated)(*)
    2012     2013     2013  
    (in thousands of pesos,
except share and per share data and operating data)
   

(in thousands

of U.S.

dollars)(1)

    (unaudited in thousands
of pesos, except share
and per
share data and
operating data)
   

(unaudited in
thousands
of U.S.

dollars)(1)

 

Average daily aircraft utilization (flight hours)

    11.08        10.03        11.33        11.38        10.42        —          10.15        10.00        —     

Airports served at end of period

    25        24        29        31        37        —          32        38        —     

Departures

    33,823        34,249        38,740        51,255        58,806        —          26,940        31,823        —     

Average stage length (miles)

    890        982        1,038        1,042        1,023        —          1,031        1,003        —     

Passenger flight segments (thousands)

    3,363        3,332        4,200        5,644        7,037        —          3,216        3,860        —     

Booked passengers (thousands)

    3,505        3,479        4,416        5,934        7,408        —          3,406        4,050        —     

Revenue passenger miles (RPMs) (thousands)

    3,177,100        3,465,040        4,628,014        6,290,707        7,668,202        —          3,547,037        4,100,899        —     

Available seat miles (ASMs) (thousands)

    4,296,000        4,892,349        5,853,823        7,939,365        9,244,425        —          4,240,933        5,014,609        —     

Load factor

    74     71     79     79     83     —          84     82     —     

Average ticket revenue per booked passenger

    1,167        1,356        1,422        1,354        1,374        105.5        1,313        1,275        97.9   

Total operating revenue per ASM (TRASM) (cents)

    102.9        103.1        115.8        111.8        126.4        9.7        120.7        121.6        9.3   

Passenger revenue per ASM (RASM) (cents)

    95.2        96.4        107.3        101.2        110.1        8.5        105.4        103.0        7.9   

Operating expenses per ASM (CASM) (cents)

    105.7        96.8        107.0        116.5        122.3        9.4        123.6        118.8        9.1   

CASM ex fuel (cents)

    61.3        66.6        70.4        68.4        71.2        5.5        71.4        72.6        5.6   

Fuel gallons consumed (thousands)

    56,437        61,115        74,075        97,970        112,225        —          51,449        59,400        —     

Average economic fuel cost per gallon

    33.7        24.2        29.0        39.0        42.1        3.2        43.0        39.0        3.0   

Employees per aircraft at end of period

    68        75        71        67        63        —          65        62        —     

 

* We decided to restate our consolidated financial statements as detailed in note 1(u) to our audited consolidated financial statements included elsewhere in this prospectus.
(1) Peso amounts were converted to U.S. dollars solely for the convenience of the reader at the rate of Ps.13.0235 per U.S.$1.00 as the rate for the payment of obligations denominated in foreign currency payable in Mexico in effect on June 30, 2013. 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) Business alliance amortization expense for the year ended December 31, 2010 (year in which it was fully amortized) was Ps.5.1 million. These amounts were recognized in sales, marketing and distribution expenses. See note 11 to our audited consolidated financial statements included elsewhere in this prospectus.
(3) Includes routine and ordinary maintenance expenses only. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Our Principal Line Items.”
(4) Includes, among other things, major maintenance expenses, which are capitalized and subsequently amortized. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Description of Our Principal Line Items.”
(5) During the year ended December 31, 2008, the Company had derivative financial instruments related to jet fuel and foreign currency transactions that were classified as trading. Accordingly, the Company recognized a loss of Ps.1,077.8 million under the caption other financing costs in the consolidated statement of operations in respect of changes in the fair value of those derivative financial instruments.
(6) Unvested shares awarded under the management incentive plan and our swap shares are deemed treasury shares and non-dilutive until December 31, 2012, and accordingly, they have been excluded in the determination of weighted average diluted shares outstanding and disregarded in the calculation of diluted earnings per share. Unvested shares awarded under the management incentive plan are deemed treasury shares and non-dilutive at June 30, 2013, and accordingly, they have been excluded in the determination of weighted average diluted shares outstanding and disregarded in the calculation of diluted earnings per share.
(7) The basis used for the computation of the pro forma information in respect of basic shares for the year ended December 31, 2012 is as follows: (i) Ps.215.2 million of net income attributed to equity holders of the parent in 2012 plus an aggregate of Ps.50.5 million in accrued interest in 2012 under the loans with Banco Inbursa, IFC, and Pasprot, for an aggregate principal amount of Ps.390.5 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 905,518,139, which is the pro forma weighted average of basic shares outstanding in 2012 equal to 732,441,216 plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,333 ADSs to repay such aggregate principal amount of Ps.390.5 million.

