troladora Vuela pania de Aviacion(VLRS) - 2021 Q4 - Annual Report

Volaris Financial Results for Q4 and Full Year 2021 Q4 2021 Performance Highlights Volaris reported strong Q4 2021 revenue and EBITDAR growth, but a net loss due to a significant non-cash charge, with adjusted net income up and net debt-to-EBITDAR at a record low Q4 2021 Key Financial Metrics (vs. Q4 2019) | Metric | Q4 2021 | Change vs Q4 2019 | | :--- | :--- | :--- | | Total Operating Revenue | Ps. 13,954 million | ▲ 43% | | EBITDAR | Ps. 5,161 million | ▲ 45% | | EBITDAR Margin | 37.0% | ▲ 0.5 percentage points | | Net Loss | (Ps. 200 million) | N/A | | Adjusted Net Income | Ps. 1,559 million | ▲ 21% | | Net debt-to-LTM EBITDAR | 2.5x | -1.0x | - The reported net loss was primarily driven by a one-off, non-cash accounting charge of Mexican Pesos 2,251 million (US$109 million) related to the termination of a non-derivative financial instrument[369] - As of December 31, 2021, the company changed its functional currency from the Mexican Peso to the US Dollar, a significant accounting policy change[369] Full Year 2021 Performance Highlights Volaris achieved robust full-year 2021 recovery with strong revenue and EBITDAR growth versus 2019, reporting net income despite the Q4 non-cash charge, highlighting strong operational performance Full Year 2021 Key Financial Metrics (vs. FY 2019) | Metric | FY 2021 | Change vs FY 2019 | | :--- | :--- | :--- | | Total Operating Revenue | Ps. 44,662 million | ▲ 29% | | EBITDAR | Ps. 16,375 million | ▲ 53% | | EBITDAR Margin | 36.7% | ▲ 5.9 percentage points | | Net Income | Ps. 2,121 million | ▼ (20%) | | Adjusted Net Income | Ps. 3,879 million | ▲ 47% | - Management attributes the strong performance to the team's ability to adapt to changing market dynamics and the resilience of its ultra-low-cost business model[371] Financial and Operational Analysis Strong demand drove Q4 revenue growth, fueled by increased passengers and ancillary revenue, while operating expenses rose due to capacity and fuel costs, with a significant non-cash charge impacting the financing result and leading to a net loss Revenue and Capacity Q4 2021 total operating revenue grew significantly, driven by increased passengers and TRASM, with ancillary revenue per passenger rising substantially and contributing a large portion of total revenue Q4 2021 Operating Metrics (vs Q4 2019) | Metric | Q4 2021 | Change vs Q4 2019 | | :--- | :--- | :--- | | Passengers | 7.3 million | ▲ 27% | | ASMs (millions) | 8,022 | ▲ 27% | | Load Factor | 86.9% | ▼ 0.8 percentage points | | TRASM (Mexican Pesos cents) | 176 | ▲ 13% | - Ancillary revenue per passenger increased by 45% to Mexican Pesos 810, representing 42% of total operating revenue in Q4 2021[375] Operating Expenses Q4 operating expenses rose due to capacity growth and higher fuel costs, while CASM and CASM ex-fuel saw modest increases, indicating effective cost management despite inflationary pressures Q4 2021 Cost Metrics (vs Q4 2019) | Metric | Q4 2021 | Change vs Q4 2019 | | :--- | :--- | :--- | | Total Operating Expenses | Ps. 10,992 million | ▲ 41% | | CASM (US$ cents) | 6.60 | ▲ 3% | | CASM ex-fuel (US$ cents) | 4.08 | ▲ 3% | | Avg. Fuel Cost per Gallon | US$2.58 | ▲ 16% | Profitability and Financing Result Volaris reported a Q4 net loss, heavily impacted by a significant non-cash foreign exchange loss from a functional currency change, though adjusted net income was positive and EBITDAR grew with a strong margin - The comprehensive financing result included a one-off, non-cash foreign exchange loss of Mexican Pesos 2,251 million (US$109 million) from the termination of non-derivative financial instruments, required by the change in functional currency to the US Dollar[379] Q4 2021 Profitability (vs Q4 2019) | Metric | Q4 2021 | Change vs Q4 2019 | | :--- | :--- | :--- | | Net Loss | (Ps. 200 million) | N/A | | Adjusted Net Income | Ps. 1,559 million | ▲ 21% | | EBITDAR | Ps. 5,161 million | ▲ 45% | Balance Sheet and Liquidity Volaris maintained strong liquidity in 2021 with substantial cash, improving its net debt-to-EBITDAR ratio to a record low, and strategically changed its functional currency to the US Dollar to better reflect operations and reduce FX volatility Key Balance Sheet & Liquidity Metrics (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Cash