troladora Vuela pania de Aviacion(VLRS) - 2023 Q4 - Annual Report

Annex - Financial Derivative Instruments Derivative Financial Instrument Policies Volaris uses derivative financial instruments exclusively for hedging financial risks, guided by a conservative Hedging Policy and aiming for hedge accounting treatment - The company's policy is to use derivative financial instruments exclusively for hedging against financial risks and not for speculative or trading purposes[2] - A dedicated Risk Management team identifies, evaluates, and designs strategies to mitigate financial risks, governed by a formal Hedging Policy approved by corporate governance[3][4] - The company's main financial risks hedged through derivatives are fuel price fluctuations, foreign currency risk, and interest rate variations[6] - As of the report date, Volaris holds interest rate CAPs for its Asset Backed Trust Notes but does not have any fuel or foreign exchange derivative instruments[6] Trading Markets and Valuation Techniques The company operates in OTC markets, uses ISDA agreements to manage counterparty risk, and values derivatives based on counterparty figures cross-verified with internal models - Volaris operates only in OTC markets and has 8 ISDA agreements in place with various financial institutions to minimize counterparty risk[7] - The company uses valuations provided by financial counterparties and compares them with internally developed models based on market data from Bloomberg[9] - All derivative financial instruments held by the company are classified for hedge accounting, with changes in fair value resulting from underlying asset price changes[10][13] Liquidity and Risk Exposure Volaris manages derivative liquidity by diversifying contracts and has internal resources to meet obligations, with no significant changes in key financial risk exposure during Q4 2023 - The company manages liquidity by diversifying derivative contracts across multiple counterparties and has internal resources to meet margin call requirements[11] - In Q4 2023, there were no significant changes to the company's exposure to key financial risks, including fuel price, exchange rates, and interest rates[12] Summary of Significant Accounting Policies Basis of Preparation Interim financial statements are prepared under IAS 34, using the U.S. dollar as functional currency, primarily under historical cost, and include all controlled subsidiaries - Financial statements are prepared in accordance with International Accounting Standard (IAS) 34 for interim reporting[14] - The functional and presentation currency for the company and its main subsidiary is the U.S. dollar[16] Consolidated Entities | Name | Principal Activities | Country | % Equity Interest (2023) | | :--- | :--- | :--- | :--- | | Concesionaria Vuela Compañía de Aviación | Air transportation services | Mexico | 100% | | Vuela Aviación, S.A. | Air transportation services | Costa Rica | 100% | | Vuela, S.A. | Air transportation services | Guatemala | 100% | | Vuela El Salvador, S.A. de C.V. | Air transportation services | El Salvador | 100% | | Comercializadora Volaris, S.A. de C.V. | Merchandising of services | Mexico | 100% | Revenue Recognition Passenger revenue is recognized upon service provision or ticket expiration, while non-passenger revenues are recognized when services like commissions or cargo are provided - Passenger revenue is recognized when the flight occurs or the ticket expires. Unflown, non-refundable tickets are initially booked as a liability under 'unearned transportation revenue'[26][27] - Other passenger revenues include fees for baggage, seat selection, and itinerary changes, recognized when the transportation is provided[28] - Non-passenger revenues include commissions from third-party sales (e.g., trip insurance, rental cars) and cargo services, recognized upon service provision[31] - Under the code-share agreement with Frontier Airlines, the airline that operates the flight segment is the one that recognizes the revenue for that segment[33][35] Financial Instruments Financial assets and liabilities are classified and measured at amortized cost or FVTPL, with a simplified approach for calculating ECLs on trade receivables - Financial assets are classified based on the business model and cash flow characteristics, primarily measured at amortized cost or fair value through profit and loss (FVTPL)[45] - The company assesses financial assets for credit impairment at each reporting date and applies a simplified approach to calculate Expected Credit Losses (ECLs) for trade receivables[49][51] - Financial liabilities, including loans and payables, are initially recognized at fair value and subsequently measured at amortized cost using the Effective Interest Rate (EIR) method[53][55] Aircraft and Engine Maintenance Routine maintenance costs are expensed, while major maintenance costs are capitalized and amortized, and the company uses power-by-the-hour agreements for component and engine services - Routine line maintenance costs are expensed as they are incurred[77][78] - Major maintenance costs are capitalized and amortized over the period until the next scheduled major maintenance event or the remaining lease term, whichever is shorter[80] - The company uses a power-by-the-hour agreement for component services and an engine flight hour agreement for engine shop visits, with associated costs recognized as incurred[83][84] Leases The company recognizes right-of-use assets and lease liabilities for most leases, with specific accounting for sale and leaseback transactions - The company applies a single recognition model for all leases, recording a right-of-use asset and a lease liability at the lease commencement date[118] - Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term or the asset's useful life[119] - Lease liabilities are measured at the present value of lease payments, using the company's incremental borrowing rate if the implicit rate is not determinable[122] - For sale and leaseback transactions, gain or loss is recognized only on the rights transferred to the buyer-lessor, with the retained right-of-use asset measured based on the previous carrying amount[125][126] Derivative Instruments and Hedge Accounting Volaris uses financial instruments to hedge fuel, interest rate, and exchange rate risks, applying cash flow hedge accounting with no ineffective portion recognized in 2023 or 2022 - The company uses financial instruments to hedge risks related to jet fuel prices, interest rates, and foreign exchange rates[143] - Under the cash flow hedge (CFH) model, the effective portion of fair value changes is recognized in OCI, while the ineffective portion is recognized in earnings[146] - For the years ended December 31, 2023, and 2022, the company did not recognize any ineffective portion related to its derivative financial instruments[146] Notes to Condensed Consolidated Financial Statements Business Description and Recent Events Volaris, a Mexican low-cost airline operating under a renewed government concession, recently converted all 57.5 million Series B shares to Series A shares - Volaris is a low-cost airline providing air transportation services in Mexico and abroad, operating under a concession granted by the Mexican government, which was extended for a 20-year term starting May 9, 2020[156][157] - The company has issued Asset Backed Trust Notes (Certificados Bursátiles Fiduciarios) backed by future credit card receivables, including a sustainability-linked bond (VOLARCB 21L) tied to CO2 emissions reduction targets[163][164] - On November 22, 2023, all 57,513,873 outstanding Series B shares were converted into Series A shares[167] Financial Instruments and Risk Management Volaris manages market, credit, and liquidity risks using derivatives like interest rate caps, reporting a net foreign currency liability of $218.9 million in Mexican Pesos as of December 31, 2023 - The company's primary market risks are jet fuel price fluctuations, foreign currency exposure (mainly Mexican Pesos), and interest rate changes on debt and leases[197][201][206][213] Net Foreign Currency Position (Dec 31, 2023) | Currency | Net Position (in thousands of U.S. dollars) | | :--- | :--- | | Mexican Pesos | US$ (218,926) | | Others* | US$ 43,166 | *Includes Colones, Quetzales and Colombian Pesos. - The company holds interest rate caps with a notional amount of US$187.4 million as of Dec 31, 2023, to hedge against interest rate increases on its Asset Backed Trust Notes (CEBURs)[218][220][224] Contractual Principal Payments on Financial Liabilities (Dec 31, 2023) | Liability Type | Within one year | One to five years | Total | | :--- | :--- | :--- | :--- | | Interest-bearing borrowings | US$ 213,871 | US$ 435,282 | US$ 649,153 | | Lease liabilities | US$ 372,697 | US$ 2,532,891 | US$ 2,905,588 | | Aircraft and engine lease return obligation | US$ 803 | US$ 286,405 | US$ 287,208 | | Total | US$ 587,371 | US$ 3,254,578 | US$ 3,841,949 | Financial Assets and Liabilities As of December 31, 2023, financial assets included $1.7 million in derivative instruments, while total financial debt significantly increased to $653.1 million, comprising various financing instruments Financial Debt Summary | Category | Dec 31, 2023 (USD thousands) | Dec 31, 2022 (USD thousands) | | :--- | :--- | :--- | | Short-term financial debt | 220,289 | 112,148 | | Long-term financial debt | 432,776 | 160,887 | | Total Financial Debt | 653,065 | 273,035 | - The company has issued three tranches