The basis used for the computation of the pro forma information in respect of basic shares for the six months ended June 30, 2013 is as follows: (i) Ps.112.2 million of net income attributed to equity holders of the parent for the six months ended June 30,

 

51


Table of Contents

2013 plus an aggregate of Ps.26.8 million in accrued and paid interest for the six months ended June 30, 2013 under the loans with Banco Inbursa, IFC and Pasprot for an aggregate principal amount of Ps.390.6 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 976,459,315, which is the pro forma weighted average of basic shares outstanding for the six months ended June 30, 2013 equal to 803,382,392 plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,910 ADSs to repay such aggregate principal amount of Ps.390.6 million.

(8) The basis used for the computation of the pro forma information in respect of diluted shares for the year ended December 31, 2012 additionally gives effect to the shares subject to the management incentive plan and our swap shares and is as follows: (i) Ps.215.2 million of net income attributed to equity holders of the parent in 2012 plus an aggregate of Ps.50.5 million in accrued interest in 2012 under the loans with Banco Inbursa, IFC, and Pasprot, for an aggregate principal amount of Ps.390.5 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 947,401,526, which is the pro forma weighted average of diluted shares outstanding in 2012 equal to 774,324,603 (i.e., the unvested shares awarded under the management incentive plan and our swap shares are deemed treasury shares and have been included in the determination of the pro forma weighted average diluted shares outstanding and in the calculation of pro forma diluted earnings per share) plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,333 ADSs to repay such aggregate principal amount of Ps.390.5 million.

The basis used for the computation of the pro forma information in respect of diluted shares for the six months ended June 30, 2013 additionally gives effect to the shares subject to the management incentive plan and is as follows: (i) Ps.112.2 million of net income attributed to equity holders of the parent for the six months ended June 30, 2013 plus an aggregate of Ps.26.8 million in accrued and paid interest for the six months ended June 30, 2013 under the loans with Banco Inbursa, IFC and Pasprot for an aggregate principal amount of Ps.390.6 million expected to be repaid with a portion of the net proceeds from the global offering, divided by (ii) 1,011,876,690, which is the weighted average of diluted shares outstanding for the six months ended June 30, 2013 equal to 838,799,767 (i.e., the unvested shares awarded under the management incentive plan are deemed treasury shares and have been included in the determination of the pro forma weighted average diluted shares outstanding and in the calculation of pro forma diluted earnings per share) plus 173,076,923 shares issued in connection with the capital increase relating to the global offering. Using the midpoint of the price range per ADS on the front cover of this prospectus of U.S.$13.00, we would need net proceeds from the sale of 2,252,910 ADSs to repay such aggregate principal amount of Ps.390.6 million.

(9) The basis used for the computation of the pro forma information is to multiply the pro forma earnings per basic share obtained pursuant to footnote (7) 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.
(10) The basis used for the computation of the pro forma information is to multiply the pro forma earnings per diluted share obtained pursuant to footnote (8) 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.
(11) EBITDA, Adjusted EBITDA and Adjusted EBITDAR are included as supplemental disclosures because we believe they are useful indicators of our operating performance. Derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are well recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. However, because derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not determined in accordance with IFRS, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, derivations of EBITDA, Adjusted EBITDA and Adjusted EBITDAR as presented may not be directly comparable to similarly titled measures presented by other companies.
(12) See “Glossary of Airlines and Airline Terms” elsewhere in this prospectus for definitions of terms used in this table.

 

52


Table of Contents

The following table represents the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net (loss) income for the periods indicated below:

 

      For the Years ended December 31,     Six Months Ended June 30,  
      2008     2009     2010     2011
(Restated)(*)
    2012     2012     2012     2013     2013  
     (in thousands of pesos)     (in thousands of
U.S. dollars)(1)
    (unaudited in
thousands of pesos,
except per share and
share amounts)
    (unaudited
in
thousands
of U.S.
dollars)(1)
 

Reconciliation:

            

Net (loss) income

     (964,322     221,272        643,113        (315,490     203,317        15,613        (156,128     108,823        8,356   

Plus (minus):

            
<