and Cash Equivalents | Ps. 15,255 million (US$741 million) | | Cash as % of LTM Revenue | 34% | | Net Debt-to-LTM EBITDAR | 2.5x | - The company changed its functional currency to the US Dollar because its operations, cost structure, and fare determination are increasingly dollar-based. This is expected to mitigate the impact of Mexican Peso volatility on financial results[389][390] - In Q4, Volaris successfully issued its first sustainability-linked asset-backed trust notes (VOLARCB 21L) for Mexican Pesos 1,500 million[386] 2022 Outlook and Fleet Volaris anticipates continued disciplined growth in 2022, with mid-twenties ASM increase and projected revenue of US$2.6-US$2.7 billion, planning fleet expansion to 113 aircraft and securing long-term growth with new A321neo orders 2022 Full Year Guidance | Metric | Guidance | | :--- | :--- | | ASM Growth (vs 2021) | Mid-twenties % | | Total Operating Revenue | US$2.6 - US$2.7 billion | | Capex | US$140 - US$145 million | | Assumed FX (USD/MXN) | Ps. 20.80 - Ps. 21.10 | - The fleet is planned to grow from 101 aircraft at YE 2021 to 113 by YE 2022[392] - In November 2021, Volaris ordered 39 new A321neo aircraft and converted 20 existing A320neo orders to A321neos to support future growth[393] Annex - Financial Derivative Instruments Derivative Policies and Risk Management%20Management%27s%20discussion%20about%20derivative%20financial%20instrument%20policies) The company uses derivative financial instruments solely for hedging fuel price, foreign currency, and interest rate risks, strictly avoiding speculative activities, with a dedicated Risk Management team ensuring compliance with a formal Hedging Policy - Volaris explicitly states that it does not acquire financial derivative instruments for speculative or trading purposes; they are used solely to mitigate financial risks[3] - The primary risks hedged are fuel price fluctuations, foreign currency risk (mainly USD exposure), and interest rate variation risk on debt and leases[7][12] - As of the report date, the company did not have any fuel or foreign exchange derivative instruments but held interest rate CAPs to hedge its Asset Backed Trust Notes[7][12] Valuation, Counterparties, and Liquidity%20Generic%20description%20of%20the%20valuation%20techniques) Volaris values derivatives at fair value using counterparty valuations and internal models, operates in OTC markets, mitigates counterparty risk with ISDA agreements, and manages liquidity for margin calls through diversification and internal resources - Derivatives are valued at fair value using valuations from financial institutions, which are then compared with internal models based on market data[11] - To minimize counterparty risk, the company only operates in OTC markets and enters into ISDA agreements with counterparties of recognized financial capacity. As of Dec 31, 2021, it had 8 ISDAs in place[9][10] - The company has internal resources to meet liquidity requirements related to derivative financial instruments, such as margin calls, if other mitigation strategies are insufficient[13] Notes to Condensed Consolidated Financial Statements Note 1 - Business Description and Relevant Events This note outlines Volaris's corporate structure and key 2021 events, including changing functional currency to US Dollar, ordering new aircraft, launching Volaris El Salvador, issuing sustainability-linked notes, and a significant capacity recovery from the pandemic Corporate Structure and Operations Volaris, a Mexican low-cost airline incorporated in 2005 and dual-listed on NYSE and BMV, operates passenger, cargo, and mail services through subsidiaries in Mexico, Costa Rica, and El Salvador - Volaris is a Mexican low-cost airline that started commercial flights on March 13, 2006, and completed its dual listing IPO on the NYSE and BMV in September 2013[19][20] - The company has expanded its operations internationally through subsidiaries, including Volaris Costa Rica (started 2016) and Volaris El Salvador (started 2021)[22][24] Key Events in 2021%20Relevant%20events) Volaris implemented significant strategic and financial changes in 2021, including changing its functional currency to US Dollar, ordering new A321NEO aircraft, launching its El Salvador subsidiary, issuing sustainability-linked notes, and achieving a strong capacity recovery - Effective