of Asset Backed Trust Notes (CEBURs) in the Mexican market, totaling Ps. 4.5 billion, backed by future credit card receivables[258][260][264] - In 2023, the company entered into several new financing agreements for the acquisition of engines with entities including Tarquin Limited, NBB Lease Partnerships, and Wilmington Trust SP Services[271][272] Related Party Transactions Volaris conducts related party transactions for services like airport operations and maintenance, with significant expenses to MRO Commercial ($15.7 million) and OMA ($12.3 million) in FY 2023 Key Related Party Expenses (FY 2023) | Related Party | Service | Expense (USD thousands) | | :--- | :--- | :--- | | MRO Commercial, S.A. | Aircraft maintenance | 15,674 | | Grupo Aeroportuario del Centro Norte (OMA) | Airport services | 12,263 | | A&P International Services (AISG) | Aircraft and engine maintenance | 2,895 | | Chevez, Ruiz, Zamarripa y Cía, S.C. | Professional fees | 1,175 | - Frontier Airlines is a related party due to common board members and investment from Indigo Partners. As of Dec 31, 2023, the payable to Frontier was $1.9 million[276][277] - On May 23, 2023, the Company purchased 139,738 common stock shares of Clean Joule, Inc., a Sustainable Aviation Fuel producer, for $1.7 million. Clean Joule is a related party due to common board members[290] Leases As of December 31, 2023, Volaris leased 129 aircraft and 20 spare engines, with right-of-use assets totaling $2.35 billion and lease liabilities of $2.91 billion Aircraft Fleet Composition (Leased) | Aircraft Model | At Dec 31, 2023 | At Dec 31, 2022 | | :--- | :--- | :--- | | A319 | 3 | 3 | | A320 | 40 | 40 | | A320neo | 51 | 48 | | A321 | 10 | 10 | | A321neo | 25 | 15 | | Total | 129 | 116 | - In response to Pratt & Whitney's preventive accelerated inspections for GTF engines, the company has extended lease agreements and added new aircraft to its fleet[303][304] Lease-Related Balances (Dec 31, 2023) | Account | Amount (USD thousands) | | :--- | :--- | | Right-of-use assets | 2,352,528 | | Lease liabilities | 2,905,588 | Lease Expenses Recognized in Profit or Loss (FY 2023 vs FY 2022) | Expense Category | FY 2023 (USD thousands) | FY 2022 (USD thousands) | | :--- | :--- | :--- | | Depreciation of right-of-use assets | 362,015 | 320,443 | | Interest expense on lease liabilities | 191,967 | 174,769 | | Aircraft and engine variable lease expenses | 103,845 | 124,532 | | Total | 657,827 | 619,744 | Equity and Earnings Per Share As of December 31, 2023, the company had 1.15 billion Series A shares outstanding, with basic EPS improving to $0.007 for FY 2023 from a ($0.069) loss in 2022 - As of December 31, 2023, all outstanding shares are Series A, following the conversion of all Series B shares during the year. Total shares outstanding were 1,151,450,983[317] Earnings Per Share (EPS) | Period | Basic EPS (USD) | Diluted EPS (USD) | | :--- | :--- | :--- | | Q4 2023 | 0.097 | 0.096 | | Q4 2022 | (0.019) | (0.019) | | FY 2023 | 0.007 | 0.007 | | FY 2022 | (0.069) | (0.069) | - No dividends were declared or paid during 2023 and 2022[320] Commitments and Contingencies Volaris has $6.6 billion in aircraft purchase commitments with Airbus and $1.45 billion in estimated sale and leaseback proceeds, alongside $29.4 million in legal contingencies Aircraft Purchase Commitments (Airbus) | Period | Commitment (USD thousands) | | :--- | :--- | | 2024 | 280,818 | | 2025 | 711,112 | | 2026 | 1,408,871 | | 2027 | 1,123,329 | | 2028 and thereafter | 3,065,774 | | Total | 6,589,904 | - The company has commitments to execute sale and leaseback transactions for aircraft deliveries in 2024 and 2025, with estimated proceeds of $626.5 million and $821.0 million, respectively[328] - Possible contingencies from legal proceedings arising in the ordinary course of business amounted to US$29.4 million as of December 31, 2023[333] Operating Segments Volaris operates as a single segment, reporting $2.07 billion in domestic revenue and $1.19 billion in international revenue for FY 2023, based on flight origin Operating Revenues by Geographic Segment (FY 2023 vs FY 2022) | Segment | FY 2023 (USD thousands) | FY 2022 (USD thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Domestic (Mexico) | 2,070,569 | 1,909,744 | +8.4% | | United States of America | 921,999 | 758,609 | +21.5% | | Central America and South America | 266,405 | 178,837 | +48.9% | | Total | 3,258,973 | 2,847,190 | +14.5% | Fourth Quarter and Full Year 2023 Earnings Release Financial and Operations Highlights Volaris achieved a $112 million net income in Q4 2023 and $8 million for the full year, driven by revenue growth and reduced fuel costs despite operational challenges Q4 2023 Financial Highlights (vs Q4 2022) | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $899M | $820M | +9.6% | | TRASM | $9.56 cents | $8.63 cents | +10.7% | | CASM | $7.81 cents | $8.00 cents | -2.3% | | CASM ex fuel | $4.86 cents | $4.39 cents | +10.7% | | EBITDAR | $281M | $208M | +35.1% | | EBITDAR Margin | 31.3% | 25.3% | +6.0 pp | | Net Income (Loss) | $112M | ($22M) | N/A | Full Year 2023 Financial Highlights (vs FY 2022) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $3,259M | $2,847M | +14.5% | | TRASM | $8.38 cents | $8.07 cents | +3.8% | | CASM | $7.81 cents | $7.95 cents | -1.7% | | CASM ex fuel | $4.81 cents | $4.26 cents | +12.8% | | EBITDAR | $823M | $586M | +40.4% | | EBITDAR Margin | 25.2% | 20.6% | +4.7 pp | | Net Income (Loss) | $8M | ($80M) | N/A | - The company demonstrated resilience in the face of challenges including the FAA downgrade of Mexico to CAT 2, Pratt & Whitney's engine inspections, and slot reductions at Mexico City International Airport[337] Management Discussion of Financial Results Q4 2023 operating revenues grew 10% to $899 million, with ancillary revenue per passenger up 32% to $55, contributing 50% of total revenue - Ancillary revenue was a key growth driver, with ancillary revenue per passenger increasing 32% to $55 in Q4 2023, representing 50% of total operating revenue[345] - CASM ex fuel for Q4 2023 increased 11% to $4.86 cents, driven by higher fleet depreciation, reduced capacity, and a stronger Mexican peso, but was partially offset by compensation from Pratt & Whitney[347] - For the full year 2023, Volaris transported 33.5 million passengers, a 7.9% increase from 2022, with total capacity (ASMs) growing by 10%[351] Balance Sheet and Liquidity As of December 31, 2023, Volaris held $789 million in liquidity, representing 24% of LTM revenue, and improved its net debt-to-LTM EBITDAR ratio to 3.4x - Total cash, cash equivalents, restricted cash, and short-term investments stood at $789 million, representing 24% of last twelve months' total operating revenue[355] - Net debt-to-LTM EBITDAR ratio improved to 3.4x, down from 3.9x in 2022 and 3.5x in Q3 2023[357] Debt and Lease Liabilities (Dec 31, 2023) | Liability | Amount (USD millions) | | :--- | :--- | | Financial debt | 653 | | Total lease liabilities | 2,906 | | Net debt | 2,770 | 2024 Guidance Volaris projects 2024 ASM growth between -16% and -18% YoY due to GTF engine removals, with Q1 EBITDAR margin of 25-27% and full-year margin of 31-33%, including Pratt & Whitney compensation Q1 2024 Guidance | Metric | 1Q'24 Guidance | 1Q'23 Actual | | :--- | :--- | :--- | | ASM growth (YoY) | -16% to -18% | +17.7% | | TRASM | $8.5 to $8.7 cents | $7.71 cents | | CASM ex fuel | $5.5 to $5.7 cents | $4.65 cents | | EBITDAR margin | 25% to 27% | 16.8% | Full Year 2024 Guidance | Metric | 2024 Guidance | 2023 Actual | | :--- | :--- | :--- | | ASM growth (YoY) | -16% to -18% | +10.2% | | EBITDAR margin | 31% to 33% | 25.2% | | CAPEX | ~$300 million | $252 million | - The 2024 outlook incorporates expected compensation from Pratt & Whitney for grounded aircraft resulting from GTF engine removals[361] Fleet Volaris concluded 2023 with a fleet of 129 aircraft, averaging 5.7 years old and 196 seats, with NEO models comprising 59% of the total Fleet Composition at Year-End | Aircraft Type | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | A319 CEO | 3 | 4 | (1) | | A320 CEO | 40 | 40 | 0 | | A321 CEO | 10 | 10 | 0 | | A320 NEO | 51 | 48 | +3 | | A321 NEO | 25 | 15 | +10 | | Total | 129 | 117 | +12 | - The average age of the fleet is 5.7 years, with an average of 196 seats per aircraft[363] - 59% of the total fleet consists of New Engine Option (NEO) aircraft[363] Consolidated Financial Statements Q4 2023 saw $899 million in operating revenues and $112 million net income, while FY 2023 reported $3.26 billion revenues and $8 million net income, with $730 million cash from operations Consolidated Statement of Operations Summary (Q4 2023) | Item | Amount (USD millions) | | :--- | :--- | | Total operating revenues | 899 | | Operating expenses | 735 | | Operating income | 164 | | Income before income tax | 129 | | Net income | 112 | Consolidated Statement of Financial Position Summary (Dec 31, 2023) | Item | Amount (USD millions) | | :--- | :--- | | Total current assets | 1,248 | | Total non-current assets | 3,913 | | Total assets | 5,161 | | Total short-term liabilities | 1,621 | | Total long-term liabilities | 3,297 | | Total liabilities | 4,918 | | Total equity | 243 | Consolidated Statement of Cash Flows Summary (FY 2023) | Item | Amount (USD millions) | | :--- | :--- | | Net cash flow provided by operating activities | 730 | | Net cash flow used in investing activities | (462) | | Net cash flow used in financing activities | (214) | | Increase in cash | 54 |