December 31, 2021, the company and its main Mexican subsidiary prospectively changed their functional currency from the Mexican Peso to the US Dollar due to an increase in international transactions and US dollar-denominated costs[26][27][29] - On November 15, 2021, Volaris signed a purchase order with Airbus for 39 new A321NEO aircraft and converted 20 existing A320NEO orders to A321NEOs[30] - In October 2021, the company completed a second issuance of Mexican Pesos 1,500 million in asset-backed trust notes, which are linked to sustainability goals to reduce CO2 emissions per revenue passenger/kilometer[42][45] - The company's capacity, measured in available seat miles (ASMs), increased by 53.7% in 2021 compared to the previous year, indicating a strong recovery from the pandemic[37] Note 6 - Financial Instruments and Risk Management Volaris manages market, liquidity, and credit risks using financial instruments for hedging, with a key 2021 event being the functional currency change to US Dollar, which led to terminating FX hedges and recognizing a significant loss in the income statement Market Risk Management Volaris manages jet fuel price risk with derivatives, foreign currency risk (previously with non-derivatives, now terminated due to functional currency change resulting in a significant loss), and interest rate risk on floating-rate debt with CAPs - As of December 31, 2021, the company had no outstanding fuel derivative positions, whereas in 2020 it had hedges covering a portion of its projected consumption[85][93] - Due to the change in functional currency to the US Dollar, the company terminated its non-derivative FX hedging strategies, resulting in a loss of Mexican Pesos 2,251 million being recognized in the foreign exchange loss line item[113] - The company uses interest rate CAPs to mitigate the risk of rising interest rates on its TIIE 28-based Asset Backed Trust Notes (CEBURs)[119][121] Liquidity and Credit Risk Management%20Liquidity%20risk) Volaris manages liquidity by matching investments to obligations and accessing diverse funding, with total financial liabilities at Mexican Pesos 59.8 billion, primarily from leases, while credit risk is minimal due to concentration with major credit card companies and high-rated financial institutions Contractual Principal Payments on Financial Liabilities (Dec 31, 2021) | Liability Type | Within one year (Mexican Pesos) | One to five years (Mexican Pesos) | Total (Mexican Pesos) | | :--- | :--- | :--- | :--- | | Pre-delivery payments facilities | 3,535,649 | - | 3,535,649 | | Asset backed trust note ("CEBUR") | 500,000 | 2,250,000 | 2,750,000 | | Lease liabilities | 5,842,492 | 43,807,747 | 49,650,239 | | Aircraft and engine lease return obligation | 451,788 | 3,436,001 | 3,887,789 | | Total | 10,329,929 | 49,493,748 | 59,823,677 | - Credit risk on accounts receivable is considered minimal due to high turnover and concentration with major international credit card companies[130] Note 8 - Financial Debt As of December 31, 2021, Volaris's total financial debt was Mexican Pesos 6,277 million, primarily comprising a revolving credit line for pre-delivery payments and two tranches of asset-backed trust notes secured by credit card receivables, with the company in compliance with all debt covenants Financial Debt Composition (as of Dec 31, 2021) | Debt Instrument | Amount (Mexican Pesos million) | | :--- | :--- | | Santander/Bancomext Pre-delivery Facility | 3,535.6 | | CEBUR (VOLARCB 19) | 1,250.0 | | CEBUR (VOLARCB 21L) | 1,500.0 | | Total (before costs/accruals) | 6,285.6 | - The Santander/Bancomext loan agreement includes covenants that limit the ability to incur further debt, create liens, merge, dispose of assets, or pay dividends unless certain financial ratios are met[154][155] - The company has issued two tranches of Asset Backed Trust Notes (CEBURs) totaling Mexican Pesos 3.0 billion, which are backed by future receivables from VISA and Mastercard credit card sales[159][161] Note 10 - Related Party Transactions Volaris conducts transactions with related parties due to shared ownership, with key 2021 activities including code-share revenue with Frontier Airlines, aircraft maintenance expenses with Aeroman, and airport services from Grupo Aeroportuario del Centro Norte (OMA) Key Related Party Transactions (Full Year 2021) | Related Party | Type of Transaction | Amount (Mexican Pesos million) | | :--- | :--- | :--- | | Frontier Airlines Inc. | Code-share Revenue | 71.2 | | Aeromantenimiento, S.A. (Aeroman) | Aircraft Maintenance Expense | 160.6 | | Grupo Aeroportuario del Centro Norte (OMA) | Airport Services Expense | 133.3 | Note 14 - Leases Leases are central to Volaris's operations, with its fleet comprising 100 leased aircraft and 20 spare engines as of December 31, 2021, and the balance sheet reflecting significant right-of-use assets and corresponding lease liabilities Fleet Composition (as of Dec 31, 2021) | Aircraft Model | Count | | :--- | :--- | | A319 | 5 | | A320 | 40 | | A320NEO | 39 | | A321 | 10 | | A321NEO | 6 | | Total | 100 | Lease-Related Balances (as of Dec 31, 2021) | Account | Amount (Mexican Pesos million) | | :--- | :--- | | Right-of-use assets | 39,463 | | Lease liabilities | 49,650 | - In 2021, the company added 15 new leased aircraft to its fleet and extended the lease terms for 13 A320CEO and 2 A319CEO aircraft[199] Note 15 - Equity and Earnings Per Share As of December 31, 2021, Volaris had 1,166 million authorized shares, with equity impacted by a December 2020 follow-on offering that raised US$164.4 million, and full-year 2021 basic EPS showing a significant turnaround from the prior year's loss - In December 2020, the company closed a primary follow-on equity offering, raising net proceeds of approximately US$164.4 million for general corporate purposes[210] Earnings (Loss) Per Share Calculation | Metric | Year ended Dec 31, 2021 | Year ended Dec 31, 2020 | | :--- | :--- | :--- | | Net Income (Loss) (Mexican Pesos) | 2,120,551 | (4,293,791) | | Weighted Avg. Shares (thousands) | 1,165,977 | 1,021,561 | | Basic EPS (LPS) (Mexican Pesos) | 1.819 | (4.203) | Note 17 - Commitments and Contingencies Volaris has substantial future commitments for aircraft purchases with Airbus, totaling US$6.68 billion, primarily due from 2024, and also commitments for sale and leaseback transactions on future deliveries, with estimated proceeds of US$813.5 million for 2022-2023 Committed Aircraft Purchase Expenditures | Period | Commitment (USD$ thousands) | | :--- | :--- | | 2022 | 114,563 | | 2023 | 314,660 | | 2024 | 903,776 | | 2025 | 981,657 | | 2026 and thereafter | 4,362,996 | | Total | 6,677,652 | - The company has commitments to execute sale and leaseback transactions for aircraft delivering in the next three years, with estimated proceeds of US$705.5 million in 2022 and US$108.0 million in 2023[222] Note 18 - Operating Segments Volaris operates as a single air transportation segment, with 2021 revenues geographically allocated, showing strong growth in both domestic (Mexico) and international (USA, Central/South America) segments compared to 2020 Operating Revenues by Geographic Segment (Full Year) | Segment | 2021 (Mexican Pesos million) | 2020 (Mexican Pesos million) | | :--- | :--- | :--- | | Domestic (Mexico) | 33,754 | 16,572 | | International | 11,342 | 5,999 | | Non-derivative financial instruments | (435) | (411) | | Total | 44,662 | 22,160 | Summary of Significant Accounting Policies Key Accounting Policies Volaris's financial statements adhere to IFRS, with key policies covering passenger revenue recognition, fair value measurement of derivatives, hedge accounting, right-of-use assets for leases, and capitalization of major maintenance costs, alongside the significant 2021 change to US Dollar functional currency - Passenger revenue is recognized when the transportation service is provided or when a non-refundable ticket expires. Ticket sales for future flights are initially recorded as 'unearned transportation revenue'[245][246] - The company applies IFRS 16 for leases, recognizing right-of-use assets and lease liabilities for all leases except for short-term and low-value assets[334][335] - Major maintenance costs are accounted for using the deferral method, where costs are capitalized as leasehold improvements and amortized over the shorter of the period to the next major maintenance event or the remaining lease term[300] - Derivative and non-derivative financial instruments used for hedging are recognized at fair value. For effective cash flow hedges, value changes are recorded in Other Comprehensive Income (OCI) until the hedged transaction affects earnings[356][357][359]